Monday, September 26, 2016

The Downside of Government Programs

I hadn't heard of Edward Conard before, but apparently he worked with Mitt Romney at Bain Capital. So he should know a thing or two, being as how Bain was what you might call a corporate repair shop. Its job seemed to be taking in beat-up corporate jalopies and doing a complete makeover, before sending them back on the road, all fixed up and slicked up.

Conard's first book was Unintended Consequences, "which set the record straight about the financial crisis of 2008 and explained why U.S. growth was accelerating relative to other high-wage economies." In other words, it wasn't the banks' fault.

Now in The Upside of Inequality: How Good Intentions Undermine the Middle Class Conard shows how how pretty well all the standard nostrums won't work to get the economic moving again.

Yes, he says, inequality has been increasing, but only at the very top end. And how are the 0.0001 percent getting rich? We all know the reason. It is chaps like Steve Jobs and Bill Gates coming up with long-shot technology startups that can grow into $500 billion corporations with very little additional capital.

The thing to understand about today's knowledge-based economy, compared to the old manufacturing economy of old is that it doesn't take much to scale up to a global scale. In the old economy a Rockefeller or a Ford had to borrow money and/or sell shares to scale up; a Steve Jobs or a Mark Zuckerberg doesn't. He gets to keep all the value for himself and his startup buddies and early VC investors.

Aside: Someone once told me that they had encountered Bill Gates in a store just after Microsoft had gone public. He asked Bill why he did it. Gates answered: to share the company with the employees.

But who cares about the inequality? Zuckerberg isn't hurting anyone except when he is buying the houses close to his place in Palo Alto. He is making money just like an entertainment star does, because people all over the world love his product.

The basic proposition in the modern economy, according to Conard, is this. To succeed in the modern economy you need two things, "properly trained talent" and a capacity for risk-taking.

And the reason that the US has been growing faster that our high-wage pals in Europe is that we have been doing the knowledge economy thing better than they.

That doesn't necessarily mean "education." Most people going to college are majoring in things that have nothing to do with the new economy. And according to Conard, pretty well all the usual suspects to fix education aren't going to make a difference. Most useful training takes place on the job.

And most people don't want to put their savings at risk. That is why we have banks. Banks take risk-averse savings and lend them to people that are taking a risk. Of course, lending is supposed to be properly collateralized and credit-worthy. But sometimes you get a Black Swan and the banks go south.

So how do you mobilize risk-averse savings? You have to balance it with equity. That just means that the startup guys need equity capital to provide a cushion against failure for the risk-averse folks. The more equity out there the more risk-taking propositions the economy can address.

Here is where Conard introduces something I didn't know. Apparently one of the provisions of Dodd-Frank is to make it harder for the Fed to act as lender of last resort.
Rather than strengthening the Fed's ability to act more effectively as a lender of last resort in a bank run, policy makers have done the opposite. They have made banks more responsible for bank runs by intentionally weakening the Fed's ability to act in a panic. Banks pulled back by raising credit standards.
Hello! The "Intellectual Yet Idiot" class provoked the Crash of 2008 because the Fed felt it could not rescue Lehman Brothers under current law. So the Fed is still stupid like it was in the 1929-33 crash. The whole point of the Fed is to be a lender of last resort that lends whatever it takes to keep the financial system afloat, as per Lombard Street by Walter Bagehot. And then worry about the fallout later. Period.

In the event, not just the Fed but the US government ended up guaranteeing just about everything in the financial system, as my shows.

The point about the banking system is that is really is doing a conjuring trick. It is taking risk-averse savings and making it into semi-risk capital. Of course that proposition goes south every now and again.

But the big message of The Upside of Inequality is that there really is not much that government can do about inequality or indeed anything else. Yes, we should help the poor, but we should not expect to get much result. We should fund education, but it is not going to have much result.

What we could do, in a chapter called "Real Solutions," is this:

  • Encourage "ultra high-skilled immigration." Because that would help the "properly trained talent" problem. 
  • Lower the marginal corporate tax rate, to attract employers back to the US. 
  • Demand balanced trade. Not to save manufacturing jobs but because when we run a trade deficit we import a lot of risk-averse capital that gets invested in government bonds. Not good. We need more risk capital. 
  • Increase bank guarantees, not reduce them. 
  • Don't enact a middle-class tax cut. That would slow growth.

Of course, after reading a 250-page policy book I rather wonder about the premise of policy analysis books. They are always recommending some sort of pushme-pullyou hydraulic replumbing of government to get the right pressure to force growth -- or equality or justice -- out of a sputtering jalopy.

But what do people really want? The working class of 200 years ago was walking from starvation to wage jobs in the city. The immigrants from Mexico have been doing the same.

But once everyone has got to the city and has got a half-decent job, what then? Most people just want to sit back and live a modest life and blame "them" if and when things go wrong. They don't care about "growth" except when their part of the world is declining, and the kids have to move away to get a job. But they do want that free stuff the politicians keep offering.

Really, nobody has thought about what comes next. What you might call the Downside of Government Programs and free stuff.

OK. We know what comes next. The whole big-government edifice crumbles to dust because its free-stuff concept has completely wrecked the economy and the culture.

But after that. What do we do then?

Come on geniuses. Give it your best.

No comments:

Post a Comment