Tag Archives: Elizabeth Warren

Inequality and Inequality Propaganda

21 Saturday Dec 2019

Posted by in Income Distribution, Inequality, Uncategorized

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I’m an “inequality skeptic”, first, with respect to its measurement and trends; and second, with respect to its consequences. Economic inequality in the U.S. has not increased over the past 60 years as often claimed. And some degree of ex post inequality, in and of itself, has no implication for real economic well-being at any point on the socioeconomic spectrum, the growls of class-warmongers aside. So I’m not just a skeptic. I’m telling you the inequality narrative is BS! The media has been far too eager to promote distorted metrics that suggest widening disparities and presumed injustice. Left-wing politicians such as Bernie Sanders, Elizabeth Warren, and Alexandra Ocasio-Cortez pounce on these reports with opportunistic zeal, fueling the flames of class warfare among their sycophants.

Measurement

Comparisons of income groups and their gains over time have been plagued by a number of shortcomings. Jeff Jacoby reviews issues underlying the myth of a widening income gap. Today, the top 1% earns about the same share of income as in the early 1960s, according to a recent study by two government economists, Gerald Auten and David Splinter.

Jacoby recounts distortions in the standard measures of income inequality:

  • The comparisons do not account for tax burdens and redistributive government transfer payments, which level incomes considerably. As for tax burdens, the top 1% paid more taxes in 2018 than the bottom 90% combined.
  • The focus of inequality metrics is typically on households, the number of which has expanded drastically with declines in marriage rates, especially at lower income levels. Incomes, however, are more equal on a per capital basis.
  • The use of pension and retirement funds like IRAs and 401(k) plans has increased substantially over the years. The share of stock market value owned by retirement funds increased from just 4% in 1960 to more than 50% now. As Jacoby says, this has “democratized” gains in asset prices.
  • A change in the tax law in 1986 led to reporting of more small business income on individual returns, which exaggerated the growth of incomes at the high-end. That income had already been there.
  • People earn less when they are young and more as they reach later stages of their careers. That means they move up through the income distribution over time, yet the usual statistics seem to suggest that the income groups are static. Jacoby says:

“Contrary to progressive belief, America is not divided into rigid economic strata. The incomes of the wealthy often decline, while many taxpayers go from being poor at one point to not-poor at another. Research shows that more than one-tenth of Americans will make it all the way to the top 1 percent for at least one year during their working lives.”

Mark Perry recently discussed America’s record middle-class earnings, emphasizing some of the same subtletles listed above. A middle income class ($35k-$100k in constant dollars) has indeed shrunk over the past 50 years, but most of that decrease was replaced by growth in the high income strata (>$100k), and the lower income class (<$35k) shrank almost as much as the middle group in percentage terms.

Causes

What drives the inequality we actually observe, after eliminating the distortions mentioned above? The reflexive answer from the Left is capitalism, but capitalism fosters great social and economic mobility relative to authoritarian or socialist regimes. That a few get fabulously rich under capitalism is often a positive attribute. A friend of mine contends that most of the great fortunes made in recent history involve jobs for which the product or service produced is highly scalable. So, for example, on-line software and networks “scale” and have produced tremendous fortunes. Another way of saying this is that the marginal cost of serving additional customers is near zero. However, those fortunes are earned because consumers extract great value from these products or services: they benefit to an extent exceeding price. So while the modern software tycoon is enriched in a way that produces inequality in measured income, his customers are enriched in ways that aren’t reflected in inequality statistics.

Mutually beneficial trade creates income for parties on only one side of a given transaction, but a surplus is harvested on both sides. For example, an estimate of the consumer surplus earned in transactions with the Uber ride-sharing service in 2015 was $1.60 for every dollar of revenue earned by Uber! That came to a total of $18 billion of consumer surplus in 2015 from Uber alone. These benefits of free exchange are difficult to measure, and are understandably ignored by official statistics. They are real nevertheless, another reason to take those statistics, and inequality metrics, with a grain of salt.

Certain less lucrative jobs can also scale. For example, the work of a systems security manager at a bank produces benefits for all customers of the bank, and at very low marginal cost for new customers. Conversely, jobs that don’t scale can produce great wealth, such as the work of a highly-skilled surgeon. While technology might make him even more productive over time, the scalability of his efforts are clearly subject to limits. Yet the demand for his services and the limited supply of surgical skills leads to high income. Here again, both parties at the operating table make gains (if all goes well), but only one party earns income from the transaction. These examples demonstrate that standard metrics of economic inequality have severe shortcomings if the real objective is to measure differences in well-being. 

Economist Robert Samuelson asserts that “workaholics drive inequality“, citing a recent study by Edward E. Leamer and J. Rodrigo Fuentes that appeals to statistics on incomes and hours worked. They find the largest income gains have accrued to earners with high educational attainment. It stands to reason that higher degrees, and the longer hours worked by those who possess them, have generated relatively large income gains. Samuelson also cites the ability of these workers to harness technology. So far, so good: smart, hard-working students turn into smart, hard workers, and they produce a disproportionate share of value in the marketplace. That seems right and just. And consumers are enriched by those efforts. But Samuelson dwells on the negative. He subscribes to the Ludditical view that the gains from technology will accrue to the few:

“The Leamer-Fuentes study adds to our understanding by illuminating how these trends are already changing the way labor markets function. … The present trends, if continued, do not bode well for the future. If the labor force splits between well-paid workaholics and everyone else, there is bound to be a backlash — there already is — among people who feel they’re working hard but can’t find the results in their paychecks.“

That conclusion is insane in view of the income trends reviewed above, and as a matter of economic logic: large income gains might accrue to the technological avant guarde, but those individuals buy things, generating additional demand and income gains for other workers. And new technology diffuses over time, allowing broader swaths of the populace to capture value both in consumption and production. Does technology displace some workers? Of course, but it also creates new, previously unimagined opportunities. The history of technological progress gives lie to Samuelson’s perspective, but there will always be pundits to say “this time it’s different”, and it probably sounds heroic to their ears.

Consequences

The usual discussions of economic inequality in media and politics revolve around an egalitarian ideal, that somehow we should all be equal in an absolute and ex post sense. That view is ignorant and dangerous. People are not equal in terms of talent and their willingness to expend effort. In a free society, the most talented and motivated individuals will produce and capture more value. Attempts to make it otherwise can only interfere with freedoms and undermine social welfare across the spectrum. This post on the Declination blog, “The Myth of Equality“, is broader in its scope but makes the point definitively. It quotes the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness.”

The poster, “Thales”, goes on to say:

“The context of this was within an implied legal framework of basic rights. All men have equal rights granted by God, and a government is unjust if it seeks to deprive a man of these God-given rights. … This level of equality is both the basis for a legal framework limiting the power of government, and a reference to the fact that we all have souls; that God may judge them. God, being omniscient, can be an absolute neutral arbiter of justice, having all the facts, and thus may treat us with absolute equality. No man could ever do this, though justice is often better served by man at least making a passing attempt at neutrality….”

Attempts to go beyond this concept of ex ante equality are doomed to failure. To accept that inequalities must always exist is to acknowledge reality, and it serves to protect rights and opportunities broadly. To do otherwise requires coercion, which is violent by definition. In any case, inequality is not as extreme as standard metrics would have us believe, and it has not grown more extreme.

Amazon, Happy Users Face Lust for Antitrust

02 Thursday May 2019

Posted by in Antitrust, Capitalism, Regulation

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It’s almost always best to resist the temptation to “fix” perceived market failures, perceptions that are often incorrect to begin with. An equivalent truism is that government intervention in any market will almost always damage outcomes for consumers and producers alike. So it is with ill-advised calls to bring antitrust action against Amazon. Elizabeth Warren is a prominent voice among the would-be meddlers. She tells the story of a hypothetical pillow manufacturer reliant on sales through Amazon’s platform. But alas, the small company is squeezed out of its market because Amazon gives its own brand of pillows superior placement and pricing. Is this a clear case of anti-competitive behavior? And if so, what’s to be done?

In this Yale Law Journal article Lina M. Kahn asserts that there is an antitrust case against Amazon. From the abstract:

“We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.”

A basic argument against anti-trust action is that the retail market and e-commerce market are not as concentrated as Kahn and Warren suggest. Amazon’s share of U.S. retail sales was an estimated 5% in 2018, but its share of e-commerce is the more worrisome to modern-day trust busters: Amazon is estimated to have controlled about 49% of U.S. online sales in 2018.

Obviously 49% is not close to monopolization, but the company is far ahead of other on-line rivals: eBay’s share was slightly less than 7%; Apple and Walmart each had less than 4%, and an assortment of sellers such as Home Depot, QVC and Wayfair, had shares of 1.5% share or less. The point is, however, that there are prominent rivals, some with aggressive plans to compete in the space. For example, apart from its traditional auction model, eBay is instituting a number of changes to its platform and offerings that it hopes will help it to compete with Amazon, some of which are very much like the practices for which Amazon is now criticized, such as preferential placement for big advertisers. Wal Mart is investing heavily in an effort to expand its online sales.

Companies like these rivals have the resources and access to capital to pose a legitimate threat to Amazon’s online dominance. That sort of competitive pressure, or even its mere possibility, imposes a far more effective form of market discipline than government regulators can hope to achieve, assuming they wouldn’t break the market. The governance imposed by the market itself keeps the focus squarely on bringing value to customers, which for Amazon means both buyers and third-party sellers. And while Amazon’s business model and platform are highly successful, no one, including Amazon management, can anticipate the shape of new technological developments that could lead to the next revolution in retail. Again, there are potent incentives for those who might be in a position to foment such a revolution.

But what about those sellers who rely so heavily on Amazon’s platform? Does Amazon exercise monopsony power to the detriment of these sellers, as Kahn and Warren contend? Again, sellers have alternatives. While it might be a burden for the smallest startups to compete on several different platforms, they do have choices. Therefore, the monopsony story just doesn’t hold up. Amazon has a large marketplace precisely because so many third-party sellers have chosen to compete there. But they can compete elsewhere.

If barriers to entry are created by Amazon’s platform management, it would involve a loss of revenue earned from hosting third-party sellers and create market opportunities for competitive platforms. The same can be said of “predatory placement” of Amazon’s own first-party product offerings. This practice bears a similarity to grocery stores giving preferred placement to certain brands in exchange for fees, which allow grocers to offer those products at lower prices. Indeed, few if any grocery stores carry all national brands, but those brands are usually available at competing stores. If anything, it would seem that getting a product listed on an online platform is relatively easy compared to getting space on grocery shelves, though like grocery brands, preferred placement is another matter. Building a brand has never been easy, and it may be necessary for less established products to be marketed on multiple platforms, including platforms based on auction models.

It would be very difficult to prove that Amazon engages in predatory pricing of their own offerings (also see here). That involves pricing below cost (including the loss of revenue from third-party sellers). Amazon might practice what has been described as loss leadership: offering products below cost from time-to-time in oder to spur sales of other products, which is a time-honored marketing tradition. The following quote, taken from the first link in this paragraph, is from a judge in a recent price fixing case involving Apple and Amazon:

“… the Complaint asserts that Amazon’s e-books business was ‘consistently profitable.’ Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing ‘below an appropriate measure of . . . costs.’ There must also be a ‘dangerous probability’ that the alleged predator will ‘recoup its investment in below-cost prices’ in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was ‘predatory,’ none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.” 

The basic considerations discussed above are couched in terms of traditional anti-trust thinking: monopoly, concentration, competitive threats, and predatory pricing. However, there is another, more fundamental point to be made: Amazon’s massive success is due precisely to the popularity of their platform as well as service to consumers and third-party sellers. That’s capitalism, baby! Does Amazon extract a price from users? Yes, it engages in mutually beneficial trade! If it tries to extract too much, it will suffer at its own hands by creating market opportunities for others. It is Amazon’s platform, asset, and private property. The Amazon Marketplace belongs to Amazon, and the company is free to manage it as shareholders allow. There is no social value in interfering with private property and voluntary arrangements that bring unambiguous benefits to customers on both sides of the transactions sponsored on the platform. Such interference would diminish those benefits and destroy private value belonging to Amazon shareholders.

Jeff Bezos’ recent letter to Amazon shareholders tells of third-party sellers “kicking our first-part butt.” Amazon’s total sales have grown fast over the past two decades, and while its sales in first-party transactions have grown at a robust 20% a year, third-party sales on the platform have grown at a rate of 52%! The last link provides this Bezos quote:

“Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer: We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.”

Bezos also tells of the heavy investments Amazon makes in efforts to improve its platform, which have brought tremendous successes and a few noteworthy failures. His letter is obviously self-serving, both as an effort to engage shareholders and as an implicit appeal against anti-trust action. Nevertheless, it is hard to deny the company’s outstanding performance, the benefits it brings to the consuming public, and the opportunities it creates for enterprising sellers and entrepreneurs. The unfortunate fact is we must always be vigilant for the itchy fingers of leftists grasping for the value created by private effort.

The Excellent Electoral College

05 Friday Apr 2019

Posted by in Constitution, Democracy

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So lacking is the average American’s knowledge of civics that they often react in shock to the suggestion that the United States was never intended to be a pure democracy. But unchecked democracy is not a system that can be counted upon to maintain stability, something the founders knew when they fashioned the country as a constitutional republic. This point bears emphasis given the recent calls to abolish the Electoral College (EC) by such Democrat luminaries as Elizabeth Warren and Beto O’Rourke. Others, like Socialist-cum-Democrat Bernie Sanders, say they want to “assess” the EC.

Jon Gabriel describes the EC as one of a series of stabilizing checks and balances embedded in our system of government. It served the purpose of balancing interests across diverse regional economies and sub-cultures:

“By distributing our presidential choice among 51 individual elections, nominees must appeal to a wide variety of voters with a wide variety of interests. Farmers in Wisconsin are important, as are retirees in Florida, factory workers in Pennsylvania, and shopkeepers in Arizona. White Evangelicals need to be courted in Charlotte, as do Latino Catholics in Mesa.

If the Electoral College were abandoned, party frontrunners would camp out exclusively in urban areas. The pancake breakfasts in Des Moines and Denver would be replaced with mammoth rallies in Los Angeles and New York City.”

So diverse were these interests in the late 1700s that it’s reasonable to assume that the Constitutional Convention would have failed without the creation of the EC. Today, no less, our country would be unlikely to survive the EC’s elimination. Why, for example, would voters in Missouri wish to allow the preferences of east and west coast voters to dominate federal policy-making?

Gabriel provides some interesting history giving emphasis to the notion of a tyranny of the majority under pure democracy:

“The world’s first democracy was ancient Athens, which allowed around 30,000 free adult male citizens to choose their leaders. They made up less than 15 percent of the population, but it was the most egalitarian political innovation to date.

Athen’s unbridled democracy, however, led to the very extremes that sowed its decline and defeat at the hands of enemies. This note from Edward Conway on Quora is instructive (his is the third commentary at the link; most of the others are helpful, but his is most succinct):

“… ancient Athenian democracy was purely a matter of votes: if you wanted to win a court case, or pass a law, or tax a group, or go to war, or massacre a large number of people, the only check was whether you could convince a majority of the citizens to vote in your favor. While there were means of checking individual people (see: Ostracon), this did nothing to check the power of the crowds, as it only removed one focus of this power.

Thus Athenian democracy never moved beyond the initial ‘UNLIMITED POWER!’ stage. Anyone who could convince the crowd to follow them had unchecked authority until they lost control of the crowd.

This led, predictably, to excesses: ‘Let’s attack Sparta!’, ‘Let’s invade Sicily!’, ‘Let’s ostracize our best general!’, etc.“

It’s interesting that the Athenian military was staffed by plebeians who found imperialistic actions to be profitable. Naturally, they voted to devote more resources to military incursions… until they were defeated. Allowing a large faction to vote on their own pay, and the taxes on others necessary to pay for it, can be a glaring defect of democracy. We see manifestations of the same phenomenon today in congressional pay raises and expansion of federal benefits for large segments of the population who pay no taxes.

Back to Gabriel:

As the saying goes, democracy is four wolves and a lamb voting on what to have for lunch. The Founders looked to Athens less as a political model than an object lesson in what not to do.

James Madison said that democracies are ‘incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths.’

The EC was a stroke of political genius: It allowed the delegates at the Constitutional Convention to reach a consensus, something that would probably be just as difficult to accomplish today as it was then. The EC transforms one federal election into 51 local elections, reducing the feasibility of tampering by the party in power at the federal level. It also reduces the incentive for electoral fraud in a national race because a greater margin of victory within a state cannot gain the votes of additional electors.

The noise regarding the EC is coming from just one side of the political aisle: Donald Trump’s electoral victory in 2016, and his reasonably good prospects for reelection in 2020, have inflamed the passions of Democrats, who are now grasping at any and all ways in which they might tilt the playing field their way. Relative to electoral votes, popular votes are heavily concentrated in the coastal “blue” states. Such a change in the rules of the game would certainly stand to benefit Democrats. Therefore, the debate looks suspiciously like it has nothing to do with “good governance” and electoral integrity, and everything to do with raw politics.

It’s useful to remember that the EC was an essential incentive for gaining the buy-in of smaller states to join the Union. It remains vitally important to states whose interests would likely be neglected if presidential politics was dominated by the coastal states. Fortunately, the founders invested the EC with durability: rescinding it would require a constitutional amendment. That could happen if two-thirds of the state legislatures agree to convene a constitutional convention. Or, it could be proposed by a two-thirds majority in both houses of Congress, then ratified by three-fourths of the state legislatures. Ain’t gonna happen.

 

Socialism and Authoritarianism: Perfectly Complementary

19 Wednesday Sep 2018

Posted by in Socialism, Tyranny

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The socialist left and the Marxist hard left both deny their authoritarian progenitors. Leftists are collectivists, many of whom subscribe to an explicit form of corporatism with the state having supreme power, whether as a permanent or transitional arrangement on the path to full state ownership of the means of production. Collectivism necessarily requires force and the abrogation of individual rights. At this link, corporatism, with its powerful and interventionist state, is aptly described as “de facto nationalization without being de jure nationalization” of industry. To the extent that private ownership is maintained (for the right people), it is separated from private control and is thus a taking. But the word corporatism itself is confusing to some: it is not capitalism by any means. It essentially means “to group”, and it is a form of social control by the state. (And by the way, it has nothing to do with the legal business definition of a corporation.)

Of course, leftists distance themselves from the brutality of many statist regimes by asserting that authoritarianism is exclusively a right-wing phenomenon, conveniently ignoring Stalin, Castro, Mao, Pol Pot, and other hard lefties too numerous to mention. In fact, leftists assert that fascism must be right-wing because it is corporatist and relies on the force of authority. But again, both corporatism and fascism are collectivist philosophies and historically have been promoted as such by their practitioners. Furthermore, these leftist denials fly in the face of the systemic tendency of large governments to stanch dissent. I made several of these points four years ago in “Labels For the Authoritarian Left“.

I find this link from The Federalist fascinating because the author, Paul Jossey, provides quotes of Hitler and others offering pretty conclusive proof that the Nazi high command was collectivist in the same vein as the leftists of today. Here are a few of Jossey’s observations:

“Hitler’s first ‘National Workers’ Party’ meeting while he was still an Army corporal featured the speech ‘How and by What Means is Capitalism to be Eliminated?’

The Nazi charter published a year later and coauthored by Hitler is socialist in almost every aspect. It calls for ‘equality of rights for the German people’; the subjugation of the individual to the state; breaking of ‘rent slavery’; ‘confiscation of war profits’; the nationalization of industry; profit-sharing in heavy industry; large-scale social security; the ‘communalization of the great warehouses and their being leased at low costs to small firms’; the ‘free expropriation of land for the purpose of public utility’; the abolition of ‘materialistic’ Roman Law; nationalizing education; nationalizing the army; state regulation of the press; and strong central power in the Reich.”

Are you feeling the Bern? Does any of this remind you of the “Nasty Woman”, Liz Warren? Here is more from Jossey:

“Hitler repeatedly praised Marx privately, stating he had ‘learned a great deal from Marxism.’ The trouble with the Weimar Republic, he said, was that its politicians ‘had never even read Marx.’ He also stated his differences with communists were that they were intellectual types passing out pamphlets, whereas ‘I have put into practice what these peddlers and pen pushers have timidly begun.’

It wasn’t just privately that Hitler’s fealty for Marx surfaced. In ‘Mein Kampf,’ he states that without his racial insights National Socialism ‘would really do nothing more than compete with Marxism on its own ground.’ Nor did Hitler eschew this sentiment once reaching power. As late as 1941, with the war in bloom, he stated ‘basically National Socialism and Marxism are the same’ in a speech published by the Royal Institute of International Affairs.

Nazi propaganda minister and resident intellectual Joseph Goebbels wrote in his diary that the Nazis would install ‘real socialism’ after Russia’s defeat in the East. And Hitler favorite Albert Speer, the Nazi armaments minister whose memoir became an international bestseller, wrote that Hitler viewed Joseph Stalin as a kindred spirit, ensuring his prisoner of war son received good treatment, and even talked of keeping Stalin in power in a puppet government after Germany’s eventual triumph.”

Some contend that the Nazis used the term “socialist” in a purely cynical way, and that they hoped to undermine support for “real socialists” by promising a particular (and perverse) vision of social justice to those loyal to the Reich and the German nation. After all, the Bolsheviks were political rivals who lacked Hitler’s nationalistic fervor. Hitler must have thought that his brand of “socialism” was better suited to his political aspirations, not to mention his expansionist visions. Those not loyal to the Reich, including Jews and other scapegoats, would become free slave labor to the regime and its loyal corporate cronies. (It’s striking that much of today’s Left, obviously excepting Bernie Sanders, seems to share the Nazis’ antipathy for Jews.)

Socialism, corporatism and fascism are close cousins and are overlapping forms of statism, and they are all authoritarian by their practical nature. It’s incredible to behold leftists as they deny that the National Socialists Workers Party practiced a brand of socialism. Perhaps the identification of the Nazis as a fascist regime has led to confusion regarding their true place along the ideological spectrum, but that too is puzzling. In their case, a supreme corporatist state enabled its most privileged advocates to exploit government power for private gain, and that’s the essence of fascism and the archetypical outcome of socialism.

Liz Warren Pitches Another Goofball

23 Thursday Aug 2018

Posted by in Central Planning, Property Rights, Regulation

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Elizabeth Warren wants to nationalize all private businesses with more than $1 billion in annual revenue. She plans to introduce legislation called the “Accountable Capitalism Act” that would, if enacted, authorize an outright theft of private property from the owners of these companies. Among other things, her plan would require large companies to obtain a federal charter and set aside 40% of their board seats for members to be elected by employees. In addition, henceforth these businesses would be answerable not merely to shareholders, but to employees along with a limitless array of other “stakeholders”. That’s because under their federal charters, firms would have a duty to create a “general public benefit”. The operative assumption here is that merely creating a product or service does not produce adequate value for society, regardless of the benefits to buyers, income to employees and suppliers, taxes paid, and the returns earned by millions of working people who have invested in these companies via pension and 401(k) plans.

In the very first place, Warren’s bill is unconstitutional, as Richard Epstein points out. Owning a business is protected as a property right under several amendments to the U.S. Constitution, but particularly the Fifth Amendment. Warren would place unconstitutional conditions on this right via the requirements for a federal charter and the so-called public benefit. If enacted, her bill would quite likely be ruled unconstitutional by the courts. But if it stood, capital would quickly take flight from the U.S., depressing asset values.

Don Boudreaux notes that absent ownership, vaguely-defined “stakeholders” have risked nothing in the success of the company. Shareholders bear the financial risk that the company will fail to produce adequate earnings, lose value, or fail. Management has a fiduciary duty to protect the funds that shareholders invest in the firm, including a duty to protect the firm’s ability to acquire credit. Warren’s legislation would compromise these duties by elevating the objectives of non-owners to the same or greater status than those who have provided the equity capital. Again, this would happen in at least two ways: required representation of employee-elected board members, and the vague public-benefit mandate under the firm’s federal charter.

Significant employee representation on the board is likely to distort decisions about labor compensation and virtually any decision affecting employment. While 40% is short of a board majority, union pension funds already purchase shares in companies both as investments and as a way of driving labor issues before shareholders and into boardrooms. Those votes, along with the 40% board representation and oversight from federal bureaucrats, would give additional leverage to labor in influencing the firm’s decision-making. To take the simplest case, economic efficiency requires that the rate of labor compensation be the same as the marginal value of labor productivity. Warren’s proposal would surely result in wage payments exceeding this threshold, diminishing the economic value of the firm and its ability to raise capital. And by reducing the efficiency of the production process, it would raise costs to consumers and/or business customers.

There any number of other worker demands that would gain viability. For example, extended break times or extra paid-time-off would certainly raise costs, and such demands from a plurality of the board would be unrestrained by the need to negotiate other terms. Or how about a plant-closing decision? The upshot is that mandated board representation for labor would create instability and lead to a decline in the firm’s performance, competitiveness, and attractiveness to suppliers of capital. Ultimately, the very jobs on which labor depends would be threatened.

Further dilution of business objectives would arise from the requirement under the federal charter to produce a “public benefit”. Serving customers is not enough, but what will satisfy federal overseers that the firm has fulfilled its social obligations? And what are the limits of those social obligations? Again, these amorphous requirements would constitute a theft of resources from the business owners, requiring the payment of alms in order to produce something of value. There is already evidence that board activism in pursuit of non-business, social objectives destroys business value:

“Labor-affiliated pensions regularly file shareholder proposals, usually involving social and political concerns. Those social and political shareholder-proposal campaigns are associated with lower shareholder value. These labor investors also tend to attack companies facing ongoing union-organizing campaigns, as well as companies with political action committees that support Republicans.”

In time, the dilution of objectives undermines a firm’s viability, its health of its suppliers, and its ability to employ workers and hire other resources. Many of the suppliers hurt by Warren’s proposal would be smaller firms. It would ripple through the ranks of consultants, repair shops, electricians, plumbers, accounting firms, janitorial services, and any number of other businesses. But even before that, Warren’s proposal would send capital scrambling overseas.

I share Don Boudreaux’s astonishment that writers such as Matt Yglesias in Vox can assert that the Warren plan would have no costs. It might or might not have an impact on the federal budget, but the cost of destroyed economic value in the business sector would be massive, not to mention the jobs that ultimately would be lost in the process. It’s also astonishing that proponents can pretend that Warren’s bill would “save capitalism” when in fact it would do great harm.

Finally, here is Kevin Williamson expressing his disdain for Warren’s true intent in putting her bill forward:

“Warren’s proposal is dishonestly called the ‘Accountable Capitalism Act.’ Accountable to whom?  you might ask. That’s a reasonable question. The answer is — as it always is — accountable to politicians, who desire to put the assets and productivity of private businesses under political discipline for their own selfish ends. It is remarkable that people who are most keenly attuned to the self-interest of CEOs and shareholders and the ways in which that self-interest influences their decisions apparently believe that members of the House, senators, presidents, regulators, Cabinet secretaries, and agency chiefs somehow are liberated from self-interest when they take office through some kind of miracle of transcendence.”

“Credit” On Nanny’s Terms

19 Sunday Oct 2014

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dentures_on_lay_away

Senator Elizabeth Warren would have you believe that buying on layaway is a wonderful deal. In “Layaway: Live After Death” in The Freeman, the authors discuss the horrible economics of layaway, Warren’s predilection for the practice, and the reason why it has risen from the dead.

First, the economics: these programs allow consumers to defer possession but “keep the dream alive” for a limited time, for a small down payment, which might be forfeited if the balance isn’t paid by the deadline. What a deal!

“In a sense, customers do not actually need Walmart to offer a layaway program; they can simply start saving the money themselves. Layaway essentially offers Walmart an interest-free loan. Put another way, while credit cards allow consumers to enjoy their goods today and pay later, layaway reverses this transaction by allowing Walmart to enjoy the customer’s money today and pay back the customer in the form of goods later. Layaway thus represents a shift in credit away from consumers and toward corporations. So much for consumer protection!”

But will supplies last? Usually they do. What if the availability of a “hot new item” is limited? That’s when the availability of credit can be extremely valuable. It’s up to the consumer as to whether the cost of buying the product on credit is worthwhile, but immediate possession is certainly of value. Ah, but statists like Warren want to intrude, er… help, so Congress passed the Dodd-Frank Act. It established the Consumer Financial Protection Bureau’s (CFPB) to regulate the financial industry, and in so doing, the agency has succeeded in limiting the availability of many forms of credit, especially to potential borrowers who pose high risks. The increasing availability of layaway programs is an attempt to fill the breach, though their similarity to real credit is slight. Or perhaps “slight of hand” is a better description.

Questioning Student Loan Subsidies

12 Thursday Jun 2014

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Obama and other statists are proposing extra subsidies to student loan borrowers. As Megan McArdle points out, the proposed breaks are questionable public policy at best: “It’s good to remember, as we discuss these plans, that people with college degrees are the best-off people in the U.S. They are a cognitive elite with substantially more earning power than almost anyone else….” These borrowers are highly visible, of course, so political opportunists like Obama and Elizabeth Warren can’t resist such proposals.