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Getting to Tomorrow -- The Story

Getting to tomorrow is a part of an integrated strategy to present a picture of the decline and corruption of the American electoral process --- with its consequences of entrenched powerful interests, massive deficits and debt, corruption (legal and illegal), and the disappearing public influence over events. These essays explain in more detail the themes developed in my novels and memoirs, which are now posted for sale on http://www.amazon.com/ as eBooks under my name. These themes were first presented by my son, Ben, and I in our, The Politics of American Discontent, published in 1994 and also available on Amazon.com. America has declined in power dramatically in the decade between 2000 and 2010, driven in my opinion by an electoral system that is profoundly broken and by decisions to waste vaste amounts of wealth on wars that do not benefit the United States or protect our future. Unless we can find a way to fix the underlying cause of our breakdown, which is the buying and selling of public policy through campaign investments in the incumbents by private interests, we will go the way of great empires of the past. But, we cannot fix what we do not understand, and understanding is the objection of all of my writing taken together.

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Sunday, February 1, 2009

The “New Capitalism:” Feed the “Losers” and Starve the “Winners”

The “New Capitalism:” Feed the “Losers” and Starve the “Winners”

The United States is rapidly inventing a new form of “capitalism.” In the “older capitalism,” the “market” is the magic hand that insures that the “winners” get access to resources for expansion, while the “market” starves the “losers” into oblivion. Supposedly, new and successful technologies and business models “win” resources in the form of invested capital and borrowed money, while the previous and less successful technologies and business models find it impossible to generate resources for ideas whose time has passed.

The “New Capitalism” turns this equation on its head, and it makes the access to capital dependent on political calculations whereby the successful get starved while the losers get access to cash and debt. That is the conclusion that one is forced to reach after viewing the proposals on the table for the great bailouts and "stimulus package" of 2008 and 2009.

The examples are obvious. Almost all of the funds so far distributed have gone to a small concentration of financial institutions that have failed in their business models and business performance. These include less than 100 of the more than 10,000 financial institutions in the United States. These failed businesses are now being funded by the government to the tune of hundreds of billions in taxpayer’s wealth, or with debt that is passed on to future generations. What do they do with the money? They have horded most of it and used at least $18 billion to pay for the exorbitant and unjustified bonuses of employees, with no punishment for those in management who created the mess in the first place.

In addition, the Federal Government is currently underwriting two of the three large automobile manufacturers in the United States. Again, the government is pouring huge amounts of money into largely failed enterprises, with poor management and impossible labor contracts, in the improbable hope that these businesses will be reformed by the very people who brought them to their sorry condition.

Finally, our national politicians are heeding the “pleas” of the states and cities which have operated with failed budgetary models, and they are proposing that the national taxpayers pick up the projects that these states and cities cannot fund any longer with their own declining resources.

The fact is that most cities and states have operated “pay as you go” government for a long time, maintaining themselves without outside support and following reasonably prudent budgets, limiting the debt they hold.

However, “failed” governments like California and New York, for example, have practiced phony accounting for more than a generation, running up massive under funded and unfunded liabilities, and now they plead for Federal money when they cannot put their own budgets in order. They expect the majority of national taxpayers, and our children, to pay for their past failures.

Who are the successful and how are they starved? Almost all new, permanent jobs in the United States, other than public employment, are generated by the nearly 65 million firms with fewer than 500 employees. These firms depend on internally or externally generated capital or debt financing for expansion, and the markets for both at the present time are greatly reduced or nearly closed in the risk adverse business climate in which we find ourselves; a business climate largely created by the large banks that have failed the test of the marketplace and failed to protect their own shareholders.

There is no accurate statistical information for the degree to which the “successful” among these firms are being starved, but all of the anecdotal evidence points to the fact that these firms are unable to acquire new financial resources in today’s market, either through invested capital or through short and long term debt financing through the banking system. As a result, their ability to generate new jobs has completely stalled, although these are the jobs we most need in this crisis because they are highly dispersed, of many different types, and located in businesses that are likely to remain solvent.

Basically, the Federal Government is operating today with a logic that is the exact opposite of what any rational person or institution would do with their private capital. The rational investor seeks, above all else, to put money into the most likely winners in the future. None of us, including large scale funds, wants our own money used to underwrite businesses (or political jurisdictions) whose time has passed; businesses who have demonstrated their lack of business judgment through decisions that were inappropriate and flawed.

However, when the politicians invest our Federal tax revenues, or debt, they almost uniformly seek to shore up the losers in the business and governmental sectors. They throw “good money after bad” with abandon,” so long as the money they throw is your and my money, and our children’s money, as opposed to their own. They are, in effect, pouring huge amounts of “other people’s money” into ventures in which they would never invest their own money.

The question is “Why?” The answer is simple. They money they distribute is not their own, therefore, normal risk calculations are irrelevant. The politicians are seldom rewarded or punished for their lack of success with investing your and my money. If programs fail, they will simply try new programs, borrowing more money for the same failed strategy. When the “chickens” of failed economic policy “come home to roust”, most of these politicians will be long gone to their cushy retirements and new roles as professional lobbyists, and their “advisors” will recycle into the private sector to await the call of a new administration in the future.

At the same time, those that seek the money from the government are “powerful” interests, who have friends in “court” as it were. If you will note, most of those in the financial sectors are basically people who know, like and respect each other. They are the representatives of the oldest type of “crony capitalism,” where whom you know is far more important than how successful you are in your business judgment. They all claim to be capitalists and espouse capitalist ideology, but theirs is the capitalism of political favoritism and not the capitalism of the market. They are much more successful at “insider politics” than they are at market competition.

At the same time, the owners of the 65 million firms with less than 500 employees basically have “no friends” at court. They are scattered all over America, and they are the real engine that drives private sector job formation; but they seldom have access to the decision makers that determine the policies which either feed them or starve them. They do not belong to Henry Paulsen’s clubs. They do not lunch with Henry Paulsen or his friends. They do not spend millions on lobbyists or on campaign contributions.

Moreover, these owners operate with a logic and business morality that is almost a world away from the institutions that are the subject of our bailout efforts. They do not, on the whole, fly around in private jets. They would not dream of paying off their employees with huge bonuses in years where they are losing massive amounts of their shareholders’ money. If they make mistakes, they know full well that they will pay for their own mistakes, even with bankruptcy. When they “win,” they do so because of the success of their ideas, business models, technology, and judgment. Unfortunately, in today’s business and political environment, those whom you know in Washington are far more important than the quality of your business, technology, or market position.

“Crony capitalism” is really a terrible disease of the market system. Crony capitalism almost bankrupted Japan during the 1990’s, when banks were the creatures of large scale business combines that directed money to failed enterprises to shore them up. Crony capitalism is now pushing the United States rapidly toward a similar fate where vast sums of debt are run up by politicians in order to stave off much deserved business and governmental failures. They tell us all that this is for “our own good,” but ordinary Americans know that this is not true at all; and they register that discontent with almost every poll that is published.

President Obama and his Democratic supporters in Congress call what they are doing a “stimulus package”. That is nothing more than a public relations name, created to hide and disguise what is really going on. This so-called “stimulus package” will only protect bad judgment, ineffective management, and poor business models. But we should be relieved. The arrogant and lousy managements, and the equally ineffective and arrogant legislators, will have their wealth protected and their positions preserved, so we won’t have to see them in the ranks of the unemployed and disposed.

Just my opinion,

Gordon Black