Monday, July 14, 2008

Why I Trust Big Business.

One thing that has always fascinated me with liberal thoughts is why they have an instinctive distrust of businesses, especially the large ones, but not so much of government. It all comes down to "fairness". I quoted the word out, because the ideas of fairness from each side of the aisle are radically different. And rather than just rip government for its usual mix of regulatory zeal, obscene inefficiency, and confiscatory tax policies that suck the people they're purporting to help (well, rip them more), I'll explain why I trust the megacorps, the financial monoliths, and even that good ol' whipping boy of everybody with a fee market ax to grind, Wal-Mart.

First of all, before you get the idea that I believe businesses are good, blameless entities that will do right when given access to a bottomless cookie jar, there are plenty of examples of what can happen when you let avaricious people run amok through the money trees (damn, I wish I had one of them). But, given that businesses are made up of people, from the "greedy" corporate executive to the bottom-feeding slob that owns three copies of Johnny Paycheck's greatest hit (did he have more than one?) that he bought at (of course) Wal-Mart, their value, from the one man op to the international powerhouse, is an almost invaluable (almost, because there is a dollar value involved) part of our daily lives, and a primary reason we have enough leisure time to, ironically, sit on blogs and bitch about our pet peeves in society. So we have a collection of entities of varying sizes, that are essential to our way of life, that have the potential to bend us over and give us a good infusion of capital. Without lube. How do we deal with them?

Let's take Big Oil. Here is an essential industry, responsible for supplying the fuel that gets everything we need to everywhere we go. And in a market where the overwhelming control lies with foreign governments who have nationalized their oil and subsidize it to grow their economy, and in the process help push the price up and up and up, these companies are pulling in the same percentage they have made for a while with prices that have doubled over the past couple of years. Not surprisingly, if you make 7 percent, the price doubles in a couple of years, with increased volume, you get (survey says) record profits!!!! And all these "windfall" profits go to the shareholders? Some do. So if you invest in, say, any mutual fund, they probably have bought oil stocks and therefore, your retirement gets better. Oh, and some of those profits go back into research for something that's cheaper than oil, like solar or wind or some source that doesn't take billions to find and extract.

And the reaction to this success is predictable. Far too many people don't worry about all the numbers, reacting instinctively to the phrase of the day (which is why I use quotes) and assuming that these super-powered entities got bored with just screwing us and decided to go for some close-up double penetration. Throw in Wal-Mart, and you've got the classic gangbang going on. It's just not that arousing to watch (as many corporate CEO's have dimply asses). And the solutions are just as predictable. We call on government to fix them, either by regulating them or taking away their obscene profits. In any other situation, if someone with a gun came into a business and demanded money, they'd call it theft.

So here's why I trust them. First, they are predicaible. Business, by its nature, will seek profits by producing stuff people want and need, trimming waste, and as a byproduct, produce jobs and growth. In other words, they function as a living organism. Second, they are subject to controls placed on them py a political system. This means they have to thread the needle between buying favors and staying off political radar. Which is where we get to part three, us. We have two ways we can control business. We can get on a blog, or write to a paper, chew on your Congressman, or strap on a sign and bob around in front of a store like a Weeble, with an iPod loaded with every Rage Against the Machine song ever made (the songs downloaded from, of course). Or, more importantly, we can vote with dollars. So businesses, as a rule, really don't want to piss us off too much.

The alternative is to let the government either regulate or run everything. I'd go on here, but then I'd have to go on about the myriad issues that come in with government. But here's the difference that matters. Where business has to convince and provide, government can regulate, rule, and force us to do things. And the only way businesses can do so is through the use of government.

(For clarification, I'm talking about business the USA. In other countries, where freedom simply isn't, market forces don't really work. So let's not go down the banana republic road here.)

In the end, a free market structure is, of course, the worst way possible to conduct a growing economy..., except for all others.


Beth said...

People who think other than you have enumerated here Patrick simply do not understand economics, nor do they realize that a free market economy can only exist in a democracy, where we have the freedom to vote with our dollars.

You start nationalizing everything and you no longer have freedom to make choices, you are stuck with whatever Uncle Sam gives you.

Patrick M said...

Beth, it gets worse. They will say they don't want to nationalize, just regulate. But the more you regulate, the closer to a de facto nationalization we draw.

Health care is the best example of this. Here is a system that is already nationalized for the poor, taken care of by someone else for most Americans, and regulated in every conceivable direction. The only difference between what we have and what will happen if we nationalize is that you can still buy better care if necessary.

On the reverse, I don't support ditching every regulation on business. But regulation should be the last resort, not the first response. And too often it's the reverse.

Imagine the obscene profits the oil companies could make with gas at half the current price if only they weren't tied up so badly by bureaucratic bullshit.

Beth said...

Another thing I think of when people want the government to take care of everything, I want to remind them of how well the government did during Hurricane Katrina, talk about a bureaucratic nightmare!

Toad734 said...

Ya, those mortgage companies and fund managers really knew what they were doing and it was just too much regulation which spawned the housing crisis, S&L scandal, Stock Market Crash of 1929 (although some would say they knew exactly what they were doing with that) etc. The free market will always lead to economic growth and efficiencies and the Government could never spawn such an effort such as the New Deal to bring us out of depressions the free market got us into. Right. And we won't talk about the wars the free market has gotten us into.

Very little of what oil spends on R&D comes from their revenues, most of it goes into the bank, most of my tax money goes towards subsidized big business. Don't talk up the power of the free market when the biggest corporations get our welfare and ma and pa businesses don't get shit.

You go ahead and trust Pfizer when they tell you your medicine won't increase you risk of a heart attack 300%. As you said, Pfizer is always going to cut corners and trim the fat to become as lean and profitable as possible. You think maybe clinical trials could be a way to do that? What about slaughterhouses? It’s the FDAs fault that ground beef is so expensive. If they just quit making Oscar Mayer live up to safety and sanitary conditions all would benefit from the flow of cheap, bacteria filled, mad cow meat.

Patrick M said...

Okay, the housing crisis (such that it is, is part speculation, part bad business loans, and very much pinned up by government changes to markets by regulating, deregulating, reregulating, changing rules, etc. And of course, we'll need the government to take money out of our pockets to throw at the problem, provide a short-term fix, and maybe address the problem after that by, for example, requiring proof of income (that was mentioned today). As for the Great Depression, it was WWII that got us out of it, not bloating the governmen0t.

On oil revenues, it's their money. They should be able to do what they want with it, R&D, payouts to stockholders, hot and cold running pussy for their execs. And you need to clarify on subsidies, because if it's transfers of government money to the companies, then I'm with you on it. On the other hand, if you're talking tax cuts and credits, then I have no problems at all with them.

And as for Pfiser (pronounced PUH-fi-zer) as well as the other drug companies, this is a classic example of what government does to the markets. they have to make enough to justify the years and dollars spent producing new drugs, then try to make their money in the US before they have to sell on the cheap because of regulations in other countries and because there's always a counterfeit market out there. And it's not the FDA's fault for beef prices. Actually, that one falls to both the ethanol lobby and the anti-drilling crowd, as well as both parties who have regulated the price of gas up, then pulled valuable feed off for ethanol mandates and subsidies. Although it looks like the FDA isn't doing so well, considering all the food poisoning scares that have shown up.

By the way, did you ever try putting all your thoughts into a cogent narrative. It's work having to effortlessly refute your myriad points. Here's the philosophy on regulations: a regulation should only be necessary when an industry fails to self-regulate. There is a happy medium out there. I'd have to study to figure it out for each industry, but I can't really think of an industry that I couldn't find an assload of idiotic regulations sucking the profits right out of our pockets.

Satyavati devi dasi said...

The energy industry has the power to cripple the economy. Trickle-down effects on transportation costs filter into higher costs of goods and commodities, utility expenses at home increase as well as for businesses, which increase their charges for services and goods to make up the difference, and more or less force the situation: by giving up the vacation, the tourism industries suffer. The tourism industry lags; businesses close. More people out of work. This is one example because there's so many that my brain can't sort them all out.

The point is that this one industry has the power to singlehandedly cripple the economy (if it hasn't yet become obvious).

When Ma Bell got too big and too powerful, it was broken up, which is why we have Embarq for his cell and our house phone, Verizon for mine, and Pioneer for long distance. When Columbia Healthcare got too powerful, they were forced to sell off hospitals. When New Hanover Regional started a mini-monopoly of its own down in Wilmington, they got nailed too.

This isn't an exact analogy because of course the oil/energy industry comprises myriad companies who all (supposedly; I make no secret of my conspiracy button) operate independently of one another to compete for business by providing the best service at the lowest prices. Which, of course, sort of confuses me when I hear in the news that gas stations A B and C are taking gas station D to court because they've dropped their prices 10 or 15 cents a gallon beneath their competitors'. I'm not exactly sure I see a 'free market economy' when I'm not seeing any competition between Big Oil A and Big Oil B to lower their prices and steal business from each other (and isn't that what free market economy is, really?)

When one industry has this much power in and of itself to decimate an economy, it needs stepping in upon. It's not like Billy Bob's Record Shop down the street, or Granny Mae's Accounting And Pie Shop. It's a vital commodity that the country cannot function without. You can't consider regulating something like the energy industry to be at all similar to regulating something like convenience stores.

The communications industry was broken up and now you can get unlimited long distance and everything else you might want for almost ridiculously low prices. Competition works: this is a perfect example. But if all the communications companies got together and decided that there was simply too much global demand for their services and they could continue to jack their prices higher and higher knowing that the economy can't function without them, essentially taking the country by the cojones, so that they could bring in higher and higher profits and continue to successfully lobby for huge tax breaks and legislation that works in their favour, then that's wrong, and it needs to be stopped.

I am no kind of a pundit and I'm sure that any number of people here, yourself included, can rip holes in everything I've got here. I argue much more successfully on evolution and religion. But I think maybe you'll see what I'm driving at here.

And here's a thought: do you really have the freedom to vote with your dollar where Big Oil is concerned? Are you going to walk to work? Are you going to shut down your electricity? Are you going to just give up on gas and oil until they crack from the pressure?

In ordinary situations, yes, maybe you do have a certain amount of control with your dollar. A big enough boycott can put pressure on an industry. But when an industry becomes absolutely vital, you lose that freedom. And what then?

Beth said...

I recommend Atlas Shrugged to you all.

Toad734 said...

A. Its bad business practice to lend homeless people money. Sure, the government shouldn't have to tell banks this but apparently they do. Any forward regulation on this industry by the government is because the people in the industry don't know what they are doing and since it's the federal government which is going to have to end up bailing them out, they are forced to regulate it. That is big business and the free markets fault, not the government.

B. The TVA and public works instituted in the new deal is responsible for getting us out of the depression. America didn't get into the War until about a year and a half after the depression was over. Sure the war kick started our economy and started one of the strongest economic periods in our country but we were mostly out of the depression by the time Japan attacked us.

C. No, it’s my money that they are using to explore for oil, not theirs, that’s the problem. Why, with 40 billion in profits, do they need subsidies? For that matter, why do they even need tax breaks? If I paid the same percentage in taxes as Exxon I would be a happy camper.

D. Why not make their money somewhere else? Why do Americans have to pay 6x the amount for their prescriptions as other countries? Why do you only want to save corporations money? Why can't the consumer save some money as well? Thanks for pointing out that with a national health care plan such as they have in Europe and Japan, regulation can keep the cost of treatments down, keep drugs affordable and keep people alive and healthy.

E. I didn't even really know beef prices were high. I thought they were rather cheap. I just used that as an example of an industry that has regulations applied to it that I don't want to see removed and I don't think you do either. If it costs an extra $.25 to insure I am not eating mad cow beef then I am happy to pay it. As you said, we do need regulation.

I can assure you that ANWR is not affecting beef prices. If you fail to see the connection between oil prices and us having a lame duck Texas oil man with ties to the Saudi Royal Family as President, but do see a connection between ANWR and Beef prices then I would love for you to send me a photo of the green skies of your world because we apparently come from two very different places.

E. "Fail to self regulate", you mean like the oil industry, timber industry, banking, finance, housing, Energy, chemical, gaming, telecom, agriculture?

Bubbly Creek in Chicago, the burning river in Cleveland, The stock market crash and great depression, Enron, S&L, Bear Stearns, Housing collapse, Sub prime mortgages...etc., etc. None of these were a result of too much regulation, just the opposite.

Patrick M said...

Saty: If I remember correctly, they busted up Standard Oil over a century ago, so there is precedent. And I don't know what regulations would be wholly appropriate. But the regulations that keep them from doing their business (drilling, building refineries) and trying to punish them when global prices are way up are definitely not the answer.

Although, if the oil companies are really primarily to blame for the prices, they're setting themselves up for pain. Nothing really escapes the press anymore, especially if it's a "corporate greed" angle.

As for the gas prices, I have personal experience. When I was managing a gas station, it was part of my job to check the gas price of the Speedway station nearby. Usually we matched their price. In other words, it was a game of follow the leader.

Beth: Ooooooooookay.

By the way, did you ever try putting all your thoughts into a cogent narrative?

Toad: Oh the tedium....

A. But the government told them to loan the money in the first place. And the fed should NOT be bailing everybody out.

B. Oh, 1939? You mean when we ramped up to supply Europe before the war got going. The fact is, until WWII, we were limping along, with plenty of people waiting for another fall. You're forgetting it was a global depression that didn't get erased until war (and unfortunately the idea of government deficit spending) came along. It's been a slippery slope ever since.

C. You still haven't clarified subsidies. Also, you do realize that NO BUSINESS PAYS TAXES. They just add it in as a cost and adjust the price accordingly.

D. To repeat, foreign governments subsidize and manage prices. That's why Canada has cheap prescriptions, universal health care, and people who have cash want choice crossing the border for our health care system.

E. You're right. Chicken doesn't seem to want to come down lately, though. But that reminds me of these beef and chicken kabobs I had Saturday. MMMMMMMMM!
Seriously though, not all regulations are bad, although avoiding regulation is beginning to help industries to self-regulate, which is better for all (until the system fails, of course).

ANWR is just a piece of the puzzle, and a place we could start drilling to get free of foreign oil. And freeing ourselves from dependence on countries that hate us is the key to cheaper everything.

As for Bush, just relax. It's not like he can do that much more now. Plus, you only have 6 more months before we get a Democrat in the White House. Whether he has an "R" behind his name or not is the only thing we don't know.

E. (part 2) Yep, thus they are regulated.

Housing collapse, Sub prime mortgages these were caused by government regulations designed to "help" people buy homes.

Satyavati devi dasi said...

Putting our eggs in the let's expand drilling basket is just putting off until tomorrow what we needed to be fixing 30 years ago. If everyone gets their panties all..ok let me rephrase that.. if everyone gets excited about drilling thinking it's the Big Solution To High Gas Prices all we've done is given permission for gas prices to stay high for another fifteen years while we don't see a drop of oil from all that drilling. In the meanwhile the oil companies are going to continue to jack and jack and jack the prices because they will have absolutely no reason to continue to look into alternative fuels or getting rid of dependence on any oil, foreign or otherwise, altogether.

And the reason that drugs are so high is not only because of the research and development costs, it's also because of the unGodly massive amounts of advertising they do. Lunches, dinners, conferences, vacations for doctors, pens, sticky pads, little funny sand things you turn upside down, clipboards, clocks, models of joints, you name it. They take out patents on their drugs that usually run twenty years and charge unbelievable amounts for them, and then the minute the patent runs out the price drops by 80%.

I have eaten enough Merck, Pfizer, and GlaxoSmithKline catered lunches, have the Miralax pen and the Evista sticky pad here on my desk and the Fentanyl clipboard in my bag. Drug companies might need to recoup a lot in R&D, but if they didn't spend out the ass in advertising, they wouldn't have to jack prices as high as they do to cover it.

Satyavati devi dasi said...

And just remember: really, all 'counterfeit' means is that someone who's not holding the patent manufactured it.

The day the patent expires anyone can make it and it isn't 'counterfeit' anymore.

Quality has nothing to do with it; all it means is that the pharma isn't getting the buck.

Patrick M said...

Putting our eggs in the let's expand drilling basket is just putting off until tomorrow what we needed to be fixing 30 years ago.

Yep. This is one thing where both political parties have failed to lead. Considering we were seeing this growing dependence in the midst of the Cold War, it's insane we didn't get moving sooner.

However, given the fact that we have to play catchup, there's no reason not to start throwing a few thousand wells down wherever the oil is. And explore every other old, new, dirty, clean, simple complex, and nuclear energy source we can get our hands on. I favor developing everything rather that fighting about which is right and which is wrong. And that's the secret to solving the energy mess.

I'll bow to your experience with the drug companies in the sense that you see more of the ads than I do (except maybe the incessant Viagra commercials). They probably have done the cost/benefit analysis and found that the advertising pulls in the revenue to keep things moving.

Again, there's no easy answer here, as we're balancing individual needs with the need of companies to sustain themselves. I do know that with the proliferation of generic drugs for $4 (yay), the ability to sneak drugs over the border from subsidized Canada, and the fact that I have a baggie full of Elidel samples sitting somewhere, there's ways around those prices. Also, out of curiosity, what do you know about those drug assistance programs the companies have out there? I'd look it up, but that would require me to care more.

Toad734 said...

No, the housing market and subprime mess isn't because of the government, its because wallstreet told Countrywide they would buy those loans. People blame Countrywide and the people who were generating these loans but the fact is that the big wallstreet banks are the ones who encouraged that practice. With a little regulation on the Mortgage company side they would have never been able to do that.

I am sure you know that when you make a house payment it doesn't really go to your mortgage company, it goes to whomever they sold your loan to.

Satyavati devi dasi said...

Most big pharma have low-income assistance available for people who can't afford medication. How this ties in with Medicare I don't know. I do know that you have to prove need and that they only do it for a limited period of time. From what I remember it's kind of a pain in the ass to get approved for.

It's a tax writeoff for them, which is why they do it at all.

Patrick M said...

Toad: Here's the Wikipedia article. I'm tired of arguing the whole thing. The fact is there's a whole lot of blame to go around. To the government, who can't top changing the rules every week, then throwing money every time things go to shit. To the lenders and financiers who kept pushing the boundaries and should have to eat an assload of foreclosures. And to all the people that took on debt they couldn't handle because of the mentality that it has become a damned right to own a home. In the end, it comes down to stupid people. Been there, done that.

Saty: Pain in the ass or not, it is an option. Thanks.

Toad734 said...

Right, no need to argue, the article says exactly what I said. It had very little to do with the government trying to give mortgages to homeless people and everything to do with the fact that Mortgage Backed Securities and financial institutions thought that they had good collateral with property and didn't care if the buyer defaulted because they would get their money when they foreclosed on the property. The problem is they didn't think that the massive amount of overbuilding and home speculation would ever outpace population and demands and that the bubble would never burst. Well, that was stupid. I knew it was going to burst and that’s why I bought before the tip of the bubble and in a bubble proof area. I got an ARM but waited to refinance when I could lock up a rate under 1 point above what my arm was for. Since I bought in a bubble proof, high demand area, the value of my condo appreciated. Giving me, a first time home buyer with almost perfect credit who was buying in a recession proof area was a good business decision which the companies who gave me that loan should profit from. The morons who gave loans to homeless people in shitty areas of Cleveland should be held responsible for that, not bailed out. That shouldn't come out of my pocket. The first thing out of Washington’s mouth was “we have to bail out Bear Stearns", "we won't let Fannie Mae and Freddie Mac crumble". Both the CEOs of Fannie Mae and FreddieMac make over 7 million dollars per year. I am not willing to let my tax money bail these fat cats out. If the corporation needs revenue, take it from the CEO, he doesn't need 7 million to live nor does anyone who buys loans given to homeless people deserve to make this much. He should personally give a portion of his income to everyone who was a victim of predatory lending, not that these two organizations were the ones doing the actual predatory lending but they were buying risky loans. Why is it when I invest and I lose money in the market, the government doesn't refund my money; no, that money is gone, it was a risk I took and I knew that going into it. I like how you think if you can't pay your mortgage you’re a deadbeat but if you can’t pay a million mortgages you should make 7 million per year and that money should come from the very tax payers who are losing their homes.

Yes, most of the people who took out loans for houses they couldn't afford should lose their houses just as the people who gave them those loans should lose their jobs. But I can guarantee that the majority of the people who, at least at first, were defaulting on their mortgages all have ethnic last names and probably don't speak English very well, at least in places like Ohio, Illinois, Florida, NY, California, etc.

Every CEO of the Financial Firms losing money right now knew exactly what they were getting into and understood the terms perfectly. So who bears more responsibility? Who are the ones who should have seen this coming?

Patrick M said...

Well, the point is that the government comes in and rescues people from their stupidity. That's why I blame the government primarily for what happened. They've created the conditions which brought us to this bubble.

Interesting thing I saw in the article: some of the problems began with the S&L bailout in the 80's. Essentially, this is the era of consequence-free actions, due to increasing intervention by government.

So the next question is: Where do we draw the line, say stop, and let a whole lot of people and companies fall on their faces?

Toad734 said...

No, none of these individuals who may or may not get mortgage relief believed the federal government would come in and save their ass if they couldn't pay. Because of Chrysler, the S&L scandal, the mortgage companies and banks knew that if they really fucked up the Government would bale them out. There's a big difference here. You keep acting as if it’s the consumer who has had their hand out from the beginning but that couldn't be further from the truth.

No, S&L scandal was due to deregulation by the Reagan administration, not too much regulations. You have your facts flipped.

We should have drawn the line during the S&L crisis which many say lead to the one we are in now. We should have drawn the line at Bear Stearns and let the herd be thinned so the herd could become stronger. As for Fannie Mae and company again, at least 6.8 million of the CEOs 7 million dollars in compensation should go to the stock holders and or into the company banks since these morons are the ones who led their company into this mess. The decision to buy loans from homeless people doesn't come from the secretary; it comes from the top down. Maybe we should force them to share one of their homes with people who have lost their homes. That would be appropriate reparations.

Patrick M said...

No, S&L scandal was due to deregulation by the Reagan administration, not too much regulations. You have your facts flipped.

It was regulation, then deregulation, then regulations somewhere else that did it, not just the deregulation alone.

This has been a pattern that has repeated itself over and over. The government, in trying to protect people from the consequences of financial disaster, has been slowly increasing its control over market forces, with the first spike coming under FDR in the Great Depression. Since then, the concept of a safety net has become increasingly ingrained in the American psyche, with the result being that we become increasingly dependent on the government to bail us out when things go south. People don't go into things expecting government charity with other people's money, but it all changes when the shit his the fan.

Now there is a happy medium where the government should step in and stop a spiral. But right now, something has to fail, or we'll simply keep entangling ourselves until the government simply can't sustain itself because we're strangling on red tape, and the government ends up gobbling up industries to "save" them.

Toad734 said...

I agree there is a limit. I don't feel sorry for 90% of the home buyers who got into this mess. My cousin was one of them. They bought expensive stuff, a bigger house than they could afford and now she is bankrupt. Although it's her idiot ex husbands fault, not hers, you can't blame the government for that nor can you expect them to fix the situation for you. However, there is a thing called predatory lending that targets senior citizens and people who don't speak English. Those are the few and far between people who should receive some help but perhaps not even from the government, how much money do you think the CEO of Country Wide has in his bank account?

Patrick M said...

Toad: It always comes down to greed for you, as though the only purpose of corporate CEOs is to figure out how to screw as many people as they can and take their money. I won't deny that there are bastards of that nature out there, but they are the exception and not the rule.

Again it comes back to the nature of government. When people are busy trying to find their way around the latest government regulation, they bend rules. Then they do it again, and again, and again. Then the playing field changes and the rules no longer apply. Sometimes, this results in messes like the S&L scandal.

Either way, though, unless there are truly illegal or wholly unethical things going on here, tacking on more regulations is generally not the answer.