One of the big questions in economics since the great recession began has been whether stimulus spending has been an effective driver of growth for the United States. On one side of the debate you have Keynesian economists. They believe that without the intervention of the government into the economy during the great recession, and the extraordinary monetary easing since, that we would be in a much worse situation than we are now. They point to the continued failure to grow in European markets undergoing austerity budget cuts as proof of concept. Their argument is, when the broader market contracts its spending, it is the government's job to expand spending to keep people employed and return the country to fiscal solvency. On the other side of the argument, economic conservatives and Austrian economists say that government spending comes at the expense of the broader economy and that government economic interventions create economic miss-allocation which lead to future economic contractions (which they view as market corrections). They point to the continued failure of alternative fuels to become economically viable, despite the large amount of government support they receive, as proof that government intervention is a waste of money and a net loss to the economy.
Recently this debate has heated up as the Federal Reserve has begun tapering its quantitative easing program. Quantitative easing is the program by which the Federal Reserve is intervening in capital markets and buying assets to prop up prices and increase liquidity (i.e. the money supply). The belief is that this, coupled with keeping the federal interbank lending rate at near zero, will flood the broader economy with money which will lead to more hiring and more production. The debate has heated up as a result of what is actually occurring as the Fed is reducing its asset buying program. If you believe that quantitative easing supports the domestic economy, then you would imagine that tapering it, reducing these funds, would cause the domestic economy to slow down. What is actually happening though is that it is the developing world that has seen their economies decline as a result of the taper. Here is a good short summary of this by The Economist.
The reason that the developing world is being hit so hard should not be that big a surprise if you think about it. The companies that are best positioned to take advantage of Fed policies are financial companies. They borrow from the Fed, own large quantities of assets to sell it on the open market, they are constantly seeking to leverage their holdings for greater returns, and are always searching for greater yield. Recently, the economies with the highest growth rates and the highest returns on investment have been in the developing world. Since most of these investment companies invest internationally, it makes sense for them to look internationally to make the most money for their investors and stock holders. This is only a problem if you are the government extending them virtually free money in order to boost your domestic economy. The implication here is that in a global economy, traditional liquidity measures and even more radical quantitative easing, are not an effective way to stimulate the domestic economy. This also would go a long way towards explaining why hiring has not picked up, and the economy has grown at record low levels for a recovery, despite record levels of government support.
Friday, February 28, 2014
Thursday, February 13, 2014
People Who Are Offended
I have noted with much disgust how frequently people get offended by just about anything. There seems to be an ultra politically correct movement, especially in academia, that tries to censor peoples' speech and writing by claiming that anything they disagree with is offensive. The root of this movement seems to be that colleges, once the bastion of the rich cultural elite, have opened up their doors to the general populace. This is undoubtedly a good thing, as an educated populace tends to be a more affluent and happy populace. But because college used to be a place for the rich to rub elbows during their formative years, colleges are uniquely sensitive to concerns of one group dominating and intimidating another. Because colleges want to have a diverse student population, they try to censor speech and behavior in the name of inclusiveness.
The problem here is that I live in a country (the USA) where freedom of speech is highly valued. So much so that we enshrined it in the first amendment to our constitution. More over, academic institutions are nominally dedicated to the craft of educating their students in a variety of subjects and preparing them to go out into the real world and succeed in whatever endeavor they choose to pursue. The real world is not academia, and with the exception of certain harassing behavior which our laws protect people from, it does not shelter people from views they don't like. Being offended is irrelevant unless the speech or action also offends the law. And yet our academic institutions continue to coddle this anti-social behavior within their student bodies. Inclusiveness is not irreconcilable with free speech, and academic institutions would do well to educate their students about this.
A good example of this is a recent kerfuffle at Wellesley College over a statue of a sleep walking man in his underwear. Link. Within hours of its installation there was a petition circulating to have it removed. The petition claimed that the statue had: "become a source of apprehension, fear, and triggering thoughts regarding sexual assault for many members of our campus community." The aim of this is obvious, to suppress the artistic speech embodied by the statue in the name of those who it offends. And while I agree that the statue is creepy looking, to start making allusions to sexual assault seems a little far fetched. More over, the complaints betray how thin skinned the community at Wellesley is. How are these people going to function in the real world if a statue makes them fear assault? Not well.
If colleges are going to remain bastions of learning and productive debate, students are going to have to be confronted with views they do not agree with, argued passionately by people who do. To silence the voices of dissent so that there is no real dialogue or debate is to do a disservice to the student population and to tacitly endorse censorship. It robs students of the chance to participate in a constructive debate, it robs them of the ability to exercise their critical thinking skills and develop coping mechanisms that they will need to function in a professional environment.
The problem here is that I live in a country (the USA) where freedom of speech is highly valued. So much so that we enshrined it in the first amendment to our constitution. More over, academic institutions are nominally dedicated to the craft of educating their students in a variety of subjects and preparing them to go out into the real world and succeed in whatever endeavor they choose to pursue. The real world is not academia, and with the exception of certain harassing behavior which our laws protect people from, it does not shelter people from views they don't like. Being offended is irrelevant unless the speech or action also offends the law. And yet our academic institutions continue to coddle this anti-social behavior within their student bodies. Inclusiveness is not irreconcilable with free speech, and academic institutions would do well to educate their students about this.
A good example of this is a recent kerfuffle at Wellesley College over a statue of a sleep walking man in his underwear. Link. Within hours of its installation there was a petition circulating to have it removed. The petition claimed that the statue had: "become a source of apprehension, fear, and triggering thoughts regarding sexual assault for many members of our campus community." The aim of this is obvious, to suppress the artistic speech embodied by the statue in the name of those who it offends. And while I agree that the statue is creepy looking, to start making allusions to sexual assault seems a little far fetched. More over, the complaints betray how thin skinned the community at Wellesley is. How are these people going to function in the real world if a statue makes them fear assault? Not well.
If colleges are going to remain bastions of learning and productive debate, students are going to have to be confronted with views they do not agree with, argued passionately by people who do. To silence the voices of dissent so that there is no real dialogue or debate is to do a disservice to the student population and to tacitly endorse censorship. It robs students of the chance to participate in a constructive debate, it robs them of the ability to exercise their critical thinking skills and develop coping mechanisms that they will need to function in a professional environment.
Tuesday, January 21, 2014
Censorship, The Ugliness of Ignorance
I'm surprised I have not addressed this before, but I am not a big fan of censorship. The reason I am not a big fan of censorship is that I am not a fan of ignorance; also, willful ignorance is a huge pet peeve of mine. Throughout history the value of knowledge and insight has been shown time and again. Whether it is knowledge gained in school, practical knowledge gained in life, or professional expertise gained through years of hard work, knowledge has enriched human life. So much so that it is too broad a category to go into in depth in a limited forum like a blog. Censorship, on the other hand, is keeping people ignorant of certain knowledge. It can be as trite and pointless as editing out curse words from movies so that they can be shown on TV, to as pernicious as banning or burning books to ensure societal conformity. In the end, it is an attempt by the powers that be to influence the populace by denying them access particular pieces of knowledge.
Censorship has a long history in public discourse and political theory. Going as far back as Plato's Republic, it has been argued that governments should take active steps to limit their citizens' knowledge of certain things in order to promote a more harmonious existence. In the Republic this was left to the ruling oligarchy, which was populated by philosophers, who Plato believed were best capable of determining what was best for the populace. In the modern era governments across the world, and China in particular, are using internet firewalls, the ability to take down web sites and block IP addresses to limit their population's access to knowledge. Practically speaking, what this does is allow ruling regimes to limit access to news and political discourse that would threaten the current regime. In the US we mostly limit censorship to banning certain "curse" words and sexual content from public broadcast on network television. However, in Europe this has taken the form of banning certain far right political parties in Greece, or providing people easy access to civil law suits for public statements "defaming, slandering or libeling" other people in England.
So what arguments can be made in favor of censorship? The easiest are arguments promoting censorship of things like child pornography and snuff films. Both child pornography and snuff films are created by victimizing someone in a criminal way in order to produce the offensive material. Because it is created by harming others, the argument goes, the government should censor and destroy all such materials it comes across to prevent future victimizations. And it is true that child rape and murder, regardless of whether either is filmed or not, are terrible crimes against other human beings. And it is absolutely right for government to criminalize child rape and murder, just as it is right for government to criminalize most acts that harm other people. But does it necessarily follow that we should then ban the derivative works (i.e. the portrayal of such acts)?
To answer this, let's look at a harder ethical quandary. Is it right for a government to censor political speech in order to protect the ruling regime? China certainly believes that it is, and it is very active in monitoring and censoring public speech on the net and in print. The argument for such censorship is that disrupting the government creates political instability. Political instability leads to protests and frequently violent confrontations between pro and anti government forces. As we saw during the Arab spring, while it is possible to have non-violent regime change, it is much more frequent for these confrontations to become violent. Such violence is invariably harmful to the populace as a whole. Thus, censoring disruptive elements is in everyone's best interest. What are the counter arguments to this? That censoring political speech allows the powers that be to stay in power and prevents political change. In the extreme, such as in North Korea, Soviet Russia or East Germany, this lead to societal decay, a breakdown of basic social structures and the suffering of the populace.
The problem I have with both the easy arguments and the hard arguments is that, in the end, the appeal is to social stability and the health of the general populace. In order to get to the point where the censored material poses a threat to the populace, you invariably are relying on actions that are already criminal without having to rely on censorship (i.e. violent acts against fellow members of society). Take the censorship of political speech to promote social stability argument. The action that actually harms society is the violent confrontation between protestors and the government. Similarly, with snuff films, the action that is harming the populace is the murder of one of its members. You can criminalize the action without limiting the knowledge or portrayal of it in any way. In other words, the offense is the action, not its portrayal.
So why is this distinction between harmful criminal action and the censorship of its portrayal so important? Art and political discourse. When you censor the portrayal of things you object to, you prevent artistic and political discourse on the subject. It is this discourse through which we make progress as a society. In America, and in most democratic societies, political and artistic discourse serves to shape the public's opinion on important issues. We make progress as a society through such discussions. The USA would have had trouble emerging from its colonial past if the founding fathers were unable to get together and discuss politics. Moreover, the horrors of war in the ancient world would no longer be known if the societies of the time had prevented the portrayal of it in paintings and books. By censoring knowledge you are limiting this discourse and thus limiting the intellectual development of society.
To conclude, I don't like censorship because I believe it limits political and artistic discourse. And while the goal of protecting society from harm is laudable, I believe it is possible to accomplish this goal without harming positive discourse about it. This can be accomplished by criminalizing the harmful actions and rigorously enforcing those laws. You don't need to prevent the painter from painting Rape of the Sabine Women to enforce the belief that rape (or in this case, abduction and rape) is a horrible criminal action that harms society. In fact, through the artistic portrayal, the horror of this moment in History is portrayed for all to see.
Censorship has a long history in public discourse and political theory. Going as far back as Plato's Republic, it has been argued that governments should take active steps to limit their citizens' knowledge of certain things in order to promote a more harmonious existence. In the Republic this was left to the ruling oligarchy, which was populated by philosophers, who Plato believed were best capable of determining what was best for the populace. In the modern era governments across the world, and China in particular, are using internet firewalls, the ability to take down web sites and block IP addresses to limit their population's access to knowledge. Practically speaking, what this does is allow ruling regimes to limit access to news and political discourse that would threaten the current regime. In the US we mostly limit censorship to banning certain "curse" words and sexual content from public broadcast on network television. However, in Europe this has taken the form of banning certain far right political parties in Greece, or providing people easy access to civil law suits for public statements "defaming, slandering or libeling" other people in England.
So what arguments can be made in favor of censorship? The easiest are arguments promoting censorship of things like child pornography and snuff films. Both child pornography and snuff films are created by victimizing someone in a criminal way in order to produce the offensive material. Because it is created by harming others, the argument goes, the government should censor and destroy all such materials it comes across to prevent future victimizations. And it is true that child rape and murder, regardless of whether either is filmed or not, are terrible crimes against other human beings. And it is absolutely right for government to criminalize child rape and murder, just as it is right for government to criminalize most acts that harm other people. But does it necessarily follow that we should then ban the derivative works (i.e. the portrayal of such acts)?
To answer this, let's look at a harder ethical quandary. Is it right for a government to censor political speech in order to protect the ruling regime? China certainly believes that it is, and it is very active in monitoring and censoring public speech on the net and in print. The argument for such censorship is that disrupting the government creates political instability. Political instability leads to protests and frequently violent confrontations between pro and anti government forces. As we saw during the Arab spring, while it is possible to have non-violent regime change, it is much more frequent for these confrontations to become violent. Such violence is invariably harmful to the populace as a whole. Thus, censoring disruptive elements is in everyone's best interest. What are the counter arguments to this? That censoring political speech allows the powers that be to stay in power and prevents political change. In the extreme, such as in North Korea, Soviet Russia or East Germany, this lead to societal decay, a breakdown of basic social structures and the suffering of the populace.
The problem I have with both the easy arguments and the hard arguments is that, in the end, the appeal is to social stability and the health of the general populace. In order to get to the point where the censored material poses a threat to the populace, you invariably are relying on actions that are already criminal without having to rely on censorship (i.e. violent acts against fellow members of society). Take the censorship of political speech to promote social stability argument. The action that actually harms society is the violent confrontation between protestors and the government. Similarly, with snuff films, the action that is harming the populace is the murder of one of its members. You can criminalize the action without limiting the knowledge or portrayal of it in any way. In other words, the offense is the action, not its portrayal.
So why is this distinction between harmful criminal action and the censorship of its portrayal so important? Art and political discourse. When you censor the portrayal of things you object to, you prevent artistic and political discourse on the subject. It is this discourse through which we make progress as a society. In America, and in most democratic societies, political and artistic discourse serves to shape the public's opinion on important issues. We make progress as a society through such discussions. The USA would have had trouble emerging from its colonial past if the founding fathers were unable to get together and discuss politics. Moreover, the horrors of war in the ancient world would no longer be known if the societies of the time had prevented the portrayal of it in paintings and books. By censoring knowledge you are limiting this discourse and thus limiting the intellectual development of society.
To conclude, I don't like censorship because I believe it limits political and artistic discourse. And while the goal of protecting society from harm is laudable, I believe it is possible to accomplish this goal without harming positive discourse about it. This can be accomplished by criminalizing the harmful actions and rigorously enforcing those laws. You don't need to prevent the painter from painting Rape of the Sabine Women to enforce the belief that rape (or in this case, abduction and rape) is a horrible criminal action that harms society. In fact, through the artistic portrayal, the horror of this moment in History is portrayed for all to see.
Tuesday, December 24, 2013
Thoughts on Christmas Eve
2013 is coming to an end and it is Christmas eve as I write this. I find myself pondering Christmases and New Years past and thinking about the many to come. While I did not remark on this yet in the blog, I passed the 1 year anniversary of this blog's existence a month or two ago. I started the blog as a way to discuss things that were on my mind and were not really appropriate for other forms of social media for reasons of length and complexity. 140 character limits and places to post pictures of pets and babies seemed to me to be uniquely poor places for political, philosophical and economic discussions. So now I have an anonymous way to put my opinions about things out into the void and see if they resonate with anybody (if you are curious, the gun control and the why teachers matters posts are the most popular by page views). And for those of you who have read anything I have written on this blog, thank you.
Christmas, as I get older, increasingly is a time for me to reflect on the holidays of my youth. It is hard for the current holiday season to compare to my memories of Christmases past. You always view such memories with rose tinted glasses to begin with and it is hard for holidays in an apartment to have the same luster as holidays in your childhood home. It is also hard to have the true spirit of giving when you have spent a year unemployed. And while yes, being unemployed has allowed me to indulge my creative urges by writing for this blog, it doesn't help the bank account. And a small bank account can only buy so many presents and still pay the bills. Still, despite all the time I have on my hands, I have been unable for reasons outside of my control to go home for Christmas. I can't help but feel my holidays are diminished as a result.
New Years is a time for people to celebrate the passing of the year and make resolutions for the coming year. However, long ago I resolved to not make any resolutions; and I have kept this promise, more or less, every year since then. This doesn't stop me from having goals, just that these goals are not New Years related. As such, I will not burden this space with my petty wants and desires. Besides, New Years is as much about partying with friends and family as it is about resolving to do things differently in the future. So instead I will simply say this, I hope you all have the chance this holiday season to go out and have fun with friends and family. Friends and family are what make life worth living. When people say money can't buy happiness, to me at least this is what they mean. I wish you all find happiness in the new year.
Merry Christmas, Happy Holidays and Happy New Year!
Christmas, as I get older, increasingly is a time for me to reflect on the holidays of my youth. It is hard for the current holiday season to compare to my memories of Christmases past. You always view such memories with rose tinted glasses to begin with and it is hard for holidays in an apartment to have the same luster as holidays in your childhood home. It is also hard to have the true spirit of giving when you have spent a year unemployed. And while yes, being unemployed has allowed me to indulge my creative urges by writing for this blog, it doesn't help the bank account. And a small bank account can only buy so many presents and still pay the bills. Still, despite all the time I have on my hands, I have been unable for reasons outside of my control to go home for Christmas. I can't help but feel my holidays are diminished as a result.
New Years is a time for people to celebrate the passing of the year and make resolutions for the coming year. However, long ago I resolved to not make any resolutions; and I have kept this promise, more or less, every year since then. This doesn't stop me from having goals, just that these goals are not New Years related. As such, I will not burden this space with my petty wants and desires. Besides, New Years is as much about partying with friends and family as it is about resolving to do things differently in the future. So instead I will simply say this, I hope you all have the chance this holiday season to go out and have fun with friends and family. Friends and family are what make life worth living. When people say money can't buy happiness, to me at least this is what they mean. I wish you all find happiness in the new year.
Merry Christmas, Happy Holidays and Happy New Year!
Thursday, December 12, 2013
The Minimum Wage Debate
First, let me state this strait out: I am not in favor of the minimum wage, just as I am not in favor of the government interfering with the rights of any two people to form contracts freely with each other. The few areas where I am in favor of government intervention in the economy at all, is in providing safety nets for the population. My reasons for being in favor of some safety nets are not economic, but prudential. Societies where the poor and disenfranchised are looked after and not allowed to starve tend to be safer and more stable societies. More over a just and moral society should not be allowing large swathes of its populations to starve.
Secondly, the minimum wage debate, like all highly political debates, is one that is fraught with cherry picked and heavily massaged statistics as well as outright falsehoods. Both sides of the debate have ample numbers to throw around, and neither side is particularly interested in listening to the other. The reality is then, that the criterion that decides peoples' views on this subject is their political view of the proper role of government in society, and not the prudential one of what the actual effects of minimum wage laws.
Thirdly, even acknowledging all this, the minimum wage remains an area that journalists, economists and even philosophers like to debate. The political left likes to point to statistics that show little immediate change in employment after minimum wages are increased, while the political right likes to point to statistics that show states with higher minimum wages tend to have higher youth and minority unemployment rates and that increases in the minimum wage do not yield improvements in the poverty rate. Why is there no consensus? Again, politics.
So, with that said, I recently became aware of a decent article, recommended by Harvard economics professor Greg Mankiw here: http://gregmankiw.blogspot.com/2013/12/minimum-wage-redux.html , by Steven Landsburg, himself an economics professor at University of Rochester, here: http://www.thebigquestions.com/2013/12/02/minimum-insight/ and in more depth here: http://www.thebigquestions.com/2013/02/18/thoughts-on-the-minimum-wage/ . And while I don't necessarily agree with all of his arguments, I think they are both thought provoking and should help inform readers on the economic and political debate over this particular public policy problem.
Secondly, the minimum wage debate, like all highly political debates, is one that is fraught with cherry picked and heavily massaged statistics as well as outright falsehoods. Both sides of the debate have ample numbers to throw around, and neither side is particularly interested in listening to the other. The reality is then, that the criterion that decides peoples' views on this subject is their political view of the proper role of government in society, and not the prudential one of what the actual effects of minimum wage laws.
Thirdly, even acknowledging all this, the minimum wage remains an area that journalists, economists and even philosophers like to debate. The political left likes to point to statistics that show little immediate change in employment after minimum wages are increased, while the political right likes to point to statistics that show states with higher minimum wages tend to have higher youth and minority unemployment rates and that increases in the minimum wage do not yield improvements in the poverty rate. Why is there no consensus? Again, politics.
So, with that said, I recently became aware of a decent article, recommended by Harvard economics professor Greg Mankiw here: http://gregmankiw.blogspot.com/2013/12/minimum-wage-redux.html , by Steven Landsburg, himself an economics professor at University of Rochester, here: http://www.thebigquestions.com/2013/12/02/minimum-insight/ and in more depth here: http://www.thebigquestions.com/2013/02/18/thoughts-on-the-minimum-wage/ . And while I don't necessarily agree with all of his arguments, I think they are both thought provoking and should help inform readers on the economic and political debate over this particular public policy problem.
Saturday, November 30, 2013
Improving Business Climate?
Recently, in The Wall Street Journal, a group of business people were asked what could be done to improve the business climate in the United States. Most of the comments involved corporate good citizenship initiatives and reinvesting in local production. The problem here is that this seems to miss the point of business, to maximize profits, and how you improve the general welfare of society through the economy. Whether or not these commentators have a point is open to debate. Here is the article: http://online.wsj.com/news/articles/SB10001424052702304017204579224072622277830?mod=hp_jrmodule
First thing to establish is that the point of a business is to make money and that in itself can be a benefit to society. In its most abstract, a business is a legal fiction, a false legal entity, in which a group of people get together to collectively produce a good or service. Back in the days of yore, most business arrangements were partnerships. People came together to collectively produce something for profit. Unfortunately, when businesses failed, the individuals were personally liable for the debts of the partnership. That meant when a business folded, often the members of that business were left destitute by the debts of the business. Go back far enough in time and that would end with debtors' prison for the founders and homelessness for their dependents. This created a large disincentive for individuals to take on a lot of debt, which also acted as a large impediment to business growth. This is why modern corporate legal codes create a variety of means for principals (people founding a business) to limit their liability through legal arrangements. This allows people the freedom to start businesses without the fear of utter ruination if they fail. The theory being that business growth, job creation and profits are in themselves a social good that society is willing to bear some risk to foster. Or, in other words, having a thriving business community that is growing and creating jobs generally works for the good of society and that justifies the added risk to lenders in not allowing them to raid the assets of the businesses' founders should the businesses fail.
Secondly, business founders who make a lot of money often use their largess to fund socially responsible endeavors. And even when they don't, the money and jobs their businesses create furthers the growth of the global economy, creating more wealth for society. One needs look no further than Bill Gates' creation of The Gates Foundation, or Warren Buffet pledging to donate the bulk of his fortune to charity, to see this in action. http://www.forbes.com/sites/alexmorrell/2013/07/08/buffett-donates-2-6-billion-in-berkshire-hathaway-shares-to-gates-foundation-other-charities/ . But even when the titans of industry are not as generous as Bill Gates or Warren Buffet, it is not like their fortunes turn to dust or are wasted. Society's wealth is held in banks, and through banks it is loaned to local businesses and the local community to further create more wealth. And if it is not put in banks, it is invested directly into the stocks and bonds of other businesses which funds those businesses' expansion which also creates more wealth. Money is never stationary, unless it is buried in the back yard and not spent, and the more it moves, the better off we are as a society.
So, with this understanding, why is it that so many business owners are concerned with corporate good citizenship and investing in the local community? Presumably, if these actions were profit maximizing in the first place, modern businesses would already be doing them to become more profitable and we would all be better off as a result. The reason is that, as the economy creates wealth, it does not do so equitably. What I mean here is that the economy creates winners and losers; some make huge amounts of money, and others do not. And while profit maximization improves aggregate well being, it does not do so for all individuals. These individuals who do not profit tend to resent the profits of others and feel cheated by the global economy.
In the USA there has been growing resentment of big business. As a result of outsourcing, and accelerated by the recent recession, many people have seen their livelihoods disappear and their nest eggs shrink. It is hard for the individual who is downsized when their jobs are outsourced to see the bigger picture. More over, it is harder still for that person to make a living and continue to contribute to the economy with no job. So while aggregate wealth is improved, local economies suffer. It is in these economies that the commenters in the above Wall Street Journal Article are urging businesses invest. The hope is that in investing in underutilized communities, it will create enough wealth and new jobs to make up for the lost profits caused by not outsourcing the jobs to cheaper international markets. Only time will tell if this burgeoning insourcing movement actually creates wealth. But it is clear that the commentators in the above article think this will be the case.
First thing to establish is that the point of a business is to make money and that in itself can be a benefit to society. In its most abstract, a business is a legal fiction, a false legal entity, in which a group of people get together to collectively produce a good or service. Back in the days of yore, most business arrangements were partnerships. People came together to collectively produce something for profit. Unfortunately, when businesses failed, the individuals were personally liable for the debts of the partnership. That meant when a business folded, often the members of that business were left destitute by the debts of the business. Go back far enough in time and that would end with debtors' prison for the founders and homelessness for their dependents. This created a large disincentive for individuals to take on a lot of debt, which also acted as a large impediment to business growth. This is why modern corporate legal codes create a variety of means for principals (people founding a business) to limit their liability through legal arrangements. This allows people the freedom to start businesses without the fear of utter ruination if they fail. The theory being that business growth, job creation and profits are in themselves a social good that society is willing to bear some risk to foster. Or, in other words, having a thriving business community that is growing and creating jobs generally works for the good of society and that justifies the added risk to lenders in not allowing them to raid the assets of the businesses' founders should the businesses fail.
Secondly, business founders who make a lot of money often use their largess to fund socially responsible endeavors. And even when they don't, the money and jobs their businesses create furthers the growth of the global economy, creating more wealth for society. One needs look no further than Bill Gates' creation of The Gates Foundation, or Warren Buffet pledging to donate the bulk of his fortune to charity, to see this in action. http://www.forbes.com/sites/alexmorrell/2013/07/08/buffett-donates-2-6-billion-in-berkshire-hathaway-shares-to-gates-foundation-other-charities/ . But even when the titans of industry are not as generous as Bill Gates or Warren Buffet, it is not like their fortunes turn to dust or are wasted. Society's wealth is held in banks, and through banks it is loaned to local businesses and the local community to further create more wealth. And if it is not put in banks, it is invested directly into the stocks and bonds of other businesses which funds those businesses' expansion which also creates more wealth. Money is never stationary, unless it is buried in the back yard and not spent, and the more it moves, the better off we are as a society.
So, with this understanding, why is it that so many business owners are concerned with corporate good citizenship and investing in the local community? Presumably, if these actions were profit maximizing in the first place, modern businesses would already be doing them to become more profitable and we would all be better off as a result. The reason is that, as the economy creates wealth, it does not do so equitably. What I mean here is that the economy creates winners and losers; some make huge amounts of money, and others do not. And while profit maximization improves aggregate well being, it does not do so for all individuals. These individuals who do not profit tend to resent the profits of others and feel cheated by the global economy.
In the USA there has been growing resentment of big business. As a result of outsourcing, and accelerated by the recent recession, many people have seen their livelihoods disappear and their nest eggs shrink. It is hard for the individual who is downsized when their jobs are outsourced to see the bigger picture. More over, it is harder still for that person to make a living and continue to contribute to the economy with no job. So while aggregate wealth is improved, local economies suffer. It is in these economies that the commenters in the above Wall Street Journal Article are urging businesses invest. The hope is that in investing in underutilized communities, it will create enough wealth and new jobs to make up for the lost profits caused by not outsourcing the jobs to cheaper international markets. Only time will tell if this burgeoning insourcing movement actually creates wealth. But it is clear that the commentators in the above article think this will be the case.
Monday, November 11, 2013
The Death of Small Business Investment
There once was a time, long, long ago when small business was the driver of the US economy and where big business did not dominate our economic policies and concerns. While it is true that small businesses still employ a huge proportion of the working people in the USA, it is also true that this proportion has been shrinking and that small business has been suffering in the post recession economy while big businesses have been hording cash and recording record profits. http://www.forbes.com/sites/scottshane/2012/04/21/small-businesss-share-of-employment-is-shrinking/
This has become an area of concern both for economists and politicians alike as stagnant job growth has plagued our economy and economic policies of late. Currently, worries about the Fed tapering their monetary easing programs has a greater effect on the stock markets than good fundamentals reported by the companies themselves. This is a sign that our current tepid growth is capital driven instead of driven by company fundamentals. http://www.usatoday.com/story/money/markets/2013/06/19/stocks-wednesday/2437101/
One of the major things that separates big business and small businesses is access to capital. A large business with an established balance sheet and a long track record of profits is a much more credit worthy entity than a small start up with few employees that is in the process of developing marketable products and services. This is true, by the way, even if the large business is not public and does not have access to public stock and bond issuances to fund expansion. Its track record allows it to borrow money at a much lower cost from investment banks at rates that the small business would envy. In a post recession world where banks are increasingly reluctant to lend to business at all, this advantage is only compounding. Where a large business today can use a large chunk of restricted stock (essentially a large stake in the firm itself) and other company assets to secure a business loan, a small business owner usually has to mortgage both his business and his house to secure similar funding. And even then they borrow at much higher interest rates than the big business. A lot of this is driven by the perceived relative risk in investing in both companies.
But...
Complicating this factor has been the slow erosion of a post Great Depressions set of laws called Glass Steagall. Glass Steagall was a set of regulations that separated investment banking from consumer banking. The idea behind this was that, if the government is going to give you access to the Fed borrowing window, and access to deposit insurance, that it wanted you investing that money in the local economy to promote small business and home ownership. With the erosion of these laws, banks were free to invest in complex securities and derivatives instead of their communities. This sort of investment is what helped inflate the economic bubble that popped in 2008/2009. While arguments go both ways for whether repeal actually caused the Great Recession, not enough analysis has been done into how the repeal has affected small business borrowing and liquidity. What we do know is that small businesses have had a harder and harder time competing with big business in the years since repeal, and the extra competition from the securities markets now available to banks could not have helped. What I mean is that instead of competing with other small businesses and real estate for loans, now small businesses compete with investments in the securities markets as well.
At some point, we as a nation are going to have to revisit this change in regulatory scheme. Because the end result has been that while our banks and large businesses are investing in international capital markets, using international operations to avoid domestic tax liability and outsourcing jobs around the world, small business is suffering. Small business, the former driver of our economy, does not have the capital it needs to expand an flourish. And when small business can't expand, it can't hire, and thus our unemployment rate stays stubbornly high, tax revenues stay low, and our economy flounders.
This has become an area of concern both for economists and politicians alike as stagnant job growth has plagued our economy and economic policies of late. Currently, worries about the Fed tapering their monetary easing programs has a greater effect on the stock markets than good fundamentals reported by the companies themselves. This is a sign that our current tepid growth is capital driven instead of driven by company fundamentals. http://www.usatoday.com/story/money/markets/2013/06/19/stocks-wednesday/2437101/
One of the major things that separates big business and small businesses is access to capital. A large business with an established balance sheet and a long track record of profits is a much more credit worthy entity than a small start up with few employees that is in the process of developing marketable products and services. This is true, by the way, even if the large business is not public and does not have access to public stock and bond issuances to fund expansion. Its track record allows it to borrow money at a much lower cost from investment banks at rates that the small business would envy. In a post recession world where banks are increasingly reluctant to lend to business at all, this advantage is only compounding. Where a large business today can use a large chunk of restricted stock (essentially a large stake in the firm itself) and other company assets to secure a business loan, a small business owner usually has to mortgage both his business and his house to secure similar funding. And even then they borrow at much higher interest rates than the big business. A lot of this is driven by the perceived relative risk in investing in both companies.
But...
Complicating this factor has been the slow erosion of a post Great Depressions set of laws called Glass Steagall. Glass Steagall was a set of regulations that separated investment banking from consumer banking. The idea behind this was that, if the government is going to give you access to the Fed borrowing window, and access to deposit insurance, that it wanted you investing that money in the local economy to promote small business and home ownership. With the erosion of these laws, banks were free to invest in complex securities and derivatives instead of their communities. This sort of investment is what helped inflate the economic bubble that popped in 2008/2009. While arguments go both ways for whether repeal actually caused the Great Recession, not enough analysis has been done into how the repeal has affected small business borrowing and liquidity. What we do know is that small businesses have had a harder and harder time competing with big business in the years since repeal, and the extra competition from the securities markets now available to banks could not have helped. What I mean is that instead of competing with other small businesses and real estate for loans, now small businesses compete with investments in the securities markets as well.
At some point, we as a nation are going to have to revisit this change in regulatory scheme. Because the end result has been that while our banks and large businesses are investing in international capital markets, using international operations to avoid domestic tax liability and outsourcing jobs around the world, small business is suffering. Small business, the former driver of our economy, does not have the capital it needs to expand an flourish. And when small business can't expand, it can't hire, and thus our unemployment rate stays stubbornly high, tax revenues stay low, and our economy flounders.
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