Focus on Prosperity, not Jobs Reprise

For those of you looking for my blog entry featured on KCPO's The Facts program today (11/20/11) here is the direct link.

My Amazon page, for those interested in reading more, can be found here.

Also, those of you looking for my piece on the OWS and the possibility of violence on Bloomberg can click here.

SCAM ALERT: Billion Toyota in Sioux Falls, South Dakota

SCAM ALERT: Billion Toyota in Sioux Falls, South Dakota

It really pains me to have to write these scam alerts but when I see economic injustice, I have to speak. I hereby warn off all potential customers (new cars or service) of Billion Toyota in Sioux Falls, SD (and its affiliated companies). The service department there is engaged in very shady activities and should be avoided in all events.

Yes, I have declared shenanigans.

SCAM ALERT: Billion Toyota in Sioux Falls, South Dakota
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The Mainstream Media Is Running Scared, Again

Yesterday afternoon, a major TV news outlet solicited an op ed from me. I agreed, though it was brutally inconvenient, because it seemed pretty wide open. Here is what the editor wrote: "Would you be interested in writing a piece for ... on the changing image of Wall Street and the financial industry over the past several years? It could be pegged to the Occupy Wall Street protests and the books and films that have focused on the topic since the financial crisis began – and could put that into the context of history. Our readers would appreciate your perspective.

The editor REFUSED to publish the piece I came up with, which I copy below, because he said that he was afraid that it would incite violence. I of course think the claim utterly ridiculous unless the editor believes that we are actually sitting on a powder keg of civil unrest and violence. The last time an editor refused to publish a SOLICITED op ed by me was back in 2005 or 2006 when I suggested that bank stock prices would suffer when housing prices stopped rising, as they inevitably would. The editor didn't want to "go there" because she would get into a lot of trouble if my little piece turned out to be the straw that broke the camel's back/the pin that pricked the bubble. So while the piece below is merely the musings of an historian conversant with the violence of our collective past, I am now worried that I hit too close to home. Allow me to reiterate, therefore, that I am not condoning violence, just warning that it may be around the corner due to deficient government policies. That the mainstream media (this left vs. right media argument misses the point, imho) is running scared again has me running scared! Here is the piece in question. Judge for yourselves.

Will Wall Street Burn?

In 1792, a mob of defrauded creditors would have lynched failed financial speculator William Duer had he not taken refuge in New York’s debtor prison. Adroit policy maneuvers by Treasury Secretary Alexander Hamilton quelled the subsequent financial panic and quickly righted the economy, diffusing tensions. But in 1835 Baltimore suffered one of the worst riots in antebellum American history because the city government failed to create a sense of social justice in the aftermath of the bankruptcy of the fraudulent Bank of Maryland. The lesson is clear: When tensions run high, how leaders respond to financial crises can make the difference between a peaceful return to prosperity and carnage.

We may be at another such crossroads today. Why Don’t American Cities Burn? asks University of Pennsylvania history professor Michael B. Katz in a forthcoming book. Other scholars have also been wondering why violence has not yet returned to American politics. Finance, politics, and explosions, after all, share a long history in America.

Some think that most Americans are too affluent and doped up on video games to risk life and limb for a cause. Others believe, Dylan-like, that revolution is in the air. The Occupy Wall Street protests, the increasingly negative portrayal of financiers in documentaries and the media, and renewed interest in movies like Fight Club, the 1999 flick in which Ed Norton/Brad Pitt sabotages credit card companies, suggest the Dylanites may know which way the wind blows.

Historical precedent is also flashing warnings. When they feel financially wronged, Americans traditionally complain to the authorities first but some turn violent when their concerns are not adequately addressed. After the French and Indian War, for example, a burst housing bubble and restrictions on international trade and money creation initiated scores of formal petitions of remonstrance. When British authorities responded to colonists’ concerns with new taxes, some Americans violently resisted the Stamp Act, the bailout of the East India Company, and other imperial policies. During the riot in Baltimore in 1835, at least five people died as the mansions of bankers and other moneylenders were looted and destroyed. Not everyone joined in the violence but thousands of bystanders stood by, cheering the rioters as they seized control of the city. The complicity of some militia units and fire brigades, members of which had been injured by the bank’s failure or subsequent downturn in the city’s economy, added to the carnage.

By the late nineteenth century, frustrated labor activists and anarchists frequently sabotaged corporate property and tried to take out anti-union business leaders and pro-bank politicians. In July 1892, Alexander Berkman shot and stabbed industrialist Henry Clay Frick in a failed assassination attempt. In 1901, Leon Czolgosz assassinated President William McKinley because “I didn't believe one man should have so much service, and another man should have none.” By staunchly supporting the gold standard, McKinley had aligned himself with banks and other creditors against the interests of indebted farmers and industrial workers like his assassin.

Attacks on anti-labor newspapers, mines, and other corporations, assassinations, and other forms of physical violence continued over the next few decades, culminating in the Wall Street bombing of September 16, 1920, which killed 38 people and wounded hundreds. Thereafter, however, class violence abated. Ostensibly, Americans were too busy to spend much time plotting, too busy sidestepping Prohibition and consuming new gadgets in the 1920s, too busy looking for employment in the depressed 1930s, too busy fighting fascism in the 1940s, and too busy getting busy during the baby boom of the 1950s. Riots rooted in socioeconomic injustices struck many major cities in the 1960s and 1970s but were more race than class based. More recent acts of extreme violence, from Oklahoma City to 9/11, were perpetrated by foreigners or directed at the U.S. government or vague notions of “capitalism.”

That could change, however, especially if banks continue to seek deficiency judgments against borrowers who lost their homes and jobs due to the subprime mortgage debacle and subsequent financial panic and recession. Many Americans still find it difficult to swallow the bailouts of 2008-9 and if the economy continues to wilt as bankers’ paychecks gain new heights they may find violence, particularly Hogan’s Heroes-style sabotage, palatable. So far most protests against the perceived injustices of the last half decade have been nonviolent and the authorities have used much more force than the protestors. If history is any guide, however, policymakers should consider the sustained protests as a warning. Nonviolent confrontations can and often have escalated into violence. Social instability is the last thing the economy or the government’s budget needs right now. Attention must be paid.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana College in South Dakota and the author of 14 books on financial history and policy, including Fubarnomics (2010).

****UPDATE****
A different publisher, Bloomberg, ran my updated version of the above on its blog last week. To read, click here.

Community Monies

The Wall Street Journal today ran an article about community monies in Brazil called "In Pockets of Booming Brazil, a Mint Idea Gains Currency." Curiously, the author does not mention that 1,000s of other communities worldwide have local monies in circulation. The author seems to think that they stimulate growth but they don't. Central banks tolerate them because they are no threat to them: community monies in Brazil and elsewhere are fixed to sovereign currencies (e.g., each Ithaca Hour = $10 USD) so they lose purchasing power along with central bank notes. I find community monies downright pernicious because they induce people to hold inferior assets: relatively illiquid, zero interest notes with default risk. The only people benefited by them are the issuers.

If we are ever going to supplant national currencies in a major way, the alternative notes will have to be superior to what governments produce, not inferior to them. That is the idea behind the bearer money market mutual fund shares detailed in my essay "Reducing the Poor's Investment Risk: Introducing Bearer Money Market Mutual Shares."

What to do about the United States Postal Service? It's almost bankrupt, you know.

Several years ago, on this blog ("Adam Smith, Profitability, and Efficiency") and in a scholarly publication (“On the Economic Efficiency of Organizations: Toward a Solution of the Efficient Government Enterprise Paradox,” Essays in Economic and Business History 25 (April 2007), 143-54.), I argued that the public-private distinction had been empirically bashed enough times that a new paradigm was necessary. In other words, not all private organizations are efficient and not all government ones are inefficient. Rather, I suggested, what matters much more than its ownership structure per se is an organization's internal incentives and the type of market (competitive to monopolistic) that it operates in. So the problem with the United States Postal Service (USPS) is not that the government owns it but rather that it has a monopoly on certain types of package delivery and that the remuneration of its employees is based largely on their seniority rather than their productivity. Open any organization to competition and reward employees for achieving goals aligned with the organization's purpose and it will thrive, even if it remains a government entity. It might be easier to privatize the USPS than to change its current culture but the privatization must be done correctly, i.e., without monopoly privileges of any kind and to companies that know how to properly incentivize workers, supervisors, and executives.


While discussing this issue with my son, Alexander Hamilton Was Wright, it dawned on me that physical delivery of letters over long distances could easily be eliminated even if a recipient or sender does not have email. Imagine a system of local letter delivery companies that zap mail back and forth to each other electronically, scanning paper documents when the sender doesn't have email and printing them when the recipient doesn't. No need for expensive, complex, international hub and spoke systems with airplanes, 18 wheelers, etc., just printers, scanners, and local delivery persons. Such a service would be cheap (the distance wouldn't affect the price but the quality of the desired output would), especially if competition was encouraged, and of course it would be faster than "snail" mail. So I'm not much alarmed at the prospect, however dim given our bailout-happy government, of the USPS shutting down. Everybody who wants will still get physical mail, maybe twice or thrice a day (from competing delivery companies).

Focus on Prosperity, not Jobs

From Washington DC to my little prairie hamlet (Sioux Falls, actually a thriving small city of 160k, give or take), politicians are talking about using the government to "create jobs." Obama has a plan, of sorts, and so does Sioux Falls's esteemed mayor, Mike Huether, who thinks that a new "event center" he has been pushing will create 1,100 construction jobs.

Can the government really create jobs? I'm often asked. Absolutely, I respond, but should it? Aren't we really interested in prosperity, not jobs?

The government can create jobs directly by employing people or contracting with businesses and it can do so indirectly through its policies. Huether has the former in mind, Obama some of both. But neither will deliver what Americans really want, which is prosperity. The JOBS mantra is a load of bunk: American economic history is about working fewer hours at easier work for more and better stuff, not about employment. (And claims by the New York Times to the contrary, we are working less for more compensation and more and better stuff. More technically, real hourly compensation has increased markedly in both business and manufacturing.)

The federal government, for example, could ensure that every American would have work to do 18 hours a day, 7 days a week, 365 days a year by simply outlawing farm machinery and food imports. We could all work picking and shucking corn, milking cows by hand, etc. We'd be impoverished, but we would all have jobs. No politician would dare implement such a policy, of course, but tens of thousands of rules and regs have the same cumulative effect: creating work that need not be done. Reversing such policies would eliminate jobs but actually be good for the economy, especially after the workers freed from the bondage of un- or counterproductive work find value-producing work. I'm not saying that ALL regulations should be eliminated, just pointing out that they come with costs that are rarely understood or directly measured.

What about when governments hire employees or contract with private construction companies or other businesses that then make hires? Most people seem to have the sense that expanding government employment probably isn't a very good thing, at least not the way such employment is currently constituted (high pay and benes based on seniority rather than productivity). Surely the latter type, though, is beneficial? Only, I respond, if one forgets about Bastiat's window, or "that which is seen, and that which is not seen." What is seen are the burly men fixing a bridge or building an events center. What is not seen are the costs, the income that is diverted (through taxation) from one purpose to another. It isn't clear how such reallocation can add to the total number of jobs (unless they are lower paying than the ones they replace), but it is clear that it creates very salient jobs that politicians up for re-election can point to proudly and that it makes it difficult for their opponents and critics to point to the jobs lost due to the taxes. But we know that they were lost: the $1,000 or $10,000 that you paid in taxes did not go to the corner coffee shop, to the auto or boat manufacturer, etc.

If a government can somehow increase wages more than it decreases it, its ability to create prosperity with those wages must be limited in scope because communist nations like the former USSR that had nothing but government employment stagnated economically. They created plenty of jobs, in other words, but little prosperity. Why do the Obamas and Huethers believe that they can do any better?

How, then, can government promote prosperity? The quick and easy answer is by protecting life, liberty, and property because that will enhance incentives for improving productivity, for making more with less. What is meant by life, liberty, and property, and how government can best protect them, afford no easy answers but we can't even begin to have that conversation if politicians fixate discussion on "jobs.

Is Rick Perry Right about Social Security?

During the debate on Wednesday night, Republican presidential candidate Rick Perry has taken som flak for calling Social Security a Ponzi scheme. Who's right?

On page 163 of Fubarnomics, I call Social Security a quasi-Ponzi scheme. I hedged because Ponzi schemes, pyramids, and related scams and flim flams are by definition illegal. Social Security isn't illegal and can't be unless declared unconstitutional, something SCOTUS has not done and is unlikely to do at this or any future juncture. Also, as Stephen Colbert hinted at last night in his critique of Perry's claim (sorry Parry's claim for Colbert -- the A is for AmericA and IowA), Social Security is not designed to enrich just one or a few people at the top, it is designed to provide modest annuities to millions of superannuated individuals (and in some cases their spouses and dependent children).

Social Security is like a pyramid scheme because it worked by increasing the number of taxpayers at the bottom of the pyramid. Demographics (the Baby Boom) helped at first, as did enlargements to the program. But now there are no new groups of any size (with the possible exception of immigrants) to add to the program and the demographics have reversed. Instead of a pyramid with a few at the top garnering benefits and a lot at the bottom each paying a little for their support, Social Security is more like a rectangle with the number of taxpayers not far outnumbering the recipients. Soon, the remaining taxpayers may feel the burden of taking care of so many beneficiaries too much to bear. In that sense, the Ponzi scheme metaphor is apt.


Interestingly, the government does seem to be following some of the recommendations I made in Fubarnomics, especially shifting Social Security from a special, highly regressive tax to the general fund. Obama apparently wants to continue the transition. The next step would be to tell everyone older than some age (I've volunteered mine) that they will receive Social Security payments as promised and everyone younger (including myself) that they had better start saving now because they will not receive any Social Security retirement benefits (and that the life insurance and disability components will phase out over the next few years). The final step would be to improve the regulation of our private security system: retirement plans, disability insurance carriers, and life insurers.