Stock Options

Posted by PITHOCRATES - April 29th, 2013

Economics 101

It takes a Lot of Time to Design, Develop and Bring to Market a Radical New Aircraft

The number one cost airlines have is fuel.  So anything that can reduce fuel consumption can cut an airline’s costs.  Aircraft manufacturers are aware of this.  And want to incorporate new fuel-saving technology into their aircraft.  Because that’s what airlines want.  And if you can give the airlines what they want they will buy your aircraft.  But sometimes new technology can be a little temperamental.  Everything doesn’t work as expected.  And sometimes problems that come up can take a long time to engineer through.  Like it did for the Boeing 787 Dream liner.

Boeing did everything they could think of to squeeze every last ounce of weight from the 787.  One thing they did is well known.  Thanks to a problem with it that caused the grounding of the entire 787 fleet.  The lithium-ion battery.  But that’s not the only weight-saving innovation of the 787.  They added Dual Electronic Flight Bags in the cockpit.  So pilots don’t have to bring bulky and heavy books aboard.  They went from conventional pneumatic architecture to more-electric architecture.  Eliminating the engine bleed air system and associated pneumatic system components.  Reducing weight and improving efficiency.  Which reduced fuel consumption.  They used simple trailing edge flaps.  Not slotted flaps.  Letting them use smaller flap track fairings (those canoe-shaped things underneath the trailing edge of the wings that operated the flaps).  Reducing drag.  And fuel consumption.  They used bigger engines with higher bypass ratios (the amount of air pulled into the fan disk but NOT used for combustion).  Increasing engine efficiency.  Reducing fuel consumption.  The use of composite materials decreased weight.  And the use of one-piece barrel sections eliminated additional joints, fasteners and splice plates.  Reducing weight.  And fuel consumption.

These and other innovations result in a fuel savings of 20% over similarly sized aircraft.  This is huge.  Which is why airlines are ordering this airplane.  But such a radical change in aircraft design comes with a lot of risks.  As the problem with the lithium-ion battery has shown.  And it takes a lot of time to design, develop and bring to market a new aircraft.  Especially one that is radically different from other airplanes.  So the decision to put the aircraft company on this course was a very risky decision.  And one that took a lot of guts.  Because so many things can go wrong.  Leading to cost overruns.  Which can delay promised delivery dates.  And Boeing had their share of those bringing the 787 to market.  Which they have worked through.  Will it be worth it?  As long as airlines want to save on fuel costs, yes.  And no problems arise that they can’t overcome.

Stock Options get Risk-Averse and Cautious CEOs to be Bold and Take Risks

These are big decisions.  Decisions that lead to great successes.  Or great failures.  Some so bad that they can bankrupt a company.  Someone has to be responsible for these decisions.  That one person sitting at the top of the corporation.  The CEO.  It is the CEO who has the ultimate say on the direction of the corporation.  And with this one decision all the resources of the corporation are marshaled together to take the corporation in this new direction.  Incurring great costs that will be on the books for years.  Making it hard to change course until these great investments pay off.  If they pay off.

These are the things CEOs have to deal with.  Not just at Boeing.  But throughout corporate America.  CEOs have to make these singular decisions that can have consequences for years to come.  Where it may take years to see if that one decision actually pays off.  There are few CEOs in the labor force.  So few can imagine the stress these people work under.  And in that pool of CEOs there are only a few that have the Midas touch.   Who can consistently take great risks while making all the right decisions.  Board members desperately want these CEOs.  Offering very generous compensation packages to lure them in.  And to keep them once they have them.  This crème de la crème of CEOs may make the big bucks.  But in exchange for that fat paycheck they do something few others can.  They make shareholders rich.  And they love making these owners rich.  For they love the thrill of the job.  Relishing that high-stress environment.  Where every little decision has great consequences.  Thriving under the kind of pressure that would leave most others whimpering in their beds.  Curled up in the fetal position.  In a pool of their own tears.

But not every corporation can get one of the crème de la crème.  They may have a great CEO.  But one that suffers from a major CEO character flaw.  Being averse to taking big risks.  Who instead wants to be a little more conservative.  And a little more cautious.  Shareholders don’t like overly cautious CEOs.  Because the people getting rich are doing it by breaking away from the pack.  By doing something different.  Abandoning convention.  Trying something bold.  And new.  Bringing something brand new to market that no one knows anything about.  But once they learn about it they can’t live without it.  This is what shareholders want.  Not cautious and conservative.  So to light a fire under these CEOs they came up with a new way to compensate them.  To appeal to their greed.  By letting them get rich if they can make that next great thing that sends the stock price soaring.  And the key to their greed is the stock option.

Stock Options provide a Powerful Incentive to bring Great New Things to Market

The CEO that creates the next big thing everyone will want to buy will send sales revenue soaring.  And with great sales revenue comes great profits.  Increasing the value of the company.  Which, in turn, makes the stock price soar.  This is what shareholders want.  A soaring stock price.  So to encourage the CEO to give them what they want they tie the CEO’s interest to their interests.  By giving the CEO stock options.  Making the sky the limit.  For the more the CEO increases the stock price the greater the CEO’s compensation.  Thus encouraging the CEO to try something bold and new.

A stock option is a right to buy a share of stock at a fixed price in the future.  Say the current stock price is $70/share.  The board of directors gives the CEO the option to buy, say, 500,000 shares of stock at $80/share up until some date in the future.  Creating a strong incentive for the CEO to raise the stock price.  The greater the CEO raises the price above $80 the greater his or her compensation.   Let’s say the CEO was bold and took a great risk.  And it pays off.  Sending the stock price soaring to $110/share.  When the CEO exercises those options he or she will buy 500,000 shares of stock from the company at $80/share.  The company gets $40 million in new capital to help finance further growth.  And the CEO will sell those 500,000 shares at the current market price of $110/share.  Pocketing $15 million.  And the shareholders, of course, get what they want.  A higher stock price.  Everyone wins.

Now let’s say that nothing spectacular happens.  And the stock price only rises to $75/share.  Because it’s below the ‘strike price’ the CEO will let these options expire.  The CEO profits nothing from these options.  But doesn’t lose anything either.  But what happens when the stock price falls because of that bold, new direction?  Causing the corporation to lose value.  As well as the shareholders.  But the CEO?  Again, the CEO will let those options expire.  And will lose no money.  Which is one of the benefits of stock options.  It got those risk-averse and cautious CEOs to take those big risks that got shareholders rich.  As there is no downside risk for the CEO.  Which is both good and bad.  On the one hand it encourages risk taking.  But on the other it encourages risk-taking.  Some CEOs will take excessive risks as they have nothing to lose.  Some will even cook the books to boost the stock price so they can exercise those options.  So it’s not a perfect system.  But they do provide a powerful incentive to bring great new things to market.  Which is what shareholders want.  And will take great risks themselves to get it.

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Female CEOs are lowering CEO Compensation just as the Left wants yet the Left Complains

Posted by PITHOCRATES - December 15th, 2012

Week in Review

President Obama won reelection in 2012 because, apparently, people hate the rich.  And they hate corporations.  When Mitt Romney said corporations are people the opposition pounced on that.  As the masses believe corporations are evil entities that serve only profits.  And Satan.  They hate corporations with a passion.  And the rich people that run them.  That’s why President Obama wants to raise tax rates.  Not to raise tax revenue.  For these proposed tax hikes may fund the government for maybe 8 days.  If we’re lucky.  No.  These tax rates are to punish the rich.  Who have raped and pillaged this country so they can live their caviar and champagne lifestyles.

According to President Obama the young should shun these corporations and do something better with their lives.  Like working for a nonprofit.  By doing something where we give.  Not get rich.  For that is being a good American in these Obama times.  We shouldn’t pursue meaningless high-paying jobs.  Instead we should get a low-paying social services job.  Or work in a food kitchen.  Anything is better than working for these most evil and vile corporations (see What Did Marissa Mayer Mean in a Year When 86% of Executives Were Still Men? by Rebecca Greenfield posted 12/11/2012 on The Atlantic Wire).

As of June, women held a mere 14.3 percent of executive positions at Fortune 500 companies, according to new data from Catalyst, reports Bloomberg’s Brooke Sutherland. That 1.4 percent increase from last year represents a “glacial pace,” the report states…

And it’s difficult to find signs of change elsewhere. Of the 71 leaders ranked in a new Forbes list of the world’s most powerful people, only four women made the cut…

As for the future of female CEOs, the gender pay-gap is still alive and well, even for fresh college graduates.

All right, I’m confused.  If corporations are so evil and serve Satan why is it so important for women to become rich CEOs at them?

This is the general consensus on the Left.  Who are not happy about glass ceilings.  Or gender pay-gaps.

If we pay CEOs too much why are they so concerned that female CEOs earn less than their male counterparts?  If we want to reduce CEO compensation we should applaud these women for doing just that.  These women may just be choosing not to rape and pillage the people with high prices.  With less profits (a good thing according to everyone on the Left) there’s less money to pay their CEO.  Or perhaps they aren’t drawing a large paycheck so their employees can have bigger paychecks.

Women are more nurturing and feeling.  We hear it all of the time.  It’s why we need more women in Congress.  Who will listen to the poor instead of the lobbyists.  Perhaps this is why there are so few female CEOs.  Because they are too nurturing and feeling to maximize profits for their shareholders.  Because profits are bad.  Or so the Left has told them all of their life from public school through college.  Institutions all controlled by the Left.  And more women did vote for President Obama than the rich CEO Mitt Romney.  Showing their disdain for corporate profits.  Perhaps shareholders noticed this general trend and prefer greedy, heartless, male sons of bitches to run their corporations so they will maximize their profits.  Someone who doesn’t favor birth control and abortion over profits, a driving factor in why women voted for President Obama according to exit polls.

So what are corporations?  Evil?  Or so good that we need more women running them?  They can’t be both.  They can’t be the source of everything that is wrong in this country while at the same time we criticize them for not having more women running them.  If they’re evil we should applaud the fact that few women run them and that we don’t pay those that do a lot.  If they’re not evil we need to stop attacking them.  And blaming our budget deficits on them.

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Stocks and Bonds

Posted by PITHOCRATES - January 9th, 2012

Economics 101

When Companies grow their Capital Requirements grow beyond a Bank’s Lending Ability

We note a civilization as being modern when it has vigorous economic activity.  Advanced economies around the world all have the same things.  Grocery stores.  Clothing stores.  Electronic stores.  Appliance stores.  Coffee shops and restaurants.  Factories and manufacturing plants.  And lots and lots of jobs.  Where people are trading their human capital for a paycheck.  So they can take their earnings and engage in economic activity at these stores, coffee shops and restaurants.

To buy things off of shelves in these stores things have to be on those shelves first.  Which means selling things requires spending money before you earn money.  Businesses use trade credit.  Such as accounts payable.  Where a supplier will give them supplies and send them an invoice typically payable in 30-90 days.  They will establish a credit line at their bank.  Where they will borrow from when they need cash.  And will repay as they collect cash (such as when their customers pay their accounts payable).  And take out loans to finance specific things such as a delivery van or restaurant equipment.

Businesses depend on their bank for most of their credit needs.  But when companies grow so do their capital requirements.  Where capital is large amounts of money pooled together to purchase property, buildings, machinery, etc.  Amounts so great that it exceeds a bank’s ability to loan.  So these businesses have to turn to other types of financing.  To the equity and debt markets.

Investors Invest in Corporations by Buying their Stocks and Bonds

Equity and debt markets mean stocks and bonds.  Where we use stocks for equity financing.  And bonds for debt financing.  Stocks and bonds allow a corporation to spread their large financing needs over numerous people.  Investors.  Who invest in corporations by buying their stocks and bonds.

When a business ‘goes public’ they are selling stock in their company for the first time.  We call this the initial public offering (IPO).  If the company has a very promising future this will bring in a windfall of capital.  As investors are anxious to get in on the ground floor of the next big thing.  To be a part of the next Microsoft.  Or Apple.  This is when a lot of entrepreneurs get rich.  When they are in fact the next big thing.  And if they are, then people who bought stock in their IPO can sell it on the secondary market.  Where investors trade stocks with other investors.  By buying low and selling high.  Hopefully.  If they do they get rich.  Because the greater a company’s profits the greater its value and the higher its stock price.  And when a company takes off they can sell their stock at a much higher price than they paid for it in the IPO.

When a corporation needs to borrow more than their bank can loan and doesn’t want to issue new stock they can sell bonds.  Which breaks up a very large amount into smaller amounts that investors can buy.  Typically each individual corporate bond has a face value of $1000.  (So a ten million dollar ‘loan’ would consist of selling ten thousand $1,000 bonds).  Like a loan a corporation pays interest on their bonds.  But not to a bank.  They pay interest to the investors who purchased their bonds.  Who can hold the bonds to maturity and collect interest.  Or they can trade them like stock shares.  (Changes in the interest rates and/or corporate financial strength can change the market value of these bonds.)  When a bond reaches maturity (say in 20 years) the company redeems their bonds from the current bondholders.  Hopefully with the new profits the bond issue helped to bring into the corporation.  Or they just issue new bonds to raise the money to redeem the older bonds.

A Company Usually has a Mix of Equity and Debt Financing that Balances all the Pros and Cons of Each

There are pros and cons to both equity and debt financing.  Selling stock transfers ownership of the company.  Sell enough so that someone can own more than 50% and that someone can replace the board of directors.  Who in turn can replace the CEO and the other corporate officers.  Even the business founder.  This is the big drawback of going public.  Founders can lose control of their company.

Stocks don’t pay interest.  So they are less threatening during bad economic times.  As business owners, stock shareholders are there for the long haul.  During the good times they may expect to collect dividends (like an interest payment).  During bad times they will wait it out while the company suspends dividend payments.  Or, if they lose confidence, they’ll try and sell their stock.  Even at a loss.  To prevent a future greater loss.  Especially if the corporation goes bankrupt.  Because stockholders are last in line during any bankruptcy proceedings.  And usually by the time they pay off creditors there is nothing left for the shareholders.  This is the price for the chance to earn big profits.  The possibility to lose everything they’ve invested.

Bonds are different.  First of all, there is no transfer of ownership.  But there is a contractual obligation to make scheduled interest payments.  And if they fail to make these payments the bondholders can force the company into bankruptcy proceedings.  Where a corporation’s assets can be liquidated to pay their creditors.  Including their bondholders.  Which, of course, often means the end of the corporation.  Or a major restructuring that few in management enjoy.

Stockholders don’t like seeing their share value diluted from issuing too many shares.  Bondholders don’t like to see excessive debt that threatens the corporation’s ability to service their debt.  So a company usually has a mix of equity and debt financing that balances the pros and cons of each.  A financing strategy that has been working for centuries.  That allows the advanced civilized world we take all too much for granted today.  From jetliners.  To smartphones.  To that new car smell.  For none of these would be possible without the capital that only the equity and debt markets can raise.

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Capitalism vs. Communism, Socialism, Occupy Wall Street and President Obama

Posted by PITHOCRATES - October 14th, 2011

The Corporation was Created to Raise Capital and Manage Risk so they can Build the Stuff we Want

No wonder the Occupy Wall Street people have their heads filled with nonsense.  Here’s an Ivy League publication that doesn’t even understand what a stakeholder in a corporation is.  They have a stake, i.e., a share.  They own stock.  They’ve risked their capital.  And if you don’t risk capital, then you’re just not a stakeholder (see Occupy Wall Street: What Businesses Need to Know by Hari Bapuji and Suhaib Riaz posted 10/14/2011 on the Harvard Business Review).

The demonstrators are asserting that they are stakeholders in American business, and they’re correct — they are stakeholders, as consumers, as employees, and as citizens affected by the financial system in general.

No they’re not.  Unless they bought stock in these corporations.  Which I doubt, because people typically don’t protest against companies they invest in.  Unless they’re idiots.

The corporation was created to raise large amounts of capital.  And manage risk.  By selling stocks to shareholders.  So they can raise the money to build the stuff we want.  Things that hopefully would make a profit one day.  A profit that the shareholders would share in.  As they are the ones taking the BIGGEST risk.  The corporate officers of these corporations have a fiduciary responsibility with the shareholders.  To make a profit.  It’s their company.  They paid for it.  And these shareholders owe nothing to that mob on Wall Street.  Unless any of them own stock.

You’d think those writing for a business school would understand basic business 101.

Businesses should look at whether existing models of compensation are contributing to this inequality. They need to find ways to reward performance without increasing pay disparities. Developing new models of compensation and governance is not easy and can only be possible through a long-term and sincere engagement with a wide set of stakeholders, such as regulators, academics, and representatives of workers.

They want to do away with merit.  And introduce something more akin to communism.  Where everyone is equal.  No matter the value of their work.  People have tried this.  In North KoreaCuba.  And the former Soviet Union.  Note the word ‘former’ in that last one.  There’s a reason why it’s former.  No one wanted to do the harder jobs if they didn’t get paid any more for the additional brain power or risk.  And those stuck carrying the weight of their comrades?  They just didn’t bust their ass in the process.  And that’s why the Soviet Union is a ‘former’ union.

But this is what the Occupy Wall Street people want.  Force people to do those harder jobs.  But pay these wealth creators no more than them.  Even if they only work at a Starbucks.  Or collect government assistance.

The Egalitarian Polices of the Great Society Destroyed the Economy in the Seventies

So an Ivy League publication doesn’t understand business.  But you know who does?  Al Jazeera.  Their conclusions are all wrong but at least they get a lot of stuff right along the way (see The instability of inequality by Nouriel Roubini posted 10/14/2011 on Al Jazeera).

While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalised world; resentment against corruption, including legalised forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

Of course, the malaise that so many people feel cannot be reduced to one factor. For example, the rise in inequality has many causes: the addition of 2.3 billion Chinese and Indians to the global labour force, which is reducing the jobs and wages of unskilled blue-collar and off-shorable white-collar workers in advanced economies; skill-biased technological change; winner-take-all effects; early emergence of income and wealth disparities in rapidly growing, previously low-income economies; and less progressive taxation.

American industry is uncompetitive.  That appears to be the problem.  That’s why there are fewer jobs.  So people who earn income via their labor are being priced out of the market by their generous pay and benefit packages.  But people who earn their income via capital always have a place to invest capital.  Capital is capital.  It is always competitive.  That’s why more wealth is accumulating to the rich.  Because they haven’t killed their golden goose.  Like unions have killed unskilled American manufacturing.

This doesn’t explain those kids on Wall Street, though.  The ones with college degrees.  Their problem is their degrees.  Many of them are worthless.  Probably a lot of English majors out there.  Or have degrees in sociology.  Anthropology.  Philosophy.  Women studies.  Etc.  But there just aren’t a lot of stores out there selling this stuff.

The increase in private- and public-sector leverage and the related asset and credit bubbles are partly the result of inequality. Mediocre income growth for everyone but the rich in the last few decades opened a gap between incomes and spending aspirations. In Anglo-Saxon countries, the response was to democratise credit – via financial liberalisation – thereby fuelling a rise in private debt as households borrowed to make up the difference. In Europe, the gap was filled by public services – free education, health care, etc. – that were not fully financed by taxes, fuelling public deficits and debt. In both cases, debt levels eventually became unsustainable.

Too much debt is never a good thing.  But those bubbles weren’t the result of inequality.  They were the result of trying to make everyone equal.  Extending credit to the credit unworthyPutting people into houses who had no business owning a house.  That was the fault of irresponsible government policy.  Not inequality.  Just like the free education, health care, etc.  We didn’t have these problems when those things weren’t free.  And when only people who could qualify for a mortgage were getting mortgages.

The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalisation, unfettered financial capitalism, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct. As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption, and the recurrence of destructive financial crises, fuelled by credit bubbles and asset-price booms and busts.

Karl Marx was wrong.  At least, he hasn’t been proven right yet.  And many have tried.  The Soviets.  The Chinese.  The North Koreans.  The Cubans.  Marxism has been an abject failure.  And those busts were made worse by monetary policy trying to eliminate them.  If credit wasn’t so cheap and mortgage standards weren’t so low there would have been no housing bubble.  It was government policy that encouraged people to accumulate debt.  Not inequality.  Government is just bad at running things.  Which is why Marxism has been an abject failure.

Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.

Some of the lessons about the need for prudential regulation of the financial system were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe’s social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone’s sovereign-debt crisis now.

Government spending exploded during the Sixties.  They printed so much money in the Seventies to pay for the obligations of the Sixties that Nixon decoupled the dollar from gold.  So he could print more money.  Giving us record high interest rates.  And record high inflation.  Weak GDP.  And high unemployment.  This was all because of the egalitarian polices of the Great Society.  They destroyed the economy in the Seventies.  Reagan and Thatcher brought back prosperity.  By stopping the insanity.  They cut taxes.  Cut regulation.  And the economy took off.  It’s the reversal of the Reagan-Thatcher policies that are returning the economy to the malaise of the Seventies.  Both in the UK.  And the USA.

In the Soviet Union all of the Good Stuff came from the Decadent, Capitalist West via the Black Market

But this socialist/communist claptrap is what they’re teaching in American universities.  These protestors don’t understand the role of capital in the modern economy.  The entrepreneurial spirit.  Risk management.  They don’t understand anything other than that they weren’t born into privilege.  And this just pisses them off (see OWS’ Program? Distract From Dems’ Failures by Charles Krauthammer posted 10/14/2011 on Investors.com).

To the villainy-of-the-rich theme emanating from Washington, a child is born: Occupy Wall Street. Starbucks-sipping, Levi’s-clad, iPhone-clutching protesters denounce corporate America even as they weep for Steve Jobs, corporate titan, billionaire eight times over.

These indignant indolents saddled with their $50,000 student loans and English degrees have decided that their lack of gainful employment is rooted in the malice of the millionaires on whose homes they are now marching — to the applause of Democrats suffering acute Tea Party envy and now salivating at the energy these big-government anarchists will presumably give their cause.

Except that the real Tea Party actually had a program — less government, less regulation, less taxation, less debt.

What’s the Occupy Wall Street program? Eat the rich. Then? Haven’t gotten that far. No postprandial plans.

It’s ironic that that they hate corporate America but love to indulge in their products.

During the Cold War.  When there was full employment behind the Iron Curtain.  In the tractor factories.  People stood in line all day to buy soap and toilet paper at reasonable prices.  But they bought Levi’s on the black market.  And anything else they wanted that wasn’t dreary and drab.  Or scratchy and caustic.  Whatever the price.  Why?  Because all of the good stuff came from the decadent, capitalist West.

These protestors need to read a little history of what it was like when there was true egalitarianism.  It sucked.  That’s why Soviets defected to the U.S.  And Americans didn’t defect to the U.S.S.R.  Because capitalism was better.  People lived better under capitalism than they did under communism.

The President of the United States should not use the Risk of Civil War as a Reelection Strategy

As Krauthammer says in his column, this Occupy Wall Street movement has political motives.  Obama is following in the shoes of Jimmy Carter.  The economy is in the toilet.  His policies have all failed.  And he has no chance of reelection based on his record.  So he is using the class warfare card.  Which is irresponsible.  And dangerous.

Obama is opening a Pandora’s box. Popular resentment, easily stoked, is less easily controlled, especially when the basest of instincts are granted legitimacy by the nation’s leader.

Mobs are easy to create.  But they take on a life of their own.  Are dangerous.  And unpredictable.  The president of the United States should not use the risk of civil war as a reelection strategy.  Because it’s not exactly constitutional.  Or in keeping with the oath of office he swore.

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FUNDAMENTAL TRUTH #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 29th, 2011

The Right likes Capitalism, the Left likes Marxism

Crony capitalism isn’t capitalism.  At best it’s mercantilism.  At worse it’s autocracy.  But the critics of capitalism haven’t the foggiest clue of what capitalism is.  They think it just exploits the working class.  Like Karl Marx said.  Of course, Karl Marx was wrong.  His philosophy has never worked.  Whereas capitalism, true capitalism, has.  Try to point to a successful Marxist country today.  You can’t do it.  Because when you take from those according to ability and give to those according to need you have everyone trying to show as little ability and as great need as possible.  Put yourself in that position.  Do you want to show some genius and work 12-hour days and see all of your earnings go to people sitting at home collecting state benefits?  Or would you rather not work those 12-hour days, relax at home and collect those state benefits?  If these are your choices, you don’t have to answer.  Because everyone is going to choose to stay at home and collect benefits.  Because no one volunteers to be a slave.

In such a world try to imagine how many cellular towers people would install when no one wants to work.  Not many.  Which means no cell phones, no text messaging, no internet on your mobile device and no sitting in your favorite coffee shop Internet hotspot.  For no one will spend the excruciating time, money and effort to create something while he or she is paid less than those with greater need who do nothing.  In other words, there is no incentive to work hard.  So no one will work hard.  Just like you won’t work hard by working overtime hours for free.  And why won’t you?  Because when you work you sell your time to an employer.  It’s your time.  If no one is paying you for it, you’d rather do something fun.  We all would.  Because it’s our unalienable right to pursue happiness.  Like Thomas Jefferson wrote in the Declaration of Independence.  And pursue it we do.  Because when it comes to our happiness, we’re all Jeffersonians.  Even Alexander Hamilton.  Even though they often saw things differently.

And one of those things was capitalism.  Jefferson didn’t like bankers.  Especially when they were in tight with the government.  Hamilton, on the other hand, liked the bankers.  Because he knew the difference between money and capital.  Assume everyone has a few bucks in their pockets.  What is that going to buy these individuals?  Not much.  Certainly no cellular towers.  But when you pool that money together you get capital.  And capital can buy cellular towers and the other conveniences of modern society.  And this is capitalism.  There’s a little more to it but the point is capitalism provides incentive.  And incentive stimulates innovation.  People take risks, work hard and create great things.  Marxism, on the other hand, provides no incentive for anyone to innovate.  There are no risk takers and people work the bare minimum they can get away with.  And there is nothing great in a Marxist society except misery, hunger and fear.  North Korea and Cuba are about the last of the Marxist societies remaining.  The Soviet Union, Eastern Europe and Mao’s People’s Republic of China are relics of the Cold War.  Now on the ash heap of history.  And all of these countries have/had sealed borders.  People could not leave.  If they tried they often died.  Many still risked it.  Because life was horrible under Marxism.

Jefferson the anti-Capitalist turns to Capitalism

Now whenever you gather money in great big piles you invite corruption.  Especially in government.  Which is what Jefferson feared.  You need money to do things.  And if government had access to great pools of it, they could do a lot of things.  Build armies.  Build navies.  Fight wars.  Grow the size of government.  Increase the size of the federal payroll.  Buy favors.  Sell patronage.  So more and more people became part of a growing, bloated federal government.  Who then had a vested interest in seeing it continue to grow to protect and increase the power and money they had.  All the great cities in the old world (London, Paris, Madrid, etc.) were corrupt.  The bankers were in bed with the politicians.  And the people suffered.  In his beloved France, Jefferson saw firsthand this insidious combination of money and power impoverish and starve the masses.  He saw revolutionary fervor grow in the Jacobin clubs.  And witnessed the outbreak of the French Revolution.  To check the power of the absolute monarchy and instill republican ideals.  And he liked what he saw.

With the backdrop of history, two men (and their followers) pulled America in two directions.  The Hamiltonians wanted to model America after the British Empire.  Rich and powerful.  Jefferson envisioned a nation of citizen farmers.  Simple farmers toiling the land.  Free from the corruption of the banks and the merchants.  With limited government.  Working with a modest federal budget.  Without any debt.  Of course, this all went out the window with the Louisiana Purchase.  When he needed a big whopping pile of money.  And a little extraconstitutional authority as well.  Sort of like a European monarch.  Which he took.  And thanks to a little thing called capitalism, the British and Dutch put together some creative financing for the French and the Americans.  They paid cash to France in exchange for the American bonds they just underwrote.  Some would say it was a bit hypocritical considering his attacks against Hamilton, but the U.S. profited very well from that purchase.  The point being is that even an ardent anti-capitalist like Jefferson had to turn to capitalism to close this deal.  Because there was no other way a young and poor nation could ever come up with that kind of money without borrowing it.

But all politicians aren’t like Thomas Jefferson.  In fact, shortly after the Founding Father generation, government began to grow.  There were political favors.  Pandering.  And corruption.  As the quality of the politician declined more unscrupulous people were attracted to government.  A growing nation needed to grow.  It needed to build things.   Armies.  Navies.  Forts.  Government buildings.  Post offices.  Canals.  Railroads.  As the nation grew it collected more taxes.  It soon had a lot of money to buy these things.  And issuing contracts for these things could be a very lucrative endeavor.  For the unscrupulous politician.  Who would only contract with those who made it worth his while.  The unscrupulous businessman.

Buying and Selling Favors for Personal Gain

This is crony capitalism.  The joining of business and government in backroom deals.  This isn’t laissez-faire capitalism.  This is the buying and selling of favors for personal gain.  And this is what many people think capitalism is.  Especially those critics on the Left.  Who think in zero-sum terms.  The only way some people can have more money is if other people have less.  Some people are lucky.  Some just aren’t.  Ability and ambition have nothing to do with it.  It’s all based on who you know.  And when money and power is concentrated in too few hands, it shuts out others from the market place.  And that’s just not nice.  Good people will be unable to make other and more important things.  So unless someone smart steps in and coordinates this economic activity, that activity will be inefficient.  It will build the wrong things.  And the wealth will accumulate in the wrong hands.

These politicians want to partner with business to make the right things.  By the right people.  The things they want to see built.  And not the things they don’t like.  A good example of this today is the electric car.  And the internal combustion engine.  They love one.  And despise the other.  They put in policies to increase the cost of gasoline-powered cars.  And the cost of gasoline.  And provide subsidies to electric car companies to help them build cars no one wants to buy.  And subsidies to consumers to reduce the price on electric cars.  So they’ll buy something they don’t want.

Currently, there is no market for the electric car.  People are buying it now for one of two reasons.  Because of the subsidies.  Or the smugness.  Yet companies are building these cars.  Why?  Well, they’re not doing it to lose money.  They’re making money.  Somehow.  But it isn’t in the market place.  And if it isn’t the market place, it can mean only one thing.  They are getting some sweet federal subsidies to build these cars no one wants.  And this just isn’t capitalism.  It’s another example of crony capitalism.

The Left hates Shareholders, not Corporations

The Left attacks the Right for being the party of the big corporations.  They’re nothing but a bunch of crooks.  The corporations.  And the Republicans.  Republicans pander to the corporations.  They want to deregulate their industries.  While consumer safety suffers.  As does the environment.  And they want to cut their taxes.  Paid for by tax hikes on the poor and working class.  To those on the Left the business corporation is evil incarnate.  Unless they want to partner with them.  And build things together.  Then they’re okay.

The Left hates corporations.  Yet it’s always the left that favors corporatism.  The partnering of business and government.  Like in Mussolini’s fascist Italy.  Or outright nationalization of the corporation.  A complete takeover by the government. Like in Hugo Chavez‘s Venezuela.  It apparently isn’t the corporations per se they hate.  It’s the shareholders.  They have no problem with these corporations making obscene profits.  As long as the politicians can share in these profits.

So there you have it.  The difference between crony capitalism and smart government.  It all depends on the amount of money flowing into the government’s coffers.  If the shareholders keep the full return on their investment then the business and Republicans are practicing crony capitalism.  If the shareholders share their return on their investment with the Democrats, then that’s smart government partnering with business.

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