Business Roundtable amputates the Invisible Hand

Martin Hutchinson

The Business Roundtable last week produced a 400-page publication claiming that its members should no longer look first to profitability but should follow the interests of stakeholders as a whole, including employees and the environment. This is pabulum we are used to from the titans of Big Business, who are no longer truly capitalist in our distorted low-interest-rate economy. The problem is, that by downplaying the central tenet of capitalism, they may, like the acolytes of central planning, produce hugely sub-optimal economic results.

Adam Smith put best the central truth of capitalism, several times in both “The Wealth of Nations” and “The Theory of Moral Sentiments,” to be an “invisible hand” of the market promoting optimal results. For example: “Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Adam Smith’s “invisible hand” of the market is immensely powerful, operating wherever it is permitted to operate. Even in situations where the market forms only a small part of the overall supply/demand picture, it operates to reduce costs, match prices and expand its coverage as far as circumstances allow. Thus, for example the short-term health plans whose expansion was authorized by President Trump last year, being cheaper than plans bought over the Obamacare exchanges, have expanded their usage far more than was expected. Similarly, the new permission to buy a limited range of drugs from foreign suppliers has reduced drug prices overall, as even a limited free market exerts a salutary effect on neighboring products.

You can see the effects of the free market outside healthcare also. In education, charter schools typically improve the education of children in poor areas, as the local public schools are forced to eliminate unionized sloth and match the offerings of their new competitors. Conversely, authorized private sector monopolies, such as local cable TV systems, have seen their prices increase far more rapidly than other services while their service quality has deteriorated – to the extent that new offerings such as satellite TV and streaming services have eaten at their market share even though with cable already laid they should be far more competitive than oustsiders.

The market only optimizes economic outcomes, however, if participants are economically motivated. You see this from economic outcomes in places where the primary motivation of producers, consumers and governments is non-economic. For example, much of the Middle East is held back by participants placing religious affiliation above the market mechanism. Similarly, many African countries are divided by tribal loyalties, which prevent markets from optimizing within them. Similar considerations must lead us to believe that elevating non-economic considerations above profit maximization will prevent the market mechanism from performing its proper optimization function, leading to outcomes that may be highly suboptimal.

To compete effectively in a modern economy, a corporation must satisfy many of the non-economic criteria that the Business Roundtable elevates above shareholders. Product quality and safety are essentials if it is to remain in business. Employees must be treated decently, or the corporation will not be able to attract good people who serve the customer well.

Environmental considerations must be taken into account, for three reasons: the law requires it, there is often a huge reputational cost from environmental bad behavior, and long-term return maximization requires the company to avoid short-termist exploitation of all kinds. There is reputational and political risk to alienating communities in which the company operates; it also brings long-term costs in that local disgruntlement may make the company’s adaptation to new circumstances unnecessarily difficult.

Every non-market constraint that companies impose upon themselves, or that is imposed upon them, makes their part of the economy less optimal, not only for shareholders but for everybody doing business with them.

For example, President Trump is currently in a battle with the automobile companies, who have happily accepted California’s draconian fuel economy standards, ignoring the looser standards available under Trump’s administration in the other 49 states. From the American automobile buyer’s view, as well as that of the automobile companies’ shareholders, Trump is absolutely right; the unnecessarily harsh standards imposed by the Sacramento soft-brains add about $3,000 to the price of each car, as well as making the cars less safe and worse-performing. When the costs of government are added up, that $3,000 per automobile, entirely without electoral mandate outside California, must be added to them; deviations from pure market principles are frighteningly expensive.

Another government interference with the market that makes its results suboptimal is the Basel system of risk weightings for bank assets. Under that system, devised under the auspices of the the Bank for International Settlements, owned by the world’s governments, government debt of OECD countries is given a zero risk-weighting for capital allocation purposes, while mortgage debts are given a reduced capital weighting compared with ordinary loans.

The result has been that governments, even over-borrowed ones like Italy and Japan, are able to borrow altogether too easily, since their paper requires no capital allocation. Conversely small businesses, lending to which should be one of the two principal businesses of commercial banks (the other being providing a safe, modestly lucrative home for depositors’ money) get very little of the banks’ lending capacity. The cost to the global economy of this vast misallocation of resources has been astronomical, both in overspending governments and in small businesses starved of capital. New competitors in the venture capital industry have emerged for business finance, but they are very expensive, and themselves have several cognitive weaknesses such as an absurd over-reverence for the tech sector.

As discussed in this column, the greatest loss of economic value from ignoring market realities has come from government interest rate policies of the past 24 years, and most particularly since 2008. These have set the real risk-free return on capital below zero for over a decade in most rich countries. Capitalism cannot be expected to work properly without a positive return on capital, and it accordingly hasn’t worked properly for the last decade. The result has been a bidding up of asset prices to insane levels, a debt market that has come to ignore risk completely (so that in Europe there are “junk” bond issues being done at sub-zero nominal interest rates) and a productivity growth malaise in rich countries that has academics bemoaning the end of the Industrial Revolution.

Today there are vast enterprises like Uber (NYSE:UBER), with a capitalization of $60 billion, that lose $1 billion a quarter and achieve even that level of return only by taking advantage of the inability of “gig” economy workers to account properly for the depreciation on their vehicles. Uber is a product of a capital market that has its central price, the long-term risk-free rate of interest, set by dozy self-serving governments rather than by the supply and demand for a money limited in amount either by a well-run central bank or by a Gold Standard.

It is very unlikely that the Business Roundtable’s 400-page tome will do as much damage as the Fed and its sister central banks; for one thing nobody takes that body particularly seriously. It is an agglomeration of very large companies, and very large companies, even at the best of times, are not especially capitalist institutions, as Adam Smith observed 240 years ago. In the past decade, the Business Roundtable companies have been especially profitable, but as Smith gloomily observed “Profitability is always highest, in the countries which are going fastest to ruin.”

It is a sobering thought. Meanwhile the Business Roundtable has joined the Fed, the Basel bank regulators, and the automobile fuel economy standards setters, in attempting to run a capitalist system without allowing the market free rein. Essentially, they are attempting to amputate the market’s Invisible Hand, and no good will come of it.

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What conservatives fight for: Trump gets it
   
One of the left’s big themes is that the president and his supporters are racists. If you need any more evidence, check out the latest column by Byron York detailing how the New York Times is shifting its coverage of the president from Russia to racism.

Trump addressed this absurd claim during his New Hampshire rally Thursday night. Here’s what he said:

Our movement is built on love… We love our family. We love our faith. We love our flag and we love our freedom, and that’s what it’s about… We love our neighbors and we love our country.

It is a beautiful quote, and, of course, it is true. Without any doubt, I know all of you reading this would agree with those words. And he has said it before.

Whether the president intended it or not, it is also a great description of what the culture war is all about and why it is raging with such intensity. This is a fight over the very meaning of America.

Notice there is not a word in the president’s statement that refers to race or ethnic background. The president’s supporters come from every ethnic group. Native-born American, immigrants, blacks, Hispanics, Asians, etc.

We love our families. That has been a huge battleground over the last 20 years. The courts forced a radical redefinition of marriage and family. And I believe the reaction to that decision led more Christians than ever before to vote for Donald Trump over Hillary Clinton.

We love our faith. For decades, the left has been chipping away at religious liberty. Earlier this summer, the Supreme Court was forced to rule on a case brought by some who wanted to tear down a war memorial because it was a cross. We won that case, but imagine how it would have gone if Trump had not nominated the last two justices. In an era of rising anti-Semitism and militant secularism, those who cherish Judeo-Christian values must stand firm.

We love our flag. Of course we do. Sadly not everybody does. The left has been associated with flag burning for decades. (Have you ever seen a conservative demonstration try to make its point by burning the flag?) Some liberal politicians want to drop the Pledge of Allegiance. When Colin Kaepernick disrespected the flag and national anthem, the left defended him.

We love our freedom. Virtually every freedom guaranteed to us in the constitution is under attack by the left. Freedom of speech is under attack on university campuses and online by big tech. The freedom to defend yourself with a firearm and religious freedom are under attack. Economic freedom is under assault by socialists.

It is very revealing that any time the president or any conservative defends these things, the left tries to define our defense as some form of “bigotry” or as somehow racially motivated. Progressives know they are very vulnerable on these issues. And so the only way they can win the debate is to shut it down by linking these values to hatred.

So when the president takes on Colin Kaepernick over the flag, virtually no one on the left says, “The flag doesn’t deserve to be honored.” Instead, they say, “Look at Trump attacking a black man.”

And that brings us to the election.

Much of the Republican establishment believes that the president must make his campaign all about the economy and our economic success. That is a powerful argument for his reelection. Historically, presidents who preside over strong economies win elections, while presidents who preside over weak economies lose.

But tell that to Mitt Romney.

Barack Obama presided over a weak economy and all that Romney talked about was the economy. He ran from cultural values issues like a cat with its tail on fire.

James Dobson and I met with him privately and urged him to stand up for and defend Chick-fil-A. He wouldn’t even do that.

Meanwhile, Obama constantly signaled his position on left-wing cultural issues. Law enforcement is racist. America isn’t exceptional. We owe the world an apology. While all that was jarring to us, it rallied young, progressive voters, which polling shows have some of the lowest patriotic impulses in history.

Thankfully, I have no doubt that Donald Trump understands all this.

Yes, he will trumpet great employment figures, a booming energy industry, rising wages, etc. But he also knows that man does not live by bread alone. He knows that faith and family, God and country are more than just buzzwords and slogans.

I am convinced that no future Republican presidential candidate will be able to win the White House unless they are willing to speak boldly for the silent majority of Americans who embrace the president’s words about faith, family, and freedom.

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Trump's Promise of deregulation

John Stossel
   
President Donald Trump promised he’d get rid of bad rules. “Remove the anchor dragging us down!” he said when campaigning for president. “We’re going to cancel every needless job-killing regulation!”

Trump was a developer, so he knew that the thicket of rules government imposes often makes it impossible to get things done.

But would he keep his deregulation promise? I was skeptical. Republicans often talk deregulation but then add rules. People called President George W. Bush an “anti-regulator.” But once he was president, he hired 90,000 new regulators!

Trump has been different.  When he took office, he hired regulation skeptics. He told government agencies: Get rid of two regulations for every new one you add.

I think his anti-regulation attitude is why stock prices rose and unemployment dropped. Trump sent a message to business: Government will no longer try to crush you. Businesses then started hiring.

Of course, the media wasn’t happy. Reporters love regulation. They call Trump’s moves “an attack on the environment” and on “workers’ health.” The New York Times ran the headline “Donald Trump Is Trying to Kill You!”

What the media don’t get is that regulations have unintended side effects that often outweigh the good they’re intended to do. Cars built smaller to comply with President Obama’s rules that require doubling of gas mileage cause increased deaths because smaller cars provide less protection.

“Should the government tell you what kind of car to buy?” asks Grover Norquist of Americans for Tax Reform in my new video about Trump.

Norquist says that Trump has largely kept his deregulation promise, and that’s been great for America. For example, Trump repealed the Obama-era plan to classify franchise businesses like McDonald’s as one single business. Why?

“The trial lawyers want to be able to sue all of McDonald’s, not just the local McDonald’s, if they spill coffee on themselves,” says Norquist. “And the labor unions want to unionize all McDonald’s, not just the one store. That would have been a disaster.”

Trump’s FCC repealed Obama’s “net neutrality” rule, which would have limited internet providers’ freedom to charge different prices.

Democrats and other regulation-lovers predicted repeal would mean that rich people would dominate the internet. Bernie Sanders even tweeted that repeal would mean “the end of the internet as we know it.”

Of course, none of those things happened. Or as Norquist puts it: “None of it! None of it!”

But some Obama regulations sounded so important. Norquist laughs at that. “The names for these regulations are written by regulators. They’re advertisements for themselves.”

Of course, unlike advertisers, regulators don’t list side effects of their rules, which Norquist says should read: “May cause unemployment, may reduce wages, may raise the cost of energy, may make your car not drivable.”

Trump’s deregulation record would be better were he not so eager to add regulations, such as tariffs, at the same time. “There is a challenge. Trump is a protectionist in many ways,” says Norquist, sadly. “Tariffs are taxes, and regulations on the border are regulations on consumers.”

So are Trump’s “buy American” rules. “That sounds like a good idea, but it’s a dumb idea, and I wish he hadn’t done it,” says Norquist. “That is not deregulation. The good news is that the vast majority of the acts have been deregulatory and tremendously helpful.”

Recently, Trump announced, “We have cut 22 regulations for every new regulation!” He exaggerated, as he often does. The real number is about five. But that’s still pretty good. Better than Ronald Reagan did.

I wish Trump would do more. I wish he’d remove his tariffs and agricultural subsidies and kill the Export-Import Bank, drug prohibition and the onerous rules that encourage illegal immigration by making it almost impossible for foreigners to work here legally.

Keep your promise, President Trump! Repeal 22 regulations for every new one!

Nevertheless, so far, mostly good. Every excessive rule repealed is a step in the right direction: toward freedom.

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For more blog postings from me, see  TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH,  POLITICAL CORRECTNESS WATCH, AUSTRALIAN POLITICS, and Paralipomena (Occasionally updated), A Coral reef compendium and an IQ compendium. (Both updated as news items come in).  GUN WATCH is now mainly put together by Dean Weingarten. I also put up occasional updates on my Personal blog and each day I gather together my most substantial current writings on THE PSYCHOLOGIST.

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