Posts Tagged ‘schumpeter’

Small Businesses, the Engine of Economic Growth

Monday, August 15th, 2016

Dear Friends,

It seems to me, the barriers to starting a small business have never been higher, as evidenced by the dearth of small businesses that are starting up. This is critical because the economic potential of any economy is a factor of the number and quality of small businesses that start in a given time period. That is because small businesses are the engine of economic growth, both by being the font of innovation, which begins the Schumpeterian cycle of economic growth and as the biggest job creator there is. If the economic cycle is stopped real economic growth stops too. Economies cannot grow organically without innovation, big businesses are not innovative nor is government. Universities can help by advancing science, but if those advances cannot be implemented, the economy cannot get a boost from even the most amazing scientific advance. Without robust job growth wages stagnate and decline, lowering economic overall demand and demand for innovative products, as well as our standard of living. The trend bodes ill for our children’s economic well being.

The economic cycle as explained by Schumpeter is a three phase system… creation, implementation and destruction, Schumpeter’s creative destruction. First an entrepreneur comes up with an innovation, for a new product, an new way of organizing business or a new way of manufacturing. This innovation starts the upswing of the cycle. The new idea is implemented creating demand for labor, plant and capital to exploit it. As the idea is implemented the economy grows dramatically. Once the idea has been fully utilized, the old products and ways of organizing business become obsolete… and so go bankrupt. As they go bankrupt the economy goes into recession, lowering the cost of capital, plant and labor opening the way for a new entrepreneur to innovate starting the cycle again.

Small businesses create all new jobs. Clearly, those who innovate and those who work for innovators, by definition, have no experience. After all it is new. So, people who have little experience get pulled in to work at those new businesses, creating opportunities for new workers and laid off workers. The extra demand for labor drives up the cost of wages via the supply demand equation. Wages for everyone goes up driving up demand for everything… especially the new product, (if that is the source of the innovative part of the cycle). If older companies want to retain their best workers those older firms must provide competing wages. Ford famously said he wanted to pay his workers enough to buy one of his cars. To him, paying more in labor was a small price to pay when that investment paid such huge dividends, by driving up demand for his product. In other words he made less per unit but made more in the end because he sold many more units.

When the economic cycle of innovation, expansion and destruction is tripped up, an economy cannot expand organically and in fact shrinks in real terms. This stagnation can be covered up by money printing, government spending and Enron accounting but sooner or later the chickens must come home to roost. The largest and most destructive recessions and depressions have been a result of this in action. The Great Depression started as a recession, but morphed into a depression by Hoover and FDR’s policies, that short circuited small business creation. The Great Depression would have never ended if not for the death of FDR and his policies crushing small businesses in favor of corporations. Obama’s policies have all but stopped small business creation, resulting in the present depression, one that only in the history books to be written, will be named and recognized.

Think about it, with all the legal and bureaucratic red tape today throughout the West, would you start a small business? The legal cost alone, simply to get permission from the government to start a lemonade stand, is nearly insurmountable. Today the cost of capital is at an all time low even as the availability of capital to start a small business is dried up. Cheap money via the Federal Reserve’s printing press only goes to government and corporations. Government spends that money to artificially gin economic growth and corporations are using it to buy back stock, thereby enriching upper management at cost to shareholders, employees and customers. None of the “cheap” money is going to innovators. Meanwhile, plant and equipment is getting more expensive every day, raising the bar for starting a small business.

While stopping small business creation damages the interests of the people… it advances the interests of the elite. CEOs can pad their plentiful income by artificially boosting their stock price in the short term, by borrowing money and spending it to buy back their stock, corporations face less competition from innovators making the job of the new class much cushier, government cronies get huge political contributions to keep the gravy train running, and corporations get to lower their labor costs because of the drop in demand for labor. This lack of demand for labor or is exemplified by the dismal percentage of people still in the labor force. Crushing small business start ups is a win win for the elite and a loose loose for the rest of us. Of course, it is the elite that make policy and we that must live the effects of those policies, for better or worse. Now you know the whole story… the economic truth the elite will don’t want you hear.

Sincerely,

John Pepin

Billion Dollar Business Idea

Thursday, May 28th, 2015

Dear Friends,

It seems to me, a smart business idea that could net someone millions, and perhaps billions, is a website that reads and posts a simple to read synopsis of every shareholder’s report, briefly describing any changes the board wants to make, the likely consequences to the company and profits short and long term of those changes, an easy to read and understand report on any election to the board of trustees regarding their background, philosophy of corporate governance and work history, those synopsis and reports would be written for every firm with over one hundred million in gross revenue, and for a nominal fee that synopsis could be read by any shareholder of those companies. Companies that are ethical would offer to pay for the service for their shareholders. To get that done, such a company needs to become well known, create simple to read, correct and understandable reports and synopsis, as well as the intellectual capital to make it work. The potential earnings of such a company are staggering.

If there was such a company it could be a paradigm shift in the principle agent relationship. Today the agents have all the power. They send shareholders a several hundred page document that we are supposed to read and understand, that is in arcane language, redundant and actually says nothing of any import pertaining to the question they want us to vote on. That paradigm has created a lop sided power relationship between the principles and agents. That lop sided power in the relationship has allowed many companies to be run against the shareholder’s interests and have enabled senior management to get an out sized portion of the profits. I mean really, what employee is worth tens of millions of dollars, while running a company into the ground?

Empowering the principles to over see the agents can only lead to protecting the principle’s interest and limit the power of the agents to abuse their position. The power differential in the principle agent relationship has been used for over a century to enrich the senior management at cost to the shareholders and customers. Examples abound where shareholder profits and wealth have been undermined by management. One famous case was when J D Rockefeller bought an iron company, converted it into a publicly traded company, sold the shares for double what he paid, and remained as the CEO, reaping even more profit at the expense of the shareholder chumps.

Such a rebalancing of the principle agent relationship would create better run companies that would have a better relationship with their customers. Everyone is self interested, which is to say we all seek to maximize our returns on our investments. Economists call human beings rational maximizers. Clearly, since we are all self interested, if given actionable knowledge, we would seek to increase the longevity of our assets, seek long term profits instead of short term gain, provide excellent quality service and products to our customers while ensuring the company’s business model is consistent with the times. In short, instead of our agents working under pernicious incentives, we could return the entrepreneurial ethos to businesses.

If the principle’s interests are protected and the companies themselves are better run, the macro economy will improve, by potentially starting a new wave of Schumptarian economic expansion. Schumpeter coined the term, “Creative Destruction,” to explain the macro business cycle. In it, he posited… a new idea that improves efficiency in management, production or product, starts the business cycle. In the creative part of the cycle, as the new idea is implemented, the macro economy grows at a rapid pace. Once the idea is mostly implemented and the gains have been mined out, the old firms that have become outdated go belly up, ushering in the destruction portion of the business cycle, (recession). The recession destroys inefficient firms, freeing up capital, space and equipment for the next entrepreneur to begin the cycle again.

When a new firm is started, the more disruption it creates the more profit there is to be had, especially in the financial services sphere, where the sector is awash with other people’s money. As in any innovative idea that is disruptive, starting a business that reads and produces synopsis of every firm’s shareholder reports, board of trustee elections and board of trustee requests, would be a sea change in the way shareholders get information about the firms they own, by leveling the information landscape. In and of itself such a firm would start the creative cycle. Such a firm would need a great deal of startup capital to hire the necessary lawyers, MBAs and knowledge base to make such reports, and do it inside the regulatory framework that has been set up by the agents to protect their interests, or to change the regulatory environment if needed. The initial cost would be high, but the profit over the long term, the benefit to shareholders and the economy at large, would be tremendous.

Sincerely,

John Pepin

Tesla, Crony Capitalism and Creative Destruction

Thursday, July 31st, 2014

 

Dear Friends,

 

It seems to me, an excellent illustration of political favor at work, the type of political favor that is destroying our economy… is the scuffle between Tesla Motor Cars and the Dealerships in New Jersey. Everyone agrees it is about politics and we also tacitly agree the question will come down to which side has the most political favor. Free market consideration is not made at all. This small set to, between the dealerships and Tesla over whether Tesla can sell it’s cars directly to consumers, is all about stopping the free market from innovating and to protect the profits of politically connected dealerships. The best interests of the consumer is not even at question! No one in the media cares if the consumer is hurt or helped by direct sales, only which side has sufficient political favor to push their argument through the New Jersey legislature, because that is all that really counts. This is very damaging to our economy, because the interest of the people is not even a factor, simply the will of the political elite. This shows how far from free market principles we have strayed. Your job, wages, benefits and standard of living are in the balance, but bear no weight on how it turns out.

 

Tesla wants to sell it’s cars directly to the consumer, bypassing the traditional dealership network. The dealerships have asked a court to force Tesla to sell their cars through dealerships and as a result Tesla doesn’t sell cars in New Jersey. Tesla has gone to the New Jersey legislature to get a law passed allowing them to sell their cars direct to consumers. Of course, politics came into it as soon as the smell of money wafted around, and justified by the fact Tesla wanted to do something different then is traditionally done. Because, as Milton Friedman said… when a firm faces competition that sells it’s products at a lower price and better quality, the firm can increase it’s quality and lower prices, or it can go to the government to force the competition closed. That is exactly what the car dealerships have done, they went to government to force Tesla to use them, to protect their profits.

 

The problem is that this strategy always results in stifling innovation, which has a profoundly negative effect on present, and especially future GDP growth, due to the compounding effect of past growth, or lack of it. Schumpeter coined the term, “Creative Destruction” to explain the cycle of growth under the capitalist mode of production. He explained that, as a new idea is implemented, units of production are drawn into realizing that new idea. This results in GDP growth, as more labor, productive facilities and ingenuity are utilized. As the innovation matures, the old systems that are rendered redundant go bust. They go out of business and the recession part of the cycle comes in. As the cost of the units of production become cheaper due to the recessionary pressures, a new idea becomes possible to implement, starting the virtuous cycle again… unless it is short circuited by well meaning but pernicious government programs to protect older more established firms from competition, (like is done in Japan…).

 

The best way would be to let the free market sort it all out. If Tesla’s plan results in angry customers then Tesla will retreat to the traditional strategy of using dealerships to sell it’s cars. Considering the recalls recently on Tesla cars, this might have proven the dealerships argument, without having gone to court and enriching lawyers for nothing. We’ll have to wait and see how the consumer reaction is to how the recalls are handled. If Tesla’s plan does work however, it will have staked out new ground undermining the market reason for dealerships to exist, which would incentivize other companies to stop using dealerships. Either way the market will show the efficiency of the present system or the potential innovative efficiency that could result in creative destruction. With the oceans of paperwork, regulations and political favor that is needed to cross before an innovation can be implemented, the innovative part of the business cycle is drowned.

 

As government policies smother innovation creative destruction is stymied. Lower present GDP growth can be expected, and will be magnified over time due to the effect of compounded growth. That damage to the innovation process by government derails the creative part of the creative destruction by protecting the firms that would face destruction, and so to keep the old inefficient crony capitalism going government destroys the very mechanism of growth of the capitalist system, and by doing that, they lower everyone’s standard of living… but the political Elite get a ton of money and power by doing it.

 

 

Sincerely,

 

John Pepin

 

Today’s Federal Reserve Meeting

Thursday, June 19th, 2014

 

Dear Friends,

 

It seems to me, economists have been predicting three plus percent GDP growth since Obama came into office, and all their predictions have been wrong. The US GDP has stagnated for over five years despite the huge recession we were in when Obama came into office. Today, the Federal Reserve danced around the obvious, and all the economists Bloomberg radio interviewed, provided the dance partners. Yellen claimed the economy will achieve liftoff once we get by this latest slow patch and will exceed long term economic output… next year. This, despite all the previous predictions that have said the same thing, and have been wrong. I guess if they predict it enough, eventually it will come true, like if I predict a solid gold meteor will land on my property making me rich… long enough, it will happen. At some point however, this ceases to be a prediction, and becomes instead wishful thinking.

 

Typically, immediately after a recession economic activity rebounds strongly for a year or two, but the recovery from the 2008 recession didn’t. The reason economies typically rebound strongly after a recession is due to the fact that the units of production become cheap. Labor rates go down, interests rates plummet along with the cost of plant and equipment. The destruction of outmoded firms drives down the costs. Lower costs of the means of production give those with new ideas, the ability to implement those ideas, resulting in the virtuous cycle of economic growth. This is the creation part of creative destruction.

 

This last recession had it’s share of what, at he time, were called “Vee shapers.” They were largely those economists in Obama’s political camp, who eschew the Schumpeter model of the economic cycle, creative destruction, and instead favor the Keynesian, aggregate supply aggregate demand model. They thought that since interest rates had been so suppressed by the Federal reserve, government was spending such tremendous amounts of money, in the form of stimulus, and their man was in, demand would go up and the economy would rebound very strongly, resulting in a V shaped recovery. We found that they were wrong… it was more of an L shaped recovery.

 

The economy dropped like a cow chip. Instead of rebounding it stagnated despite the record amount of stimulus. Trillions of dollars were spent by the government, what is called fiscal tailwinds, spending that drove up aggregate demand, but did nothing for the average man and woman. Interest rates have been extraordinary low for half a decade now with essentially no real GDP growth to show for it. Inflation has been alarmingly low as well despite the record monetizing of government debt that the Federal Reserve has done. Pimco has named the recovery, or lack of one, the “New Normal,” now the term has become the “New Neutral,” but by any name a skunk is a skunk. The labor participation rate has fallen off the table, GDP growth hasn’t even reached normal levels, let alone takeoff velocity, and the Federal Reserve along with most of the central banks of the developed countries have followed along and monetized their debt… to no avail.

 

The one exception is Britain who instead embarked on a policy of fiscal austerity. Economists the world over warned that Britain would suffer economic Armageddon as a result. They were wrong. Today Britain and Germany are the only developed countries that are experiencing real economic growth at all. Since their economies are too small to be the engine of the world’s economy, the world is left with America as the little engine, that couldn’t. The developing countries have stalled as well due to the lack of an engine pulling the train.

 

What everyone in the economic community are dancing around, and trying their best to ignore, is the tsunami of regulation that washed over the US economy in 2008-2009. That tidal wave of regulation continues flowing in to this day. Obama care was a thousand page law, one that has fluffed up to tens of thousands of pages of arcane regulation, hindering economic growth in a myriad of ways. It has driven up the cost of labor dramatically, without a penny of it going to workers. That increase in the cost of labor is still rising even today from Obama care! The incentives of that single piece of legislation has directly resulted in lower wages, terrific job losses and a cost of labor that is unpredictable. Dodd Frank was meant to eliminate the problem of too big to fail but has made that problem even more intractable than ever. It is driving small banks out of business, and pushing large banks to get larger, exacerbating too big to fail. In short Dodd Frank has failed. Environmental regulation has skyrocketed under this administration. But these are only the top waves of the tsunami.

 

These problems that regulation has created cannot be worked through with low interest rates, we have had a low interest rate policy for 5 years, and it has failed. No amount of new regulation can solve the problem of too much regulation, it’s like trying to heal a burn, by burning yourself more. The long term unemployed will not be solved by importing millions of low skilled labor, sopping up the few jobs that are still available, and raising the minimum wage will only drive down the demand for those low skilled jobs in the first place. Dancing is all well and good, but when the elite dance around the problems they created, simply to protect a President and theory they are in love with, all of us suffer. Any alcoholic can tell you, the only way to solve a problem is to recognize it, then roll up your sleeves and actually fix it. Unfortunately, that is not on the Federal Reserve’s dance card.

 

 

Sincerely,

 

John Pepin

 

Socialist’s Hypocrisy

Thursday, August 22nd, 2013

Dear Friends,

 

It seems to me, socialists never seek to live under socialism, they want the rest of us to. To a man, or woman, socialists always want others to live in their social laboratories, like lab rats, in their notions of the perfect society. From Rousseau’s social contract [of indenture], to Joseph Schumpeter with his authoritarian socialism, none of them ever wanted to live under a socialist regime themselves, but explained in treatise after tome that we should live under socialism. Knowing the old adage, one should never eat food the cook himself won’t eat, this certain knowledge about socialists is more damming than any economic theory trouncing ever could.

 

Marx went on and on about the Bourgeois mode of production and the tyranny of the workers, but in his personal letters, what he himself really wanted, was to live as the elite did in his day. His wife complained about having to nurse her own child, since they could not afford a wet nurse, and how unfair that was. I maintain that Karl Marx was too lazy to work for a living and sought the patronage of Engels so he wouldn’t have to. Clearly, Marx would have recoiled at living in a society where he had to work every day in a mindless job, else face certain punishment by the authoritarian state. Not unless Marx was the authoritarian.

 

That, my friends is the rub, all socialists want to have a socialist state, but they all want to be the authoritarian… not the plebeian. Take Bernadine Dohrn and Bill Ayers. They planted bombs that maimed people in the 1960’s in the US. (Now they are college professors teaching your children). When asked by an undercover FBI informant, “What will we do when we take over?” Bill Ayers replied, they would install a communist state of course. When prodded that many wouldn’t just go along, Bill Ayers responded, he would have to kill about 25,000,000 Americans. This was said in a cold blooded matter of fact tone! Imagine his indignation, at having to submit to execution by someone else, for his political beliefs! What epic hypocrisy!

 

Joseph Schumpeter, who famously said, “Can capitalism survive? I think not…” devoted most of his book, Capitalism, Socialism and Democracy, to advancing the notion that socialism is not only possible, it would be quite easy to implement, and would achieve at least the level of production of a similar capitalist nation. The USSR was active then, and never stopped immigration, only emigration, and so… Schumpeter was able to move to his socialist paradise any time he wanted. Moreover, as a noted economist, Schumpeter would have been awarded a hansom professorship in a prestigious Russian university in Moscow… But he didn’t.

 

I could go on all day with examples of the blatant hypocrisy of socialists but no use belaboring the point. This latest crop of socialists we have in government, are righteously outraged even to pay lip service to Our Constitution, let alone knuckle under to their own laws… that is for us to do. They poison the economy with crony capitalism and strangle it with bureaucratic regulation, then spuriously claim, capitalism has never worked! They expect the rest of us to forget the last 500 years of human history in general and the last 100 in particular. Socialists in the US government show, by their actions (and rhetoric when in certain circles)… they seek a socialist society, but I ask you, if they truly believe in it, or are just as egoistically self serving Machiavellians, as the examples I have mentioned… why did they all write themselves a loophole to get out of Obama care?

 

 

Sincerely,

 

John Pepin

Economic Circadian Rhythms

Thursday, February 21st, 2013

Dear Friends,

It seems to me, the boom bust cycles of all market economies, are like the sleep wake cycle of human beings, and all higher life forms. We must have times of rest, else we become less efficient, and an economy needs a rest period after a time of rapid expansion. Most people would agree that human beings need sleep but those same people are unaware that economies, being complex systems like us, need rest cycles as well. To ignore this fact, insures that our economy will under perform eternally, to our personal economic misfortune.

People can be forced to stay awake for days at a time. There are many ways to do this, drugs, cold water and electric shocks are but a few. As we are kept awake for longer and longer periods of time our performance diminishes. This is a scientifically proven fact. Methamphetamine is very good at keeping people awake, and it even boosts performance for a while, but the lack of a rest period eventually catches up, and we experience a crash. Human physiology is unbending in this… ask any doctor.

Many means have been devised to do away with the boom bust cycle of market economies. The federal Reserve was implemented under Woodrow Wilson to end recessions for all time. It has not only failed… it has failed miserably! The recessions under the federal reserve mechanism have been harsher and longer then they were before the federal reserve system was set up. But, as with all government programs, the more they fail the more permanent they become. Failure ensures longevity for bureaucracy.

Another means to stop recessions was proposed by Karl Marx. He claimed that socialism would end the boom bust cycle of the capitalist mode of production. This has had some success. Socialism has stopped the boom bust cycles in all countries that have fully implemented it. The drawback to this scheme, is that it eliminates the boom… and permanently enshrines the bust. Perpetual bust is not very effective at raising the standard of living of the average man and woman. It is far more effective at lowering the lot of the people and elevating the lot of those in power.

Once a market economy has seen a period of rapid growth, the new means of production, organization and products that come about in a period of expansion, need to be matured. These new ways of doing business drive the old ways into bankruptcy. Recession is a chance for the old ways to be destroyed and the new means entrenched. Schumpeter coined the term, “Creative Destruction” to describe this paradigm. In this concept, new more efficient ways of doing business have to be paid for, and the old ways have to be dismantled, for the next cycle to begin.

If there is not a time of rest for an economy, the old less efficient ways cannot be plowed under, in favor of newer more efficient means. In fact, the implementation of newer more efficient ways are hampered by those very programs, that seek to eliminate recession. It is usually during recession that new ideas are invented. New ideas that generate the next economic expansion.

History shows that whenever government is the most involved in the market outcomes are the most impaired. We can experimentally examine many people to prove that the sleep cycle must not be disturbed. Over time, examining many people, this has been empirically proven. However, there is only one economy in a country, and the fortunes of those people, who live in that country are tied to it, so experiments are less likely to yield clear results. Couple this with the pernicious interference of politics, politicians, bias and egoistic self interest by the elite… and unbiased empirical results are almost impossible to reach.

Our fortunes and the fortunes of our posterity are put at risk by the modern alchemy of eliminating economic cycles. No doctor would argue that the sleep cycle can be overcome, but economists, who are the doctors of economies, argue with a straight face that economies need not rest. The ways that have been tried to eliminate the need for economies to rest, like national banks and socialism, have yielded poor results, and in some cases, have led to human suffering on a scale that boggles the mind. Through creative destruction, economies grow, efficiency expands and the lives of people are improved. All the increases in efficiency, that have resulted from the evolution of economic systems, have resulted in magnificent improvements in the lot of Mankind. Since economies cannot be empirically tested, because of personal bias and political interference, it is nearly impossible to quantify the need for a recession after a period of growth. Understanding this leads us to the conclusion, to stop economic cycles of boom and bust, is as foolish as keeping a worker awake for months with drugs… and expecting his work not to be impaired. Foolishness is foolishness no matter who does it.

Sincerely,

John Pepin

Faction in the Modern World

Monday, August 20th, 2012

Dear Friends,

It seems to me that faction is a bigger threat to our Constitutional republic today than at any time in our history. That is a pretty big statement, considering that we have fought a Civil War, as atonement for the evil of slavery, and all the other times faction has threatened our liberties. The threat of faction has been known and understood since Madison wrote Federalist Paper #10. That faction is a bigger threat today, speaks more about the characteristic of faction in modern society, than the nature of faction as a whole. If I am correct, and faction poses a greater threat to our freedoms and the liberties of our children than at any other time in American history, we must all wake up and address this threat, else we will leave our children a far worse state of affairs, than our parents did us.

In Federalist paper #10 Madison wrote that faction is the biggest threat to a republic. Faction, being like fire and liberty being like oxygen, the way to control faction is not to starve it of oxygen, (liberty) but to pit faction against faction. I am of course paraphrasing his words but the meaning is correct. By pitting faction against faction his theory, and the theory of the US Constitution, is that if faction is always fighting turf wars, no one faction can grow sufficiently large to take over the apparatus of the State. Madison warned that if some faction gained total control of two of the branches of government then our liberty would be threatened. He was adamant about this.

One of the bulwarks against this happening is the free press enjoyed in the US. The free press being able to point out when any single faction in society is becoming too large. A free press was considered one of the controls on the predilection of the Elite to usurp power. This control has worked sometimes better, sometimes worse, but all in all it has been a moderately sufficient safeguard in the past. Today however, we have a media that calls itself unbiased, yet they have a demonstrable bias toward a single faction, showing absolute contempt for our intelligence. This faction was briefly in charge of all three branches of government and still has hegemony over two. The Executive and the Judicial. Control of the Legislative branch is tenuously limited, by the inclusion of a few that are not in that faction, but they are incessantly vilified by the unbiased press for it.

The two party system was another protection against the vicissitudes of faction. If there are only two parties, then all factions must squeeze into one or the other party, thus limiting their overall power. Various factions would have to commingle within each party in order to have some seat at the table. The two party system worked well throughout most of our history but recently has become an impediment due to the pernicious nature of the one faction. This faction has penetrated both parties. The democrat party is under total control of this faction and the Elite in the republican party are loyal to this faction as well. There is only a small minority, growing to be sure, but nevertheless a small faction within the republican party that resists the advance of these people.

Joesph Schumpeter said that free markets and liberty cannot long last. His dire prediction was based on the fact that, once a person becomes wealthy their first order of business is to close the door behind them, so that no one else can pass through the portal to wealth, they did. This doesn’t make the rich bad… it makes them human. The means to this end being ever increasing regulation. As Milton Friedman said, when a business man is confronted with a superior competitor he has two options, the first is to ramp up his business to effectively compete and the other is to turn to government and regulate the competitor away. It is the responsibility of the electorate to control the avarice of the wealthy by the popular vote.

Now we have one faction that seeks to regulate the people while resisting the most basic controls on their actions. They use populist rhetoric to convince us that they work in our best interests, but even a cursory knowledge of human nature shows, this is mere folly. No one works against their own interests. Those very few that have, are given the attribution… Saints and the Christ. To believe that people who seek to control us with arbitrary power, only seek the interests of society, eschewing their own is blindness. The progressive faction is nearing their complete victory over our Constitutional republic, destroying their mortal enemy, the free market and imposing arbitrary rule on us and our children.

All is not lost however. We still have suffrage and the unconventional media. This blog being an example. We can use that power given to us by the Founding Fathers and turn the tide, for at best a few more years, or we can stand aside and allow the demise of our republic, and with it, our liberty, opportunity and safety. It is up to us to be rational maximizers, to stand in the way of the progressive agenda, for the sake of those we love most, or, we can accept the part of useful idiot. I for one, have no interest in being a useful idiot and ceding our republic to a single faction, no matter how flowery their rhetoric… Do you?

Sincerely,

John Pepin

Incentives Count

Thursday, May 10th, 2012

Dear Friends,

It seems to me that, in every human endeavor, incentives count, but no place more than in the field of economics. Government sets the incentives both obviously and not so obviously. Society and culture also create incentives and disincentives. Incentives are far more important than animal spirits or demand to an economy’s well being. The set of incentives that government creates by it’s actions, laws, regulation, taxation and rhetoric, can devastate an economy, or create the environment for rapid economic expansion. If a person wants to understand why a given economy is faltering or succeeding they need only look at the incentives that government has in place. Your family’s economic well being are subject to this natural law.

The most obvious is the societal attitude to wealth creation. In a society that holds wealth to be a bad thing, there will be few wealthy people, and they will almost certainly be the people who run the government. Under this type of incentives the government will usually be some form of autocracy or plutocracy. Monarchy and aristocracy are most often cited but tyranny and oligarchy are never far away under this set of societal attitudes. The Dark Age in Europe is an example of this societal attitude to wealth creation, with the Renaissance being the watershed moment, that changed the mind set of the people… to embracing wealth creation.

Every parent knows that you punish that which you want less of and reward that which you want more of. Only an idiot would knowingly reward acting out, stealing, lying or any of the other bad behaviors we civilize out of our children. We know this as parents, but amazingly some of us seem to forget this, when it comes to the economy. When government takes the position of a bad parent the economy suffers and the people suffer.

Taxation is most often thought of when talking about the incentives that effect an economy. Taxing something creates negative incentives to that action. Look at the great lengths, companies and individuals go to, to avoid taxes. They invest their money foolishly to get some tax write off. Look at GE in the last few years. They have paid no income tax because they play ball with the government. They buy the electric cars that don’t work, they invest in “green” technologies that cost more, to produce less, etc… This will eventually put GE at a disadvantage to their competitors in the future but today it makes them seem more profitable. Taxing income is an obvious form of discouragement to wealth creation.

When government places more and more regulation on an industry it creates bars to new companies entering that industry. Older more established firms have a regulatory step up, in that they have grown their business around the existing regulation, and can better cope with new regulation as a result. New firms have to research the laws and regulations and have less interaction with the regulators of that industry. Regulatory capture also creates a bar to entry for new firms, because older firms have built a rapport with their regulators, who may not like seeing there “friends” being out competed, so they may look more closely at the actions and business model of a new entry into the market. This is highly pernicious due to it’s undermining the very nature of a competitive marketplace and smothers new ideas. The very definition of Schumpeter’s law.

No matter how much demand there is for a product or service, regulation, taxation, attitudinal incentives and cultural moors have the ability, alone or as a group, to destroy any industry. Incentives can make an economy vibrant or stagnant. When government punishes wealth creation, no matter how, wealth creation slows and can be brought to a complete stop. When this happens we see economic stagnation and depressions. If you think about it a moment, the level of economic activity, as measured by the creation of firms, and how close to perfect competition there is in a country’s economy, is a metric of the incentives to wealth creation and vibrancy, of markets in that country. When we apply this measure to the American economy, since Obama took the Presidency, we see that the incentives his administration have set up… are uniformly negative to wealth creation. We can clearly see that the rhetoric of class warfare is a form of attitudinal negative incentive to wealth creation as well. Under this set of incentives we can expect a continuing lowering of the material standard of living in the USA, and since America is still the engine of the World’s economy, the material standard of living of the people of the World will also suffer.

Even if this concept is completely lost on the Obama administration it is obvious to the American citizenry. Perhaps that is why the Tea Party is ascendant today. They understand incentives…

Sincerely,

John Pepin

Class Mobility and Centrist Republicans

Monday, January 23rd, 2012

Dear Friends,

It seems to me that John Boehner’s performance on FOX News Sunday today is exactly why a centrist like Mitt should not be President. They are both upstanding men of high caliber. They are personally good men and they do in their own lives what we all should do. They are members of the Elite and have the goals and aspirations of the Elite as their focus… Not necessarily the good of the Nation.

Lest you believe I am falling into the fundamental attribution error ponder these salient points.

Look at how softly the Speaker spoke about the President. Boehner leaped opportunities to attack Obama on the Keystone Pipeline, Obama care, the Democrat’s total control of government for two years and the American people’s reaction to it, the list goes on and on. Boehner kissed Obama’s derriere more than once in that interview. That makes me think Boehner is onboard with Obama’s destruction of the US Constitution to replace it with words on the wall of a barn. Words that have only the meaning the Elite give them. Subject to change if it suit’s the Elite. Boehner, despite his personal virtue, disappointed me.

The President roundly criticizes Boehner and his caucus. Even as Boehner eschewed criticizing Obama, the President roundly criticizes Boehner and ascribes his caucus with evil intent. The attack is daily and vitriolic. The intensity is ratcheted up with every bill the House passes and the Senate rejects so Obama won’t have to veto it. The unbiased press is doing it’s job to the best of it’s ability, vilifying everyone who is opposed to total government, as evil. Gary Trudeau in Doonesbury, called anyone who is against Obama evil. Categorizing logic this way is what Islamofascists and Inquisitors do.

Obama is merely speeding up the progressive agenda. Lets face the facts Joseph Schumpeter had the Elite nailed. They only liked the market system when it made them rich Elite, but now they are, the door must be closed. Else they will have to compete with more virtuous people on the way up, even as the Elite fall. This is unacceptable so regulations must be put in place to slow and eventually stop class mobility. Because that is what it is all about. The evil of class mobility. Obama has merely accelerated the miring of class mobility through gumming up the markets with regulation.

When Mitt Romeny had political power he forwarded the goals and ends of the progressives. He was firmly for every progressive plank. He firmly believed, and voted for, the State superseding the parents in abortions for minor children. (Against the proscriptions of his religion). But, after all, doesn’t the faceless bureaucrat care far more for that number, than the parent who has committed his and her, entire life, fortune and most importantly, affection for? The faceless bureaucrat is the side Romney voted on when he wielded political power. The most damming thing Romney is responsible for, however, is Romneycare. As the template for Obamacare, class mobility slowing regulation and all, it is telling that the very people Romneycare was foisted on, (the people of Massachusetts), made the decisive vote for Scott Brown, to end the Democrat filibuster proof majority in the Senate, and stop Obama care. No matter, Obama, Pelosi and Reed used an extra constitutional trick, to get the unconstitutionally sweeping law passed.

Obama came in with a veto proof majority in the House and a filibuster proof majority in the Senate. The Progressives had absolute power for two years in the American government. The 2010 election was an indictment of Obama’s policies. The Republicans were not voted in to work with Obama in destroying the US Constitution, they were voted in to stop him! Only a fool or a con man would claim different. The fool has hope of waking up but the con man is in on the con…

The assault on the US Constitution must stop. The original intent must be restored. If people really believe, abortion should be enshrined within the US Constitution, there is a means. If people think strongly enough, the Federal government really should regulate every facet of our lives Constitutionally, throw out the perverted definition of the Commerce Clause, and use the proscribed means to change the US Constitution. It is not supposed to be as easy as, getting five people of the same faction on the Supreme Court, to change the Constitution. That we have allowed it to become so bastardized is to our immortal shame and chastisement. It is time to elect someone who will take the slings and arrows to restore our Republic. A middle of the road progressive is not that person!

Gingrich has won the undying enmity of the Elite, for lowering their power, when he wielded political power. Expect them to personally destroy him for it. He has committed the unforgivable… even worse than Nixon in the Alger Hiss affair. Now he has won South Carolina the vomit will pour forth on him like a waterfall. Lets see how he stands up. Or he dissolves away.

 

Sincerely,

 

John Pepin