A Capitalist’s Dilemma, Whoever Wins the Election

http://www.nytimes.com/2012/11/04/business/a-capitalists-dilemma-whoever-becomes-president.html?pagewanted=all

by iProject • 14 years ago

70 88 14 years ago

It’s as if our leaders in Washington, all highly credentialed, are standing on a beach holding their fire hoses full open, pouring more capital into an ocean of capital. We are trying to solve the wrong problem.

Perhaps this is the cause of the problem and not just a poor solution to the problem.

dmix8• 14 years ago

Indeed, what if the prevailing Keynesian economic theory is in fact making things worse. At what point can we determine it's not helping?

> The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism.

te_chris• 14 years ago

I thought Keynesian economics was about fiscal, not monetary stimulus like what the fed is doing? From my understanding you're confusing the two.

001sky2• 14 years ago

One issue people continually fail to grasp is that low rates are setting a low bar for capital investment. The result is shitty assets/investments/businesses.[1] People will only jump as high as the bar requires.

Think of the analogy of your Kid: Would you set the bar low and expect the kid to excel and get into Stanford? No. Thats now how it works. Without coaching, encouragement, benchmarking, and measurement, success is the exception not the rule.

Why is this so hard for DC to grasp? The empirical datapoint on this is clearly Japan in the 1990's. Ultra-low interest rates, and ultra-cheap capital might spur investment, but not <profitable> investment. Twice as much investment at 1/2 of the return on capital is not moving you anywhere.

That's a major part of the problem. USA have been facing this since the Greenspan stimulus following the Dot-Com crash in the early 00's.

_______

[1] This might work OK in a short run, of 6 months or a Year, but not over 3-5-10 years -- then you are talking entire capital investment life-cycles.

epa2• 14 years ago

Low interests rate are indeed preventing investment. Althought capital is readily available for borrowing, as the article says companies already have cash on hand as it is. Higher returns are needed to boost investment. Why do you think so many funds and banks are exploring developing nations. Higher returns.

purplelobster• 14 years ago

I don't think your analogy makes any sense at all.

guylhem6• 14 years ago

I'm sorry but that seems to go again the currently admitted way the IS/LM model works http://en.wikipedia.org/wiki/IS/LM_model

A high interest rate means firms reduce their investment spending to avoid high interest payments ; or said otherwise rising interest rates lead to crowding out of private fixed investment.

Look at the IS curve on http://macrotutor.weebly.com/2-is-curve.html

(but I might be wrong - I'm quite new to macroeconomics)

jwallaceparker2• 14 years ago

> The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism.

Free markets fuel capitalism.

The Fed's market manipulation is abhorrent to pure capitalism; it throws the elegant system of free competition and trade horrifically out of balance.

virmundi• 14 years ago

I'm not entirely sure why you're being voted down. I would like to see more detail from you, but I get the feeling that a Reddit mentality of "I don't like this, down boat for you" is at play.

rayiner4• 14 years ago

He's being voted down because he deserves it. His comment is based 100% on ideological handwaving. It's really no different than saying that something is "blasphemy" except he's espousing a different religion.

jwallaceparker2• 14 years ago

Thanks. :)

A sound, stable currency is an essential component to a free market. When a currency is manipulated it can drastically upset the natural balance within a marketplace.

When money is cheap (i.e. artificially low interest rates combined with Fed pumping new money into system) it leads to malinvestment.

Consumers buy things they wouldn't normally buy. Companies invest in projects they normally wouldn't invest in.

There is an initial "boom" (i.e. asset prices rise) that comes from people spending the easy money. But it can't last because the spending didn't come from savings or underlying productivity increases. It came from artificial stimulus.

I'm glossing over a lot of points here, but it's called "business cycle theory" if you care to investigate.

shardling• 14 years ago

It's because it's a glib fucking comment.

pfraze• 14 years ago

> The Fed's market manipulation is abhorrent to pure capitalism

Perhaps, but systems should use managerial feedback systems to dampen large deviations. The incompleteness or the ineffectiveness of money-supply controls does not lead us to conclude that no managerial feedback should occur at all.

EDIT: expanding on that, I'd say we often go 'round with that binary question, when we rarely ever ask, "what would be a more effective way to handle disruptions to the economy?" in which case we'd begin to examine the available and potential metrics, the tools of affecting behavior, and whether those tools can be used without violating autonomy. If we have successfully optimized for efficiency and available capital, as the article suggests, then how could we next optimize for risk, experimentation, and innovation?

guylhem6• 14 years ago

I'm a libertarian and I love the free market and pure capitalism.

OTOH, the great depression made a strong case for an intervention by governments at the macroeconomic scale - if only to smooth out bumps that could certainly sort themselves out in the long run, but which could still be uselessly painful for tens of years.

Fiscal policy is IMHO wrong, but monetary policy is not that damaging, especially since it doesn't do much damage to real assets (like say gold)

bswap0• 14 years ago

I agree wholeheartedly. Strong monetary policy is essential to maintaining a strong economy. In the case of deflation, the Federal Reserve expands the money supply to counteract disincentive to invest. Unfortunately, the Fed often overshoots and ends up causing inflation instead since it's very hard to predict exactly how much is necessary. The Fed's job is not to pick winners and losers; it's just to keep the monetary base stable so that individuals can make investments without having to anticipate changes in the value of the currency.

arthurrr• 14 years ago

Often, people will defer to an "expert", who they assume knows more about a subject than they do. However, in many cases, and especially in economics, the expert thinks he knows something to be true, but it turns out that what he knows completely wrong, but he has invested his entire life building knowledge on top of bad knowledge, so he is not willing change his mind. A person who knows something that is wrong is much more dangerous than a person who knows nothing.

Then what happens is that the expert will say something, and people will accept it as truth, because after all, he is an expert. And then it goes viral. All of a sudden, everything thinks something is true, even though it is completely false.

Then entire books are written. An entire field called economics is created. Universities teach economics using these books that are based on incorrect assumptions. An entire generation of people build their knowledge on top of these false assumptions. And the cycle repeats, perpetually.

I'm convinced that the entire foundation of economic thought is wrong, and that the entire field of economics contributes negatively towards humanity.

Regarding the great depression, you can make the argument that government intervention in fact created and prolonged the great depression. You'll never really know, because you can't go back in time and run the experiment again.

If you don't understand how something works, it's probably best to leave it alone, rather than try to fix it.

bennesvig• 14 years ago

The government helped create and prolong the great depression, from my understanding.

Great book on the subject: http://www.amazon.com/FDRs-Folly-Roosevelt-Depression-ebook/...

"As already noted, major factors bringing on the Great Depression were the severe monetary contraction that the Federal Reserve presided over, unit banking laws that made it almost impossible for small-town banks to diversify their portfolios, high-wage policies that made it more expensive for employers to hire people, the 1930 Smoot-Hawley tariff that throttled trade, and the 1932 tax hikes that took money out of people’s pockets."

po3• 14 years ago

Why do you assume 'pure' capitalism the ideal we want to achieve?

To me that's like saying we need to stop playing football with all of it's unnecessary rules and regulations and get to the purest form of sport: kill the man with the ball.

All sports put arbitrary restrictions into the game. You can't touch the ball with your hands. You have to dribble while running. You can't pass to a teammate when he's too far down-field. All of these are to make the sport better for the players as well as the spectators. The players often complain about the rules, try to get around them and/or fight with the refs, but the appropriate response is generally to call them big whiny babies.

That's not to say the refs should be corrupt and influencing the game too much; that needs to be called out when it happens.

The way I see it, the game spun out of control (mostly because the rules were changed to favor risk-taking) and now the Fed is trying to reset it to a point where we can all start playing again. Can we at least agree that a game with the rules removed is not always better?

ahallock3• 14 years ago

This analogy doesn't hold true in reality. Pure capitalism doesn't mean no rules, just no rulers. Look at Github, for example. Spontaneous standards, conventions, communities, etiquette, etc. happen all the time. Now, I know the Fed is private, but is still hugely influenced and tied to the US Gov. Why can't we have competing currencies in the market? And then we can see what kind systems & rules evolve and come into being. Fiat currency is like a single point of failure.

smokeyj2• 14 years ago

Pure capitalism represents voluntary interactions. How exactly does coercion produce value? Pyramids?

rayiner4• 14 years ago

It's not like there is a spectrum of capitalism with a federal-reserve type system at one end. You need to throw currency into the economy some how. The argument is about how. Doing it at the rate you can mine gold isn't really any more sensible than doing it at the rate the Fed decides to.

ahallock3• 14 years ago

Doesn't have to be gold. We could have many competing currencies. Some stable, some more speculative. Use your imagination.

ef4• 14 years ago

> Doing it at the rate you can mine gold isn't really any more sensible than doing it at the rate the Fed decides to.

Ah, but you're making the false assumption that somebody needs to make this decision, from the top down. But the real alternative is a free market in money itself.

All it really requires is the repeal of legal tender laws and the ability to enforce the settlement of contracts in whatever currency the parties agree to. No need to abolish the Fed or end government-backed currency. Just force them to compete on even footing with anyone else who thinks they can do better.

Monopoly is bad for consumers, and it always leads to abuse. And you don't need monopoly to have interoperability -- especially given our digital technology.

While government currencies would likely continue to enjoy certain benefits (like being acceptable for taxes, and being used to settle civil damages), there's no reason that large swaths of the economy couldn't operate under entirely different currency terms, and trade back and forth across currency regimes through freely moving exchange markets.

cynicalkane2• 14 years ago

So you talk about elegance. Okay, let's talk about that. Maybe this will be more helpful than the usual mud-slinging that comes with these sorts of discussions.

People tend to denominate their contracts in the base currency. In the old system before the Fed, the value of this currency in the US would fluctuate as much as 50% in one year.

It is hard to imagine with what bizarro world economic actors is this an elegant and sound basis on which to conduct trade, that a bank could find that all of its customers suddenly find it 50% harder to pay off their loans, or conversely, that its capital stock is worth 67% (1/150%) of what it was before. Now imagine how that feels for the customers, or shareholders. Imagine a society when the money can come or go in floods and what this means for every contract, every wage, every price.

Why would you want this? So you can satisfy some Rothbardian itch about an "elegance" constraint that means very little in practice?

The Fed tends to target price levels. In addition to being a very elegant basis with which to conduct trade and form contracts (as Milton Friedman pointed out), stable price level targeting has the advantage of actually working out pretty well, unlike 'free market' currencies or fixed standards. NGDP targeting is probably better but that's outside the scope of this discussion...

stretchwithme4• 14 years ago

By what measure did the value of the currency fluctuate 50%? Could you buy 50% more cats with it?

What year were you thinking of?

guylhem6• 14 years ago

The ideas are interesting, but there is one really big suggestion: "we should instead make capital gains regressive over time" - this is the single best idea I've heard recently!

It would encourage self-sustaining growth instead of fly-by-night profits, made in the present at the expense of the future - ie let the market sort out which sectors are more likely to bring better long term outcomes, considering the current focus on short-term is a negative externality that should be fixed by government intervention.

The author also properly acknowledges that increasing tax on the top 1% will only be redistributive, and increase consumption - which might certainly have better effects on consumption than leaving that money to the top 1% who might keep saving it while there is no current shortage of capital.

But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent instead of saved (or paid in tax) - yet as the author points out trading consumption for consumption is pointless given the current state of the economy.

It's quite a interesting time.

It seems like the current situation is not just a demand shock which can be treated with Keynesians stimulus, but a new kind of shock based on a slowdown of the progress of technology - especially of the "empowering kind".

I wonder how this will make us reassume the traditional models such as Solow (technology drives long term growth) or Romer (technology and education), since it now seems there are different kind of technology and education that we should invest in - and some that we should consider as negative externality (like humanities - I have nothing against such studies, but they should not be on the taxpayer dime)

Introduction to Solow model : http://en.wikipedia.org/wiki/Neoclassical_growth_model

Introduction to Romer model : http://en.wikipedia.org/wiki/Endogenous_growth_theory

jacques_chester5• 14 years ago

> this is the single best idea I've heard recently!

Taxes aimed at changing behaviour are generally considered to be bad taxes.

Firstly, you may not like the outcome. Changing the entire time-and-capital structure of an economy is Serious Business and is going to be utterly unpredictable (if it were predictable things would be more stable. They're not).

Now, suppose it turns out to be a dumb decision. For example, say that some unforeseen feedback loop pops up between overdraft facilities and capital now sitting long-term because of tax changes. Suddenly overdrafts become even more difficult for small businesses to obtain and voila, new cash crunch.

Even if it does more harm than good, you've created a powerful constituency for it. Bond market funds, index funds etc are now all in favour of the new tax rules and will lobby with great vigour to keep it.

Now, this is true of every tax ever. But the reason economists counsel against taxing for non-revenue policy purposes is because every tax has externalities that are unrelated to the direct incidence of the tax. You want to minimise those as much as possible.

Incidentally, the tax system already has consequences. For tax reasons that I simply don't understand, Australian corporations tend to be keen on paying healthy dividends and American corporations focus more on driving up the stock price.

> But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent

The Australian experience has been that instead of spending the money, Australians are using it to pay down debt. Fine as far is it goes, but hardly the pump-priming that everyone was hoping for. There has been a seismic shift in debt/spending preferences across the population.

> but a new kind of shock based on a slowdown of the progress of technology

The long term trend of American GDP is stunningly linear[1] (edit: log linear -- actually exponential, I fail graph-reading forever); the only real deviation in the past century has been the Great Depression and WW2, a pair of connected economic earthquakes. We're talking about the 120 year period which included the widespread use of radio, television, highway systems, air travel, computers, the internet, modern medicine including antibiotics ... the list of literally revolutionary changes that quickly become blasé is very long indeed.

Yet what we see today as monstrous fluctuations are within trend. Perspective matters (cue someone talking about the past 5000 years ...).

[1] http://skepticlawyer.com.au/2012/10/27/the-ever-sharpening-c...

mbetter3• 14 years ago

> Firstly, you may not like the outcome. Changing the entire time-and-capital structure of an economy is Serious Business and is going to be utterly unpredictable (if it were predictable things would be more stable. They're not).

I already don't like the outcome of the last change to the "entire time-and-capital structure of [the] economy," which wasn't that long ago, and is due to expire anyway.

guylhem6• 14 years ago

I don't think with the [1] graph that use a LINEAR LOG SCALE for the Y axis we can talk about a LINEAR growth of GDP per capita as you do.

It's more like an EXPONENTIAL increase!!

Also, if you look at the trend, the recent decline is totally unprecedented - except maybe just before the great depression (the small cut over 1914) and during the great depression.

Considering the decline happened even with a very strong stimulus - and was NOT fixed by the stimulus, I guess we have many reasons to be worried about this slowdown in the pace of growth (and technology).

A tax change may not usually be a good idea - just like a keyneysian stimulus looked weird and was even initially though to be damaging during the great depression.

Desperate times call for desperate measures. We are not there yet, but at least having a refreshing new proposal (regressive tax based on the duration investment spending is kept) is IMHO valuable, if only to have another tool we can use besides the traditional "progressive tax+redistribution to increase consumption".

BTW the Australian example you give is quite interesting. May I ask you for some links ?

jessedhillon6• 14 years ago

Taxes aimed at changing behaviour are generally considered to be bad taxes.

By whom?

rndmize• 14 years ago

I don't really see a slowdown in technology - not even the empowering kind. The most obvious example for me would be drones - the military is notoriously slow to adopt new technology, and yet drones have gone from nonexistent to core infrastructure in what, six years? Personal computing had a slow move from desktops to laptops, then a fast move from laptops to smartphones, a faster move from phones to tablets, and now Google is showing off its Glass project - five years after the iPhone and three after the iPad. Saas has exploded in recent years, etc., etc.

The problem I see is that none of this needs to employ many people anymore. How many people does Microsoft or IBM or Oracle employ? Compare that to Google or eBay or Yahoo! - and that to Facebook or Dropbox. Even for physical products, what does it take to "make stuff" anymore? Does anyone think that if Telsa gets to selling as many cars as Ford, they'll employ anywhere near the same number of people? Or have a supply chain that extends to hundreds of thousands/millions of workers?

Technology is constantly replacing human work, but for a long time it was slow enough for people to adapt and find other work. These days I'm less and less sure that's the case.

chubbard4• 14 years ago

Yes he addresses this. If all you do is make things more efficient then you have no where for the displaced to go. That's why transformative innovation is needed and is currently missing. Transformative innovation needs a longer time to grow so it needs longer term investing before seeing a payout hence a retooling of our tax system that favors investment for the longer term.

We know there is a problem related to new job growth, he mentions that its taking longer for our economy to recover from the last recessions. And, he points out exactly what is missing from that economy too.

jacques_chester5• 14 years ago

If I may use a single data point, US fiscal and monetary policy is broken. Compare the US experience with Australia: http://skepticlawyer.com.au/2012/10/29/time-enough-for-succe...

brucehart• 14 years ago

What are some empowering innovations that we can expect to see developed in the next few years? The only one that immediately came to mind for me was 3D printing.

dmritard962• 14 years ago

1. Part of this article reminded me of Jacque Fresco talks (http://en.wikipedia.org/wiki/Jacque_Fresco). Well at least the part about efficiency and the effect on jobs. I am probably just being an annoying futurist but honestly, I don't see employment problems going away. Manned toll plaza's -hah. Self checkout - more and more common. Vending-machine-like fast food chains - not yet but wouldn't be a surprise. Self stocking shelves....blah blah blah. This will take a while but what are we going to do when low to mid skill jobs are less and less needed?

2. I hate to be the consumerism party pooper but I think pointing out that it has been 60 months and we still are not at prerecession levels to be a good thing (ducking for cover). The reason we were at those levels is partly because we were operating unsustainably - spending more than we had (or at least more than we should if we want retirement savings) and giving out mortgages and loans to people that couldn't afford them (obviously there are many more reasons...).

cynicalkane2• 14 years ago

There is no such thing as spending more than we had. The housing boom didn't consist of houses borrowed from a cosmic banker, whom we now have to pay. A nation cannot spend anything it doesn't "have" except by trading with other nations, and trade does not remotely explain the deficit.

As Friedman might say, monetary unsustainability is purely a monetary phenomenon. Even Keynesians know this and in fact that is why they tend to call for higher inflation.

dmritard962• 14 years ago

"The housing boom didn't consist of houses borrowed from a cosmic banker, whom we now have to pay. "

We don't have to pay because people foreclosed and filed for bankruptcy protection.

A nation cannot spend anything it doesn't "have" except by trading with other nations, and trade does not remotely explain the deficit.

When did we start talking about the deficit and why are you suggesting the deficit is related to the economy collapsing/recovering (not saying it isn't)? To be fair, when I mentioned retirement savings I wasn't really thinking public programs, probably should have been more specific.

I think many would agree that irresponsible loans were given to people that didn't have the means to pay them off, especially if (when) the adjustable rates adjusted. If housing prices don't get back to prerecession levels for instance - well I think thats a good thing. People where inflating the markets that they really had no business being in and banks gave them mortgages for these markets wearing a grin...

stretchwithme4• 14 years ago

Capitalism is a system where bad ideas and companies fail. They aren't propped up by government.

The Federal Reserve has been shoveling money into large banks, literally lending trillions of dollars to them at times. Interest-free, of course. Then they lend it the US Treasury. Or leave it in their Federal Reserve accounts and collect interest there.

With such a sweetheart deal, anybody could make a profit. How is it these guys deserve bonuses?

One can only conclude that our government has been completely captured by these guys.

rzreik• 14 years ago

An empowering innovation we can expect int he next 5 years is a shared value business model. One that will free up a lot of the corporate cash of today and bring better returns for business and society. Michael Porter of HBS has been working on an academic framework.

chubbard4• 14 years ago

Man this article has created all sorts of strange discussions. I've watched in on G+, Facebook and now here, and eventually they get soooo derailed talking about odd ball stuff not really related. I guess this means Mr. Christensen is onto something stirring up this much discussion.

One thing is common among all of the discussions which is the fixation on the tax proposal, but I think it was just a swag at what a policy might look like. I thought the real interesting part of his observation is that we are rewarding efficiency innovation too much and transformative innovation almost nothing. Try and develop a new power system not based on fossil fuels and see how much money people want to give you when your time horizon is 10-20 years out. It is the transformative innovation that recreates jobs for the jobs lost through efficiency innovation. I think that is the more important discussion over a regressive capital gain tax. Remember, most entrepreneurship would qualify for preferential capital gains taxation (except for ISO options oddly) because even the efficiency innovation takes more than 1 year to payback.

His tax would mostly affect wall street and the trader mentality: HFT, ETFs, day traders, etc. Remember people buying or selling securities don't actually give companies money directly. Companies only get more money when the issue more shares (or hold their own shares). If I buy a share for 1 day or 10 years the company doesn't benefit at all from my action.

If you look at the green energy movement a few years back was going to be very transformative, but VCs backed off when it was hard to turn a profit as quickly as information technology. It's that kinda of calculus that needs changing if we really want to do what Christensen is outlining.

A Capitalist’s Dilemma, Whoever Wins the Election

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