6.15.2009

The Aristocracy of Unproductive Zombies

In an in-depth piece on WSJ.com today, writers Bob Davis and Jon Hilsenrath report that Federal Intervention Pits 'Gets' vs. 'Get-Nots' (subscription required). Speaking to a factory worker who stopped into a sporting goods store for a gun case, they informed him that, because of the government bailout money given to Cabela's for its store-issued credit card operations,
The U.S. government helped finance the transaction. Earlier this year, it recharged the credit-card operations of the Nebraska-based retailer of hunting and camping gear with nearly $400 million of federal financing.

Mr. Davis was surprised to hear about the government's helping hand, and hardly pleased. "Anything the federal government, or any government, sticks its nose in fails or makes things worse," he said as he made his way across the parking lot with his son.
This is a common sentiment in large swaths of America. It's difficult to discern if the authors agree, but luckily they make few evaluative comments and instead focus on the disturbing facts:
True or not, what's undeniable is that the federal government has burrowed its way deep into the quotidian workings of American capitalism.

Since the onset of the financial crisis nine months ago, the government has
  • become the nation's biggest mortgage lender,
  • guaranteed nearly $3 trillion in money-market mutual-fund assets,
  • commandeered and restructured two car companies,
  • taken equity stakes in nearly 600 banks,
  • lent more than $300 billion to blue-chip companies,
  • supported the life-insurance industry and
  • become a credit source for buyers of cars, tractors and even weapons for hunting.
[converted to a list for emphasis]
When laid out like that, it's truly flabbergasting. What is the effect of this unprecedented interference in the economy on the nature of American business? If you have read Atlas Shrugged, you'll likely be able to answer quickly: the Aristocracy of Pull.
The massive intervention has shifted the way companies do business in a host of ways -- not all of them intended by the government. Increasingly, companies big and small are competing on the basis of their ability to tap government money. A divide is opening between gets and get-nots. ...

Government spending as a share of the economy has climbed to levels not seen since World War II. The geyser of money has turned Washington into an essential destination for more and more businesses. Spending on lobbying is up, as are luxury hotel bookings in the capital. [bold added]
Government intervention has wide-ranging impacts on markets, and on firms that seek and obtain bailouts, those that fail at that task, and with firms who actively avoid government cash. Some even use their defiance and independence as a marketing tool.
Victor Stabio, chief executive of Hallador Petroleum Co., a Colorado coal and oil producer, recently got mail from UMB Financial, a bank in Kansas City, Mo., that advertised it hadn't taken a penny from the Treasury's Troubled Asset Relief Program, or TARP. Mr. Stabio says he was impressed. He moved $8 million of Hallador's money to UMB. "I didn't like the whole TARP program to start with," he says. [bold added]
But when even admirable companies like BB&T feel compelled to take bailout money because money given to competitors puts them at a disadvantage, what happens to the less admirable, less well run companies who seek bailouts?
Some economists and business leaders worry the intervention will result in rules that hamstring the way some businesses operate, and that it will sustain unproductive zombie firms and burden the next generation with debt or inflation. [bold added]
Were the authors thinking of GM when they wrote about "unproductive zombie firms?" That was certainly the first thing to come to my mind. GM and Chrysler were the beneficiaries of lots of government help, while Ford was not because Ford was in a stronger position. It's not hard to predict that the market-distorting impacts of this government takeover of one of the major players in the auto market will have long-term negative effects on their slightly healthier, and non-bailed out competitors. This whole mess could easily destroy the entire market for American-made cars, leaving only a government-run monopoly, inefficiently producing substandard cars that no one wants.

Competitive advantage is no longer obtained by making the best product at the lowest cost, or in having the best marketing or distribution strategy. Advantage is gained by having the most pull, by being the one to be declared "too big to fail." Witness the perversion of the nature of competition in the following example:
The prospect of dipping into buckets of federal money has ignited competitive scrambles in lots of industries. In the farm-equipment sector, Deere & Co.'s purchase of a thrift years ago qualified it in December for a government guarantee on $2 billion of its debt, through a Federal Deposit Insurance Corp. program to help banks access debt markets.

But the FDIC didn't cover competitors such as Caterpillar Inc. or smaller equipment providers. So the Equipment Leasing and Finance Association, a trade group, lobbied the Fed to expand the TALF program to sales of farm equipment and other machinery. The association's president, Kenneth Bentsen, a former Democratic congressman from Texas, met with the Fed's general counsel and followed up with phone calls and letters. The Fed eventually expanded TALF to cover Deere, Caterpillar and other equipment makers. [bold added]

Welcome to the new face of the American competitive spirit, one fawning and obsequious, pleading for privilege. Mr. Rockefeller, meet your replacement: Wesley Mouch, Washington Man.

The other edge of this double-edged sword is increased regulation. Because of the popular, and seemingly impossible to kill, incorrect notion that it was a lack of government regulation that led to the economic crisis -- when in fact it was the exact opposite -- the Obama administration will be calling for new regulation that they swear will not "hamstring the way ... businesses operate."
One of the most important pieces of the federal intervention is the rewriting of financial regulations, which the administration expects to propose this week. Under the plan, firms deemed "systemically important" would be regulated more heavily than other firms, to limit the chance they fail and threaten the broader economy.

Government backing could help banks, hedge funds, private-equity firms and others considered too-big-to-fail firms to gain an advantage by being able to borrow at rates below their smaller competitors. But there's a catch. The government could demand these big firms hold more capital or limit their dependence on debt, discouraging them from gambling with taxpayer backing. That would limit both their risk-taking and their potential profits. [bold added]
"Systematically important"? Is this a newspeakian euphemism for "too big to fail," but with an implied stick (regulation) instead of a carrot (bailouts)? As we have seen from this administration, it is all too eager to use its new found power impose its will on private business. Just ask the ex-CEO of GM, or see the new "executive pay czar."

As the acceleration of the aristocracy of pull (which has sadly been around for some time) fast becomes the aristocracy of unproductive zombies, while the government continues to prop up the GMs of the world, one wonders how bad it will have to get before people wake up to the fact that government interference in markets is the problem. What will it take for Americans to understand that we need a Separation of Economy and State as badly as we do one of church and state?

12 comments:

Burgess Laughlin said...

You have done a masterful job of identifying the problem. You have also highlighted the fact that there is a reservoir of opposition to growing statism. Unfortunately that opposition is mostly based, as your quotes show, on the economic-inefficiency argument (statism isn't as productive as private enterprise).

Statists don't much care about efficiency. The root of statism is altruism, as you know. Only killing that root and replacing it with rational egoism has a chance.

Thank you. I realize you already understand and agree with these points. I needed to spell this out, to help maintain a little historical perspective. Changing an ethics takes generations. Reminding myself of that reduces the anguish a little.

Take care.

mtnrunner2 said...

Nice article. I also laughed several times, in a painful sort of way.

Of course the Obama administration is every bit as bad as I feared it would be, and just as predictable. Absurdities abound, such as: "Under the plan, firms deemed 'systemically important' would be regulated more heavily than other firms, to limit the chance they fail and threaten the broader economy."

?? Aaaah!!

I do enjoy hearing about people around the country who see through the nonsense, like the Cabela's shopper. The Left just loves to slam the so-called ignorant masses (which as far as I can tell, is anyone who doesn't love Kos, Olbermann and Jon Stewart), but in most cases their brains seem *much* more attached to actual reality. It's political gold, waiting dormant for the right ideas.

Doug Reich said...

"Because of the popular, and seemingly impossible to kill, incorrect notion that it was a lack of government regulation that led to the economic crisis -- when in fact it was the exact opposite..."

First, thanks for a great post.

Re quote above, this is indeed an argument that seems "impossible to kill". This argument appears in virtually every article and/or especially in the comments section of any article related to the crisis.

That capitalism would take the blame for the consequences of socialism is such an egregious injustice that it makes my blood boil. Refuting this argument should be a high priority for those who value freedom.

We can never overestimate the value of refuting this argument (or in the positive sense, making th argument for freedom) no matter how obvious it seems to us.

C. August said...

Thanks for the comment, Burgess, and for the perspective.

MtnRunner2 - I have to say that this administration is as bad as I feared it _could be_, but I never thought it would realistically get this bad. I agree that it is very predictable, because we've identified the root causes and ideas that motivate all sides of the issues, but who knew he'd stick with the leftist/statist plan so consistently? It almost smacks of him having some sort of principles -- as wrong as they are -- except that I know how much of a Pragmatist he is. Perhaps he just thinks that he has all the power, so he can decide what is practical, and that just so happens to be implementing fascism.

C. August said...

Doug, you said "That capitalism would take the blame for the consequences of socialism is such an egregious injustice that it makes my blood boil." That is exactly my reaction, and I fear I sound like a broken record in combating it. Nearly every post or comment I make seems to revolve around that idea.

"We can never overestimate the value of refuting this argument (or in the positive sense, making the argument for freedom) no matter how obvious it seems to us."

I'll have to remember this and use it as a mantra, so that the next time I think "I can't believe I have to keep reiterating this same damn argument!", I'll just push past the frustration.

But when I look back and see that Bastiat made similar arguments over 150 years ago, I must admit to some bouts of hopelessness. Then again, I could look back to Aristotle and be depressed that people are still, millenia later, caught up in denying that an objective reality exists or can be known. That's obviously self-defeating. There are wrong ideas and there are right ones. All we can do is keep fighting for the right ones, under the banner of Reason, Egoism, Capitalism.

Doug Reich said...

C.,

I think this issue of "capitalism taking the blame" is more complicated than we think.

When you have the integrated view that Objectivism offers, it allows one to see the economic system in a fuller context, viz., the context of a system of morality, individual rights which leads to freedom and capitalism. It also offers a clear and rational definition of what "capitalism" acutally means since you can put it into this fuller context.

Once you grasp rational morality and egoism then rights and principle of the initiation of force, etc. all follow logically.

For those who do not have this understanding, the meaning of "capitalism" depends. It could mean "anything America does" or it could mean "any law or policy that allegedly benefits business owners (at the expense of everyone else)", or whatever. Often, peoples conception is a blurry mixture of these elements which they often package deal into "free markets" or "globalism", etc. rather than grasping that capitalism is an economic system based on the recognition of individual rights.

Often, my frustration in these arguments is that I am really arguing for something, i.e., "capitalism" that is not at all what the other side is conceiving. They have no idea what "capitalism" even means.

It can be difficult to get a leftist to admit that their ideas are predicated on the use of violence in the form of government force. However, it is very easy to get them to admit they favor higher taxes and state intervention into business. That's how ridiculous it is and how far away we are in terms of implementing fundamental ideological change.

I think an efficient approach is to constantly argue for more general fundamental principles like individual rights, property rights, and to cast political issues into arguments over these principles. This approach necessitates translating the political issue into a more general issue. Arguing over the minutia of various pollicies can be useful in certain contexts but translating the political into a more philosophical, ethical framework has the power of appealing to people morally at the same time more clearly defining the real issues.

I'm not saying anything you haven't heard or don't know but I'm repeating it again because it never hurts to keep repeating this point.

I think the reason why we keep repeating the errors of the past is the breakdown or lack of discovery of principled thinking methods. There is just no other way to win than to tackle this.

Burgess Laughlin said...

If I were looking for a central purpose in life--or even a theme that would focus my part-time intellectual activism, then I would look no further than the observation made here that statists blaming capitalism for the destruction caused by statism is a huge impediment to creating a better world.

This problem is widespread, enduring, and frequently used. A problem like this cries out for someone to dedicate himself to dealing with it: identifying instances of it as they appear, philosophically detecting the problem, and slowly developing the rhetorical skills for blasting this injustice away so that anyone who commits this injustice will feel embarrassed to repeat himself.

That is a project for a lifetime. Maybe someday someone will fill that need. It would require focus, persistence, hard thinking, courage in debate, and a positive perspective. If successful, it would be a victory in one battle in a long war.

Doug Reich said...

Burgess,

Well put. fyi, look no further than Newsweek headline "The Capitalist Manifesto" by Fareed Zakaria supposedly arguing for capitalism. His definition of capitalism appears to be "whatever the U.S. has done" as he accepts the recent state as exemplifying capitalism - then it gets worse.

C. August said...

I agree... well put, Burgess.

And Doug, that Newsweek article is as bad as you stated, if not worse. And linked from that one is an article titled The Secret Battle To Save Capitalism about some senators who are fighting with the Obama administration to impose even more regulation in order to "save capitalism."

Doug Reich said...

C.,

Ughh - disgusting

Every now and then, like a tidal wave, it hits me why the entire theme of Atlas Shrugged revolved around the sanction of the victim. We are not fighting the left - we are fighting the right.

brendan said...

C, great post -- I've had little time lately to review my favorite blogs, but glad I caught up with this one before the comments aged too much.

The idea of persuading liberals/statists is one that I have been thinking about for several months. While I enjoy reading blogs by people I agree with, and seeing thoughtful comments from others who agree, I get frustrated because of the rate at which the world around us is forcing its "change" upon us. While it's comforting to know there are others like us out there, it's not effective for all of us to sit around agreeing with each other. I fear that the net effect is that we'll have someone to talk to in the reprogramming camp. :-)

I think we need to prepare for an intellectual fight. And we need to win. The cost is too great.

Everyone who posted here has great ideas; truly there's not one that I disagree with -- all very logical. The problem is, a statist won’t be convinced with logic. While it means a great deal to *us*, logic is impotent when it comes to convincing *them*.

I'm referring here to the dumb masses; the leftists who think they're doing the right things by voting for more regulation, be it health-based, financial, or environmental. The way they "think" about the world around them is based in emotion. They *feel* good if everyone has access to health care. It makes them *feel* good when they recycle. Taxing the rich is a sure-fire way for them to *feel* that justice is being done. There are so many examples; anyone who thinks as we do can come up with dozens.

I'll use environmentalism as an example, though you can apply this idea to any statist belief. Environmentalism is -- in every way that counts -- a religion. Its followers feel good when they act out upon their beliefs. A logical argument, valid though it may be, doesn't give them the undefinable glow of feelgoodism that they get when they pick up a plastic bottle that some careless person put on a trash can. So they reject the logic, and continue with what makes them feel good.

The vast majority of people who subscribe to environmentalism (or any statist belief) do it because they think it makes them a better person. They are *kind* because they help when others don't. They believe they are benevolent, which is why they seem shocked when they meet people who (gasp!) don't recycle. They use their actions and beliefs as a bubble, to protect them from feeling bad about themselves, and (most importantly) to protect them from the criticism of others. You can surround that bubble with inescapable logic, but as long as the bubble is intact, they don't have to see it.

To pop that bubble, you need a pin. And the most effective pin I can think of is to tell them that they are cruel.

"Have you *seen* how much those florescent bulbs cost? How is a single mom going to be able to keep her house lit?"

Even if they have a solution to that problem, with a little research you can figure out a way in which (insert statist politically-correct cause here) is actually *hurting* (insert statist politically-favored group here). Because in every case I can think of, it's true. Further example:

"You think a government subsidy is the solution? Those bulbs contain mercury, you know. With all the bulbs that will be used because of your government subsidy, how can you guarantee that the mercury won't end up poisoning the water supply? Not everyone can afford bottled water, you know!"

Before we can convince them of our beliefs, we need to get them to question their own. The only way to do this is to get them to feel guilty about their beliefs, using the consequences of their decisions as evidence that their ideas are not kind. They are cruel.

I'd love to know your (really, everyone's) thoughts on this. It won't work on the dedicated, evil, Ellsworth Toohey types. But I think it will work on the rest of them, who are far and away the majority.

Apologies for the long comment -- maybe it should have been a blog post. If I only had a blog!

-Brendan

brendan said...

Just re-read my own comment, and I noticed that the first couple of paragraphs sound like I think the other commenters are happy to just agree with each other, without convincing others. That was not my intent. I had to slice up my original post because it was too long (surprise), and I didn't realize in time that I had somewhat changed the meaning of the first couple of paragraphs. Sorry -- I didn't mean to misrepresent anyone.