By Dan McLaughlin, on April 28th, 2009
“Talent Is Overrated” by Geoff Colvin is an inspirational book that puts exceptional performance into perspective. It presents a solid case that great performance does not come primarily from innate talent, or even hard work, as is supposed by most people.
The thesis of the book reminds me of a theme that I heard many years ago from Albert E. N. Gray called the “Common Denominator Of Success.” Successful people do the things that failures don’t like to do. It is not that successful people necessarily like doing them any more than anyone else, but rather that, by doing the things that unsuccessful people don’t like to do, they are able to get the results that come from doing those things.
All great performers get that way by working long and hard, but hard work and long hours obviously don’t make people great. Many people work long and hard and stay mediocre. The meat of the book describes what the author calls deliberate practice, and presents supporting evidence in a convincing manner. It matters what kind of practice, not just how long and how much sweat is spilled.
The practical value of the book comes from the practical application of the thesis. In talking about world class figure skaters, he said that top skaters work on the jumps they are worst at, whereas average skaters work on those they are already good at. In his words, “Landing on your butt twenty thousand times is where great performance comes from.” Each of those hard landings is able to teach a lesson. Those who learn the lesson can move on to the next hard lesson. Those who don’t pay the price and learn the lesson never progress beyond it. In other words, hard work and dedication is necessary but not sufficient in itself for developing higher level performance at any endeavor.
The book is very readable and very entertaining, stocked with examples that anyone can relate to. The book itself will not make great performers or great organizations. The ideas in the book may, however, free the reader from the bondage of the talent or hard work myths. It is worthwhile for anyone to digest if they want to move beyond stagnation.
While everyone will not choose to make the sacrifice to be truly great at what they do, Colvin ends with the encouraging conclusion that great performance isn’t reserved for the pre-ordained few. “By understanding how a few become great, anyone can become better.”
By Dan McLaughlin, on April 28th, 2009
There is an old saying that I remember first hearing back in my college days. I remember it from a funny looking word – TINSTAAFL. It is an acronym for “There is no such thing as a free lunch.” It originated long before I was around, but it is as true today as it was one hundred years ago. It deals with a fallacy that often distorts the decision making process of individuals, as well as political leaders.
If someone takes you out to lunch and pays the tab, the lunch was free to you, but it wasn’t free. Your friend bears the cost, rather than you. If the restaurant owner tells your friend that the meals are on the house, the meals are free to your friend, but they are still not free. The restaurant owner bears the cost instead of your friend. If the employees and suppliers donate their time and food, it is still not free. Now, they bear the cost. When real resources are used up, including time, there is a real cost that someone ultimately bears. They have eliminated the opportunity to use the resources for other valuable alternatives.
The concept applies to government programs as well as dinners out. Someone pays for everything. You may be getting a benefit, but if you are not bearing the cost, someone else is. Since government does not produce anything, whatever it gives out in benefits to someone, it necessarily takes from someone else involuntarily. That someone else is the present taxpayer, future taxpayers or all consumers when the tax takes the form of monetary inflation.
We are in the midst of the biggest free lunch program in the history of the world. Millions of businesses, municipalities, educational institutions, development projects and individuals will be getting lunch for free. The problem with it all is that they will be eating from someone else’s lunch bucket. That lunch is no longer available for the original lunch owner.
The multiple stimulus plans and bailout packages totaling trillions of dollars are based on the absurd notion that propping up prices and encouraging irresponsible consumption equals stimulus. For most of the past decade, consumers were ridiculed by moralists for their conspicuous consumption. The big screen TV and oversized mortgage payments were symbolic of the era. A question is begging for an answer from know-it-all politicians: if under-consumption is the root of today’s problems, then why didn’t the conspicuous consumption before the collapse keep the party going indefinitely?
A recession or depression only occurs, without exception, after an inflationary bubble. During a bubble, artificially low interest rates induced by monetary authorities fool entrepreneurs and investors into investing. New money from inflationary credit floods the market, making prices go up. Like a Ponzi scheme, the early profits draw more players into the game, but the available real resources don’t keep up.
New competitors use the cheap money to buy goods and services that do not expand with the money supply. Prices are bid up and, eventually, what looked like a profitable enterprise on paper becomes a big loser in real life. At the peak of the bubble, it becomes obvious that many assets, such as mortgages and financial assets are vastly overvalued. The prices are unsustainable. That is very apparent when an average wage of $50,000 supports the weight of a mortgage on an average $500,000 home. The bigger the bubble and the more overvalued the assets, the bigger the fall and the more pain that will be felt by those that made mistakes.
It is unfortunate when people have to pay the price of their mistakes, especially when the mistakes are induced by government authorities. It is far worse, however, when people who didn’t make the mistakes have to bear the price of the people who did. The free lunch mentality is contagious. It is quite obvious now that everyone is jumping on the something for nothing bandwagon. Taxpayers are forced to take over the losses of toxic bank assets so millionaire bankers can get their free lunch. Recent legislation gives trillions of dollars of free lunches to special interests and pork barrel project owners.
If you are one of the unfortunate ones who didn’t overspend and overextend, who counted the costs and the risks and who did the right thing to keep out of financial trouble, now you get your reward. You get to pay for all of the free lunches for everyone else. What a perverted sense of justice.
By Dan McLaughlin, on April 17th, 2009
David Cay Johnston has written a book on a very important topic, the corporate welfare that occurs on a massive scale. Unfortunately, Mr. Johnston takes a very important topic and shoots it so full of populist sensationalism that it is hard to take him seriously. One of the main building blocks of his hype building is the grossly flawed study by Pickety-Saez, which attempts to use income tax data to prove radical changes in the distribution of income, but instead proves that people respond to changes in the tax laws.
The core of the book is the corporate-government partnership, where greed and malice on the part of business people siphons off mountains of money from taxpayers in the form of subsidies and protection for favored businesses and industries. Very surely, that modern day mercantilism is one of the primary problems in most modern societies. Mr. Johnston, however, puts on very thick blinders to the fact that the mercantilist partnership involves two sides. Government is the other partner, and for sure, the more egregious offender.
Business people are in business for profit. It is not all that unexpected that people will try to use whatever tools are available to increase that profit. Politicians and bureaucrats, on the other hand, are elected and hired as servants of the people. The primary legitimate role of government is to protect the rights of the individuals in society. They operate under the expectation that government is there to protect the members of society. Thus, when a politician or bureaucrat aids business at the expense of the individual citizens and taxpayers, they are forsaking their fundamental reason for being, they are worse than the businessman seeking handouts.
The book was hard to read, in spite of the fact that Johnston has a great, easy-to-read writing style. So many times throughout the book, a sentence would stand out as pithy, straightforward and true. Then, a few sentences later, he would make conclusions that didn’t follow or somehow destroyed the credibility that he may have built up. Quotations from Adam Smith are generously sprinkled throughout the book, and made to sound as though the champion of free markets would have supported Johnston’s proposals for big government and heavy regulation of business.
According to Johnston’s analysis, the problems that modern America faces are due to alleged “deregulation”. The author summarizes his confusion early on when he says “In the past quarter century or so our government has enacted new rules that have created not only free markets, but rigged ones.” If the markets are “rigged”, they are not free in any sense. The regulators rig the market and make it un-free. It shouldn’t be that hard to make the connection. The regulation that he longs for has always been written by the regulated, to the detriment of competitors, taxpayers and the buying public.
His conclusion is that people should bring pressure on elected officials, to enact regulation necessary to bring us back to the good old days. That conclusion invites the fox to guard even more henhouses. He plays into the hands of the very people he seeks to control. Economic freedom is the source of progress and prosperity, and limitation of government is the only possible way to limit the power of mercantilists to rip us off. Without government enablers, bad businesses would be punished, either by the market or, if they actually used force, fraud or violence, by government, using its limited power to protect people against those obvious violations of individual rights.
By Dan McLaughlin, on April 1st, 2009
You may have heard of the report of the Missouri Information Analysis Center (MIAC) called “The Modern Militia Movement.” The MIAC is “fusion center”, combining the Department Of Homeland Security with local organizations. It has created a stir because there are a few people who resent being called domestic terrorist suspects. Who knows, even you may even qualify. You might want to check before you go to Missouri. With involvement by DHS, the same is likely in other states. It just hasn’t been leaked to the press yet.
The Missouri State Police have been issued the report to make them more aware of what to look for to determine potential domestic terrorists. They include characteristics such as Christian religious ideology, anti-abortionist, tax resistance or anti-immigration beliefs. It’s comforting to know that you may be joined on that list of terrorists by some very well known and respected citizens.
According to the report, those who have concerns about the new world order should be watched carefully. They may have terrorist tendencies. Indeed, President Bush, the elder, must be one of the top suspects, because almost two decades ago, he discussed openly and publicly about the “New World Order”, or NWO, and has been pursuing the idea actively. He has been joined by many national and international politicians in discussing the idea of a NWO over many years. Of course, he will be a leader of the new order, so he probably won’t be harassed too much.
There are countless ways to qualify, however. If you don’t like President Obama, you may qualify as a white supremacist. If you resent the idea that the president refused, and continues to refuse, to present a valid birth certificate to prove that he is eligible for the presidency, you may be a terrorist.
If you believe that “President Obama is tight on gun control” and may enact firearms confiscations, or if you happen to think that the strong correlation between gun control laws and violent crime might be worth considering, you may be a dangerous criminal. If you think that the Ammunition Accountability Act is an abuse of power, you may have latent terrorist tendencies. President Obama’s chief of staff, Rahm Emanuel will have to be tagged as a potential terrorist, because he definitely believes gun control and confiscations are coming, and is actively working to make it happen.
If you believe that there may be a severe economic and political crisis that may cause violence, be careful what you say, you may be watched. If you are concerned with the plans for the formation of a North American Union by former Assistant Secretary of State, Strobe Talbott, all of the intellectuals of the Brookings Institution, the Council on Foreign Relations and countless other organizations and politicians, you are probably a crazed lunatic. None of that wild talk of the Amero unified currency or the NAFTA Superhighway through the heart of America. Robert Pastor and Andres Rosenthal, contributors to the book “The Future Of Integration”, have said “NAFTA is not enough” and the integration will “create the most powerful, single economic entity on earth.” Bush the younger and the presidents of Canada and Mexico can also be added to the list of suspects for their silly talk about the Union in their planning session.
Your unfounded concern that the government may institute mandatory national service may land you on the list also. You should be joined there by the 535 congressmen who are presently attempting to pass the euphemistically named “Generations Invigorating Volunteeerism and Education (GIVE) Act”, which directs the study of the feasibility of mandatory service requirements. It is a goal stated by the president and various administration officials, so theoretically, they should also be on the list.
If you exercised your political rights but had the bad judgment to support politically incorrect presidential candidate Ron Paul or third party libertarian candidates Bob Barr or Chuck Baldwin, the jigs up. You had better scrape those bumper stickers off your car.
It’s a good thing for us non-terrorists that we are being protected against all of those wacko people who don’t adore the politicians or believe that they may be corrupt and sell out the citizens of this country to the highest bidder. We won’t have to worry about all of those crazy Christians and patriotic constitution-lovers. The police are now aware of all of those dangerous bible toting thugs and freedom loving patriots. There now, don’t you feel safer?
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By Dan McLaughlin, on March 31st, 2009
Economists are anticipating that the federal budget deficit will be in the trillions of dollars this year. There are estimates that, with all federal efforts combined, the bailout and stimulus packages will be upwards of $7 trillion. I wonder if politicians who are so cavalier about using taxpayer money actually know how much a trillion dollars really is.
According to the Bureau of Engraving, a dollar bill is .0043 inches thick. That means that a stack of 100 new dollar bills would be .43 inches tall. A thousand is 4.3 inches. A million is a thousand thousands, so a million dollars is 4,300 inches. Converted to feet, that is about 358 feet high. A trillion is a million millions, so a trillion dollars would be a stack of money 358 million feet tall. If you convert that to miles, the dollar stack would stand 67,866 MILES high! It would wrap around the equator more than two times.
For another perspective, I saw an ad in the paper just this morning, offering bread for $1.99 per loaf. A loaf is 4 inches tall, so one dollar will buy a 2 inch tall loaf of bread. If, instead of using .0043 inches, the thickness of a dollar bill, we substitute 2 inches, the thickness of a loaf of bread that 1 dollar will buy, we get a much more dramatic view. A stack of bread that $1 trillion can buy would reach up more than 31 million miles. Given the price of $2 per loaf, that would be 500 billion loaves of bread.
Considering that there are roughly 300 million people in the United States, that is enough bread to give about1600 loaves to every man, woman and child in America. It is enough to give each of the 6.5 billion people in the world 77 loaves apiece. Our politicians certainly don’t buy loaves of bread with the money. So where does it go? Where does it come from?
The answer to the second question is that it comes from out of thin air. Modern money is the creation of the monetary authorities, in the case of America, the Federal Reserve and fractional reserve inflationary credit. Money is only as valuable as the goods it can be used to buy. Wealth and prosperity only come from production and never, under any circumstances, from money created by a central bank. When more money is made from nothing, with no increase in production, the primary effect is to increase prices. More dollars in the system changes the ratio of dollars to goods, and prices have to rise.
Prices should be decreasing significantly at this point in the downturn, lowering the cost of living for everyone, making everything easier to buy. They are, however, being propped up by your government. They are also establishing the next big wave of the cycle, and the choice in the near future will be runaway inflation or excruciatingly high interest rates.
Not too many years ago, the outrage was over politicians’ callousness when dealing in terms of billions. Billions lead to trillions, which lead to tens of trillions, then hundreds of trillions. Zimbabwe has put it in high gear with an inflation rate of over 1 million percent per year. Their government destroyed their monetary system and economy by making lots of money out of thin air.
We may never get to the point where we have a million percent inflation rate, but if we don’t start holding our elected officials accountable, they will destroy our economy, even more so than they have so far. From the ridiculous and irresponsible things that they keep doing, that destruction actually seems to be their goal.
The first question above, where does all the money go, is a very good one. It’s all a deep, dark secret. In spite of the rhetoric about transparency, you won’t really see where most of it goes. I’m sure that bailout millionaires will be grateful for your contribution to their investment fund.
A trillion dollars is an incredible sum of money. Incredible sums invite incredible abuse. Maybe something good will come of this whole mess. Just maybe, the people of this country will finally see through the scam that both Republicans and Democrats in congress have been perpetrating for decades. Maybe we will start to see some real change in the next few years when hundreds of crooked Washington politicians are kicked out.
Hey, anything’s possible when people use their heads, isn’t it?
By Dan McLaughlin, on March 16th, 2009
Life is full of uncertainty. A plane might fall on your house. You may total your car. The value of your investments may crash. But, then again, you may find valuable mineral deposits on your land. You may inherit lots of money. You may find that the old trinket you bought at a flea market is worth thousands of dollars.
People make decisions based on their assumptions about the present circumstances and expectations for the future, whether that future is the next second or decades away. People act only because they expect to be better off, in some way, emotionally or physically, by acting. Those expectations may not hold up to reality, however, because, as we have seen, life is not a sure thing. Some people win and some lose.
There seems to have been a lot of losers these days. Investors, business owners, home owners and mortgage holders are taking a collective hit in the pocketbook. It is difficult in times like this to step back and see the overall picture, which is actually a quite wonderful thing, in spite of the mess created by monetary authorities. In societies where property rights are secure and people are protected from fraud, coercion and violence, including that by politicians, free trade leads to an amazing phenomenon. Whenever two people enter into voluntary trade, both sides win. Both sides to the transaction expect to be better off. If that were not the case, the transaction would not have taken place.
At the store, the customer values the shirt more than the money used to buy it. Conversely, the seller values the money more than the shirt. At work, the employer, the buyer of labor services, values the efforts of the employee more than the money he pays. The employee, the seller of labor services, values the money more than the time and effort given up to obtain it.
Because people create value by the things they do, they can give value for value received. That is the basis for the advancement of any society. Those societies that honor property rights and voluntary trade advance at a much quicker pace than those that don’t. The expectation of gain, and the ability to benefit from it, is a powerful incentive for people to create value. The expectation of ownership encourages people to invest in processes and equipment to create value more efficiently, thus benefiting everyone.
Some see the market process as systematic exploitation, a situation where every transaction has a winner and loser. They may point to the housing market or the stock market and explain that if someone buys at a high price and sells at a low price, that seller loses and the buyer wins. In this case it is important to identify what the loss actually arises from.
Using the stock market as an example, if someone bought at the peak of the bubble, they may indeed lose half of their investment if they sell today. The decision to sell is based on present circumstances of the seller and expectations for the future. There is a risk that the market can go lower. Neither seller nor buyer can predict the unknown future. If someone buys from the seller who’s stock lost value, the buyer assumes that the market will go up. He is willing to assume the risk of the unknown, which the seller is no longer willing to bear. The loss came only from the decline in the market prices, not from the selling. The decision to sell cannot affect what happened already. The seller benefits from being relieved of the risk of further decline. The buyer benefits from assuming the possibility of turnaround and future gains. In the transaction, both sides must necessarily feel they are better off by consummating the deal. They may regret their decision afterward, but that is because of events independent of the sale.
It is similar to totaling your car. The collision with the tree was the loss. If you make a deal with someone to buy your car, the person will pay the price of a wreck, not the price of a new car. The accident with the tree changed the present situation. Given the present reality, the decision can only be whether you are better off with the wreck than you would be with the money the buyer offers you.
The recent economic meltdown is like running into the tree. It arose from various factors, but chief among them is the inflationary credit expansion, and the inevitable collapse that results. Responsibility for the bubble and collapse rests squarely on the shoulders of the central banks and the fractional reserve system. Given that the loss in market prices is a fact of life, however, trade can only benefit the participants, as it did with the owner of the wrecked car.
In every voluntary trade, if you decide to sell your car or your stock or anything else, you win. You are better off after the trade, even if it is just because you don’t have to worry about any more losses. If the buyer decides to buy, he is also better off. Subsequent events might turn him into a loser also, but at the time of the deal, he was a winner. Both sides necessarily win with honest, un-coerced, voluntary trade.
By Dan McLaughlin, on March 6th, 2009
“The Audacity of Hope” is a catchy phrase with important implications. It is good to hope, to look forward boldly in anticipation of better times, to have a positive outlook that is open to opportunity. But, just as it is not a good idea to run around in the dark with a sharp butcher knife, it is also not a good idea to boldly pursue policies with blinders on, while wielding dangerous economic weapons.
The “war on poverty” has been a miserable failure, in spite of the trillions of taxpayer dollars spent over the last 4 decades. The “war on drugs” is another expensive failure on all fronts. Central planning in American education has resulted in a very expensive system that is failing our children. Ask any supporter of the welfare state, however, and the ongoing failures of government programs result only from not throwing enough money at them. It doesn’t matter what miserable results from whichever government program, the only proposed solution to the problems is more money stolen from taxpayers.
In the real world, if a private business or association is not successful, it either changes the way it does business and serves people or it takes a one way trip to the business graveyard. Bankruptcy and failure ensure that bad ideas or inefficient, unproductive systems don’t keep sapping life from the productive sectors of society. That is the way that society progresses and economies advance.
Not so with government. It seems that the bigger the failure, the more support it gets. We have been victims of expensive stimulus plans for some time now. Remember the cure-all about a year ago? If only the wise politicians could take enough money from taxpayers to redistribute to taxpayers, they could jump-start the economy. Not enough. More billions prop up banks and failing businesses. Between the Federal Reserve Bank, FDIC and the multiple stimulus spending plans, the toll is now in the multiple trillions of dollars.
With all of the smart people purportedly hanging out in Washington DC, you would think that they might realize that, if you take a dollar from Joe and give it to Frank, and a dollar from Frank and give it to Joe, you really haven’t stimulated either. Worse yet, if you take a two dollars from Frank, give one to Joe and keep one to feed the beast, you have actually de-stimulated and made the whole economy less productive.
Stimulation is the fundamental reason that this country and the world are in their present sad state of affairs. Central banks try to stimulate economic performance at the beginning of an economic boom by pumping counterfeit money into the economy and lowering interest rates below the market rates. That stimulation only distorts the real economic incentives. The inflation devalues the dollar and creates bubble economies, where certain sectors inflate at a quick pace, giving the illusion of rapid real growth. In the present case, artificially low interest, specific homeowner incentives, government subsidized mortgages and ownership programs, and requirements for banks to offer loans to risky borrowers combined for the deadly combination that exploded into the current meltdown.
Those same smart people in our nation’s capital choose to ignore the obvious, and instead, throw trillions of dollars of good money after bad. Instead of fixing the core problem, they play political games for fun and profit. It is hard to believe that hundreds of the most well connected and powerful people in the country can be so willfully ignorant. That is, hopefully, the case, however, because if it isn’t, it means that, instead, they are willfully malicious. They consciously hurt the people they pretend to help.
Audacity, in the positive sense, means boldness or daring. It is a characteristic of effective leaders.
There is, on the other hand, an old saw among seasoned airplane pilots: “There are old pilots and there are bold pilots, but there are no old bold pilots.” Audacity is sometimes the precursor to disaster, because it substitutes cockiness for clear thinking, and throws caution to the wind. In this time of crisis, our leaders have thrown caution to the wind. They are flailing in the dark so they can say they are doing something. They are prescribing poison as the antidote for poison. They don’t think about the ramifications and, instead, rely on knee jerk reactions, which will ultimately multiply the problems they themselves have created.
Wouldn’t it be refreshing if our politicians would have the audacity to actually think for a change?
By Dan McLaughlin, on February 23rd, 2009
President Obama is taking a harsher stance on antitrust and monopoly than President Bush did. According to a New York Times story, the president will “take a more active approach than his predecessor in scrutinizing deals that could hurt consumers.”
Hurting consumers presumably involves restricting output and raising prices, as antitrust theory goes. Preventing that sounds heroic, like being the champion of the people, but the reality is that antitrust actions have a much better record of protecting inefficient companies at the expense of more efficient competitors and consumers. It is a fact that most antitrust actions have been brought about not on behalf of customers but, rather, on behalf of competitors. Many businesses support antitrust laws because they serve to cripple and break up their more effective competitors. The Microsoft antitrust case was concocted in a secret meeting between competitor Netscape, their state’s Senator and justice department representatives. It wasn’t about customers, but about using political power to deal with competition. The late Yale Brozen from the University of Chicago concluded that antitrust was almost always anticompetitive.
Think for yourself what your boss would say to you if you worked for an auto manufacture and said “I’ve got a great idea. Let’s use predatory pricing and drive our competitors out of business. We will sell each car at a loss and lose billions of dollars a year, but in 5 or 10 years we could capture the entire market and then charge double the price we charge now to make up for the losses.” Before your boss signed your pink slip, he would probably remind you that, once you raised the prices, the door would be open for competitors again and the losses would never be made up.
All of this is not to say that monopolies or cartels don’t or haven’t existed. Of course they have, but if you look at the record, those that have remained for any length of time are either government operated or private organizations that are protected from competition by the government. AT&T was the sole long distance provider for many decades, not because it had any special technological advantage or operational efficiency. It was only because all competitors were excluded by law. You will find that to be the general case for any monopoly or cartel.
You will also find that the sectors of the economy that are in the worst shape are those dominated by government cartels. The banking system is one of the largest cartels, with the United States system dominated by the Federal Reserve Bank. The financial meltdown, not surprisingly, rests on the manipulations by the cartel of the money supply and interest rates. The educational monopoly is failing the millions of students growing up in America. The science monopoly is producing dangerous and damaging politically motivated pseudo-science. And on and on.
The whole antitrust-monopoly industry, a multi billion dollar a year lawyer enrichment program, is based on entirely false premises. The idea that anti-competitive behavior consists in doing things that make it difficult for your competitors is an absurdity. That is what competition is. You become more efficient to get more customers. That includes economies of scale. The very things that bring prices down and increase production in a free market economy are precisely those things that are considered anti-competitive. The government should actually be congratulating those businesses that have low unit costs and efficient processes, and thus are able to offer customers lower prices.
Economist Dominick Armentano conducted a study of the most famous antitrust cases and published the work in the book “Antitrust and Monopoly: Anatomy of a Policy Failure. It details the cases and highlights the lack of evidence of consumer injury. The conclusion was that the entire antitrust system has worked “to lessen business competition, and lessen the efficiency and productivity associated with the free market process.”
In his book “How Capitalism Saved America”, Professor Thomas DiLorenzo described the state of the sectors that were the most subject to early 1900’s antitrust hysteria: “Those industries targeted as “monopolies” grew seven times faster than the rate of the economy as a whole.” Prices decreased significantly faster than in the rest of the economy. States legislation was actually passed to suppress “unhealthy competition”, by which they meant low prices.
The late 1800’s and early 1900’s was the heyday of anti-monopoly sentiment. Big businesses were definitely formidable organizations. Standard oil controlled 88% of the infant oil industry in 1890. By the time the Supreme Court reaffirmed the ruling that Standard Oil was a monopoly in 1911, its market share had dropped to 64%. By 1911, there were 147 oil companies. Costs were continuously declining and prices dropped to a fraction of what they were a couple of decades earlier. Output was increasing, not just for Standard, but for most of growing number of producers. The core justifications for antitrust were false.
The epitome of antitrust irrationality was the 58,000 page Alcoa decision. It concluded that Alcoa’s skill, foresight and industry were exclusionary. It forestalled competition by stimulating demand and then supplying it. Judge Learned Hand opined that “…we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connection and the elite of personnel.” Quite obviously, if they faced each opportunity with new capacity, they were not restricting supply in the least. Others could not compete because Alcoa was so efficient and prices were so low. To antitrust lawyers and judges, up always seems to be down. Very smart people can say and do very dumb things.
Obama has apparently surrounded himself with very smart people. Unfortunately for the citizens of the United States, the smarter they are, the more arrogant the approach seems to be, and the dumber the things they do. Larry Summers, chief economic advisor to the president, intends to use “behavioral economics” in antitrust cases, the use of psychology to determine how “real people” should act. This opens new avenues of attack, and will possibly add billions of dollars to the tabs of taxpayers and to the customers who have to pay for the defense and the increased prices due to crippled competitiveness of the top producers.
I am sure Mr. Summers and his bureaucratic colleagues are sincere, and may even think they are doing the right thing. Being smart and powerful, however, doesn’t make you right, and it doesn’t make sense out of nonsense.
By Dan McLaughlin, on February 18th, 2009
A recent Forbes article listed the ten “tallest cities”, those with the most buildings over 700 feet tall. The current record holder for tallest building is the Burj Dubai in the Arab Emirates, at 2684 feet, scheduled to open this fall. It is more than 1000 feet taller than the previous record holder, the Taipei 101 in Taiwan. There are plans to build a couple of skyscrapers over 3000 feet tall.
The article brings to mind a concept introduced in 1999 by Andrew Lawrence, called the “Skyscraper Index”. The index highlights a fairly strong correlation between new world record buildings and the onset of recession. While correlation isn’t causation, and tall buildings certainly don’t cause economic downturns, it is quite interesting and can help to shed some light on the workings of business cycles.
Business cycles can be more aptly described as banking or monetary cycles. They arise in conjunction with inflationary credit bubbles, the responsibility for which lies with the central banks and the fractional reserve banking system. The relative regularity of the bubbles is linked to the fact that the actions taken to mitigate the deflationary effects of an economic downturn, when the bubble bursts, actually plant the seeds for the next bubble.
The root of the matter is that central bankers use incentives to spur rapid economic growth. The interest rate is artificially reduced to below the market rates and the market is flooded with money. Fractional reserve banks greatly leverage the money supply, and it expands like an accordion. The banks use deposited money to make loans, and the leverage of fractional reserves transforms a billion dollars of new reserves into ten billion dollars of new money, created out of thin air.
When interest rates are artificially lowered, business ventures that might not make sense under normal conditions suddenly look profitable. The beginning of the bubble is actually the end of the previous bubble, so costs look favorable. The prior shakeout means that there are lots of resources available at cheap prices. Business really does look good, and entrepreneurs make rational decisions to start projects which look profitable. The money entering the system makes it appear that business is booming for everyone. High spirits and lots of cash stoke the fires for bigger and bigger projects. At times like this, record breaking skyscrapers start to materialize. The thesis of the Skyscraper Index is that when world record building projects get rolling, it is likely that the end of the bubble is near.
The problem is that real resources are limited in the short term. More money pouring into the system does not make any more steel, concrete or lumber available. It does not make more people available to do the work. As the market heats up, the limitation on real resources becomes apparent and costs of production are bid up far beyond expectations. It turns out that entrepreneurs have been fooled. Projects that once looked like big winners now become losers.
The downhill side of the bubble occurs when businesses and individuals can’t pay and the loans go bad. The accordion of fractional reserve banking starts to contract as the leverage is reversed. A billion dollars in bad loans will cause a contraction of 10 billion dollars, as money made from nothing disappears into the ether from whence it came.
As the bust progresses, the real productive resources are still there. Skyscraper owners may go bankrupt but deflation should make prices come down. Productive assets, or overpriced homes in the present case, should become more affordable and realistically priced. If that was allowed to happen, the efficient entrepreneurs would take over productive assets and prospective homeowners would finally be able to afford the homes that they were responsible enough to avoid when they were overpriced.
The reaction among politicians today is to flood the market with “stimulus” to prevent prices from falling and to prop up failed banks and businesses. Aside from the glaring moral hazard of supporting failing businesses and irresponsible homeowners at the expense of those who were responsible, the actions prevent the adjustment that is needed for the economy to become productive again. Skyscraper owners are bailed out, while Average Joe drowns.
Eventually, we may wake up to the reality that the present banking system is the problem. Real banking reform may make the bailout mentality obsolete. It is probably not a good idea to hold your breath waiting, though. Big banks and skyscraper owners with political clout have become addicted to bailouts.
By Dan McLaughlin, on February 9th, 2009
Health care has gotten to be one of the top issues of our time. Many people believe that the present system in America is broken. It is too expensive and excludes too many people. The political solution is to move from a highly centrally planned system to one that is even more centrally planned. Government is to be the savior and magically solve all of the problems and make everyone healthy, but that can only happen when it gets big enough, and interferes with the markets on a grand enough scale.
The problem with central planning in health care is the same as the problem for central planning in any other area of our lives. It assumes that the planning body is able to make decisions for hundreds of millions of people and optimize the results. The justification for government provision of health care is wrapped up in morality and rhetorical turns of phrase, as it must be to get around the obvious contradictions and logical incoherence.
Discussions of health economics, even by many PhD economists, often seem to neatly and conveniently avoid any mention of the relationship of prices, supply and demand, the essentials in any economic discussion. In every respect, the provision of health care is an economic issue, similar to the provision of food, shelter, clothing, transportation, and every other need of humanity. There is absolutely nothing special about a doctor doing brain surgery. It is a service that he or she provides, and the market for brain surgery operates according to the same economic laws as the markets for plumbing, catering or transportation services.
Not all discussions of health economics avoid economic principles, however. A growing number of participants acknowledge the tradeoff in the triangle of access, affordability and quality. In a health care system, you can successfully manipulate one or maybe even two of the three, but you can’t manipulate all three at once. You can artificially make health care accessible to everyone and even control prices to make it more affordable. In that case, the quality will inevitably suffer. You can have the highest quality and make it accessible to all, but the society will go bankrupt trying to pay for it. In order to make a high quality health care system with a low overall cost to society, you must necessarily exclude people with expensive problems. The three factors are opposing. You can’t have them all together.
The iron triangle of access, affordability and quality is really just a nod to the relationship of demand, price and supply. In any market, whether for health care or automobiles, manipulation of prices, demand or supply inevitably leads to negative unintended consequences. Health care would benefit a great deal if only people would take economic law into account.
Central planning, in all of its various forms, must, by its very nature, ignore economic law. It must manipulate prices, demand or supply. There are no other tools for central planners to use. Taxes, regulations and other legislative vehicles are merely the methods they choose to impose controls on supply, demand or prices.
If one assumes that all politicians and bureaucrats are actually benevolent and really care about the needs of the citizens, one might believe that the laws and regulations they enact will be beneficial to all of the people. That belief fails on at least two points. The first, most glaring fault is that politicians and bureaucrats are generally not benevolent and don’t care for the rest of us. Their career advancement depends on accumulation of power. Their benevolence falls toward those special interests that give them the highest bang for the buck they take from taxpayers.
The second failing is vastly more important, though much more subtle. Planning by government assumes that individuals don’t plan, or more to the point, that individual’s plans are wrong and don’t count. In reality, only the plans of people count. All that government planning can do is restrict the options for consumers and entrepreneurs and distort the economic environment under which they make their decisions.
The crisis in health care has only been an issue since politicians decided they know better than consumers do. The real solution to the health care crisis is to remove the cause, the severe interference that has distorted the markets for decades. Quality health care will be affordable only when individuals are accountable for their own costs and providers are free to compete on their own terms. Everything else is political whitewash.
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