What Role, Government?

Tribe and jungle

Image via Wikipedia

When human beings were hunter-gatherers living in small tribes, life was simple.  There was no need for the concept of money and possessions were limited to what one could carry – tools, weapons, animal skins, maybe some crockery. This state lasted for about 150,000 years after we first became a species. Then, about 6,000 years ago, crop and animal husbandry were discovered. For the first time people were able to stay in one place for extended periods. The very earliest evidence of writing was in the form of accounting for commodities and the concepts of money and property ownership were born.

In the modern world people get money for living in a variety of ways. A few inherit enough money that they don’t have to work at all, but most people still “earn” their living by working for an hourly wage, perhaps the most basic form of work as commodity. That’s what my blue-collar father did. For many years he made $2.12 an hour with time-and-a-half for overtime. Benefits? Zero. It was a straight trade, work for money. And of course many also work for a salary, a contractual agreement that sometimes included benefits. (Robert Reich in today’s paper says that the fraction of workers with medical benefits has declined since 1980 from 74% to less than 10% today.)

Another source of money for living is investing. Is investing a form of “earning”? If it is, I suggest that it is fundamentally different from the barter of work for money. Investing of course is essential in a society that is inter-dependent because it leverages specialization, the process by which we have learned to trade different forms of labor. By specializing, everyone benefits and that has been amplified enormously by science, technology and industrialization. In only a hundred years, for example, America has evolved from a culture of 90% farmers to one in which only 1% of the population produces enough to feed the whole country and export even more. But here’s the point: that basic link between bartering hourly work for pay was, in the latest 0.06% (six one-hundredths of one percent) of humanity’s time on earth, broken by the concept of investment. I say that we still have a long way to go to learn to live with this concept.

Anyone who has taken economics 101 in college knows that capitalism, while being head and shoulders ahead of any other system, has always been beset by wild cycles of boom and bust, cycles that continue today. Why should this be? I suggest that it is because of that broken link. There is no objective formula for the system, and fairness is not part of it. Corporate boards are notoriously cozy with management and often morally, if not legally, corrupt. What is an executive’s time worth? You can’t price it objectively. You can’t say it should be 10% of sales, or 5% of earnings, or 0.1% of net profit because it is simply impossible to separate the executive’s contributions from those of his colleagues and those who work for him. It is all subjective, and in present day America we have seen an explosion in what most people see as unreasonable “compensation” of executives compared to workers.  Compounding this problem is that we currently tax capital gains, the principal source of money for the rich, at a lesser rate than than we do the wages of regular workers.  It is a moral inversion.

Mitt Romney

Image via Wikipedia

In the current controversy surrounding the amazing wealth of GOP candidate Mitt Romney, the broken link between “earning” money and leveraging it by manipulation is prominent. Bain Capital, Romney’s invention, is not a company that builds widgets, it simply reorganizes the debris left from other failed businesses. Is this a necessary kind of business? Obviously it is – somebody has to clean up the messes. Are its profits justified? That is an unanswerable question because there are no criteria for that. Capitalism is a system of hard work on a small scale and of clever opportunism on a large scale. And a collective economy on a national scale is subject to the aforementioned wild swings of boom and bust.

What should be the governor of the engine of wealth, the popular source of the American Dream? I submit that it can only be found in the twin mechanisms of government regulation and an open press, and those in turn can only operate effectively under a constitution like ours, a constitution which was crafted to encourage openness and compromise in governing.

Those who see economic success in less regulation of business are missing an important point. Unregulated free enterprise is an engine without a speed governor, and it was just that that caused the internet bubble and also the housing crisis that culminated in the present Great Recession. Capitalism is an unstable system that our young species is still learning to manage, and lately we aren’t doing so well at it. (The dinosaurs ruled for 60 million years, 400 times longer than our species has been around.) We had better learn because all seven billion of us are stuck here together on this little blue marble.  We can screw it up out of avarice or we can make it work for everyone, our choice.

And one final thought about that great document, the Constitution: it is government that we expect to “promote the General Welfare”, not business, and if we deny government that function, fairness in society will be forfeit and the economy will continue to fail of its own imperfections.

Advertisements

About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
This entry was posted in Economics, government regulation, Uncategorized and tagged , , , , , , , , , , , . Bookmark the permalink.

11 Responses to What Role, Government?

  1. ansonburlingame says:

    Jim,

    I was inserting a rather lengthy comment but word press “ate” it. No sure what happened. But here it is, shortened greatly.

    My ship had two “engines” using all the power available from the reactor. One set supplied the “hotel load” (electricity, heat, light, air, etc) for the entire crew. It amounted to about 1% of Total Power available. The other 99% was available to the “main engines” driving the ship (of State) and could operate between “all stop” and “ahead flank”. Those “main engine” throttles were controlled MANUALLY, by a well trained individual, supervised by other well trained individuals, ready at all times to meet the demands from the skipper, ultimately, to drive the ship on the correct course and speed.

    Of course that skipper and all the members of the “system” operated under rules (regulations) to ensure safe operation of the ship over a wide range of “demand”. The only “governor” in the entire system was the overspeed trip on the main engines that only operated in a rare emergency (which I never saw happen in 23 years of ship driving). The main engines would automatically shutdown and had to be reset manually, by the crew.

    That is a capitalistic economy, designed to deliver a whole lot of steam over a wide range of DEMAND for such steam. It is called supply and demand of course, economically.

    When you speak of a governor to control an economy, it is a constant speed, not a range of speeds available from the economic engine. Take our current GDP of $14 Trillion and divide by 308 Million. The result is about $45,000 per individual. Great. We can all now run at the same speed with your “governor”.

    But of course GDP will then “scram” like the reactor on my ship and we will all starve, but do so together!!! That in essence is pure communism and it does not work with a constant speed governor.

    Socialism has a variable speed governor where government can sit there and simply rotate the knob to meet demand. Little WORK is required until the demand exceeds the ability of the reactor to supply the steam to meet the demand. Europe is right now trying to conduct a fast scram recovery because the people demanded more from government than the reactor could supply.

    Well keep that variable speed governor in the hands of government, and guess what, the reactor will just keep on scraming and ultimately there will be no crew that knows how to conduct another recovery.

    Supply and demand, economically or driving a submarine, automatic, variable speed control by government of a bunch of individuals doing their jobs, working within the rules, to keep the reactor and thus the POWER to drive the economy or the ship.

    I know how I want a ship to be driven, be it the ship of state or a submarine. And the “hotel load” to keep food, lights, air to breath, etc. should be minimized to keep the maximum power available to meet the demand from the people. Right now our “hotel load” is about at 25% power.

    Now wonder we cannot drive the ship of state at the speeds we all want.

    Anson

    Like

  2. Jim Wheeler says:

    @ Anson,

    Metaphors I suppose are inherently imperfect. The point I was trying to make in the post was not that socialism is better than capitalism, but rather that unregulated supply and demand routinely results in “wild swings of boom and bust”, particularly on the large scale. I believe the housing collapse is a good example. Proper regulation could have prevented it. In the same sense, there is no objective standard for executive compensation. But in a free and open society there are at least political consequences for excess, and I think we are seeing those now.

    Like

  3. Jim,

     
    Fantastic look at this problem. I want to emphasize something you said,

    Capitalism is an unstable system…

    To me, it is a denial of human ingenuity that we can’t figure out a way to make this indispensable system more stable. Car engines built in the early 20th century were much less powerful than car engines today. The average horsepower in 1930 was under 70. Today it is around 250.

    I can imagine that if you would have told someone in 1930 that there was an engine that could generate three and a half times more horsepower, he or she would have said: “What? That would be too dangerous to drive!”  Except that we have figured it out. We’ve built better and straighter roads, established speed-limit laws and other traffic regulators, required licenses to drive, improved the design of cars and added safety equipment, and, yes, there are speed governors to prevent all kinds of mischief.  And we’ve done all this and still managed to increase MPG!

    Why do some folks believe that human beings aren’t capable of regulating capitalism so that it is our servant rather than our master?

    Duane

    Like

    • Jim Wheeler says:

      Why do some folks believe that human beings aren’t capable of regulating capitalism so that it is our servant rather than our master?

      Well said, Duane, and a perfect one-sentence summary of the idea. Thanks.

      Like

  4. ansonburlingame says:

    to both,

    “Capitalism is an unstable system…”

    See there is where we disagree.

    Capitalism shuts down unsafe or uncontrolled companies all the time. Instead of a reactor scram on a submarine it is called bankruptcy. Don’t follow the rules of “good business practices” and your business goes bankrupt (the reactor scrams).

    Or in my metaphor, short of bankruptcy, the “main engine overspeed trip works as designed” and the crew must take immediate and correct action to reset the main engines and proceed as ordered. We use to run drills on my ship all the time to test that capability of the crew and I could tell you some really funny stories of how things got all messed up in such drills. Fine a drill is for training. But our main engines trippedm nationally, about 3 years ago and we have STILL not reset them to deliver full power to drive the ship, metaphorically speaking.

    And of course you BOTH ignore my metaphorical point about “hotel loads”. Jim at least understands what I am talking about, I hope. Sometimes accidents happen and the whole ship (of state) must do with less until the accident or emergency or economic downturn is fixed.

    What happens on such a ship. Simple, it is called “rig ship for reduced electrical power”. Crewmembers run around and turn of unneeded lights, hot water heaters, stove to cook food (break out the sandwhiches) etc. The whole crew does with less from the hotel load until full power is restored.

    Well what Obama has done is during the emergency he has tried to INCREASE the hotel load of government. Well, buddy, if the reactor is scrammed you can DEMAND all the “hotel load” you like but the steam (Power) is just not there to produce the power demanded.

    On a nuclear submarine it is called “running on the batteries” of if you are lucky “running on the diesel generator”. But whatever “running” is done is with much less power available until it is returned when the reactor is back on line, the main engines have been reset and the economy is “ready to answer all bells”.

    Jim I hope understands the metaphor I am using in terms of nuclear submarine operations. Duane may not have a clue or other readers for that matter, which is not intended as a disparaging comments. I have no idea how to deliver mail on time, for example

    But my comments and metaphor are really directed at Jim, who wrote the blog looking, it seems to me for a good “governor” on this engine we call capitalism. I instead argue that the correct “governor” is already there and is inherenty in capitalism. Bad businesses fail, period and the market takes care of such.

    Now one point I will agree with Jim on. When the main engine overspeed trip operates automatically. SOMEBODY did something really WRONG. Recall I said I NEVER saw or heard of such happening in 23 years of ship driving.

    That is like saying I never, as a civlian worked for a company that went backrupt or had to lay off workers to survive. I only worked for companies (and on ships) that GREW (companies) or never went aground (ships). Good skippers, marginal skippers insert CEOs for skippers, I never saw the consequences of really bad decisions from the top. But I have studied them a lot for sure and see clearly the results of bad decisions. And I cannot tell you how TERRIBLE I think it is that a bad CEO gets huge compensation for driving his company aground.

    But I will add that I see no way for GOVERNMENT to dictate the punishment (other than legal punishment when laws are broken) for such CEOs. That lack of holding people accountable is disgusting to me and I hold Boards of Directors accountable. Put it in BIG headlines when that happens. For sure I would NEVER invest in that company again, assuming I now have money to invest, which I do not have. But the MARKET has the the money to withhold from such investment and smart investors will do so, thru the market, not the government.

    In other words, I believe the market is self correcting. Government is not. When things went wrong on my submarine, NO ONE called for rewriting the “reactor plant manual” (the rules or regulations to safely operate the reactor). Nope, I just got a “phone call from Rickover or my immediate superior, asking me why I allowed that to happen on MY ship” Can you imagine how long I would have lasted if it say “the last skipper gave me a bad crew”????

    Anson

    Like

    • Jim Wheeler says:

      @ Anson,

      Again, metaphors are only imperfectly useful. In this case you pick bankruptcy as an automatic fail-safe response, but I submit that it isn’t that simple. In some cases that is appropriate, IMO, but not in others. Case in point: the bail-outs of Chrysler and GM. Hundreds of thousands of American jobs were saved by not letting them go bankrupt, an action which would have effectively ceded the entire industry to foreign ownership. This goes to my point, and Duane’s, that economics is not simple, especially on the large scale, and that we ought to be smart enough to steer the economy past the rocks and shoals. (Oops, another metaphor!) 🙄

      I am glad we agree on the behavior of Boards of Directors, but I am not sanguine about doing anything about it and I don’t agree that the “market” will take care of it. The “market” has only a gross effect on their behavior. Take a company like Apple for example. So long as a company like that is so very successful, stockholders will not complain even if the Board gives the CEO an unimaginably huge chunk of the company, and they did just that: one million shares of the company. New CEO Tim Cook got a minimum of $378,000,000 in compensation for 2011!!! Did he “earn” that much? How much success is due to Mr. Cook and how much to others, including Steve Jobs? There is no logic to it, and no “speed” governor to it. It is nothing more than what Humpty Dumpty said:

      “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean – neither more nor less.” — Lewis Carroll

      Like

  5. ansonburlingame says:

    Jim,

    I was unaware of what Apple just did in terms of compensation to a new CEO. I put it in the “disgusting” category and suspect Steve Jobs is rolling over in his grave. I also believe that the “market” will ultimately “fix” such grevious errors by a BOD. Now knowing what you just told me, I would not invest a nickel in Apple today. First of all the stock price is WAY too high for “little people” to so invest. Do YOU think Apple stock will now continue to rocket upwards.

    To me that would be akin to buying a $1 million condo in Florida in 2007!

    I just read a very interesting article by a major Wall Street leader, talking about long term market swings in the past, how such swings (up or down) eventually were “corrected”, etc. He calls the “secular” bull and bear markets which are far different from shorter term recessions and “booms”. His lesson in market history is compelling, to say the least. It also supports my metaphors related to submarine operations envoling “scrams, main engine trips,.crew responses to such, etc.” If I can find it I will send it to you for your own consideration.

    As for GM, recall what eventually happened with the government intervention. Who LOST, big time, in that deal? Investors were left with NOTHING of any value, right? Who got “saved”? Unions of course.

    Had the government NOT intervened the “damage” would have been far more equally spread in a normal bankruptcy proceeding with both investors, managers and workers feeling the pain of terrible business practices over a long period of time..Given such a view, which process would have been more “fair” to resett that particular main engine or scrammed reactor?

    Anson

    Like

    • Jim Wheeler says:

      @ Anson, & other readers too,

      Re the price of Apple stock, after I retired from the Navy I made an effort to understand the stock market. After buying and selling stocks for 10 years or so I came to what should have been an obvious conclusion: the price of a stock on an open market represents exactly the consensus of all the investors’ opinions, given past history and available information. Therefore, intuition and general reading about the worth of stocks is worth about as much as a bucket of warm spit. The only consideration not reflected in a daily price is insider trading and other criminal manipulations.

      I would not buy Apple stock today simply because it is common for past success to overly influence expectations about the future, but the bottom line is, nobody (except maybe insiders) knows the future. Apple just might have an even better 2012 than 2011 because of, say, a new iPhone 5. If it does, there is no telling what else Apple might give to Tim Cook under the illusion that he did it all himself.

      A different example shows how the dollar value of a stock can also be misleading by itself. Berkshire Hathaway, Buffet’s holding company stock, might have seemed expensive at $7,450 a share 22 years ago. (BH has never had a stock split.) Yesterday BH closed at $119,450 a share. That stock is a testament to the virtues of long-term investing as opposed to speculation, but that requires knowledgeable study of internal finance and the patience of years, which is Buffet’s specialty. That is why I settled for investment in low-cost index funds and the theory of asset-allocation, a decision that has served me very well through two huge cycles of boom and bust, cycles which graphically illustrate what I meant by boom, bust, and instability.

      Much more than unions benefitted from saving GM. Lots of managers did too – they are collecting bonuses now. So did the government, which is now collecting your hated taxes on those incomes, and so did all the other businesses and entities who sell to both workers and management who can now afford to spend rather than collect unemployment. I have read that every dollar spent generates 7 or 8 more dollars of economic activity, so when you say only unions benefitted you are showing your prejudices big time. I believe even the previous stock investors made out OK if they held on to the stock. GM is currently at abut $24 a share, only a little lower than what it was worth in 2006. At its low in 2009 it hit $1 a share, but it appears to me that those who held on recovered rather well, thanks to the federal government. I hope you can see what Duane and I are trying to tell you about the complexity of economics on the large scale, but if not, maybe other readers will.

      Like

  6. ansonburlingame says:

    Jim,

    My former wife made gradual gains in accumulation of money (I paid little attention as I was “at sea” during those years) because the equity market went up over our 30+ year marriage. We were not in it for the short term. Rather it was a go ROI over our adult and professional years lifetime. In the late 60’s when we put maybe $100 into the stock market the DOW as below 1,000. Look at it today. And look where it went in 2009. And guess where it will be in a year???

    You can take it to the bank that I will NEVER look to you and Duane to suggest how I should invest my money today, as well.

    But what I WILL argue with both of you is the role that government should play in such market conditions. The more government does in markets to more screwed up markets become is the obvious, to me lesson in history. What caused the housing bubble to burst. REAL simple explanation to me. Lenders, borrowers and regulators made HUGE mistakes in judgement and there went the bubble. All three categories made huge PERSONNEL ERRORS.

    Your solution of course is to ignore the “people mistakes” (lending, borrowing and regulating) and want to simple write more RULES to prevent the mistakes from happening again. CRAZY is the only think I can say about rewritting rule books when the rules we already had would have been fine if people, had followed them.

    But I suppose you and Duane would now call for rewriting Navy Regs in view of the actions by four Marines, recently!!!

    Anson

    Like

    • Jim Wheeler says:

      I don’t really care whether you take my investment advice or not, Anson. I was simply stating a philosophy that has worked well for me, and it was as much for other readers as you. But I do resent the arrogance of assuming an opinion for me on the Marine incident, something I have not commented on. It seems you have firmly categorized me, whether I like it or not. I’m not surprised.

      Like

  7. ansonburlingame says:

    Jim,

    My point was very simple and whether you resent it or not is beside the point. You don’t rewrite the rule books everytime something goes wrong. First you find out WHO made the mistakes and FIX that problem. Navy Regs, Federal Laws, etc do not need to be rewritten every time someone, or even a lot of someone’s screws up. And when you do rewrite the laws you still have the same batch of regulators to enfore the NEW ones AS WELL AS THE OLD ONES, still left on the books.

    But oh no, a liberal cannot blame a PERSON for screwing up. Obvisously it is the SYSTEM that made the poor soul screw up, right!!

    Holy cow.

    Anson

    Like

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s