Browsing the blog archives for May, 2012.

Free Enterprise & the Politics of Bain Capital

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There are two things we know about the upcoming presidential election: (1) Obama will not talk much about real economic problems and (2) class warfare will be central to his reelection rhetoric. Nothing illustrates this reality like Bain Capital.

From a political perspective, Bain is both Romney’s greatest strength and his greatest weakness.  The Democrats charge that Bain represents everything that’s wrong with conservative/libertarian economics. The opposite is true, however. Anyone who understands how a free economy works appreciates the Bain Capitals of the world and their role in the economy.

Firms like Bain deal with distressed entities.  By definition, they make high risk-high return investments, so downsizing is often part of the required restructuring effort. In the end, some recover, but others fail anyway. Private equity firms like Bain are a last resort. The fact that jobs are “lost” in a turnaround effort is not attributable to Bain any more than a death after an auto accident is the fault of an emergency room physician. Moreover, companies fail when customers decide to spend elsewhere; failure is a part of a regeneration process that advances the economy and our standard of living. This is a clear logical flaw inherent in the anti-Bain attack, one that is being swept under the rug of emotionalism and class warfare. The rug must be lifted.

Contrary to popular opinion, firms do not exist to create jobs anyway; they exist to generate a profit for their owners. Of course, profits are only possible if customers are willing and able to purchase their products and services. Unfortunately the government often intervenes in these exchanges through punitive regulations, crony capitalism, bailouts, and the like. When government stays on the sideline, however, companies only profit when they make their customers better off along the way. This is the beauty of capitalism.

Here’s where job creation comes in. Firms are formed to serve customers, not employees. This truth must hold because customers must provide the revenue necessary for the firm to survive. In other words, employees exist because the firm has customers to serve. Employment is an indirect or secondary benefit of free enterprise. If you want jobs, then leave all of the players in the economy alone, including entrepreneurs, family businesses, large companies, and the private equity firms.

A larger point here is that a government can’t create any jobs, unless you count getting out of the way as job creation. Even when governments hire workers, they must pay their wages by taxing present or future generations. The confiscated wealth to support government employment could have been spent to create jobs in the private sector, so it’s a wash at best, and usually worse.

Back to Bain…The Obama attacks that blame Romney and Bain for lost jobs are both illogical and misdirected. They are designed to pit evil rich capitalists like Romney against the desperate and unemployed masses who–without government intervention–are helpless. The Republicans can respond in one of two ways. First, they can apologize for Bain’s restructuring efforts as a necessary evil of capitalism’s imperfection. Doing so opens the door to a litany of socialist claims, however. If capitalism is the problem, then the debate shifts to how government can best control it. If Romney chooses this route, he resembles Obama, has little to offer, and either loses in November or is unable to institute serious free market reforms if he wins.

The second option is a proud defense of free enterprise and Bain. The solution to our ailing economy is more capitalism, not socialism or the elusive middle ground. There is no governmental shortcut to prosperity. This debate requires a strong educational effort but it can be won. The Democrats are forcing Romney to make a choice. We must pressure him to make the right one.

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More preferential treatment for GM

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The Wall Street Journal reported something very interesting about GM last week.

http://online.wsj.com/article/BT-CO-20120516-718162.html

GM claims it can’t be sued for punitive damages related to product liability issues–cars with defects–before the bailout because the “new GM” can’t be held responsible for something the “old GM” did. By allowing only compensatory damages, most potential plaintiffs will not find it worthwhile to sue. While punitive damages are often excessive, there is no reason that GM should be exempt from paying them while their rivals are not.

A no-punitive-damages clause was written into Chrysler’s bankruptcy deal. The notion of limiting a restructured company’s liability for past wrongs is often negotiated, but only in traditional bankruptcy proceedings. This was not negotiated in the GM deal. Of course, the proceedings were far from typical, with GM receiving a huge government bailout. Nonetheless, GM’s legal staff has decided to claim immunity anyway. I wonder if anyone will stop them.

The hypocrisy here is blatant. You might recall that GM was granted the privilege of counting “old GM” losses against “new GM” profits, another scheme that will cost the taxpayers billions.  I guess the “old GM” is ignored when real money is on the line.

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The Obesity Battle

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Obesity is a health challenge in the United States. According to the Institute of Medicine, “fighting obesity will require changes where Americans live, work, play and learn.” So-called walkable neighborhoods, zoning limits on fast-food restaurants, stricter government regulations on marketing foods, and taxes on sodas are among the recommendations in a recent IoM report.

I challenge the premise of this report, namely that capitalism is inherently flawed because it encourages self-destructive behavior—eating Big Macs and drinking too much Pepsi)—and reasonable people must reign in excessive market freedom for their own good. But why is federal action required whenever someone identifies a social ill, and what claim does the federal government have to infringe on the rights of private companies and citizens?

The assumption that underpins each of these recommendations is that government knows best and control is necessary to force Americans to behave appropriately. After spending trillions of dollars in the War on Poverty, left-wing organizations such as Feeding America tell us that hunger is still a problem for one in six Americans. While I don’t buy such statistics, they point to a truth about socialism. Regardless of the programs created and the amount of wealth redistributed, there are always more problems that require additional government spending and control. Obesity is a good example.

I can hear the opposition now: Certainly federal and state governments have a role to play; if not, we’ll all end up paying more in health care expenses. However, this argument assumes that we have a collective responsibility to pay for everyone’s health care in the first place. This is why accepting a “right to health care” is so dangerous. Once you do, you open the floodgates to endless regulations and taxes to pay for it.

Of course, there are some things that can be done on a practical level. For example, schools can provide nutritious meals and limit access to the soda machines, especially in elementary schools. They can provide physical education programs to encourage exercise as well. Decisions like these should be made locally, however, and nobody should seek to regulate the content of the lunchboxes that kids take to school.

In the end, each of us should determine what to eat and how much to exercise. Proper labeling can help us make informed decisions, but the choice should remain with the individual.

Source: www.washingtonpost.com/national/health-science/specialists-debate-solutions-to-americas-weight-problem-_-from-exercise-to-better-kids-meals/2012/05/08/gIQA96jm9T_story.html

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The Chevy Volt in China

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GM exported the first Chevy Volts to China earlier this year. A PR video Faces of GM touts the electric vehicle as a perfect fit . The subtle message is that the newly restructured, profitable GM is–thanks to the bailout–actually creating American jobs by exporting cars to China. But there’s a lot GM is not telling you.

Volt sales have been flat so far in the US. Washington recognizes that the Volt’s 40K MSRP is a bit pricey in the US and even offers a $7500 bribe to taxpayers who buy one. The sticker price in less-affluent China is $79,000. Don’t expect many of these to roll off the lot in Shanghai, especially at this price.

GM is one of the top foreign automobile manufacturers in China, selling about 227,000 vehicles there through its joint ventures in April, compared to about 213,000 in the U.S. I certainly don’t mind production and sales in other nations, but a recently filed GM document titled Global Assembly Footprint forecasts that 80% of its production growth over the next 5 years will occur in low-cost countries like the BRIC (Brazil, Russia, India & China) nations and Mexico. Moreover, the Chinese government is pressuring foreign carmakers to share technology and produce vehicles with a Chinese brand. While other carmakers have attempted to resist, GM was the first to comply by introducing the Baujun brand with Chinese partner SAIC last year.

Here’s my problem: Taxpayers financed a bailout and GM responded by producing more cars abroad, sharing technology, and launching a Chinese brand. Executives even plan to export cars back to the US in a few years. GM has already benefitted from CARS (Cash for Clunkers) and other government “incentives,” and Obama is calling for an increase in the Volt tax break to $10,000. To add insult to injury, a special TARP provision means that pre-bankruptcy losses can be counted against future profits, resulting in a potential additional taxpayer drain of as much as $45 billion down the road.

If you’re looking for a definition of crony capitalism, you’ve found it.

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May Day

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We are told that May Day is an international day of celebration. I spent May 1 on the west coast this year and witnessed no celebrations, only a few marches and signs. Three of them caught my eye.

1. “We demand our rights.” Somehow I suspect that the guy carrying the sign wasn’t sure what he was demanding or who was going to pay for it.

2. “Banks are immoral.” Banks provide a storehouse for money. They facilitate transactions with checking accounts and debit/credit cards. They provide access to capital for thousands of businesses–big and small–to keep the economy moving. I just don’t understand the point here. If banks are immoral, then what means should be employed to fulfill these critical functions?

3. “More unions, more jobs.” I understand the argument for unions; collective action places pressure on firms to provide better wages, working conditions, and benefits. The irony here is that union activity tends to be associated with job losses, especially in the private sector. Most of the jobs that have been outsourced overseas have been in union-controlled industries. Say what you want about McDonald’s and Wal-Mart, but they always seem to be hiring.

Of course there were other signs as well, some of them a bit more rational. My point here is that many of the demonstrators just don’t seem to understand how the economy works. I never cease to be amazed watching those who protest one system without proposing another, or those who demonstrate in favor of the very institutions and activities that create their livelihood. They say that ignorance is bliss, but this ignorance is taking a real toll on our economy.

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