Capitalists make the case for socialism, a continuing series

NYT reports that American CEOs are taking minimal -- or even non-existent -- paycuts during the pandemic, letting employees suffer layoffs while refusing to do any real sacrifice.

A survey of some 3,000 public companies shows that the cuts — which, so far, have come in the form of salary reductions — were tiny compared with their total pay last year. Total pay includes things like bonuses and stock awards that typically make up the bulk of what corporate bosses take home.

Companies in this group include the Walt Disney Company, Delta Air Lines, United Airlines and Marriott International. All of those businesses have laid off or furloughed employees or pressed workers to take pay cuts.

Seems obvious at this point that American capitalism is disordered. Right now the shareholders are making a killing -- as Ryan Cooper points out today, the only way to get Republicans to move on an economic relief bill right now is to root for the stock market to collapse -- and so, apparently, are the CEOs. It's the workers who are taking the hit. If capitalists want to survive, they might think about re-ordering their businesses a bit so that sacrifice is shared. Otherwise, why should workers buy in?

What's wrong with private equity? Debt. What Mitt Romney and Sam Zell have in common.

A lot of the debate over Mitt Romney's time at Bain Capital has been focused on how many jobs he did or didn't create, did or didn't destroy. That's understandable, given that we're in a time of sustained high unemployment, but I'm not sure that tallying lost jobs really gets to the heart of what might be objectionable about Romney's business practices.

The problem is debt.

In the case of the shuttered Kansas City steel mill at the center of the debate, the chain of events is pretty clear:

• Bain Capital bought the steel mill in October 1993, putting up just $8 million of its own money to gain majority control—even though the total purchase price was $75 million. 

• The next year, Bain had the company issue $125 million in bonds—debt used to pay Bain itself a dividend of $36 million in 1994. Understand again: Bain made a quick profit on its investment, but it wasn't by helping the steel mill earn greater profits—but by having the mill take on a chunk of debt.  

• Now: It's true that Bain used $16 million to buy another steel mill the next year—it's not as though executives were using all the cash to light cigars with $100 bills—but this is also true: The Kansas City mill took on another $125 million in debt to pay for the acquisition and merger. 

• All of which means that the Kansas City steel mill in 1995 had $378 million in debt. Its profit that year was $32 million. You can see where this is headed.  

• When it finally filed for bankruptcy in 2001, the combined company had debts exceeding $500 million. The plant's workers lost their jobs, and ended up with reduced pensions because the retirement funds had been under-funded.

In the wake of the bank bailout, there was a lot of talk about our economy privatizing profit and socializing risk. The problem here is just a bit different: Bain Capital kept the profits to itself, but largely externalized the risks of its business practices. That's smart, on one level, but it certainly belies talk of investors being "risk-takers" and "job creators."

I think I'm a little sensitive on this topic because journalists have been hurt by this kind of activity. Sam Zell bought the Tribune Company a few years back by investing $315 million of his own money—not chump change, I suppose, but a pittance compared to the overall $8 billion purchase price, most of the money borrowed from the employee pension fund. The company went into bankruptcy soon after, and the workers were screwed.

It's a little bit like me buying from you the car your son uses to get around, forcing your son to lend me the money to make the purchase, crashing the car, and getting to keep the insurance check without repaying your son the money he lent in the first place.

The steel industry in America has been dying for years. But Bain's practices hastened the Kansas City mill's demise—and it wasn't Mitt Romney nor Bain Capital that got stuck with the fallout from those practices.

Romney is running for office based largely on his business acumen. So let's be clear: Finance is a necessary component of a market economy, and while a market economy isn't necessarily utopia, it's often the best way of raising the living standards of the most people. Not everything done in the name of the market economy is wise or even good, however, and criticism of those bad acts and bad actors isn't—as some would have you believe—socialist.

There's a problem—for society, for morality—when a company can profit from its bad decisions while sticking the little guy with the consequences. It's wrong, plain and simple.

Romney's problem: Profits over people

Ben and I discuss Mitt Romney's venture capitalist past in our Scripps Howard column this week. My take:

This is the problem with the Republican version of capitalism, as practiced by Mitt Romney and so many of his Wall Street friends over the last few decades: Profit isn't just regarded as the highest virtue; often, it is seen as the only virtue.

It wasn't always this way. During the 1950s, a time when labor unions were ascendant, the American social contract expected that big corporations would make big bucks, yes, but that those employers would also provide their workers a comfortable living, and would even hang onto those workers during rough times.

Now, quarterly profits are the only thing that matter and if a few jobs have to be sliced to make the accounting work out, then that's what has to be done.

The result? Our businesses are richer. But our society feels poorer.

And Mitt Romney helped lead the way.

Profit isn't unimportant. What today's market enthusiasts forget, though, is that it's a means to an end not the end itself.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," economist Adam Smith said way back when, "but from their regard to their own interest." The Romney Republican version expects the butcher to buy out the brewer and lay off the bakers, which might maximize profits in the short term. But it leaves everybody hungry in the long run.

Today's lefties have a little slogan that sounds cool, but doesn't bear up under examination: "People, not profits." That doesn't work so well. Neither do profits without people. Romney's not a bad man for making a profit, but his venture capitalist past raises questions about whether he can truly serve America's citizens.

Ben's take: "Venture capitalism creates, sometimes through destruction. Crony capitalism merely stagnates."

This is why there's an Occupy Wall Street movement

Because government helps banks, but it doesn't help you:

The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data.

Stabilizing the financial system was considered necessary to prevent an even deeper economic recession. But some critics say the Bush administration, which first moved to bail out Wall Street, and the Obama administration, which ultimately stabilized it, took a far less aggressive approach to helping the American people. 

“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”

A recent study by two professors at the University of Michigan found that banks did not significantly increase lending after being bailed out. Rather, they used taxpayer money, in part, to invest in risky securities that profited from short-term price movements. The study found that bailed-out banks increased their investment returns by nearly 10 percent as a result.

Thomas Sowell defends usury

At NRO today, Thomas Sowell gets cranky about a California newspaper's investigation into "payday loan" companies and their practices. He particularly objects to a line suggesting that customers of such institutions are charged what amounts to an annual interest rate of more than 400 percent:

The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long.

Using this kind of reasoning — or lack of reasoning — you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year. It is clever propaganda, but do people buy newspapers to be propagandized?

Sowell, having raised such questions, might've attempted to answer them.

That might've detracted from his screed, though, because the evidence is that quite a few customers actually do get caught in a debt spiral with these companies. In 2007, Michael Stegman did an overview of the industry for the Journal of Economic Perspectives:

Sowell, in the end, decries the story as part of a lefty plot to keep payday lenders from defending themselves:

Instead, we get the story of how the payday-loan industry, like most other industries, has lobbyists contributing money to politicians to try to be spared more regulations. This the investigative reporter calls “protecting” the payday-loan industry.

Protecting it from what? From the politicians. Some would call their campaign donations “protection money,” in the same sense in which the mafia collects protection money.

Not exactly. In California, the payday loan industry has put its muscle behind a bill that would boost their profits by letting them lend greater amounts of money at higher rates of interest. That's not defensive, it's aggressive. If Sowell's mafia analogy is correct ... well, let's just say the payday industry would be the guy in the leather chair, stroking a cat.

I suspect the broader argument is that payday companies provide a valuable service, which workers are free to use or not use. But it certainly appears that the systemic incentive is to put the working poor on the hook and encourage them to stay there for as long as is profitable. Sowell's fellow conservatives like to talk a lot about liberty from government, but payday loan lenders offer plenty of evidence there are other institutions that offer oppression, which is no less pernicious.

Even Paul Krugman thinks Max Boot sounds like Paul Krugman

I've poked fun at conservative defense writer Max Boot lately because of Boot's recent assertions that cutting defense spending would end up cutting American jobs in a soft economy. I noted that Boot sounded like liberal columnist Paul Krugman, and suggested that "mainstream conservative Republicans—whatever their fiscal rhetoric—have long favored the soft socialism of big defense spending."

Krugman sounds the same theme this morning, not mentioning Boot specifically, but otherwise making the same point. He calls this crowd "weaponized Keynesians," a term borrowed from Barney Frank.

First things first: Military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups. Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs.

Beyond that, there’s a point made long ago by the Polish economist Michael Kalecki: to admit that the government can create jobs is to reduce the perceived importance of business confidence.

Appeals to confidence have always been a key debating point for opponents of taxes and regulation; Wall Street’s whining about President Obama is part of a long tradition in which wealthy businessmen and their flacks argue that any hint of populism on the part of politicians will upset people like them, and that this is bad for the economy. Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power — so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts.

Right. I don't mind that Boot and his fellow hawks are making an economic argument for defense spending. I just wish they'd apply that same logic to the rest of government.

Shut up and be happy, you ungrateful Occupy Wall Street protesters!

A conservative friend posted this to Facebook a couple of days ago, and it's been gnawing at me a bit:

The suggestion here being that the Occupy Wall Street crowd is selfish and ridiculous to be protesting.

This is both right and wrong. We should all be grateful in a cosmic sense for what we do have, of course. But "being a starving baby with ribs showing" shouldn't be the only grounds for complaint. (If it is, the Tea Party might want to pipe down as well.)

If you believe that your betters are tilting the playing field not through luck, not through accident, not merely through hard work, but through the greasing of palms and the escaping of the same rules that apply to you—then I think it's fine and appropriate to speak up.

This is a similar logic to those who suggest (say) American women shouldn't complain about disparities in the United States because, hey, Afghanistan! Burkhas! It's a logic that allows the people at the top to deflect the complaints (merited or not) of people in the middle and even people near the bottom—in in deflecting, serves those people at the top quite well.

It's also a logic at odds with the American Founding that conservatives like to claim as their unique heritage: The Founders might've been taxed without representation, but they were doing pretty well under the British, by and large. My conservative friend replies to this point that the Founders were concerned with "representation and consent of the governed. It wasn't simple materialism."

Well, exactly.

There are many Occupy Wall Street critics who have convinced themselves that the protests are, at foundation, envy by the poor of the rich. Perhaps there's some of that at work. But the most common complaint, as I understand it, is about governance. The fact that government is supposed to be accountable to people, but seems to be more responsive to moneyed interests—in ways that disadvantage many of us.

No: Things don't suck as much here as they might in other parts of the world. They might not suck as much as they did 100 or 200 years ago for many people. But it's not irrational to look at one's own time and place and ask if we could or should be doing better—and it's not selfish to push for that improvement if you can identify it.

The flat tax is bad

So says I in this week's Scripps Howard column with Ben Boychuk:

The flat tax is Republican-led class warfare. It makes the rich richer and the poor poorer, for no better purpose than making the rich richer and the poor poorer.

We have progressive taxation -- in which people with higher incomes pay a higher tax rate than those at the lower end of the scale -- for a reason: People on the low end are less able to pay. Flat taxes invert that logic, giving the rich a huge tax break and often burdening the poor.

The Tax Policy Center says a low-income family making $31,000 a year would lose its $5,147 tax return under Perry's plan, for example.

(Herman Cain's plan is worse. Nearly everybody making under $50,000 would see a huge tax increase.)

Perry's plan was unveiled the same day as a new Congressional Budget Office report showing economic inequality is widening in this country.

From 1979 to 2007, people in the richest 1 percent grew their after-tax income by 275 percent. The three-fifths of people in the middle class saw less than 40 percent income growth during the same period -- and the bottom fifth grew incomes just 18 percent.

The gap is getting bigger. Even before the recession, the middle class was being left behind. Perry's plan would exacerbate the problem -- and likely balloon the deficit even further.

"But I don't care about that," Perry says. He should.

In the new book "The Darwin Economy," economist Robert H. Frank points to research that high levels of income inequality are correlated to slow economic growth. "Larger shares (of income) for poor and middle-income groups were associated with higher growth rates," Frank writes.

Flat taxes burden the poor, make income inequality worse, and in so doing put a stranglehold on an already-strangled economy. Other than that, Mrs. Lincoln, how did you like the play?

Ben, in his portion of the column, points out that Perry's plan would let people opt to stay under the current tax structure. Fair point. The likely result of that is top earners would choose the flat tax and lower earners would stick with the current tax structure—meaning the Perry plan is to make the rich richer, and let the poor spin their wheels. That's not quite as awful as the picture I paint, but it seems kind of pointless—particularly in an era of ballooning deficits. Nobody's made a serious suggestion that I'm aware of that the problem with the economy is that rich people don't have enough money; I'm skeptical that such a plan would actually deliver good results for the rest of us.

Rich Lowry: The poor have only themselves to blame

I wondered where National Review editor Rich Lowry was going with this. He spends the bulk of his column conceding that, yes, the American Dream is "raggedy around the edges," that if you're born poor in America, you're all too likely to stay poor, that "picking the right parents" seems to make more of a difference here than it does in (say) Finland for your future economic prospects.

So, God bless Lowry for providing some conservative reality-based pushback to Paul Ryan's fantasy of an economically mobile society.

But Lowry arrives at the end of his column—just two paragraphs to go!—and concludes that despite all this, one shouldn't blame America's economic structure—really, the poor have only themselves to blame:

This stagnation is less a statement about the structure of America’s economy than about its culture. As Ronald Haskins, also of the Brookings Institution, wrote in an essay for National Affairs, “economic mobility is constrained above all by personal choices and behaviors.” He argues that society’s leaders “should herald the ‘success sequence’: finish schooling, get a job, get married, have babies.” If Americans finished high school, worked full-time at a job that matched their skills, and married at the rate they did in the 1970s, the poverty rate would be cut by 70 percent.

These old-fashioned bourgeois virtues, and particularly marriage, rarely figure in the public debate. Everyone is more comfortable talking about taxes or the banks, as the America Dream frays.

Let's unpack this a bit, using Finland—Lowry's comparison—as our guide a bit.

First of all, marriage, since that's the item that got my attention. While it's true that the marriage rate in the United States had declined in recent decades, it's also vastly truer that the marriage rate in the United States is much higher than in Finland: 7.5 marriages for every 1,000 people in the population in 2005, compared to Finland's rate of around 5 marriages per 1,000 people in the same year. The decline in marriage rates has happened in just about every developed country around the world (except Sweden, where the rate wasn't that high to begin with) but the United States remains one of the most marrying countries of them all. To a great extent, "old-fashioned bourgeois virtues" have held on tightly here—only it doesn't seem to make much of a difference in our economic mobility rates.

Maybe it's just the poor who aren't married? Nope. A 2004 study from the MDRC suggests that "through their early 30s, economically disadvantaged adults actually are more likely to marry than advantaged adults." The poor are attempting, at least, to embrace old-fashioned bourgeois virtues—but it's also true that those marriages more often end in divorce. That does give rise to a chicken-and-egg question, I suppose: Are the poor economically disadvantaged because they can't build stable marriages? Or can they not build stable marriages because they're economically disadvantaged? I don't know the answer to that question, but I have a hunch. But the overall point is this: The United States is a marrying country, and our poor are a marrying people. The evidence seems weighted against Lowry's point.

I'm going to skip the baby-making part, except to note that having a kid hasn't done anything to improve my economic prospects. Kids eat!

Let's focus on education, instead: It's true that the high school graduation rate in the United States is shamefully low—72 percent, compared to Finland's 92 percent. (It's worth noting that Finland also has a much higher rate of college graduates: 48.5 percent compared to America's 36.5 percent.) I'm skeptical Lowry and his fellow conservatives would recommend adopting the Finnish education system—it's European!—but I could be wrong.

For those who do graduate high school, how easy is it to find a "full-time job that matches their skills?" It's much more difficult these days than it was in the 1970s to find such a job that will pull you out of poverty. We already know that between the 1970s and now, the American economy shifted pretty radically, shedding manufacturing jobs and pushing more people to the service industry. Generally speaking, that's meant a shift to not-as-well-paying jobs: In September, a manufacturing-sector job in the United States paid $980.98 per week; a private-sector service job paid $756.96—provided you weren't in retail, which paid $496.12 per week. These are average wages, not median wages—which would provide a better picture of what a typical worker in those sectors make. Generally speaking, though, the type of full-time job that matches the skills of a high school graduate has shifted away from well-paying to not-as-well paying. That's assuming the jobs exist; the high unemployment rate suggests that's not always the case.

Making babies won't change that dynamic.

Maybe it doesn't make sense to blame taxes and bankers for that shift, but the issue is definitely one of economics—not just or even mostly, as Lowry tries to suggest, about poor people having bad habits. The numbers indicate that the poor are trying; the opportunities aren't there. Whose fault is that?

Regulatory uncertainty: Still not the problem

Kevin Drum sums up a new report: "I'm not sure how many ways it's possible to debunk a single meme, but in this case it's a helluva lot. It turns out that (a) Obama has issued fewer regulations than Bush, (b) adjusted for inflation, they cost less than the average over the past 30 years, (c) this doesn't take into account the benefits of any of his regs anyway, and (d) only about 0.3% of mass layoffs during the Great Recession were related to new regulatory issues."

Read the whole thing.

Philadelphia: Does George Bochetto really pay more than half his income in taxes?

Stu Bykofsky, always the contrarian, uses his perch in the Philadelphia Daily News today to let the "Top 1 Percent" respond to the Occupy Wall Street protests. I found this excerpt to be particularly confounding:

How do the members of the "1 percent" feel? I asked three - Renee Amoore, Tom Knox and George Bochetto - each a local, unapologetic, self-made millionaire. They believe they already pay their "fair share" in federal taxes.

"I don't only pay the 35 percent," says Center City lawyer Bochetto, who was raised in an orphanage. "I also pay Social Security tax, state and city income tax, property tax. More than half of my income goes to the government. That's my fair share."

Due respect to Bochetto and his rise to riches from the orphanage. Good for him! But does he really pay more than half his income to the government? If so, he needs to hire a new accountant—immediately.

Why do I say that? Because the effective tax rate for the top 1 percent of earners—and this combines and includes federal, state, and local taxes—was 30.9 percent in 2008. Here's a chart from Citizens for Tax Justice:

Granted, this is a national overview that's several years old. And granted, Philadelphia can be a little tougher on the pocketbook than a lot of places. But is it so much tougher that Bochetto loses and additional 20 percentage points off his income? Really, really doubtful—especially since the Social Security taxes actually take a bigger bite out of the incomes of low-wage earners than they do millionaires like Bochetto.

We can argue about appropriate tax rates and the responsibility of the rich to help provide services and opportunities for the rest of us. But that argument should be grounded in reality instead of unchallenged hyperbole. Bykofsky didn't help anybody by quoting Bochetto uncritically today.

Andrew Stiles is wrong: The problem with the economy is lack of demand.

At NRO, Andrew Stiles tries to prove the "regulatory uncertainty" canard is actually true:

A new Gallup survey asked small-business owners an open-ended question about what they viewed to be “the most important problem” facing the small-business community. It’s not “lack of demand,” as Democrats like to argue. In fact, 22 percent of respondents listed “complying with government regulations” as their top concern.

Here's the graphic that Stiles uses as supporting evidence:

Notice anything about items 2 and 3 on that list? "Consumer confidence" and "lack of consumer" demand" are parsed out as two different items, but the effect is the same: Consumers who aren't confident are consumers who aren't buying stuff—thus, they're not demanding the products that businesses provide. Add those two up, and 27 percent of small-business owners see some variation of the demand side as being the biggest problem with the economy.

Which is, ahem, more than say the same for "regulatory uncertainty."

Stiles is guilty of doing some cherry-picking, too, because later on in the same poll, business owners are asked what they need to see in 2012 in order for their business to thrive. Here's that graphic:

Check it out: The number of business owners who see regulations as the big problem suddenly drops by 10 percent when they have to name the thing that would make their business better.  Sales increases is No. 1. "Job creation" is No. 2—and I don't think it's a stretch to suspect that what business owners here want is for more of their customers to have jobs so they'll start buying stuff again.  Add in "improved economy" in at fourth place, and suddenly you have 37 percent of business owners suggesting that demand is what stands between them and success ... and just 12 percent citing government regulations.

Which makes intuitive sense. Businesses don't like dealing with paperwork and regulations, of course; no one does. But more business owners know that it's not the government that's holding them back right now. It's lack of demand. And we know why there's a lack of demand. Solve that, and we begin to move forward again.

Jonah Goldberg: Capitalism loves you, baby

Jonah Goldberg this morning delights in his own prescience in writing this 2008 column about how the children of capitalism are spoiled and ungrateful:

In large measure our wealth isn’t the product of capitalism, it is capitalism.

And yet we hate it. Leaving religion out of it, no idea has given more to humanity. The average working-class person today is richer, in real terms, than the average prince or potentate of 300 years ago. His food is better, his life longer, his health better, his menu of entertainments vastly more diverse, his toilette infinitely more civilized. And yet we constantly hear how cruel capitalism is while this collectivism or that is more loving because, unlike capitalism, collectivism is about the group, not the individual.

These complaints grow loudest at times like this: when the loom of capitalism momentarily stutters in spinning its gold. Suddenly, the people ask: What have you done for me lately? Politicians croon about how we need to give in to Causes Larger than Ourselves and peck about like hungry chickens for a New Way to replace dying capitalism.

Although I agree with Goldberg, generally, that market capitalism has generally been the best force for raising the living standards of the maximum number of people. But I think it's terribly weird that he would advance the idea—as he seems to here—that capitalism is an end unto itself. It's not: It's a means to an end; an imperfect means—and one can acknowledge that and still be a capitalist!—but likely the least-worst means.

Goldberg today places the column in the context of the Occupy Wall Street protests, and it's here that you start to see that he creates a bit of a straw man in dealing with critics of the free markets. While it's true that there are Marxists, socialists, and anarchists among the protesters, the movement has broad support beyond the fringe not because it opposes capitalism, but because it's asking an important question: Why has capitalism stopped working for us, the broad mass of Americans?

The answer the protesters have come up with is this: The wealthiest Americans and wealthiest American institutions have bent government to their will, so that while the rest of us are left to live with "austerity" and "creative destruction," the banks and banker bonuses are protected from their catastrophic mistakes with taxpayer dollars. The alternative? Letting them lay waste to the economy if they fail, making things even worse for the rest of us. As conservative commentators like Nicole Gelinas and Timothy Carney have noted, that's not free-market capitalism, properly understood—and, in fact, serves to undermine the discipline that markets usually impose when the possibility of failure is real. Corporatism is tearing at the foundations of capitalism, in other words.

It is not "spoiled" to point out when capitalism is coming unmoored from its foundations, or when it is failing to deliver the maximum good to the best number of people. (It's also not irrational to compare one's lot with one's contemporaries, instead of being grateful that conditions are better than they were 300 years ago.) The Occupy Wall Street folks are far from perfect, but they're giving voice to an important critique of the status quo that even serious advocates of the free market can agree upon.

Drop out of school, become a billionaire

Michael Ellsberg argues in the New York Times that we should emphasize entrepreneurship over education:

I TYPED these words on a computer designed by Apple, co-founded by the college dropout Steve Jobs. The program I used to write it was created by Microsoft, started by the college dropouts Bill Gates and Paul Allen.

And as soon as it is published, I will share it with my friends via Twitter, co-founded by the college dropouts Jack Dorsey and Evan Williams and Biz Stone, and Facebook — invented, among others, by the college dropouts Mark Zuckerberg and Dustin Moskovitz, and nurtured by the degreeless Sean Parker.

American academia is good at producing writers, literary critics and historians. It is also good at producing professionals with degrees. But we don’t have a shortage of lawyers and professors. America has a shortage of job creators. And the people who create jobs aren’t traditional professionals, but start-up entrepreneurs.

College isn't for everybody, sure, but this line of attack rings false to me. The men—all men—mentioned here didn't have traditional educations, to be sure, but their knowledge base was heavily augmented in non-traditional ways not necessarily available to most Americans. Steve Jobs continued auditing classes at Reed College after he dropped out, and he learned the fundamentals of electronics in his father's workshop. Bill Gates went to an "exclusive prep school" in high school, and obtained free computer time at a time when computers weren't ubiquitous. Same for Paul Allen. Stone went to one of the most academically challenging high schools in Massachusetts, while Zuckerberg went to Philips Exeter Academy on his way to Harvard.

Point being: All these men received educations that gave them a pretty good knowledge foundation for their future work. All of these men were born to comfortably middle class families, often with parents personally deepening their child's knowledge base. And because of those middle class families, each of the men had a comfortable safety net to fall back into if their entrepreneurship failed. It's easier to start a business if you understand the world a bit, and if the failure of that startup won't ruin you for life.

Ellsberg is right to argue for alternatives to the higher education machine. And as a proud liberal arts grad, I'll even agree that maybe we could use a few less liberal arts degree holders. But his "college dropout" meme ignores that nearly all the men he names arrived at college having already had extraordinary educations. Would we know of any of them without those educations? Education is the foundation of entrepreneurship, not a substitution.

Is Goldman Sachs quarterly loss due to 'regulatory uncertainty?'

Maybe. But the New York Times doesn't offer any evidence to back up this assertion:

To improve their profitability, banks have three main options: increase revenues, cut expenses and reduce the shareholder base. But the first method is not working at a time when earnings have been crimped by regulatory uncertainty and economic woes.

The reason I ask the question is that "regulatory uncertainty" is one of those Luntzian phrases—like "death tax," say—that Republicans toss around cavalierly. And it's true that Dodd-Frank regulations are altering the investment banking landscape. But is that the reason Goldman Sachs lost $428 million during the quarter?

Consider the very next paragraph in the Times' article:

Goldman reported a loss of $428 million during the third quarter, compared with a $1.74 billion profit a year ago. The firm was punished by its holdings in stocks and bonds, losing $1.05 billion on its holdings in Industrial and Commercial Bank of China, a strategic investment the firm made in 2006. I.C.B.C. stock fell about 35 percent in the quarter, a paper loss that flowed through to Goldman’s results.

Well, wait. Why is I.C.B.C.'s stock falling so far, so fast? The Times doesn't explain. Fortunately, Bloomberg reported on the story in February:

Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national auditor’s estimate, and the industry’s credit outlook could decline, Moody’s Investors Service said.

“The Chinese audit agency could be understating banks’ exposure to local governments,” Yvonne Zhang, a Moody’s analyst in Beijing, said in the report today. The “apparent absence of a clear master plan to deal with this issue” is likely to exacerbate problems and lenders may be left to manage a portion of the souring loans on their own, it said.

The nation’s first assessment of local government debt showed that 79 percent of the liabilities are bank loans and 8 billion yuan is overdue, Auditor General Liu Jiayi said June 27.

The additional 3.5 trillion yuan of loans, which account for about 7 percent of China’s 50.8 trillion yuan in outstanding local-currency loans, aren’t considered by the audit office as real claims on local governments, Moody’s said. That indicates the debt may be poorly documented and at greater risk for defaults, it said.

In other words, Chinese banks like I.C.B.C.—and it's not the only one faced with this problem—got a little credit crazy, made too many loans that may not get repaid and documented the whole process poorly. This is starting to sound familiar, isn't it?

In this scenario, Goldman Sachs is the late-50s woman on the verge of retirement who plans to live off her nest egg—only to find the nest egg has been wiped out because of bad investments. I'll leave it to others to engage in schadenfreude—except to say this: Maybe Goldman Sachs is part of the 99 percent after all!

Instead, I'll note this: Goldman's loss on I.C.B.C. is more than double its overall quarterly loss. Take that off the books, and the bank turns a profit of more than a half-a-billion dollars—not as huge as it's used to doing, no, but still considered a tidy sum in most parts. That Goldman took a loss, in other words, isn't due to "regulatory uncertainty," but to the breaks of the business—and, perhaps, it's own failure to do due diligence. But why blame your own bad business acumen when you can blame the government instead?

Commenter's Corner: Andrew on Starbucks and small-biz credit

This is in the comments on my Starbucks post, but I think Andrew S. offers some good and interesting commentary that I want to highlight:

It really doesn't reduce new and small businesses to charity cases. It treats CDFIs--and the services they provide in the form of technical assistance and low-cost credit--as charity cases which almost all of them have always been. That's the innovation. I think this effort does a good service by recognizing that not all sources of credit are the same and that getting a loan as a small business is not merely a matter of declaring your interest in getting one. If you have a sexy internet company with high growth potential, money can be easy to come by. If you want to start a lawncare business, not so much. The "technical assistance" part of the picture is important as well. There are lots of people with great ideas for starting their own businesses who don't really know how to use debt effectively. Coupling loans with that kind of education has proven extremely effective in the CDFI community. Kickstarter is great for some things, but it has high labor costs and it's an all-or-nothing payoff which is a terrible structure for a long term sustainable business to work with. Anyway, recognizing that the market has failed small business borrowers is a good thing, and recognizing that lenders who serve those borrowers will need subsidies to do so is also a good thing.

Starbucks becomes a microlender? (Or: Capitalism becomes a charity case)

Joe Nocera highlights Starbucks' new effort in the NYT:

Here’s the idea they came up with: Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses. Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled “Indivisible.” “We are hoping it will bring back pride in the American dream,” he says. The tag line will read: “Americans Helping Americans.”

It didn’t take long for Starbucks to find the perfect financial partner: Community Development Financial Institutions, or CDFIs. These are lenders, mostly under the radar, that specialize in underserved communities. Most, but not all, CDFIs are nonprofit, and their loan default rates are extremely low. “We specialize in expending credit, getting paid back, and paying back our investors,” says Mark Pinsky, whose organization, Opportunity Finance Network, acts as an umbrella group to the best of them.

It seems to me this is a variation on microlending, usually a developing-world phenomenon to help the poor develop their own businesses. It could be effective. But I'm worried about one thing: Starbucks' effort reduces new and small businesses, essentially, to charity cases.

And maybe that's the way it has to be in 2011 America. But—since I'm not a socialist, and want to actually see markets made to work for the maximum public good—I'd rather see Starbucks put its muscle behind a Kickstarter-style operation that lets entrepreneurs raise capital by going directly to the customers for their products. That lets businesses that have an actual market for their ideas rise to the top rather quickly, instead of going through a bureaucracy—even a well-intentioned one—that'll have more of a hit-miss rate. And Kickstarter-type operations strengthen capitalism by providing investors with a return on investment—even if that return is simply the product being manufactured—instead of the warm glow of nebulously "saving American jobs."

I'm grateful that Starbucks CEO Howard Schulz is thinking about this kind of stuff. But Starbucks didn't start out as a charity case; it created a product that people liked, and became fabulously successful doing so. For the next generation of businesses to succeed and provide jobs, they'll have to do the same thing. In this case, maybe it's better that we ask Americans to be investors instead of donors.

Walt Disney, Snow White, and Occupy Wall Street

At NRO, Charles C.W. Cooke finds an Occupy Wall Street protester to mock and educate. It needs to be quoted at length.

He was a fairly well dressed and sometimes well spoken middle-aged man, and he wanted to talk to me about Walt Disney. This request alone was enough to pique my interest. But then, he surprised me. “Walt Disney,” he said, “was a whore…Look at how much money he made out of Snow White….Why can’t I use it in my mashups?”

Walt Disney made a lot of money from Snow White, something my friend considers unfair. But then Walt and his brother Roy also took a lot of risk. Originally estimating that the movie would cost $250,000 to make, the final bill ended up at around $1.5 million. During the three grueling years of production, Walt was almost universally laughed at for his ambition, including by his wife and brother. In the industry the project was known as “Disney’s Folly,” in part because the studio quite literally had to invent most of the processes necessary for the production of a full-length animated film. It had never been done before, and he was banking the studio’s future on it turning out alright. Through sheer will and charisma, and the hard if skeptical work of his brother Roy, Walt managed to borrow enough money to realize his vision. And here is the kicker — Walt remortgaged his house to help pay for it.

I told my friend this in response to his appraisal, albeit in less detail. His response: “So? I’ve lost my house twice.”

What we should have absolutely no sympathy for whatsoever, however, is the naked rejection of the American system, as espoused by my Disney-hating friend. Whatever one thinks of Wall Street, Walt Disney won fair and square and deserves our admiration not our oppobrium. It is this sort of attitude, encountered widely, that devastates the protester’s cause.

Actually, Walt Disney's corporation is a perfect example of how big corporations can bend the government to suit their purposes in ways that benefit them and crowd the public out of their own moneymaking and artistic endeavors.

Until 1998, a movie like "Snow White"—that is, a work of "corporate authorship"—would've been under copyright for 75 years. Under that law, Disney's movie would've entered the public domain ... next year, making it possible for Cooke's protester to use the video in his mashup without fear. Something new and interesting might've been born of it.

But the Walt Disney corporation managed to use the power of its lobbying muscle to have the law revised with passage of the Copyright Term Extension Act. Now works of corporate authorship are protected for 120 years. "Snow White" won't be lawfully available for mashups until ... 2057. Assuming Disney hasn't had the law changed again by then.

There's a reason for copyrights—so that creators can reap the rewards of their work—but, once upon a time, there was a good reason for limited copyright terms: So other creators could take those ideas, build on them, create new innovations, and extend the vitality of capitalism.

And it's a good thing, too: "Snow White" was available for Walt Disney to use and fashion into something new, beautiful, and profitable because it was in the public domain. Walt Disney took risk, sure. His corporation is keeping others from acting similarly. That's not the "fair and square" victory Cooke claims.

Steve Jobs was capitalism at its best. Let's not make him the champion of capitalism at its worst.

Wednesday night, my Twitter feed—after the Phillies game ended—was primarily concerned with two things: Occupy Wall Street, and the death of Steve Jobs. It's terribly dangerous to mash up two wildly disparate news stories and find a Common Meaning in them, but I was struck nonetheless. And so I Tweeted my thoughts: That while capitalism has real, sometimes huge flaws, it is also capable—uniquely so, in my opinion—of offering us goods and services that help us survive, thrive, and extend our abilities. I think it's also largely true, as Rod Dreher said—and he, incidentally, is no fan of Big Corporatism—"socialism just doesn’t produce a Steve Jobs."

But I think National Review's Kevin D. Williamson takes the Jobs-as-awesome-capitalist meme too far:

Profits are not deductions from the sum of the public good, but the real measure of the social value a firm creates. Those who talk about the horror of putting profits over people make no sense at all. The phrase is without intellectual content. Perhaps you do not think that Apple, or Goldman Sachs, or a professional sports enterprise, or an internet pornographer actually creates much social value; but markets are very democratic — everybody gets to decide for himself what he values. That is not the final answer to every question, because economic answers can only satisfy economic questions. But the range of questions requiring economic answers is very broad.

That phrase—that profits are "the real measure of the social value a firm creates"—strikes me as a bridge too far. Profits are one indicator, a significant one, but the real measure? There's no other good way to assess a firm's social value? No.

Porn is hugely profitable. For that matter, so is selling meth. So is housing speculation—at least, until it isn't. And even Jobs' record on the front of "social value" isn't uncomplicated—witness the debate over working conditions at Apple's China factories.

The point here is not that Steve Jobs should be lumped in with flesh peddlers and junk dealers. He shouldn't. But Williamson writes that "economic answers can only satisfy economic questions"—and it's simply obvious that sometimes the answer is wrong. And sometimes, it can be very difficult to see that because of the profits involved. We are, in 2011—on the apparent cusp of a double-dip recession—living with proof of that.

Williamson concludes:

And to the kids camped out down on Wall Street: Look at the phone in your hand. Look at the rat-infested subway. Visit the Apple Store on Fifth Avenue, then visit a housing project in the South Bronx. Which world do you want to live in?

Well, no question: I'd rather live in the Apple Store. But I can't. The Apple Store is an advertisement, really, for Apple products specifically and the Apple ethos more generally. It's not a place I can live—advertising exists outside the realm of reality. Mistaking it for reality, as Williamson does here, doesn't do much to advance the cause of capitalism. Apple Stores are nice in part because poor people, generally, don't go in. That's not the case in the subway. But many of us need the subway to get to work—rat infestations and all—so that we can make the money we use to buy Steve Jobs' great products. That's a huge social good—it is an answer to an economic question, as Williamson says—and yet transit systems are pretty much never profitable.

As my headline says: Steve Jobs is an example of capitalism at its finest. Conservatives like Williamson should take that example for what it's worth, instead of using it to argue for a fairy tale version of reality. There are flaws, and Jobs—for all his genius—wasn't completely exempt from them.

Typo nearly wipes out your retirement savings

That 1,000-point drop on Wall Street today? Guess how it happened?

In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points before paring those losses in what possibly could have been a trader error. According to multiple sources, a trader entered a “b” for billion instead of an “m” for million in a trade possibly involving Procter & Gamble [PG 60.75 -1.41 (-2.27%) ], a component in the Dow.

That set off a chain-reaction panic on trading floors. As Daniel Foster at National Review noted:

P&G's 37 percent nosedive was only responsible for 172 points of the 992.60 the Dow lost in the slump. The rest was market reaction — and part of that was computerized and automated.

You know, capitalism and free trade generally make a lot of sense. But our current method of allocating capital -- Wall Street being the big mover in that process -- keeps finding new ways to make itself look dangerously insane. Terminator was about how computers and robots set off an apocalyptic attack on humanity; turns out they don't need nuclear weapons to do that, just mindless programming instructions to start selling if somebody else is selling -- even if that sale is the result of a "fat finger" typographical error. Holy crap.