Posts Tagged ‘wages’

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

The American Oligarchy

Thursday, May 19th, 2016

Dear Friends,

It seems to me, the West is ruled by an oligarchy, that oligarchy is… the new class. You will remember, if you read my articles or have a sufficient education, that Aristotle characterized the three wrong forms of government and the three right forms, as well as his perfect form. It is always best to use Aristotle’s definition of oligarchy, in the way he meant it… an oligarchy is a system of government where the upper class, (hereditary aristocracy in Aristotle’s time but could be any form the upper class takes per elitist theory), rule and rule for their own benefit rather than the benefit of all. So what I am saying is that the new class is a defacto upper class in Europe, North and South America as well as Australia and New Zealand, they rule what we call the Western World, and rule it for their own good rather than the good of mankind.

A wrong form of government is any government that rules for it’s own narrow self interest. To put it another way… the rulers are egoists. It’s easy to happen, after all something put them in the upper class to begin with, whether it was birthright, education, merit, wealth, intellect, cunning or evil, those in the upper class have an instinctual drive to look down on those not in the upper class. The more structurally separated the elite become from the hoi polloi, the more sharp the divide becomes until instead of benevolence, the elite view the unwashed masses with contempt and scorn. The elite are the smartest, most educated, and are willing to do what it takes, get blood on their hands… so why shouldn’t they run the show and run it for their own good. Who are the imbeciles, layabouts and common laborers to have a say, or even a share, let them starve, clean the gene pool anyway… becomes their mindset. Once that happens aristocratic rule, no matter who the elite are, becomes oligarchy.

Who are the new class, you might ask, and how are they a ruling elite? The new class are those with advanced college degrees. Not everyone who have college degrees agree with the politics of the new class, but in the realm of politics it is democratic, the consensus of those with advanced college degrees is what decides such matters. Your attorney, banker, accountant, run the business where you work, the woman who writes your favorite newspaper column, your governor senator and doctor, the new class are the people at the top, well, of everything. They decide what you see on television, read in the paper, what your daughter wears when she goes out and what your son listens to, they are the new class who pass our regulations in the darkness of bureaucracy, teach our children, tell our police what to do and what not to do, they decide where to send our boys and girls into battle, and what their lives should be spent on, the new class is by every definition, the modern aristocracy.

How can we tell, by the economy, they rule for themselves only and are not simply incompetent? Well, incompetence cannot instantly be ruled out, in this case however, for the most educated most powerful and most wise people, (by their own definition), be so very wrong? More likely, their incompetence is manifested in the fact they thought they could keep the loaded dice game going forever. Moreover, look at the rate of pay for CEOs, the quintessential new class citizen, compared over time to the rest of society. The exponential growth in upper management pay, mirrors an equal decrease in the pay for employees, and lowered sock performance by return on investment, is a sure sign something is wrong with businesses today. Every absurd ruling of a judge, granting a million dollars to a plaintiff who cuts himself while breaking into a home or awards a conniver a loophole in an otherwise iron clad contract… all add up to a society and culture of anger, fear and division, which feeds back into the power and wealth of the new class. To the detriment of the nation and humanity.

People with advanced college degrees tend to marry only those with advanced college degrees today, segregate themselves into gated communities and send their children to private schools, showing they have become in many ways separated from the huddled masses. which is always destructive of social cohesion. The new class is by all definitions a ruling class, as shown by the fact they run everything, and control the dissemination of information. The new class rules for it’s self interest at the cost to the rest of humanity. By all accounts and measures… the new class is an oligarchy.

Sincerely,

John Pepin

Style over Substance in Democracy

Thursday, February 18th, 2016

Dear Friends,

It seems to me, in politics, to follow style and ignore substance is to court tyranny and spurn liberty. Sadly, a political race is all about style and nothing about substance. The election of Barak Obama showed this in neon lights. He ran on “hope and change,” without a moment given to what that meant. Today Trump is running on “Make America great again.” Both slogans are strong on style but have little substance. When people vote on a slogan, instead of on policies, they open themselves up to politicians who don’t necessarily have the people’s best interests at heart. If a politician is reticent to explain how he or she will make his or her slogan come true, then the reason is probably that they have no idea how, they just want political power. Perhaps they have an idea, but know it would be obnoxious to the electorate, so the dishonest politician falls back on a slogan.

For good or evil it is policies that get things done. If more jobs is what is sought, lower regulations, less government intrusion into the market, lower taxes and less cronyism are the policies that are called for. This set of policies have the drawback to the statist of, lower government and political power and to the dependent of less government handouts. If more government power is the goal, then higher regulations more intrusion and higher taxes are the ticket. Those policies have the drawback of lower wages, less jobs, lower economic output and less liberty, however. There are always trade offs to any policy.

Since there are trade offs a conniving politician seeks to persuade the people to follow him or her with an empty slogan. Every politician and political adviser knows running on lower wages, less jobs and the loss of liberty is a loosing message. Those who seek more government control cannot run on the drawbacks or even let the idea there will be drawbacks into the conversation. They have to deftly avoid admitting the results of their policies will have drawbacks, in fact, they usually claim they seek the very opposite things their policies will result in. Politicians are Machiavellian in that they care nothing about how they get to their goal, only that they get to their goal.

An empty slogan has the advantage of avoiding talking about any negative effects of their policies but also of focusing the people on some simple to understand sentence. Those politicians who run on policies however, have the double difficulty of explaining how their policies will do what they say they will and defending the attacks on those policies for their trade offs. Since most people are lazy in thought their eyes will gloss over at discussions of policies and their effects instead focus on an empty slogan.

Slogans work best when they are backed up by personality. The most charismatic politician with the best slogan usually wins. Of course… no one is more charismatic than a psychopath or sociopath. That is because people with these disorders have no self awareness, they glibly lie, care not when they are caught, can look you in the eye while and smile as they stab you in the back, love to manipulate people, etc… Have you ever wondered why Hannibal Lector in the Silence of the Lambs is so magnetic? Psychopaths are inherently charismatic, love to manipulate others and seek luxury, and so they levitate to politics where their special abilities and needs serve them, and are served by them as well.

It is by the people being lazy in their voting, voting for a slogan rather than policies, that a nation is moved from limited government, free markets and liberty, and the economic strength that results, to unlimited government, socialism and tyranny. Even as the people begin to feel the results of the policies that result in lower wages, less jobs and reduced liberty, they fail to see their own part in the problem, continuing to vote for slogans instead of policies. Very few voters really want lower wages, less jobs and reduced liberty but when faced with the task of processing and examining the probable results of various policies, they fall back on a slogan and personality.

This paradigm of democracy has corroded every democratic republic ever constructed. Constitutionalism was supposed to limit this quality of democracy, but has been perverted by the very people elected to preserve our constitutions, as is the nature of democracy. The answer is not to eliminate democracy, it is only through the assent of the governed that any government has legitimacy, the answer is a thoughtful electorate. You have the ability to cast a vote, you are the foundation of your governmental system, you have the responsibility to act as a rational maximizer, a self interested human being rightly understood. If you choose to vote for a psychopath with a catchy slogan, you are the problem, but if you look into the policies, reason what the logical outcome of those policies will be, and vote accordingly… then you are the solution.

Sincerely,

John Pepin

Embezzlement by Stock Buybacks…

Thursday, October 15th, 2015

Dear Friends,

It seems to me, if a business is the biggest buyer of it’s own stock, that business is admitting it has a problem. To take it a step further, if most businesses are the biggest buyers of their own stock, the economy has a real problem. Sadly this has been the case for the last few years in the US. Some claim buybacks are a valid means to return profit to shareholders, but in reality, it is a naked admission of failure. Stock buyback programs are an admission the business model is insufficient to produce profit from further investment in it’s core business. Logically then, buybacks on a massive scale are an admission the economy is not conducive to further investment in plant, equipment or personnel. Moreover, when a company doesn’t plow it’s profits into buybacks, but borrows money to do it, that is a symptom of a dire illness in that business in particular and the economy in general.

Buyback programs do help the executives at a corporation however. It enhances the bonuses of executives by artificially inflating the stock price. The new class likes stock buybacks because it allows them to siphon off more of the nascent profits for themselves. Of course the chief victims are really the shareholders themselves, because the stock price increase doesn’t reflect any actual change in the value of the company, and is not reflective of a rising demand for the products or services, but is a corrosion of actual value. The employees are damaged because their wages get downward pressure due to the lack of investment in the core business, which lowers demand for workers across the economy, and the customers interests are hurt by the lack of investment, when there is less innovation and availability of products to enhance their lives. The new class is the only beneficiary, but at a cost to the economy, wages, and investors.

The stock market as a whole is made to appear stronger than it really is. As the number of outstanding shares decrease the value as a percentage of a company increases. Sadly, buybacks can make the stock price increase, even as the total value of a company decreases. If the value of a company declines three percent in a given year, but the number of shares in that company decline at a rate of four percent, the company’s stock price will increase at one percent. The actual value of the investment will have declined but the stock valuation will not adequately reflect it. As more companies do this the actual value of the market as a whole decreases, even as the price of the market itself increases. Even a first grader would understand this is not sustainable. At some point reality must slap investors in the face.

The stock buyback programs are usually funded with borrowed money. This has been enabled by the Federal Reserve’s Zero Interest Rate Policy or ZIRP. This makes the stock buyback programs even more pernicious. While the CEOs and Vice Presidents get bigger and bigger bonuses, they put the company more and more in debt, further lowering the actual value of the company. It is like borrowing money against your home and squandering it by going out to eat at fancy restaurants. Clearly it is not responsible to borrow money to use on such frivolities. Borrowed money should be put into plant, equipment or product development, any other use of money borrowed against the shareholder’s value is irresponsible. Further, when a company borrows money against a corporation, the bondholders get in front of the shareholders! So once the chickens come home to roost the shareholders will be left penniless!

Those who are entrusted with protecting and growing the value of the actual business owners, shareholders, are instead lining their pockets and stealing their employer’s money. In a sane world they would be prosecuted for such fiduciary crimes, but in our world, a world run by and for the new class, there are no consequences for what is essentially embezzling. You or I would face long jail sentences for embezzling twenty bucks, while the executives get away with millions, taken directly from retirees and people who have forgone immediate gratification, to set some money aside.

Stock buyback programs will eventually blow up in the face of our economy, the stock markets and executives themselves. Buybacks inflate a bubble in stock price, a bubble that when it pops is more likely to explode than deflate, because the actual value underlying the investment will have been so diminished. However, as history has shown time and time again, the criminals will be held blameless and the victims will be vilified and left holding the bag. Unfortunately, there is little we can do to protect ourselves, the new class run our corporations, control the media, determine our culture and man the government from top to bottom. Our only recourse is to demand they be held accountable, because the only real power we have is political, and that is only if we stand enmasse.

Sincerely,

John Pepin

Do You Hate the Rich?

Thursday, June 4th, 2015

Dear Friends,

It seems to me, The social contract between those that run our societies, the elite, and the rest of us, has been broken by the elite. The elite have become an oligarchy, the wrong form of aristocracy, and as a result, the average Joe is livid, but doesn’t know what he or she is livid about. Our ignorance allows the elite to manipulate us into doing damage to our own interests while enhancing theirs, which further infuriates us, making it easier to manipulate us… This is why so many people hate the “rich.” Many of us see “the rich” as the problem, but sadly, that is exactly what the manipulators want! We play into their hands when they call for more taxes, regulations and limits on “the rich,” The “rich” never actually get those higher taxes, regulations or limits, we get them instead, which further lowers our standard of living, infuriating us even more…

The contract between the elite in any society and the rest of the people, is the leader gets the best, but has responsibilities for those perks. That is why the chief of a hunter gatherer tribe gets the best meat, his choice of huts, etc… He is the biggest and strongest man in the tribe and if there is a war between tribes, he is expected to lead the other men into battle, at risk to his own life. If a wild animal attacks the tribe, he is expected to fend it off. Those perks of leadership come with responsibilities, those responsibilities are why he gets the extra benefits. That is the paradigm in all human societies everywhere and at every time. The elite get the lion’s share of the goods of society but have responsibilities to the rest for those perks. They don’t come free!

When the social contract between the elite and the people functions, no one has a problem with the tribal chief getting first pick of the meat. When the Chief gets the first pick of the meat, but runs at the first sight of danger, allowing others to die due to his lack of bravery, he quickly becomes loathed. Why should he get the first pick if he doesn’t meet his responsibilities? People get a visceral hatred of him. That is the place our society has got, the elite don’t meet their responsibilities. Instead, they throw the rest of us under the bus at the first sign of trouble, they never lead by example, they protect their interests at the cost to society’s interests, in short they expect us to hold up our end of the contract with no intention of them doing their part. They have broken the contract and so we hold them in utter contempt. The modern elite want those perks for free.

People know it, even if most of us cannot put it into words. So, when some affluent member of the elite calls for more taxes on “the rich,” many people stand and cheer, when an out of control elite politician tells us he or she will control “the rich” with regulations many hold up their fists in support and when a multi millionaire socialist shouts the government must seize the assets of “the rich,” many people rush to the exits to get a share. The actual rich elite never get those higher taxes, regulations or have their assets seized, that os for the people, the non elite. Again, the elite avoid fulfilling their role in the contract and manipulate the people into forwarding an agenda that is counter to the people’s interests, by shirking their responsibility.

When Warren Buffett went on national television, announcing his secretary was paying a higher tax rate than him, there was outrage. The elite solved the problem by raising his secretary’s taxes more, and giving Warren Buffett a billion dollar kickback by vetoing the Keystone Pipeline. That evil oil is still getting to Texas refineries, but on Warren Buffetts trains! Who cares about the added danger of transporting oil by train, Lac Magantic be damned, or the additional cost. In the case of Warren Buffett’s train windfall, courtesy of the US government, he was rewarded for being instrumental in manipulating the people into calling for higher taxes… on themselves! We were made chumps!

Because the actual rich, the elite who are moguls, wield political power and control the means of production, only seek to keep the rest of us down. Joesph Schumpeter argued, the moment someone gets rich, they immediately turn around and close the door behind them. Today the new class, the intelligentsia, control the means of production, have taken the lion’s share of profits, and are the power behind the government, but have abdicated their responsibility to ensure wages grow, the standard of living increases and liberty is maintained. Instead, they work to lower wages at every opportunity with unlimited immigration, enacting by law the Malthusian idea, wages can never grow because there will always be more workers than jobs, they raise taxes on “the rich” but the rich never pay those higher taxes, only those trying to get rich pay them, (you and I) and the elite squander our resources while protecting theirs.

Have you ever wondered why when the tax rate on millionaires was ninety percent in the US, the number of millionaires didn’t go down, only the number of new millionaires did? It was because the elite were using their political power to keep people from getting rich. Holding the rest of us down to protect themselves from competition. By doing so they abdicated their responsibilities to us and society for their own gain. Then they blame the nebulous “rich,” for all the troubles we face because of their shirking their responsibility.

We are angry because we know a scam is being played on us. Most of us, only understand the power contract in human affairs on a gut level, and so can be manipulated by the elite to act against their own interests. I for one, don’t care at all how much a factory worker gets paid, in fact, the more she makes the better, in my view. If a factory worker gets one million dollars an hour, that is no skin off my nose, if an entrepreneur becomes a multi billionaire, I cheer for him, or is an inventor gets millions and acclaim, I am ecstatic for her. When a CEO makes tens or hundreds of millions of dollars a year in bonus’s, wages and perks, while at the same time, making chumps of the shareholders, screwing the workers and poking the customers in the eye, forcing his political, religious and social perspective down the rest of our throats, I become irate. He has avoided his responsibility, the responsibility that comes with those perks to run the company for the interests of the shareholders, provide value to customers and pay good wages to the employees, and that is unacceptable.

Beware of falling for the trap that calls you and I the rich, and thus degrades our standard of living, with our acquiescence. Aim your anger where it belongs, at the new class who shirk their responsibilities, while feeling entitled to the perks they get. Demand they live up to their end of the contract! Else fall for the illusion and become a slave.

Sincerely,

John Pepin

The Fiction of Unending Economic Growth

Sunday, May 3rd, 2015

Dear Friends,

It seems to me, the desire of economists, government officials, the media and brainiac 2000’s, that the economy grow in a straight line is as absurd as it is ignorant. Unending economic growth has been the siren call to economists, politicians and business elite for ever. They all want only economic expansion, (as do we all), and they will do anything in their power to get it, even destroying the engine of economic advancement, if that is what it takes. The desire for unending economic growth without recession has led our policy makers to take us down paths that can only result in perpetually lower economic growth. Such measures as fiddling with the interest rate to stave off recessions, bailouts, the ever increasing size and scope of monopolies as well as regulations designed to control the economy, are the norm. To paraphrase an ancient Chinese philosopher, (Mo Ti)… they spend that which they have too little of to gain that which they have too much of…

First lets define recession versus depression. A recession is a period of time where an economy shrinks and a depression is a period of time where an economy grows at less then it’s normal growth rate. A depressed rate. The effect of a recession is to eliminate inefficient businesses from the economy freeing up resources to be used in more productive enterprises. There is utility in a recession. A depression however, where an economy grows at less than it’s normal rate, has no utility. That lower growth rate lowers the economic lot of the people drastically and that lowering is multiplied over generations. Look at it this way… Let’s say you have a savings account and are normally getting five percent. One year in ten you get negative two percent. Now look at the same initial savings in another account where you get two percent. The first account will out earn the second by orders of magnitude. That difference is exaggerated over time, the longer you get the depressed rate, the lower the actual total returns.

Economic suicide has come to fruition in the modern welfare state. Japan is the poster child for a failure of welfare state economic policies but does the government of Japan change it’s policies? No, of course not, instead, they double down and claim they just need to pass more regulations, raise taxes and print more money, all so the government can spend more money on five thousand dollar toilet seats and thousand dollar swizzle sticks. If only the government had a bit more money they would fix the economy and everyone would be richer than rich. That line of argument is so transparent it shouldn’t fool a toddler but it seems to work exceptionally well on the highly educated new class.

Meanwhile the rest of the developed world follows Japan’s example of lost decades. The US has been in a depression since Obama took office and the government has done everything in it’s power to ensure it stays that way. The Federal Reserve has printed trillions of dollars and handed them to the monopoly banks, lowered interest rates to essentially zero when you factor in inflation, they under count inflation to make the economy appear to grow and the Obama administration has ushered in a tsunami of regulations and taxes that especially stifle small business growth. Not to seem unfair, they have even regulated the Internet, to protect the titans like Google and Facebook, from competition from small businesses. Economists sing the praises of Obama because the unemployment rate has dropped and there are no soup lines. Well, the unemployment rate has dropped because a record number of people are no longer in the workforce, and the soup lines have been replaced by EBT cards. Those measures have changed from that which is seen to that which is unseen…

The economy of any nation is like an organic system. An organism grows for a period then stops growing, even shrinking for a small time, then grows again. That is the way organic systems and complex systems grow. Rapid growth creates instabilities and inefficiencies, those sub par hindrances can only be addressed by short periods of rebalancing, in organisms and recessions in economies. Without those short periods of rebalancing, structural deficiencies grow out of control until the organism gets cancer, or an economy becomes inefficient to the point of depression. Like the illustration earlier in this article… that less than ideal growth rate drives down the economic standard of everyone. That lowered economic outcome is more obvious at the bottom of the economic ladder and less visible at the upper end.

That lowering of economic outcome for those at the bottom of the economic scale, creates conditions where hate, envy and jealousy flourish, but the fix the elite propose is always more of what caused that lowered economic outcome in the first place. There are never enough jobs, wages, savings or start ups in an economy but they are spent to create more welfare, monopolies, taxes and regulations. So we can say with certainty… the elite spend that which we have too little of to get that which we have too much of. The question is, how long are the rest of us going to fall for the flim-flam?

Sincerely,

John Pepin

The Insanity of the New Class…

Thursday, February 5th, 2015

Dear Friends,

It seems to me, Obama is channeling Marx in his latest diatribe against technological growth. Along with the US President, the elite in the media chant the absurdity… that productivity innovations are bad. On Bloomberg radio yesterday, they were interviewing some CEO and the questions constantly turned to how the advance in technology is damaging the middle class, and that the reason wages are stagnant and dropping is because of the advances in productivity. The theme is that labor saving wipes out labor. To someone who is ignorant about economics that might sound logical, but it is in fact spurious logic… an argument made to sound logical but is in fact illogical and used to fool the listener. It is critically important to understand the truth behind this lie. Technological driven productivity gains are critical to an increasing standard of living. Moreover, the reason wages are stagnant and jobs are scarce in the US and around the world is that regulatory constraints on our economies have reached critical mass, and are melting down our economies.

Marx basic theme in his Manifesto was that the mechanical loom was going to drive everyone out of work. He said, “As the forest of arms looking for work grows ever thicker, while the arms themselves grow ever thinner…” Meaning the mechanical loom made the production of cloth so much less labor intensive, and most people worked in the textile industry at the time, mass starvation was just around the corner. That is essentially the exact argument Obama made about ATMs. Of course Marx was proven wrong in his assessment just as Obama is in his. The mechanical loom allowed the price of a wool coat to drop, (the evil deflation), so that the average worker could afford one! Imagine, the mechanical loom allowed a mere plebeian to wear a warm coat! Horrors! He didn’t have to stuff his shirt with straw to keep warm he could wear a warm coat!

The Bloomberg interviewer argued against the Schumpeter model, by saying that those workers in the buggy whip industry got jobs in Ford’s factories making much better wages with less taxing labor, but today, there are no new jobs for the laid off workers to go to. An ignorant argument at best and spurious at worst. The reason that wages are stagnant is that government policies, policies designed to protect the politically favored, are destroying the creation of small businesses. For the first time in US history the creation of small businesses is NEGATIVE!!! Let that sink in a moment, there are more small businesses going bankrupt… than are being created! Creative destruction needs, as a fundamental input, new businesses and new business models. Regulation, taxation and the lack of standards, have so undermined that fundamental aspect of a growing economy that small business creation is now negative.

There was a story in the media the other day about some kids walking from house to house in New Jersey shoveling driveways for spending money. I did that when I was a kid. It is a great way for children and young people to learn that labor creates wealth. In a market system that is an important lesson. In America today however, the police were called, and the kids counter revolutionary snow shoveling business was shut down by the state. There was another story recently about some kids setting up a lemonade stand, they were also shut down by the government, running afoul of some regulation. In a society where even children cannot shovel a driveway or set up a lemonade stand, without facing daunting regulation and a police investigation, how can any business get started?

Without new businesses, creative destruction is destroyed. Giant firms are not entrepreneurial, that is a basic law of economics. Large corporations are run by the new class, for the new class, and against the interests of employees, customers and shareholders. The very definition of the principle agent dilemma. Anything that threatens the status quo is to be feared. Those at the top of large corporations always pay lip service to entrepreneurial ideas, but when faced with the choice of striking out on a new path or staying on the old one, unless there is a large bonus in it for them, the old one is always preferred. That is why new ideas are implemented by entrepreneurial small businesses. If those new ideas are profitable those new small businesses grow to large ones and wealth is created, if not, the risk taker gets a haircut. That is why Capital expenditure is so low while mergers and acquisitions are so high.

The new class progressives have effectively wrested the economy from the Bourgeois, (shareholders and entrepreneurs). Large corporations are able to line the pockets of politicians to protect their businesses from competition. When they do face competition their response is telling of their utter incompetence. Blockbuster is a perfect example of this in action. When faced with competitors who provided a better product at a lower price point, Blockbuster would have preferred to regulate their competition out of business, but couldn’t because of public scrutiny, so they did the next best thing, they raised their prices and lowered the quality of their product… to maintain their profit margin. The new class executives got their bonuses. Of course in doing so, they ignored the basic mantra of any and all businesses, provide value to the customers else they will shop elsewhere. So, Blockbuster went bankrupt, wiping out the investments of the shareholders, screwing their employees and abandoning their customers. The only ones who made out were the new class executives who got their bonuses and new executive jobs.

It isn’t creative destruction that is broken, nor is it the market system, it is the nonsense of the new class, in academia, politics and business, that has broken our economy. Regulation, taxation and cronyism have combined to eliminate small business start ups. So much so that the creation of small businesses has turned negative. Creative destruction requires small businesses to implement the new ideas that every economy, everywhere need, to grow the standard of living of the people. The new class run the businesses they have wrested from the owners, for themselves, at cost to every other element of our population. When faced with competition, lowering price and raising quality are not even a consideration, raising prices and lowering quality are the norm now, to maintain the bonuses of the new class. Deflation, the normal course of price evolution in a market economy is attacked as evil, so government can continue it’s profligate spending, to hide the outcomes of their policies and their cronyism. The “journalists” at Bloomberg are inculcated in the new class way of thinking, as are the “journalists” of every other major news outlet, and so we get one unanimous voice, all agreeing creative destruction is dead and socialism is the way forward… forward into slavery. Just as Joesph Schumpeter predicted.

Sincerely,

John Pepin

Confusion About the Market System…

Monday, January 26th, 2015

Dear Friends,

It seems to me, very few people the world over actually understand what the market system really is, most have fallen into the trap set for them by new class Marxists, that the market is evil and government is good. As long as the new class elite can maintain the fiction they spew we are on a path to predestined serfdom. The global elite quake at the thought that the hoi polloi discovering the ruse. If enough of us did understand what real capitalism is, we wouldn’t stand for their bigger government solutions that never work, but only make the problems worse. That is why we are constantly bombarded by spurious arguments like, the gap between the rich and poor, the market needs regulation, capitalism only benefits the rich, the wealthy got that way by stealing, etc… always made by the uber rich to blind us to the truth that we haven’t lived under a market system anywhere on the planet for generations. Ignorance may be bliss, but it is the best way to keep us in a state where our slavery is all but guaranteed.

What the world struggles under today is called “welfare state capitalism.” It is to the market system as bone cancer is to astrology. Welfare state capitalism is a system where the government redistributes the profits of free market interactions, from those who worked and took risks for them, to those who didn’t. In doing so, the government gains terrific power to destroy businesses that are not politically favored, enrich those who are, hold people in generational poverty, wipe out class mobility, destroy the family unit and create a permanent upper class… all in the name of fairness.

In a real market system, people get rich by taking risks, providing service and value to their customers. Under a welfare state however people get rich by having political favor. When those with political favor fail, they are bailed out by the government, (you and I), but in a market system, failure is paid for by he or she who fails. Moreover, failure in a market system leads to new ideas and greater efficiency, while in the welfare state, failure leads to more of the same, since there are no consequences to the elite, only the people. That is why too big to fail banks were bailed out with enough money to pay off three quarters of all the home mortgages in the US, and QE3 was sufficient to create eighty five thousand millionaires a month! Meanwhile, you and I were stuck with falling house values, wages and financial repression. All because of the bubble created by government policies. Not a real market by any measure!

In a functional market system deflation is the norm. That is one of the ways you can be certain that we have not lived under a market system for generations. The cost of those things we need and desire gets cheaper and cheaper. This is because the market system drives down the cost of everything by increasing productivity. That increase in productivity also has the effect of raising real wages. A carpenter with a nail gun and precut studs can frame a wall in seconds, where a carpenter, even a much better trained one, using a hand saw, hammer, nails and rough cuts, takes an hour. That increase in productivity lowers the cost of the final product even as it raises the wage of the carpenter. Raising his or her standard of living and making the work easier and less taxing on the body.

In welfare state capitalism however deflation cannot be allowed. Government runs a perpetual deficit to maintain the illusion of a functional market and prosperity through bubbles, and so, if the elite were to allow the market to do it’s normal operation and deflate the cost of everything, that huge debt would quickly become unserviceable. Inflation is needed to evaporate the debt through currency devaluation. Without inflation lowering your wages and driving up the cost of everything, the government would collapse, as many have in the past, and the elite would be out of their cushy high paying jobs. A disaster that the elite cannot allow to happen. So they inflate bubbles, watch them pop, destroying the meager wealth hard working people have saved up by the sweat of their brow… and the government inflates the next bubble, to maintain the illusion of economic growth.

Welfare state capitalism is a system where the elite decide who gets rich and who doesn’t. It undermines the market’s innate class mobility. The old saw, “shirts sleeves to shirtsleeves in three generations,” is rendered inert by the state’s interference, allowing the half witted grandchildren of the elite to remain wealthy, despite themselves. This is done by the state requiring everyone to get permission from the state for every economic activity. Those who are the children and grandchildren of the elite not only get permission, but the largess to engage in market activities, (as in Solyndra), while the children of the plebeians have to fight, pay bribes and struggle to get even the smallest of permissions. Crony capitalism is created this way.

Harry Truman said, “Anyone who gets rich in politics is a God damned crook!” Since the all powerful welfare state decides who will get what, the benefits will naturally flow to politicians, their cronies and family. Others who would compete are frozen out. Ways to measure this… are the number of small businesses in an economy, how many are started in a year and the rate of expansion of small businesses to medium and large. Moreover, people will spend absurd amounts of money to gain political office… so they are the ones to decide who gets what, insuring their business isn’t destroyed, and giving them the power to destroy their competitors. In a country where welfare state capitalism is at it’s apex, small businesses cannot compete with large ones because of political favor, and therefore, there will be few small businesses, and most of them will be engaging in illegal activities, ie, doing business without the proper licenses, paying employees under the table, selling non pasteurized milk, exceeding the weight limit of a road, idling a truck so a worker can get out of the cold, hauling without the proper permits, cutting hair without a license, etc…

The new class elite have to keep us in the dark about the market system. To that end we are inculcated in a doctrine that has no basis in reality… that crony capitalism is the market system, that we need the elite to regulate the economy to protect us from it, we are taught to hate those trying to get rich by providing value to us, and love those who get rich by political action. Our children are programmed in school to have a visceral reaction to the term “capitalism,” as a bad thing, and socialism is lionized as the solution to all the world’s problems. The bloody history of socialism is glossed over with absurdities like, “Marxism has never really been tried.” If most of us understood the fiction we have been inculcated with, is just that, fiction, we would demand real capitalism, and that cannot be allowed. The elite have too much at stake… their power, wealth and prestige.

Sincerely,

John Pepin

Economic Cancer

Thursday, January 22nd, 2015

Dear Friends,

It seems to me, the economy has cancer, sectors that are supposed to facilitate business creation and operation are now the ones supported and the real economic actors, (firms that build things and provide services) are now facilitators. I am of course talking about the legal profession and the financial sector. Turning the economic incentives against the creation of businesses and capital expansion of their production. This has had the effect of decoupling wages from productivity, drying up capital available to expand production and start new firms, adding extraordinary costs to doing business and lowering profits for firms the create things. An economy reacts organically to inputs from the actions of it’s various sectors, as such, when incentives become perverted firms need to use more and more creative measures to stay competitive, and are forced to do creative accounting to appear more profitable than they really are. All these negative incentives in an economy result in lower economic outcomes for everyone… except those in the financial and legal services sectors.

The financial services sector of the economy is there to be a conduit from people’s savings to firms looking for capital to start or expand their businesses. The way economists traditionally see banks is that they take in the savings of individuals and firms, paying reasonable interest, amass that capital and make it available to businesses to start new ventures, or expand profitable ones. In this scenario both savers and firms win, a win win. However, today the financial services sector has become the be all end all of the elite. Politicians kowtow to the too big to fail banks, giving them special privileges denied to other sectors of the economy, they have out sized power over the policies of government, there is even a shadow pseudo government agency that explicitly protects them… the Federal Reserve. Instead of being a facilitator of business the financial services sector has become the focus of our economic policy. Wall street versus Main street if you will.

The legal services sector is there to allow self interested people to come to agreements that benefit both parties. It is imperative that when people do business they trust each other. That is impossible without verifiable contracts and standards holding all participants to their word. These important factors in facilitating business cannot be overstated. Sadly, the legal system has bent over backwards to undermine this very noble calling and pervert it to serving lawyers, at the expense of everyone else. Today, contracts are only as good as the lawyers who break them on some absurd technicality, the primary role of attorneys is to bankrupt businesses for huge profits, drive up the cost of doing business by a continual threat of frivolous lawsuits, and keep new possibly disruptive products from the marketplace to protect older less efficient ones who have political favor.

The liver is supposed to filter toxins from the blood. As long as it does it’s work the body is healthy, but when the liver becomes distended and cancerous, it ceases to filter toxins. Instead it adds to the toxin load in the body. In that case the liver has ceased being a facilitator of bodily health and instead has become a drag on the body’s ability to function. The financial services and legal service sectors have become like a cancerous liver and kidney. They don’t perform their function in our economy, like a cancerous liver and kidney cease to filter blood, they only serve themselves. In both cases, a cancerous liver/kidney and perverted financial/legal sector, the body eventually dies… and so does the economy. Until the cancer is removed, allowing them to return to their correct function, the body becomes more and more diseased, and the same is true with the economy.

The proof is in the out sized compensation of those in the legal and financial sectors. The wages of the lawyer far exceeds that of the entrepreneur. The bonuses of the “banksters” is exponentially more than the those who create wealth. From this small example we can see that the lion’s share of profits today, flows to those who are supposed to facilitate business, from those who actually do business. The huge percentage of the total economy of these two sectors, that are supposed to be facilitators, is proof they have outgrown their place and, like cancer, have become a threat to the very existence of our economy. Since everyone wants the most profit possible for their actions, it is clear that the extraordinary wages in the financial sector and legal profession, come at cost to the rest of the economy, imply that those sectors have more than their fair share of power, political and economic, because if they didn’t those profits would be instead kept by those who create things and provide other services.

The result is that our economy, the world over, has become dysfunctional. The financial services sector now only serves itself, at cost to the rest of the economy, it doesn’t fund small business start ups or CAPEX, because taking printed fiat money and investing that money in government bonds is more profitable, moreover, it earns the favor of the political elite. This drives up the cost, and pushes down the return, on those bonds. Lawyers get rich by finding ways to break contracts, drive up legal expenses, suing firms and individuals and otherwise undermining the economy. These two sectors have become cancer in the most alarming sense. Most people understand this, at least subconsciously, and hope it will solve itself, but cancer never spontaneously heals, it only grows. If we don’t cut the cancer out with legal and financial reforms, and prevent it’s recurrence… the cancer will eventually kill our economy.

Sincerely,

John Pepin

3D Printing and Creative Destruction

Thursday, August 21st, 2014

 

Dear Friends,

 

It seems to me, 3D printing is an innovation that has the potential to start a new round of creative destruction. The potential of this technology to make whole sectors of the economy outmoded gives us an idea of the economic impact for the good, then for the bad, this technology will bring us and our children. Whole sectors like, manufacturing, home building, and even retail sales will be changed fundamentally by this technological revolution. Our standard of living can be elevated dramatically or lowered drastically by this technology, depending if government decides to distribute the economic good that will come of it. This will deeply effect how our children live.

 

3D printing is based on ink jet printing, it merely takes the ink jet’s 2 dimensional characters and adds a third dimension to them thus, 3D printing. With it all kinds of amazing things have been made. Things that could not be made any other way. 3D printing allows anyone who has a 3D printer, and they are getting cheaper by the month, the ability to manufacture, in their own home, most of the day to day items one would need. Spatulas, containers, book covers are a tiny speck among the possibilities. Just download the details of the ideal spatula and print.

 

3D printing has other uses as well. If a machine were to be built that could build a house using 3D printing technology, and one be will very soon, the entire home building industry would be flipped on it’s ear. Such a machine is easy to envision. It would use local sand, a polymeric adhesive and diesel or gas to run the thing, so it could be set up away from utilities. The 3D Home Printer would crush the sand into silt or perhaps clay, dry it and mix the dried clay dust with the adhesive and spray layer upon layer until the house was complete. Any detail that can be thought of could be included at little extra cost. A Queen Anne Victorian with all the spindles and detail could be replicated in exactitude… for pennies. Homeless problem?

 

Even operational machines can be made with this technology. So far relatively simple machines have been made like adjustable wrenches but much more intricate machinery can be made with this technology. Machines so intricate they there is no other way to make them. This opens up the possibility that a car could be made of modular pieces. If any breaks you could simply print the replacement and bolt it on. Moreover this same ability of 3D technology allows anyone to be an inventor! All one need do is imagine a thing, code it with a computer aided drafting system and print it. Voila! Imagine the things that would be invented if every member of the entire human race was given the ability to invent them?!

 

Of course with the creative part there is always the destruction. Today we stand at the starting line of the race to monetize 3D technology and so, if the governments of the world let up on the regulatory brakes, we are looking at a potentially high rate of economic growth along with the jobs, higher wages, more benefits and a rising standard of living such a paradigm carries along with it, all fueled by the implementation of 3D printing Technology. But in 10 to 50 years when this technology matures, (as long as government doesn’t abort 3D technology before it is born), there will be the wholesale destruction of entire industries ushering in an epic recession. One that can be turned around quickly by laissez faire policies or could be turned into a depression with socialist ones. Time will tell.

 

As the future comes at us with faster and faster innovations we should keep our knees bent so we are not knocked over by events. We are rapidly approaching several innovations that could change who and what we consider ourselves to be very soon. 3D printing technology is only one. The rapid advance of robot technology means we now face the possibility that the unit labor cost could fall to zero, with all that entails, and Moore’s Law showing itself to be true the leaps computer technology is taking brings the Singularity closer and closer. The interface of man and machine, coupled with 3D printing could allow us the ability to merely think of a thing and it will be made for us on our printers, or… if it harnesses us instead of we harnessing it, we could be in a world of hurt.

 

 

Sincerely,

 

John Pepin