Daniela Earnest at her lemonade stand (left) and in court (right). Source of photo: http://3.bp.blogspot.com/_GGAmzDRA_BY/SnvDbYoMpzI/AAAAAAAAHEg/W1BI2XK8DH4/s400/daniela%2Bearnest.jpg
(p. 5A) THE FRESNO BEE
TULARE, Calif. — Eight-year- old Daniela Earnest made lemonade out of lemons in more ways than one last week.
Hoping to raise money for a family trip to Disneyland, the Tulare girl opened a lemonade stand Monday. But she didn’t have a business license, so the city shut it down that day.
. . .
Tulare officials said they could not recall ever shutting down a lemonade stand before, though such action is not uncommon. Authorities across the nation have done it.
. . .
Daniela found the situation “pretty weird” but said it hadn’t soured her on reopening the lemonade stand.
(p. A15) . . . beyond amelioration and providing the judicial (or in the case of the FDIC, quasi-judicial) procedures for reorganization, there is little more that the government can do to accelerate the unwinding and renewal necessary to put the economy back on an even keel.
The process involves a sequence of negotiations and experiments that cannot be truncated by throwing in more resources. As Frederick Brooks wrote in his celebrated book on software development, “The Mythical Man-Month: Essays on Software Engineering”: “When a task cannot be partitioned because of sequential constraints, the application of more effort has no effect on the schedule. The bearing of a child takes nine months, no matter how many women are assigned.” “Brooks’s Law” suggests that increasing the size of software teams may delay development.
The wide variety of problems and circumstances in an economic downturn precludes the effective use of a single solution. And the federal government doesn’t have the capacity to determine adjustments on a case-by-case basis. The late Nobel Laureate Friedrich Hayek taught that the “man on the spot” with the appropriate local knowledge was much more capable of making good investment decisions than a central planner.
. . .
Suppose that, when the financial crisis broke two years ago, our leaders had shown a Churchillian steadfastness and allowed the normal realignment to play out under a predictable judicial and regulatory regime. The prices of stocks, bank debt and houses would still have crumbled and unemployment risen. Although recovery wouldn’t have been immediate, we’d at least have progress, instead of a sullen paralysis and futile efforts to turn the clock back.
More loans would have been renegotiated and foreclosed properties auctioned off. The FDIC would already be engaged in finding a good home for the loans and deposits of a megabank or two. That agency, now operating with about one-third the staff it had in the 1980s, could also have used some of the bailout money that helped pay for bonuses at AIG and its counterparties to recruit, train and retain more employees.
Best of all, more entrepreneurs and innovators, who capitalize on the opportunities to be found in the midst of turmoil, could have been building the foundations of a prosperous future.
(p. A15) . . . , a compassionate judge would tend to base his or her decisions on sympathy for the unfortunate; an empathetic judge on how the people directly affected by the decision would think and feel. What could be wrong with that?
Frederic Bastiat answered that question in his famous 1850 essay, “What is Seen and What is Not Seen.” There the economist and member of the French parliament pointed out that law “produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.” Bastiat further noted that “[t]here is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
This observation is just as true for judges as it is for economists. As important as compassion and empathy are, one can have these feelings only for people that exist and that one knows about — that is, for those who are “seen.”
One can have compassion for workers who lose their jobs when a plant closes. They can be seen. One cannot have compassion for unknown persons in other industries who do not receive job offers when a compassionate government subsidizes an unprofitable plant. The potential employees not hired are unseen.
“John A. Allison IV, chairman of the banking company BB&T, is a devoted follower of Ayn Rand’s antigovernment views.” Source of photo and caption: online version of the NYT article quoted and cited below.
(p. 1) OVER much of the last four decades, John A. Allison IV built BB&T from a local bank in North Carolina into a regional powerhouse that has weathered the economic crisis far better than many of its troubled rivals — largely by avoiding financial gimmickry.
And in his spare time, Mr. Allison travels the country making speeches about his bank’s distinctive philosophy.
Speaking at a recent convention in Boston to a group of like-minded business people and students, Mr. Allison tells a story: A boy is playing in a sandbox, only to have his truck taken by another child. A fight ensues, and the boy’s mother tells him to stop being selfish and to share.
“You learned in that sandbox at some really deep level that it’s bad to be selfish,” says Mr. Allison, adding that the mother has taught a horrible lesson. “To say man is bad because he is selfish is to say it’s bad because he’s alive.”
If Mr. Allison’s speech sounds vaguely familiar, it’s because it’s based on the philosophy of Ayn Rand, who celebrated the virtues of reason, self-interest and laissez-faire capitalism while maintaining that altruism is a destructive force. In Ms. Rand’s world, nothing is more heroic — and sexy — than a hard-working businessman free to pursue his wealth. And nothing is worse than a pesky bureaucrat trying to restrict business and redistribute wealth.
Or, as Mr. Allison explained, “put balls and chains on good people, and bad things happen.”
Ms. Rand, who died in 1982, has all sorts of admirers on Wall Street, in corporate boardrooms and in the entertainment industry, including the hedge fund manager Clifford Asness, the former baseball great Cal Ripken Jr. and the Whole Foods chief executive, John Mackey.
But Mr. Allison, who remains BB&T’s chairman after retiring as chief executive in December, has emerged as perhaps the most vocal proponent of Ms. Rand’s ideas and of the dangers of government meddling in the markets. For a dedicated Randian like him, the government’s headlong rush to try to rescue and fix the economy is a horrifying re-(p. 6)alization of his worst fears.
(p. A13) Imagine if in the middle of the computer transformation the Reagan administration worried about the upheaval and tried to rescue this vital industry by making huge investments in leading mainframe companies. The purpose of such investments would have been to protect the viability of these companies. The effect, however, would have been to put the brakes on transformation and all but ensure that the U.S. would lose its leadership role.
The government’s investment in General Motors might be directly helpful if the auto industry only had the recession to contend with. But that is not the case. The industry faces the confluence of a world-wide recession, rising fuel prices, environmental demands, globalization of manufacturing, and, most importantly, technological change involving the very nature of the automobile.
Uncreative destruction. “Jose Luis Garcia pours sodium silicate into a junkyard car engine to render it inoperable at a lot in Sun Valley, Calif., on Tuesday. The process destroys the car’s engine in a matter of minutes.” Source of photo and part of caption: online version of the WSJ article quoted and cited below.
(p. A4) WASHINGTON — Who doesn’t like the government’s “cash for clunkers” program? Your mechanic, for one.
Owners of automotive repair shops say the program to help invigorate sales of new cars is succeeding at their expense.
Bill Wiygul, whose family owns four repair shops in Virginia, said he has already had five or six customers decide against repairs. A man who sits on the board of Mr. Wiygul’s bank traded in his car rather than repair it. “He’d been a customer at our Reston store since it opened,” Mr. Wiygul said.
The clunkers program, formally known as the Car Allowance Rebate System, offers subsidies of as much as $4,500 to consumers who trade in older vehicles and buy new, more fuel-efficient models. The program was initially given $1 billion. That money was spent in one week.
The Senate reached a deal to extend the clunkers program Wednesday night, agreeing to vote on a measure Thursday that would add $2 billion to the program, the Associated Press reported.
The House approve a $2 billion extension last week.
For Mr. Wiygul and other mechanics, until now the recession has brought them more customers as people fixed cars rather than go into debt for new ones. He has hired five people and is expanding one of the shops.
Auto dealers who offer the rebates on new cars in exchange for clunkers must agree to “kill” the old models by disabling the engines and shipping the dead vehicle to a junkyard.
The loss of such potential work — as many as 250,000 vehicles will be destroyed in the program’s first round — prompted Mr. Wiygul to question the federal program’s focus on dealers and big business at the expense of the little guy.
“How do we get on the special interests, special treatment bandwagon? How much is it going to cost me and to whom shall I send the check?” he said. “Who picks the winners in this game ’cause obviously the game is fixed.”
Source of graph: online version of the WSJ article quoted and cited below.
(p. A15) . . . , starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
. . .
With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It’s a catch-22.
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.
(p. 67) Through all the centuries of man, there has recurred this same morbid misunderstanding of the nature of wealth and the wealth of nations. Always wealth is seen as something solid and calculable: to be seized and held, clutched and hoarded, measured and inventoried, amassed and monopolized. In the age of imperialism, it was imagined to consist in land and the armies that could acquire it; in the mercantilist era, it was recognized as bullion, gained through a favorable balance of trade; in every period, men have fawned over gems and glitter; in the modern age, fossil fuels and strategic minerals have seemed to be the open sesame, but seekers of wealth still fumble for gold and baubles, and real estate as well.
All bespeak the materialistic fallacy, a fixation of leftists, but a shibboleth also for much of the intelligentsia of capitalism: the idea that wealth is material and collectible, finite and definable, subject to measurement and inventory, to entropy and exhaustion. The way to get rich is to find some precious substance and (p. 68) hold It. Its price will inevitably rise in time as its quantity declines with use. This is the fantasy through which Pierre Trudeau was bankrupting Canada in the early 1980s and the Arab leaders were impoverishing the world and destroying their own future.
Wealth consists not chiefly in things but in thought: in the ideas and applications that confer value to what seems useless to the uninformed. The Arab leaders should learn that they can best enhance the value of oil–and the wealth of oil-producing nations–by lowering its price and enlarging its uses. This is the central rule of riches, understood by every major titan of wealth, from John D. Rockefeller and Henry Ford to the entrepreneurs of modern computers and the industrialists of contemporary Japan. Each gained his fortune not by increasing the price of his product but by drastically dropping it, bringing it within the reach of the creative uses and ideas of millions, and thus vastly enlarging its total value and market.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
(p. 96) While science and enterprise open vast new panoramas of opportunity, our established experts flee in horror to all available caves and cages, like so many primitives, terrified by freedom and change.
Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.
The clip is the famous corporate graveyard scene from Ben Wattenberg’s 1977 “In Search of the Real America: A Challenge to the Chorus of Failure and Guilt.” The scene appears in the first of 13 episodes, the episode called “There’s No Business Like Big Business” which received the Tuck Award for the Advancement of Economic Understanding. The episode was produced and written by Austin Hoyt.
The corporate graveyard scene illustrates that under entrepreneurial capitalism, companies prosper that innovate in better serving the consumer.
Wattenberg discussed the “In Search of the Real America” program, and the graveyard scene, in his recent book Fighting Words:
(p. 307) The central point of the program was that if big American corporations didn’t compete effectively, they suffer, and many would go out of business.
The producers had the wonderful idea of a visual of a graveyard on a foggy night, with headstones made from papier-mâché and a smoke machine providing the fog. I walked through the mock cemetery in a raincoat and read off the names of corporate tombstones, which included Central Leather (the seventeenth largest company in 1917), International Mercantile Marine (the eleventh largest in 1917), as well as failures like Baldwin Locomotive Works, American Woolen, Packard Motor Car, International Match, Pierce Petroleum, Curtiss-Wright, United Verde Mining, and Consolidation Coal.2 When we showed the Central Leather tombstone, a sound effect mooed; behind International Mercantile Marine’s, a steamship horn bellowed (I love shtick).
. . .
2 The program was based on an article by James Michaels, editor of Forbes. For many years, people would come up to me in airports, recalling that one scene and complementing me on the program.
Source:
Wattenberg, Ben J. Fighting Words: A Tale of How Liberals Created Neo-Conservatism. New York: Thomas Dunne Books, 2008.
(Note: ellipsis added.)
(Note: I have corrected a few obvious errors involving the omission and placement of commas in the list of companies in the text of Wattenberg’s Fighting book.)
. . . , Mr. Michaels graduated from Harvard in 1943 with a bachelor’s degree in economics.
(p. C14) KUALA LUMPUR, Malaysia — European consumer groups and nongovernmental organizations have said they want environmentally friendly palm oil. Malaysian producers of palm oil that have made the switch are discovering that it is still a hard sell.
The price premium for palm oil certified as produced through sustainable plantation practices has been shrinking since the first eco-friendly palm oil was shipped to European markets last November, and producers say it may need to disappear if they are to regain business in the key European Union market.
Producers say the difficulty in selling higher-priced sustainable palm oils highlights the double standards of those who criticize the industry but buy the cheaper, uncertified oil that they say is harming the environment.
Daniela Earnest at her lemonade stand (left) and in court (right). Source of photo: http://3.bp.blogspot.com/_GGAmzDRA_BY/SnvDbYoMpzI/AAAAAAAAHEg/W1BI2XK8DH4/s400/daniela%2Bearnest.jpg
