no third solution

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Category Archives: Rent Seeking

The Problem of Oligopoly

December 31st, 2008

Jeopardy-style, answers first:

The answer is: A system that encourages oligopoly: government for business, and business for government. This is State Capitalism, and this is how it works: they get your money, in order to make you ever more dependent, ever more acquiescent.

The last few months of 2008 have been characterized by a severe economic downturn. People in the mainstream news are finally calling it a “recession”, not because of any newfound integrity, but rather because they’ve simply run out of euphemisms. The trouble became really apparent when people began to realize the banking system is broken, although some of us had been predicting this crash for several years.

In all fairness, I had no idea the extent to which it would wreak havoc on the economies, but there you have it: unintended consequences. I saw a boom that needed to bust in the housing market. But I didn’t know how far it would go.

Money flooded into real estate, and consequently into mortgage-backed securities, those securities were largely held by banks and insurance giants, and when the value of these securities dropped to zero, or became so toxic that it was impossible to value them accurately (so they were treated as if their value was zero) the whole house of cards began to fall apart.

Financial institutions like AIG were deemed too big to fail. The automotive manufacturers had their own epic fail, and are getting their own share of your hard-earned money.

This is what happens when consumption (rather than production) drives an economy. (And don’t give me any of that Keynesian Circular Flow bullshit.) Lenders now illiquid, or on the precipice thereof, stopped lending, and the economy which is built on a shaky foundation of consumption, grinds to a halt. Individuals, who for the better part of a decade had been sucking paper equity out of their mortgaged-to-the-hilt McMansions, now find themselves burdened with very real debt. Other monolithic corporations like the American automobile manufacturers, who for years have been selling vehicles as loss-leaders in order to profit through their financial arms, found that they have a hard time making that business model work when new money isn’t continually pumped into the economic system.

The very nature of these institutions implies a massively distorted one-way dependency:
An Insurance Giant doesn’t give a damn if one of its customers files bankruptcy or loses his job, but heaven forbid, a giant like AIG goes out of business, millions would be left uncovered, without affordable health insurance, and without much recourse. Whereas, every single automotive supplier needs the Big Three; the Big Three could give a damn if one or a hundred small machine shops closed their doors tomorrow, never to reopen. The asymmetric dependencies are problematic in their own right.

In a free market (the U.S.A. is not a free market) it is unlikely that any company could ever get as big as General Motors or AIG, for the simple fact that in order to grow, they would have to be profitable, and as long as they were profitable, there would be an incentive for others to compete with them. In a free market, where profit exists, small businesses should have easy access to capital.

Currently, regulations and restrictions prevent most people from effectively competing with large corporations. In a free market, any large corporation would be the necessary offshoot of an extremely beneficial product: in order to be big and profitable, you have to satisfy your customers in ways none of your competition can. General Motors, AIG, etc., none of these companies are now or were unique in this manner, so the question isn’t about their failure, rather it should be redirected.

The question is: Producing nothing meaningfully distinguishable from, nor more valuable than their competition, how in the world did these companies ever get so big.

For bonus points: what do we do about it?

Will General Motors Go Bankrupt?

November 7th, 2008

At this point, there is probably nothing that can be done to salvage General Motors as we know it.

Two months ago, GM’s market cap was something like $6.5 Billion. Today it is less than $3B. General Motors is now spending, on a monthly basis, about as much money as GM’s total market valuation. General Motors now burning through $2.3 Billion, every month.

Let’s put it in perspective: General Motors has about 8 months of cash reserves left. In order to ultimately stave off bankruptcy.

GM would need to sell something like 5 million new cars over that period of time, in order to generate that sort of positive cash flow (assuming an average car payment of $400/month). That would potentially buy them three to four years, before those notes expired and the company would find itself in a very similar position, again.

No, really, let’s put it in perspective. General Motors sold just over 2.1 million vehicles in 3Q2008. They would need to literally double their sales over the next eight months to stay solvent, which would probably require that they double their capacity. This is inconceivable.

Although the merger talks with Chrysler are temporarily on hold, but GM (actually all of the Big 3) is still pandering for a bailout in the neighborhood of $25-50 Billion. A bailout is the only thing that could possibly keep General Motors in business, and for that reason alone, it is objectionable. In the event of a bailout, a handful of insiders are going to make a bunch of money that was taken from the rest of us, and the company is going to go under, anyways.

There is simply no good reason to force the rest of us to finance GM’s life-support, only delaying what is in all likelihood a foregone conclusion. General Motors will die, whether we keep it alive for a few more months (or years) is beside the point. There’s no justification for society’s productive members to be forced to pay higher taxes, and enjoy all the benefits of a reduced standard of living, just so a company that has failed so objectively and so perfectly can continue to make cars that nobody wants to buy.

Exploitation: Immigrants and Slaves

May 6th, 2008

Continuing my recent ponderings and pontifications on the topic of “illegal immigration,” I came across the following argument, which I believe to be a widely-held, yet erroneous belief:

Illegal immigration causes an enormous drain on public funds. The seminal study of the costs of immigration by the National Academy of Sciences found that the taxes paid by immigrants do not begin to cover the cost of services received by them.

And if slavery persisted to-day, some would argue that freed slaves would consume far more in government programs than they would pay in taxes. But the freed slave, or the immigrant’s comparative poverty and misfortune is the result of the system which has been holding them back; it is not caused by a desire to “cheat” the rest of us! Specifically, in the case of the immigrants earning black-market wages, one reason they don’t pay taxes is because they’re not allowed to pay taxes! Give them a legal job, and voila – they’re taxpayers.

That they may be a “drain on public funds” is an argument that is at least as true for the native poor, and the elderly, the latter being among the wealthiest individuals to have ever walked the earth. Yet nobody is clamoring to kick them out of the country, or to build a wall to keep them at bay, even though such extradition would almost certainly enrich the rest of us. The very notion of paternalist “social safety nets” is founded upon the belief that those less fortunate are more deserving of assistance, and that we ought to help those who are less fortunate than ourselves. Yet some people only care about the less fortunate as long as caring for the less fortunate does not impact their livelihood, which is to say: these people don’t give a shit about the less fortunate, since any act of compassion requires some amount of self-sacrifice.

If there is a problem, it is not with poverty or immigration, but rather the incentives created by such programs. FAIR continues:

Additionally, job competition by waves of illegal immigrants desperate for any job unfairly depresses the wages and working conditions offered to American workers

This statement would be more accurate if it read: “The violent suppression of the non-native poor is a contributing factor to the benefits packages offered to uneducated and unskilled Americans.”

The eradication of chattel slavery presented the same sort of alleged problems: the new waves of workers would drive down the wages of all workers in destructive competition. This is an argument that is simply not born from the facts of reality. Were some people harmed? Undoubtedly so, but the brunt of this was borne by those who had, for generations, profited from the exploitation of others. This is no less true when applied to would-be immigrants, whose standard of living is artificially suppressed by draconian immigration laws and the State’s usurpation of private property rights, free association, and voluntary contract..

Along the same vein, FAIR pulls out the “population growth” scare-tactic:

Illegal immigration also contributes to the dramatic population growth overwhelming communities across America

[Come to Detroit, where factories sit idle, and the population is dwindling!]

In all seriousness, as I’ve previously noted: the “population explosion” argument is patently untrue. Over the past 200+ years, the population growth in America has slowed substantially. Growth was at its peak, many years ago, when the people were arguably dumber and less productive than we are today.

Curiously, and in spite of these natural handicaps, the population continued to grow, and wealth continued to increase to such a point that generally, even the poorest Americans are now wealthier in real terms than just about anyone in the history of the world! Clearly, the mass-immigration that characterized the Industrial Revolution era did not destroy America, and it will not now destroy a wealthier, more productive America.

Like slavery in years gone by, laws forbidding the peaceful migration of people represent the basest imaginable form of economic rent-seeking. Of course, those who believe (rightly or wrongly) that they benefit from the status quo will probably be its loudest proponents. So we see Big Labor fighting against immigration, just as we historically viewed the Plantations’ vested interests as the mouthpiece for the continuation of slavery. Releasing men from the chains of slavery (proper, or economic) has the necessary side-effect of eradicating any “advantages” accruing to others as a reslult of that gross inequity. .

When it becomes necessary to right a wrong such as slavery, there are undoubtedly going to be “victims” whose way of life has only been sustained by the perpetuation of that injustice, but removing the inequity does not cause economic harm; it merely destroys the capacity for one man (or group of men) to continue earning economic rent through the exploitation of the less fortunate.

no third solution

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