Wednesday, May 9, 2012

Edward Conard reveals the lies of Romneyomics

This New York Times article gives us a good insight into what Mitt Romney really thinks in an interview with business partner Edward Conard.  Conard's viewpoint explains how Romney can think that wealth inequality is no big deal, and complaints about it motivated simply by envy.  It's because they do not understand how economies work.

Romney and Conard come from  the perspective that economies are powered by investment, not consumption.  This idea was discarded by the economics profession because it was wrong.  The notion the rich have of investment is that it is something they acquired by saving more of their income than other people (virtuously), which is then put to work investing in new opportunities which brings innovation and change. We'll call this the "virtue" version of wealth.  They then compete in bringing new products to the public at cheaper prices, which benefits the public more than it benefits the rich - if they are successful.  According to Conard, insane disproportionate rewards are beneficial because they make people compete to earn them (the "lottery" model of labor competition, where a bigger jackpot causes more people to join the game).

This is a fundamental lie about how economies work, how investment works, how innovation works, how the rich got their money, and about what they did with it.

In all economies, investment  is driven by demand, not capital.  This was the great insight of Lord Keynes in the 1930s and the truth has been never more apparent than today, with the failure of austerity measures in Europe to bring about prosperity. The rich can affect it by distorting investment, but they can't create demand.

Nobody will invest in any idea for which there is not a market, and there is  no market where there is no spending money.  Give a rich man a million dollars and he will buy a nice car.  Give a hundred men $10,000 each and you will sell a hundred cars.  In the second case there is demand to build cars and the rich will find and employ men to build them, and if there aren't enough rich in the country to finance it, overseas rich will be brought in or the financial system will create fiat money to do it.   In the former case, the rich man moves his money to where there is demand, offshore,  which has been the case in the United States in the past dozen years as middle class incomes have fallen.

 When the rich absorb more of the spending money, they reduce the amount of spending money available for consumption demand and therefore the amounts that will be invested and the people who will be employed.  The rich then either send it offshore or waste it speculating on asset values, which leads to the eventual crash of asset prices.   Moreover, when they earn vast amounts that no risk or skill can justify, they lower the value of work and money for everyone.  Fairness is what Adam Smith's mystical "Invisible Hand" was, the idea that anyone's money was as good as anyone else's and people could expect through work to earn reasonable rewards.  Eliminate the fairness and you eliminate the Invisible Hand.  People won't work if the system isn't fair and the rewards few, and increasingly the system isn't fair and people are less and less inclined to  work.  Mormons, on the other hand, believe it is one of God's miracles to make Greed into Good.

Money represents a "store of value," or past work, and those who have earned in the past are not always the best placed to envision or promote the future.  When we tie all our investments to people who have money, and they are increasingly unrepresentative of the public, then their investments will be an increasingly bad fit with what the public wants.  The fewer and richer they are, the more brittle, uncreative, inflexible, stupid and backwards looking their investments will tend to be.  Nothing retards innovation as much as a rich man who thinks he knows technology.

Conard attacks the financial crisis of 2008, which he describes as merely a run on the bank, not caused by mortgages or CDOs.  This shows a simplistic view of the banking system.  If what he says were true, then the government's stimulus would have corrected the crisis immediately and there would be no structural unemployment. Those of us who were alive during the last decade remember it differently.  When the Federal Reserve Act was passed, its board was charged by Congress with ensuring that banks not invest more than 25% of their assets in real estate. The experience of many nineteenth century banking panics had been that banks were all too prone to betting on land prices and neglecting business loans.  Alan Greenspan lost that discipline. In the orgy of deregulation set loose in the financial sector in the 90s and early 00s,  low interest rates and weak demand led the banks to invade the real estate market such that by 2006 the majority of their assets were backed by real estate instruments and the outstanding real estate loans in the nation had increased five-fold.  As long as real estate prices appreciated quickly, banks had more money to lend, and they sucked in money from all over the globe by repackaging risky mortgages and selling them overseas with little off balance sheet guarantees that made 5% risky loans into 5% risk free loans.  When real estate prices began to fall, banks had to mark down their assets, which gave them fewer balances to lend against.  They were forced to stop lending.  Thus, the real financial crisis started in 2007, and it was met by the government with reductions to the reserve requirements and a massive injection to banking reserves of cash in August and October 2007, amounting to a trillion dollars of liquidity. The objective was to keep the banks lending.

The banks should have spent the next year carefully culling their real estate portfolios. Instead, they redoubled their bad habits.  It was the redoubled speculation, combined with a slightly higher mortgage default rate, that led to the collapse. The government guaranteed their actions, and their losses were comparatively slight, but there is no evidence that they learned from anything from what they did, nor did they eliminate the off balance sheet derivatives that their CEO's never understood but which continue to put the worldwide economy in danger. Just week, the Chase CEO Jamie Dimon, paid $23 million last year, admitted to a $2 billion trading loss on a $100 billion derivative bet, a bet of a size that no player in the economy should have been allowed to make.  Chances are Mr. Dimon still does not understand the bet or why it went wrong.

 They continue to reap insane bonuses, they continue to invest in asset bubbles, and they have not restarted business lending within the United States.  There is rather something of a "capital strike" going on by major corporations, who claim they are holding $2 trillion overseas that they would love to spend in America, if only the government would eliminate their taxes.  One clear example of how political gamesmanship is leading to economic suboptimal outcomes was a rejected proposal for special glass for the new Freedom Tower, made in Pittsburgh, which was then planned to be shipped around the world to China to be cut and shipped back, not because China has better glass cutting technology, or because an around the world trip of heavy breakable glass was genius business, but so the company could justify parking its profits in China. The accounting was driving the business instead of vice versa, and that is always a danger sign for an economy.
Fortunately, that plan was scuppered after being revealed on television.

Conard makes the startling claim that entrepreneurs who with very little real effort can become billionaires are underpaid, and if we paid them more we would have many more entrepreneurs.  This is nonsensical.  Ideas to improve society are always ubiquitous, but the limitation is the willingness of people to pay for them, not the willingness of people to work for them.  Moreover, when people try to become say a professional basketball player and fail, while the basketball may be marginally better than it would have been without the extra competition, we now have a large class of people who have failed and do not have skills to support themselves.   In Conard's world of entrepreneurs like gnats, there would be a huge increase in the supply of failed businesspersons who have no means of support.

Society would clearly be better off if fewer people tried to be professional basketball players or famous actors or billionaire bankers and more people learned a different trade like plumbing or installing solar collectors.  Germany invests less than half of what we do on health care and barely half of what we do on education per capita, yet their manufacturing and trade are healthy, they run trade and current account surpluses consistently,  and they employ 5% more of their population than we do. The gambling rich can only be supported at a high level of income if they agree to socialistic support of the rest of society who tried and failed, and neither Romney nor Conard would support that.  To them, failures simply disappear, and there is no reason to wonder who feeds them, where they live, what medical care they might receive, or who pays for it all.

Conard was probably responsible for the Dade International deal with Romney, where Bain paid $400 million for a medical products company that today is worth $7 billion (not a fair comparison since Romney merged the company with two others).. The part Conard leaves out is the part where Bain didn't see that potential in the company and demanded to be bought out.  The loans undertaken for the company's business were diverted to line Bain's pockets, and Dade went into bankruptcy, with the creditors accusing Bain of "unjust enrichment" in court.  It was only after those debts were managed or discharged under bankruptcy that the company has climbed to a worth of $7 billion.  It turns out when they made an investment and the company went bankrupt, Bain Capital always profited.  There is only way that could happen: they either defrauded new lenders who invested or buyers that they sold the companies to.  They only got away with it because the buyers represented the competitors of the companies so stripped and closed.  The plan was to reduce competition and raise prices, not to compete and lower prices as Conard insists.

Conard then takes a swipe at Warren Buffet's charity, saying that the money earmarked for the undeserving poor is money that would otherwise go to the middle class. This unjustifiable slam at charity attempts to turn the middle class against the poor, just as the rich are thought to be more deserving than the middle class.

 Conard then goes into a wildly unhistorical comparison of Europe and the US, saying that Europe erred in turning to socialism, even though European countries have eliminated most of the income gap between them and us which existed in 1945. He then lies about Obama's alleged income redistribution efforts, which so far have not produced any improvement in the income structure of society.  Conard then dismisses crony capitalism as not really something that happens in a large modern economy, a breathtaking thing to say when confronted with Dick Cheney, whose extraordinary wealth is founded only on corruption. In short, Conard makes a very strong case for why Mitt Romney should never be allowed to get within a mile of 1600 Pennsylvania Avenue.  Everything that he thinks is self-serving, ignorant, childish, and dumb.  He is a living advertisement for the fact that wealth and merit are nowhere correlated.

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