Moral Compass

Ooo! Evil Goldman Sachs! Evil, nasty, money-grubbing Goldman Sachs! They’re just in it for the money. And did I mention evil?

OK, I’m getting really tired about how people are demonizing Goldman Sachs specifically and Wall Street generally. Demonizing Wall Street is a transparent attempt of the Obama administration to discredit them and drum up yet another crisis. And once they have properly ginned up this crisis, then government will ride up on its white horse and “fix” the crisis by taking control over the financial sector of the economy. And every time people like cartoonist Bruce Beattie demonize Goldman Sachs, they play into the power-grabbing government’s hands.

But it’s clear to me that Beattie doesn’t understand the nature of business. Goldman Sachs isn’t in business to do some moral good. It’s in the business of making money because making money is what businesses do. Businesses that don’t make money just don’t last long as businesses.

Do you think Apple makes iThis and iThat because it loves the public, or does it do it because it loves the revenue that comes from each sale? Obviously, it is the latter. And it is precisely the love of profit that drives Apple to improve and innovate their products to the benefit of people. Adam Smith explained it centuries ago, and it is just as true today.

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Yes, a business has a moral compass, and it points towards money. That’s what a business does, and if it is successful in achieving money, it has done so by pleasing and benefiting people. If a business has done something illegal, then the government certainly should step in to enforce the law. But just making money isn’t illegal, regardless of President Obama saying, ” I do think at a certain point you’ve made enough money.”

The AP news story starts off with the title of “Initial jobless claims increase unexpectedly.” My initial reaction was disbelief. How could the current unemployment be anything but expected?

The number of newly laid-off workers seeking unemployment benefits rose last week, a sign that jobs remain scarce even as the economy recovers.

The Labor Department said Thursday that first-time claims increased by 18,000 in the week ending April 3, to a seasonally adjusted 460,000. That’s worse than economists’ estimates of a drop to 435,000, according to a survey by Thomson Reuters.

“…a sign that jobs remain scarce even as the economy recovers.” What? How can the economy be said to be recovering when jobs continue to hemorrhage away? I also have to laugh at the way the economists are constantly surprised by the unemployment numbers. It’s not all that surprising to me.

Quite simply, the principal purpose of a business is to make money. A business that doesn’t make money soon stops being a business, and all its employees are then out of a job. The more uncertain the future, the more uncertain businesses become about hiring and expanding. And hiring people and expanding business is exactly what will get us out of our current recession. Why would a business hire people and purchase equipment if the likelihood of making a profit is dubious at best? And what is producing that uncertainty? Government, of course.

The massive health care overhaul has passed. What does that mean for additional taxes and fees to businesses? At this point, it’s too soon to tell. After all, the Senate version was passed, but the House is still fighting for its changes to be reconciled into the law. That is producing uncertainty.

People in the White House are talking about tax increases. What will those tax increases be? Will they be focused more on people or on businesses? And if businesses are targeted, will the increased taxes apply to all businesses or just businesses over a certain number of employees? If additional tax burdens apply to a business once it has 51 or more employees, what would a struggling business with 51 or 52 employees likely to do? If you say “fire enough people to drop below the new tax level,” you’re right, and obviously not a government economist. So the prospect of increasing taxes is producing uncertainty.

In the same Reuters report talking about increasing taxes, Paul Volker also floated the idea of a European-style value-added tax. If you think our current tax system is complex, the VAT adds yet another layer of complexity on top of it. And his comment doesn’t show any assurance that our current income tax would be replaced by a VAT, so I’m left to believe that we would have a VAT on top of our current income tax. Adding a VAT to business would produce uncertainty.

Even though much of the science behind human-caused global warming has been shown now to be fraudulent, eco-freaks and people in government are still pushing for a carbon tax. Since everything humans do, including simply breathing, produces CO2, a carbon tax would affect every business, and not in a nice way. Discussion of a carbon tax like Cap and Trade produces uncertainty.

The tax breaks signed into law by President Bush are scheduled to expire in 2010. Will Congress renew the tax breaks, or will it let them expire? The expiring tax breaks would mean a hike in the taxes paid by businesses, and increasing taxes on businesses just puts an additional burden on them in an already tough economy. Not knowing whether the current tax breaks will remain or vanish away produces uncertainty.

Every time government steps into a business and tells it what it may or may not do, it is creating uncertainty. Will this meddling change with the next administration? Will it change with the next big scandal or witch-hunt? Toyota is being pummeled by the government for a run-away acceleration problem which is most certainly mostly hype and partially driver error. But government, who controls Toyota’s competitors, is creating a hostile work environment and fining Toyota over this latest bugaboo. Not knowing if government will allow a business to actually do its job produces uncertainty.

Government isn’t able to create wealth; it can only take it from one person to give to another. And while it is transferring the wealth, some of it sticks in the bureaucracy, so this wealth transference isn’t efficient. Likewise, government cannot create jobs that will stimulate the economy. The most it may do is create government jobs that require taking more of the nation’s wealth to feed the bureaucrats. And that way does not lie prosperity, just more government bureaucracy.

To promote the common welfare, stimulate the economy, and foster the creation of real jobs, government needs to make it easier for businesses to do their business. Our government could easily do that by lowering taxes and reducing uncertainty. But as long as this administration, or any other one, continues to make the future scary and uncertain for businesses, we will be slow to exit this recession, and businesses will be reluctant to hire new people or even keep all of their employees on.

Next time you read that joblessness or recession numbers are unexpected, you may rest assured that you are dealing with someone who doesn’t understand business, even if they have a Ph.D. in economics. Why else would they be so surprised?

Here are two dueling news stories that caught my attention today within seconds of each other. The first comes from MSNBC.com:

White House won’t try to directly limit exec pay

WASHINGTON – The Obama administration, which partly blamed out-of-whack executive pay for the nation’s financial crisis, says it won’t try to directly limit such pay, choosing instead on Wednesday to try to tame compensation through shareholder pressure.

Treasury Secretary Timothy Geithner said the administration will ask Congress to give shareholders a nonbinding voice on executive pay and to require corporate compensation committees to be independent from company management. That second provision would give the Securities and Exchange Commission authority to strengthen the independence of panels that set executive pay.

Separately, the administration is preparing to issue new, more specific regulations governing pay at financial institutions that have received infusions from the $700 billion Troubled Asset Relief Program. Those regulations, following legislation already passed by Congress, would limit top executives at these companies to bonuses no greater than one-third of their annual salaries.

An official said the administration will appoint a “special master” to oversee compensation at firms receiving large amounts of government assistance. The pay overseer would have the power to reject excessively generous pay plans.

The second comes from the New York Times:

Overseer to Set Executive Pay at Rescued Companies

WASHINGTON—The Obama administration on Wednesday appointed a compensation overseer with broad discretion to set the pay for 175 top executives at seven of the nation’s largest companies, which have received hundreds of billions of dollars in federal assistance to survive.

The mandate given to the new compensation official, Kenneth R. Feinberg, a well-known Washington lawyer, reflects the federal government’s increasingly intrusive role in the corporate affairs of deeply troubled companies. From his nondescript office in Room 1310 of the Treasury building, Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America, including Kenneth D. Lewis, the chief executive of Bank of America; Vikram S. Pandit, the head of Citigroup, and Fritz Henderson, the chief executive of General Motors.

The compensation of executives at some companies receiving aid provoked a firestorm of political outrage earlier this year. In revising a previous proposal to set pay limits, the administration has decided to take an approach that will leave the success or failure of the effort to curtail high compensation at the assisted companies in the hands of Mr. Feinberg. (Mr. Feinberg himself will not receive any government compensation.)

So which is it? Is the Obama administration planning on overseeing executive pay or not? Just looking at the title of the MSNBC article, you’d come away with the idea that the White House is not limiting exec pay, but the third paragraph puts the lie to the title. The New York Times title and article are in complete agreement. For this article at least, the Grey Lady is reporting the news, while the MSNBC article is spinning the news. Shame on MSNBC for attempting to deceive their readers. And shame on the Obama administration for their heavy-handed actions. So, what’s the correct term to describe government control of business?

When I read the two headlines in my RSS news feed, I recognized instantly that they couldn’t both be true, and in my mind’s ear I heard the Dueling Banjos tune, so here’s a good rendition you can listen to while rereading the two dueling stories.

Every now and then, something that should be completely obvious is investigated and announced to the world as if it were something new and surprising. Remember the news headline of “Men and Women are Different” of several years ago? What is clearly obvious to some is not so obvious to others.

Speaking of the obvious, the World Bank released a report on Oct. 8th, 2003, entitled “Doing Business.” The Wall Street Journal printed a short review of this report on page A2 the day before its release. The first paragraph of the article summarizes the new World Bank report as showing that “the least amount of business regulation fosters the strongest economies.” To quote Conan O’Brien, “Duh!” Let’s take a look at just how simple and obvious this finding is. Imagine you want to set up a new business selling widgets, which means getting a business license from the government. Here comes the test: would you rather set up the business in a country where it takes only two days to create a private company with no government fee, or in a country that requires 146 days and nine times the average per-capita income to start a company? Is it any contest? The two countries in this example are Australia and Angola. Is it any wonder that Australia is doing so much better than Angola in creating businesses? After all, a high level of government regulation is directly related to more unemployment, higher corruption, and less productivity and investment. Does it take a report like this one to point out that countries get less of what they regulate, and more of what they subsidize?

Don’t believe me? Well, America has subsidized illegitimate births for 40 years now, so what do we have? Let’s say it all together: More illegitimate births. Thanks to government involvement, there are places in the U.S. where married parents are the exception rather than the norm. And that’s not all. Heavy regulations are almost always associated with a highly inefficient bureaucracy. For every dollar of your tax money earmarked to support someone on welfare, less than 25 cents actually reaches the intended recipient. Everything else is sucked up by oversized bureaucracy. The solution is simple, but it is not what you will hear from the intelligentsia surrounding those in government. Their wrong-headed solution is to appropriate more tax money while still wasting three-quarters’ worth of it. The simplest way to put more money in the hands of the needy is to reduce government overhead. If we could reduce overhead by 50%, the needy would see a much greater amount of money reaching them–and it would not cost you, the overtaxed worker, a single dime in extra taxes.

If the burden of government regulation on business becomes too great, people will stop forming officially registered businesses and will switch to doing work on the black market. The government will never see tax revenues from these businesses, and these “freelancers” will have a hard time getting loans or the legal protection that the law grants to recognized businesses. At last estimate, over 80% of Bolivia’s businesses are run outside of government control. If one of these businesses has problems with its suppliers, the owners cannot appeal to the courts for redress. And since when do black market businesses like Bolivia’s offer worker benefits? Since liberals claim to be champions of the working poor, shouldn’t they also be champions of less government regulation? You would think so.

So far I have written about government regulations, but what about the property rights I mentioned in the title? As the Journal says, “[t]he report argues that improving property rights offers benefits to citizens, especially the poor.” From 1995 to 2001, the Peruvian government issued over 1.2 million property titles to urban-squatter households. Since these people now own the land they previously only squatted on, they have an incentive to improve their property and take better care of it. And since they no longer need to have someone on the property at all times to keep other people away, this single government act has allowed parents to find jobs. The former squatters now look to the police as friends and protectors, rather than threats. Now if someone breaks into their homes, they may call the police without fear of being evicted. In the past decade, work hours in Peru have increased by 20% and child labor has declined by 30%.

The more people feel safe about their property, the more they will be willing to work for more property. Countries where property rights are safeguarded tend to have stronger economies; places without these safeguards are centers of poverty. If someone owes you money, be grateful you do not live in Guatemala. The courts there can take over four years to resolve something as simple as a bill-collection dispute. How willing is a Guatemalan to loan money to others or start up a business venture if he knows it will take four years to get a loan issue resolved? In Burundi, you will have to jump through more than 60 legal and bureaucratic hoops before you can collect a debt. The top ten countries whose regulations make it easy to do business are (in alphabetical order): Australia, Canada, Denmark, the Netherlands, New Zealand, Norway, Singapore, Sweden, the United Kingdom, and the U.S. Did you notice that not one of these countries is poor? The five slowest countries to enforce business contracts are Guatemala, Serbia and Montenegro, Slovenia, Poland, and Ethiopia. None of these five are places you would think of as being first-rate wealthy countries. There is a direct correlation here. But do you think any of these countries will notice and change? I wouldn’t hold my breath waiting for it to happen.

As a country lowers the regulations governing business, and as it enforces the laws that protect property rights, that country will enjoy economic prosperity. Simeon Djankov, a co-author of the “Doing Business” report, said that legal systems which help companies collect debts are the single most important factor in attracting business. And as businesses increase and the economy booms, the government will see tax revenues increase, even if they have lowered the tax rates that businesses and people pay. After all, a smaller piece of a large, robust economic pie is better than a large slice of a weak, anemic economy. This is obvious to me and to many others, but what is obvious to some is not necessarily obvious to all.