Wednesday, April 21, 2010

Myths About Capitalism

by John Stossel

I won 19 Emmy Awards by reporting a myth: that business constantly rips us off -- that capitalism is mostly cruel and unfair. I know that's a myth now. So I was glad to see the publication of "The 5 Big Lies About American Business" by Michael Medved. I invite him on tomorrow's Fox Business Network show to talk about that.

"You can only make a profit in this country by giving people a product or a service that they want," he says. "It's the golden rule in action."

Medved used to write about the movies, so he's familiar with the businessman as villain. I'll play a clip from the movie "Syriana," in which an oil tycoon makes this ridiculous speech: "Corruption keeps us safe and warm. Corruption is why you and I are prancing around in here instead of fighting over scraps of meat out in the street."

"What's interesting," Medved commented, "is that in the old days, Hollywood would have businesspeople who were very positive: George Bailey, the Jimmy Stewart character, is a banker in 'It's a Wonderful Life.'"

No longer. Today's movie capitalists are criminals or playboys. Apparently, Hollywood writers think it's plausible that CEOs have lots of time to sip cocktails and chase women.

"In school, we all studied a book called "The Theory of the Leisure Class," which ... indicted the leisure class and these people who were out there exploiting other people and really had nothing to do except sit on their yachts and go to their swimming pools and their vacations."

In real life, that's nonsense. "The higher up on the income scale you go, the less leisure time you have. You make money in this country by working hard."

Medved's second myth is that when the rich get richer, the poor get poorer. This is the old zero-sum fallacy, which ignores that when two people engage in free exchange, both gain -- or they wouldn't have traded. It's what I call the double thank-you phenomenon. I understand why politicians and lawyers believe it: It's true in their world. But it's not true in business.

"If you believe that when the rich get richer, the poor get poorer, then you believe that creating wealth causes poverty, and you're an idiot," said Medved. "One of the things that I hate is this term 'obscene profits.' There are no obscene profits ... . (The current economic downturn shows) "that when the rich get poorer ... everybody gets poorer."

Myth No. 3: Government is more fair and reliable than business. "Remember the last time you went into Starbucks, and then remember the last time you went into the DMV to get your license," Medved said. "Where did you get better treated? And it's not because the barista is some kind of idealist or humanitarian. She wants a tip. She wants you to come back to the Starbucks ... ."

But the left doesn't get it. "This is the suspicion of the profit motive -- the idea that if somebody is selflessly serving me, they're going to treat me better than somebody who wants to make a buck," Medved said. But "(i)f you think about it in your own life, if somebody is benefiting from his interaction with you ... it's a far more reliable kind of interaction than someone who comes and says I'm in this only for you."

Myth No. 4: The current downturn means the death of capitalism. "Capitalism is alive and well," Medved said.

I'm also bugged when people argue that today's problems prove that capitalism "failed." What failed? We had a correction. A bubble popped. But from 1982 to now, the Dow rose from 800 to 11,000. Had it happened without the bubble, we'd say this is one of the great boom periods.

Medved added: "This is one of the biggest lies -- the idea that because of capitalism, we're all suffering. ... Poor people in America today, people who are officially in poverty, have a higher standard of living in terms of medical standards, in terms of the chances of going to college, in terms of the way people live, than middle-class people did 30 years ago. It's an extraordinary achievement of technology and of the profit sector."



Regulations are made to be evaded

Igor Volsky at WonkRoom has just discovered that when you arbitrarily set restrictions on what sorts of expenses companies can take, they will arbitrarily reclassify those expenses as something else. Specifically, government officials think it would be nicer if insurance companies spent a higher percentage of their revenues on medical care rather than administrative overhead.

Without particularly investigating whether this was sound, or even possible, they enacted a rule dictating that the "medical loss ratio" had to be a fairly high percentage of revenues. Predictably, companies are reclassifying administrative expenses as medical in order to make their numbers.

Now, maybe this is an example of evil companies struggling to hold onto their profits. But you certainly couldn't prove it by Volsky's post. He seems to confuse administrative overhead with profits, and further seems unaware that overhead (apart from profits) is usually higher when dealing with a lot of small clients rather than a few big ones. He refers to the MLR rules as "one of the few ways to prevent insurers from earning outrageous profits before most of reform's provisions kick in", even though the health insurance industry isn't particularly profitable.

It is true, of course, that profits are part of the overhead targeted by the medical loss ratio rules. But it does not therefore follow, as night to day, that if you raise the percentage of money that you spend on treatment, you lower profits. It certainly doesn't follow that you lower profits the way you want to--by taking money from greedy executives and giving it to nice folks seeking treatment--rather than, say, by forcing companies with high overhead out of the market entirely.

He seems blind to the other obvious way to meet your MLR requirements: stop searching for fraud on either the customer or provider end, and let costs balloon. If you stop paying attention to controlling costs, your overhead goes down, especially relatively to your costs. Normally, this is a recipe for bankruptcy, as your competitors undercut you. But when your competitors are all subject to the same rule requiring them to let this happen....

Given how much focus reformers put on controlling health care costs, reclassifying administrative costs as medical expenses is probably a positive development.

I'm generally annoyed by conservatives who claim that Washington is full of pointy-headed wonks who have never held a "real job" . . . but I do think that the most dangerous weakness on the pro-reform side is a broad ignorance of how companies actually work.

There seem to be a lot of assumptions that are intuitively satisfying, but blatantly silly to anyone who has ever managed a company (or spent much time talking to those who do). The assumption that lower overhead is invariably better is one of these, but not the only one. Others include a fairly persistent confusion about how companies make investment decisions, and how capital markets work; the belief that price rationing and government rationing are somehow economically equivalent because they both contain the word "rationing"; and the belief that having more the one product in a market is obviously wasteful "me-too" competition which is bad for consumers.

It's a dangerous weakness because it leads them to an extremely simplistic model of how companies work, and I think it makes them believe that they can mandate a lot more than they really can. The pro-reform side has been at its best in describing market processes that look a lot like what happens in government programs--things like adverse selection, and bargaining with providers. But when you have to add in processes that don't look much like what the government does--things like capital costs and investment decisions*, competition, and price discovery--their mental models often seem suspect.

I suspect that's going to be a big problem as we go forward, particularly when it comes to controlling costs.

*Before you rush to tell me that the government does too make capital investment decisions, let me just say that the government capital investment process simply looks virtually nothing like what happens in a company. Just try to imagine calculating an IRR on a highway.



Democrats Hate That Tea Parties Are Peaceful

Former President Clinton reminds us, on the 15th anniversary of the bombing in Oklahoma City, to police our discourse so as not to incite the "delirious" and "unhinged." Timothy McVeigh, he notes, "took to the ultimate extreme an idea advocated … by an increasingly vocal minority: the belief that the greatest threat to American freedom is our government … "

This is only the latest and most high profile installment of a long-running campaign by Democrats to malign their opposition. It worked very well for Mr. Clinton in 1995 -- the baseless insinuation that right-wing radio hosts had ignited murderous rage with their intemperate rhetoric -- and he's reaching into that seedy toolbox again.

By citing "the belief that the greatest threat to American freedom is our government" as the chief motive of murderous terrorists, the former president implies that resistance to government overreach and encroachment is illegitimate; the province of extremists.

There are two problems with this. First, it is perfectly true that government can be a threat to liberty. This is so obvious that it hardly bears rebutting. Two examples: Alien and Sedition Acts, internment of Japanese Americans. No one understood government's capacity to constrain freedom better than the Founders, who designed a system so diffuse and balanced that power would be difficult (though not impossible) to abuse.

The second problem with Mr. Clinton's intimation is that his pious concern about a "vocal minority" protesting government threats to freedom was nowhere in evidence during the Bush administration, when many liberal commentators were caterwauling that President Bush was "shredding" the Constitution. A "vocal minority" certainly believed that the government was the greatest threat to American liberty (they thought Bush a far greater threat than Islamic extremism) -- but their saying so didn't trouble Mr. Clinton.

Nor was Clinton moved to speak out when anti-Bush protestors labeled him the world's "worst terrorist" and carried posters of the president wearing a Hitler moustache.

You can delegitimize all political speech you dislike by suggesting that it may inflame the violence-prone. The press attempts this again and again. Rather than openly debate, they smear. The 1994 election, which unseated the Democratic majority, was described by the press, without any evidence, as the eruption of "angry, white, male" voters. One fan out of 8,000 at a McCain/Palin rally was reported to have shouted "Kill him" in reference to Obama. Rafts of stories dwelt upon this revelation of the "ugly" side of Palinmania. A later investigation found no evidence that it had even happened. And of course the tea party movement, a spontaneous, widespread upwelling of grassroots dismay at the direction of government policy, has been falsely and savagely maligned as racist, violent and primitive. (The best poster spotted at a tea party rally: "It doesn't matter what I put on my sign because you will accuse me of racism anyway.")

Actually, Democrats are reduced to warning that certain attitudes can lead to violence because there hasn't been any actual violence at the tea party rallies. All have been remarkably orderly and even friendly. You can almost feel the Democrats' frustration at this.

By contrast, many, many left-wing protests and demonstrations have sparked violence. Just last year, at the G-20 meeting in Pittsburgh, rampaging protestors broke shop windows and scuffled with police, who used batons and tear gas to subdue them. A 1999 meeting of the World Trade Organization in Seattle was so badly disrupted by anti-globalization fanatics, who smashed windows and shut down the center of the city, that the governor had to declare a state of emergency and call out the National Guard. (President Clinton failed to assail those who criticize corporations as inspiring the violence.)

In 2007, several hundred protesters who descended on Washington, D.C., during the International Monetary Fund meeting turned over trash cans, smashed windows, threw bricks, and pushed a police officer off her motorcycle.

In 2008, as John Hinderaker of Powerlineblog recalls, anti-Republican protesters at the convention in St. Paul: "threw bricks through the windows of buses, sending elderly convention delegates to the hospital. They dropped bags of sand off highway overpasses onto vehicles below." The violence was only fleetingly covered in the press and went unmentioned by leading Democrats.

Republicans have been very quick to condemn violent acts or even intemperate words by right-wing individuals or groups. They've even condemned some that didn't happen -- like false account of racial slurs shouted at members of the Congressional Black Caucus. While it's important to police one's ranks, it's also necessary to expose the Democrats' persistent and malignant libels.




Americans down on federal government: "Already wary of the federal government, Americans have grown even more critical, less trusting and even fearful of Uncle Sam since President Barack Obama took office, according to an exhaustive new study being released Monday. The in-depth poll found Americans not only rejecting the idea of an activist government, but a growing number urging that its power be curtailed. The findings reinforce the anti-big government message of tea party rallies and suggest anew that incumbents, particularly Democrats, face a strong headwind in this fall’s elections for control of Congress."

Value-added tax would be a big disaster: "The idea that the Obama administration wants to make the United States more like France can no longer be considered a black-helicopter conspiracy theory concocted by Tea Partiers and ‘right-wing extremists.’ It is, in fact, a serious possibility. White House adviser Paul Volcker went on the airways recently to resurrect the idea of implementing a value-added tax (VAT). He did this after the president signed a massively expensive health care bill that will soak ‘the rich,’ tax the Jersey Shore’s tans and add other burdensome taxes and regulations.”

Media sensationalism obscures the facts: "It isn’t unusual for a TV reporter to get his facts wrong. It’s rarer for the images that accompany his dispatch to flagrantly contradict what he says. But on January 21, broadcasting in the aftermath of the earthquake that devastated Haiti, CNN correspondent Ivan Watson fretted about ‘chaotic crowds’ as the camera showed people who were calm and patient. When Watson announced that we were watching a ‘chaotic scramble’ onto a rescue ship, this was illustrated by a group of refugees carefully, methodically passing a baby onto the boat. Then, while more men and women peacefully loaded their luggage in the background, the reporter asked the ship’s owner his burning question: ‘Has anybody offered you any help with crowd control of these thousands of desperate people?’ Bizarre as the report was, it was only an especially egregious expression of beliefs that have taken hold in far more places than just CNN.”

Justice and commercial crime: "The very institution of government regulation of people in business is flawed — it involve[s] what in other contexts is considered impermissible prior restraint. Just because a business might do something untoward, it is deemed a valid target of prior punishment or imposition of burdens. In the criminal law this is nearly uniformly resisted and condemned. Just because one might do harm to another–is rumored to be planning such harmful conduct - -it doesn’t mean one may be imposed upon via some kind of criminal sanctions. Due process requires that the suspect be shown to be guilty, not merely feared to be so.”

That terrible “we” again: "Sure many people I know are concerned with their economic situation, especially over the last couple of years. But who wouldn’t be, what with the recent evidence mounting that all the government meddling in the country’s commercial life since the early 1900s has produced little else than irresponsible government plans and, recently, endless purchases of homes, massive deficits and debts, and whatever else can go wrong with a macroeconomic system. None of this is about you and me — any kind of ‘we’ — but about quite specific people, officials in various parts of the federal and state governments, parts where politicians and bureaucrats basically spend other people’s resources and take it upon themselves to rearrange the world guided by their own murky utopian vision.”


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