Business/Finance

Politics, the Devil’s Excrement and remaking the 99%

The days and nights of the zombie businessThere are still nights when the nightmares take me. I am in the shop I made, standing behind the till. My wares are on the shelves and I wait for customers who never come.

I see them passing by the windows, looking in. Their faces, a mixture of curiosity and contempt I dare not interpret. My heart-beat is erratic. I am 10 kilos down. I sleep maybe two hours a night. I am exhausted.

These are the days and nights of the zombie business; too weak to live, too strong to die.

The cost of failure

It has been six years and I no longer wake up screaming, only unsettled and with a lingering pain that lasts through the day.

These days, when I pass by a business I can see is struggling, or closing-down-sale signs, I feel a frisson of pain. Almost the way men will feel when watching some poor guy take a nut shot. A little cringe of shared agony.

This economic crisis in the UK has seen countless high-street shops close. Bargain-seekers, like vultures, throng to the dying body, picking at the still-living flesh, seeking morsels of value. A new dining-room table for 90 percent less. A set of DVDs for a few pence. A $400 jacket for $10.

Once the customers are done then other businesses have a go. A point-of-sale system for next to nothing. Air-conditioning units. A complete catering outfit. My spotless coffee machine and refrigeration units.

It is a tiny tragedy. If the local economy is still good then perhaps the vacant store will be filled soon with a new shop, the ex-employees re-hired. If not, then another vacant space opens up in a high-street, gradually dying. The staff join the growing unemployment statistics.

All of this is necessary. All of this is the only way to heal. Even in the midst of my own experience I knew that this had to happen.

How else will the goods and equipment I was not using correctly find better utility? How will my staff find jobs that are sustainable? How will the daily agony of nursing my dying business end?

And consider the only other alternative: that such a zombie business must survive through charity from the state or private alms. The management knowing that there is no purpose to endeavour, for the business is not wanted. How do you motivate staff when there is no purpose? There are no customers.

In this way a private pain becomes distributed amongst everyone, whether they choose it or not.

No, far better that the company die, that the shop be refitted and repurposed, that the equipment find new uses and that the employees find better work.

As for the owner? It’s tough. You have a big hole in your curriculum vitae. Difficult to find employment again. Difficult to get back to “normal”.

It was my risk to take. I am sad at the failure. Sorry I couldn’t make it work. And I mourn a little every day. I don’t ask anyone to empathise or pity my experience. It wasn’t their risk. It wasn’t imposed on me. I took it on willingly and I accepted the consequences even if the world isn’t very forgiving of failure.

It isn’t particularly forgiving of success either.

The price of success

“Ten years from now, twenty years from now, you will see: oil will bring us ruin … Oil is the Devil’s excrement,” said Juan Pablo Pérez Alfonzo, one of the founders of OPEC, and Venezuela’s Oil Minister back in the 1970s.

This Paradox of Plenty distorts state expenditure, unbalances the economy, and leads to a higher currency valuation, reduced investment and greater reliance on imports. It also distorts the state, undermining the common law and creating incredible opportunities for corruption and inefficiency.

Brazil’s pré-sal oilfields, discovered in 2007, are already having an impact on their economy. The government has decided that the fields will be the exclusive monopoly of the state. The problem with any form of monopoly is that price discovery is lost. Prices rise as the state, awash in cash, pays through the nose for the goods it needs to support extraction, distribution and investment. This impacts on the whole economy, increasing inflation, inflating the value of the currency, suppressing exports and raising the cost of business.

The reason that economies should encourage competition is because a price of any good can only be found out by free trade. Price discovery through open competition. Every now and then some scientist comes out and says, “Human beings can’t run faster than x.” Then Usain Bolt comes along and proves them wrong. And he does so in competition with others.

There are rules. He must obey them. Within those rules he is free to push the barriers as far as he can take them.

The alternative is that some committee of worthies, or a public servant, has to pick a price for every good. How could they ever know what is correct?

Too many countries have thought that oil wells, gold mines or rain forests were licenses to print money. The sad part is that they are, with the same consequences for economic stability. Such commodities are tremendously volatile. At the top of the market they make a country seem wealthy but at the expense of creating an indolent population who are now too expensive to work. When the tide turns and prices fall the economy is left exposed. Chaos follows.

Gradually, economic thinking has trended towards treating such unusual and volatile wealth differently. Responsible governments no longer throw it into the trough of government spending. They create Sovereign Wealth Funds and use the money for structural investment. Norway’s oil fund is worth over $500 billion, even after a terrible investment year.

It’s a rainy-day piggy-bank for pensions and insurance. The rest of the time the money can be spent on critical infrastructure that improves the competitiveness of the rest of the economy.

Technology is especially volatile and the cycle of innovation, investment, boom and bust has shortened. Sadly, governments – and their citizens – still regard the wealth generated by technology as an entitlement. Hence the latest crop of enraged and baffled people camping outside stock exchanges singing the song that follows “This time is different”.

Yes, it’s that old ditty, “Capitalism is broken”.

The winners are the losers are the winners are the losers

Capitalism is the process by which cash is allocated towards its greatest investment return. Some people are sufficiently motivated (by money, recognition, power, innovation, sex, anything really) to dedicate their time, sacrifice other opportunities and take great risks to try new things. We don’t always notice them when they fail but, when they succeed, they surf the wave and take a very large proportion of the money generated from their success.

Since the product or process they invent is new it is impossible to know how big the market for it should be. The right size of market requires a discovery process no different from finding the right price. Speculators may then flock and vastly overvalue various me-too risk-takers. A bubble emerges and correction follows. Correction is messy, especially so for the would-be risk-takers who can go suddenly bankrupt.

It is a supreme folly assuming that such a bubble is a dependable way to finance state expenditure.

So, by all means, tax the wealthy, but treat whatever you get out of them as the Devil’s excrement and stick it in a Sovereign Wealth Fund for a rainy day.

In a free market the process of price-discovery should be quick. A good idea should be commoditised rapidly. A bad idea should be killed before it absorbs too much useful investment. The problem is that this rough and tumble is brutal, not only on the active participants, but also on dependants like governments (wanting a stable tax base) and employees (wanting a stable work environment).

Enter special-pleading. One of the earliest forms of this is protectionism in which we charge companies who wish to import a higher rate of tax on their products in order to promote local manufacturing. That doesn’t work as it leads to a trade war with the recipients of that country’s exports who raise taxes there.

Even if they didn’t, it simply raises prices for consumers. Removing the competitive pressure simply allows local companies to be less efficient and charge higher prices. They get rich at the expense of consumers.

Not all companies get to try special pleading. Those with large numbers of employees (the motor industry), are considered strategic (military manufacturing, agriculture, energy) or could cause economic carnage (banking) can all get an ear from the government and special favours when they need them.

The alternative is to let these companies fail. The consequences? Massive layoffs in manufacturing. Watching China’s military technology catch up with the US. Everyone loses the savings in their bank accounts.

And the protectionism works at both ends. Companies can claim unfair price discrimination and call for import taxes or subsidies on foreign competitors. Unions can call for unfair labour practices in foreign countries and similarly call for import taxes and subsidies.

There are a never-ending stream of protections, all of which undermine the price discovery process: never-ending patents, undying copyright, special access subsidies, distortionary tax loopholes, unfireable workers, mandatory prison sentences, peculiar license requirements for hairdressers.

The reasons don’t matter. The consequences are higher prices to support people and companies that are not competitive and you are storing up bigger problems for the future when you can no longer afford to keep subsidising, or paying the increased prices related to, this behaviour.

Structuring the post-crash economy

I’ve long said that, in order to restructure the economy to make it an actual free-market capitalist enterprise, it is necessary to be less dependent on the rich. That doesn’t mean “don’t tax them”. But it does mean ring-fence those taxes lest they distort your economy.

It is naïve to believe that the people who went out and over one weekend bought 4 million iPhones wouldn’t make Apple’s investors wealthy. It is just plain ignorant to imagine that those investors and entrepreneurs who spent years working on new cures for cancer, new ways of manufacturing microchips, improved plastic packaging, or the next big web application did so without some hope of success. And, if that business blows up to the point that it becomes an established product, it is foolish to imagine that they won’t benefit disproportionately.

Worse still is to imagine that, if you don’t wish to share in the pain of those who invest and lose, you should benefit from those who invest and win. Buy shares, become an employee or wait in line for the taxes they pay. But don’t think that you have a right to the disproportionate profits they generate just because they exist. Where were you during the painful period of risk?

The US has long been the home of such success. They are America’s oil well. A volatile gusher.

For those same people will be disproportionately hurt when that company is outcompeted or makes a critical error. They are the fountainhead and the fall is a killer.

The first step to unbundling them from their influence over laws and lawmakers is to remove their money from the general tax pot. Then make the laws symmetrical.

If you undermined your statutory legal system with special opt outs – if it’s legal to murder other people if you are important enough, or mug grannies if you wear the right hat – then you would expect a lot of frustrating muggings and murders by people who appear above the law.

The same goes for special-pleading. When you allow one group of people – no matter how worthy – a special right to a subsidy then you will know no end to it. Others will always come up with good reasons for such support. Soon you are not competing.

Don’t take that to mean that those harmed by a business failure shouldn’t be supported. But we know how to deal with that without giving the money to the business. It’s called unemployment insurance and it can pay income support and retraining where required. Maybe a portion of the taxes from the 1% can go into a fund to pay for such insurance?

The alternative to such insurance is to fund the businesses to keep them going. Which is a bit like preserving a condemned building with occasional props so that the tenants can keep living there. Why not let the building fall and the owner deal with the mess while you find the tenants somewhere else to live?

The problem with the jobs of the future

In 1943 it took 40 adults to harvest a single row of cotton on the average American farm. 1943 was also the year the first International Harvester cotton-picking machine made its debut picking one row at a time.

Political attitudes were different back then. Most cotton pickers were the children of slaves freed less than 100 years previously. Their lives hadn’t changed much since the end of servitude. Cotton-picking, whether performed by slaves or free men, is back-breaking, soul-destroying, low-paid hardship. Millions of people fled farms for America’s cities.

Americans remember the period after the Second World War as their glory days of mass production, rapidly rising productivity and tremendous social mobility. Nowadays, in our more enlightened times, a machine that put so many people out of work would probably be destroyed.

The degree of social change in the 1940s was far greater than even present-day China can aspire to. In 1945 it took 14 hours of labour to produce 100 bushels of corn on two acres of land. By 1987 it took 3 hours of labour to produce that same 100 bushels.

Industrialisation lowered costs and freed human beings to perform more interesting, better-paid work. It has also changed the gearing; the way in which such companies are structured.

GE, founded by Thomas Edison in 1892, has 300,000 employees today and $157 billion in annual revenue. Walmart, founded by Sam Walton in 1962, has 2.1 million employees and turns $400 billion.

Google, founded by Sergey Brin and Larry Page in 1998, has 23,000 employees and $23 billion in revenue. Facebook, founded by Mark Zuckerberg in 2004, has 1,700 employees and revenues of $800 million.

These new companies employ fewer people, make more profits for themselves and less money for others.

The implications are that the jobs of the future will require a greater investment in education, and of a higher standard. Businesses will be smaller and so there need to be more of them. Big infrastructure projects, or big manufacturing businesses, will never employ the numbers of people they used to. Our economies and technology are too sophisticated for this.

Understand this, though: if you continue to use the taxes you get from the rich to support mandatory government expenditure then you will distort your economy. It will be less flexible, less capable of creating space for these small new companies, less adaptable to external and internal pressures.

Neither America nor Europe is dominant anymore. This is the great global rebalancing back towards the East for the first time in a thousand years. They are competitive as anything and they’re in a race, whether you choose to compete or not. They’re not going to stop for a while so you can catch a breather.

This isn’t the end of it, of course. Stabilising economies is only one small step on the way to directing that economy towards growth and job creation. But it’s a bit like climate change; first you have to agree it exists before you can get to the rather more complex problem of what you do about it.

In each case, though, accepting the existence of climate change, recognising the need to de-risk an economy by treating its most volatile revenue sources differently and taking a long hard look at whether the common law is still “common”, requires the selection of moderate, open-minded and intellectually honest political representatives.

The questions for you: would you elect a politician who told you the truth; that your economy needs to become fit again – sloughing off acres of fat; that legislation needs to be adjusted; that such legislation will create disruption not only for the rich but for all? Would you be prepared to hear that the solution that will fix the problem will take 20 years to implement, so far is your economy from competitiveness?

Would you even listen?

6 replies »

  1. To your last question, I think the answer is probably obvious. I would, yes. Me and literally dozens of others. But that’s a general comment about the truth of anything. A politician who tells the truth over here is done before he finishes the sentence. Wufnik’s piece a couple of weeks about the trouble with the 99% gets to the heart of our real problem.

    Here’s my issue with the prescription here, though. Once we “make the economy fit again,” as you put it, what do things look like? Especially at the beginning? What, for example, is the unemployment rate? How do these people live? If the answer is what I fear it to be, how do we feel about either a) millions starved to death in the streets, or b) the only alternative, the streets on fire in a raging civil war? In other words, how do we get from point A to point B in one piece?

    There is much about your argument here that I find quite compelling. Although it wasn’t your intent, you actually articulate a good deal that I think most #Occupy protestors would agree with. In a nutshell, you acknowledge how special pleading by corporate entities unhinges the economy, and I think the only real point of divergence between your argument and the #OWS position would be that they see it happening far more widely than you do (or maybe they don’t – maybe the fact that you seem more reserved is merely a function of your analytical style).

    In any case, your argument for a rainy day fund is an interesting one. I guess I’d just note that it’s raining like hell in a lot of places over here and the creek is rising….

  2. My analytical style is to be conservative (with a small-c, not a US-style big-C)…

    As for what to do… the insurance model is best. Guaranteed bail-outs are a problem since they require money-up-front and also that government is entirely correct in who they believe needs a bail-out (that isn’t any clearer than any other form of picking winners). Money gets spent on things that weren’t that important and then no money is available for unexpected things which are tremendously impactful.

    So, take all that money from the wealthy, stick it in a big fund. Use that fund to issue more bonds (or, reserve the right to do so). Set rules on who qualifies for insurance (rather than “what”) and then do the necessary to restructure the economy. Make sure insurance evaluations and payouts are swift for those caught in the mess that is sure to come.

    • Okay, let’s say I buy this. You still don’t answer my “how do we get there alive?” question, which is critical. Right now we have an economy that has been so badly damaged by the corps and the politicians who serve them that there isn’t much hope for recovery. It’s a badly rigged system with four unemployed job hunters for every job.

      The rainy day fund is an intriguing idea, but you still have to have a workable every day base.

  3. Well, this is sort of where I’m going with another article, but think of what is happening at the moment as a bank run. It isn’t that the countries of the world have suddenly run out of money and can’t pay their debts (bar Greece, that is). It is that they are all so badly run that investors are looking at the distant future and going, “Oh, *&$%^!”

    The US, for instance, isn’t battling to raise capital. Neither is it suffering from unemployment of such levels that the state can’t afford to pay for remediation. What it lacks is the political will (or sufficient politicians from either party willing to talk to each other, and able to do so without losing their jobs).

    The thing that will calm markets down is simply (as banks used to do in the big days of bank runs) boldly walk into the village square with a big suitcase of money – so astonishingly large that it made account-holders vomit – and say, “OK, what’s the problem?”

    That is what countries like Germany (in the Euro area) are refusing to do even though they have the cash to do so.

    The US has an “unfunded mandate” in terms of future Medicare/Medicaid liabilities. Investors are worried as to where the money is coming from. The US government needs to show exactly where future income is coming from that guarantees all these liabilities. And all of this is very possible.

    The difficulty isn’t the economics. It’s the politics. And I’ve never – in 20 years of watching the US – seen it this polarised to the point where each side appears entirely willing to burn their faces off to prove how tough they are.

    The Europeans (once they’ve exhausted all other options) will eventually put money on the table (although probably not my rainy-day-fund idea). The Americans? No idea…

    • On the question of political will I agree completely, but there’s nothing about our system today that encourages anything but short-term pandering to our worst elements.

      On the question of “each side appears entirely willing to burn their faces off to prove how tough they are” I’d say you’re engaging in false equivalence. The better argument is that you have one side that is as intransigent as a spoiled two year-old. On the other you have a pack of spineless accommodationists. The end result is perhaps the same – that the public interest goes begging – but it helps to get the structural details articulated…..

  4. Just want to express congratulations on a well written and very provocative article. I’m finding both much to agree and disagree with here, but I appreciate that it challenges me to reject pat answers. I’m perhaps more cynical than Sam in my final assessment of the political will issue. I see two wings of the same Corporate party playing at political theatre while they are “burning off their faces” so as to pander to their electoral constituencies, thus perpetuating the two-party ruse.

    As for the rest, I’m going to give this a serious re-read tomorrow and see how I feel when I read it with fresh eyes.