Crony Capitalism

“Washington’s war against short-term stock traders”

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From an excellent column by J.W. Verret:

The government policy of promoting long-term profits is bad economics, and even worse, it is engineered to favor incumbent firms and stifle innovation. When the government gets to decide the proper term of your investments, it constitutes the same form of cronyism as when campaign donors are directly given sacks of cash by the government officials they donated to when they were candidates.
 
A guiding principle in our economy is Joseph Schumpeter’s theory of “creative destruction.” Just as some forests need to burn in order to clear away brush and make way for more robust growth, economic innovation also requires that old and outdated companies be broken up for new replacements to take root. Recently, Americans have received an education in this principle by watching Uber’s challenge to the taxi cab incumbents.
 
The American capitalist economic system is at its best when guided by the principle that no firm is too big or special to fail. While corporate executives may feel such a jungle atmosphere is harsh and unforgiving, don’t forget that customers who buy products and investors of capital are at the top of the food chain in this jungle. Wall Street banks and corporate executives are the prey! Protecting failing companies and subsidizing politically powerful incumbent firms, under the false guise of promoting long-term value, is simply un-American.

A couple of other points:

-Short-term trading adds market liquidity, which reduces bid/offer spreads. Because of short-term trading, long-term investors pay less to buy and receive more when they sell.

-Liquidity buffers volatility. Wild market swings happen when liquidity dries up. Any trading restriction that reduces market liquidity will increase market volatility.

This stuff is basic. It’s a shame that many people never learn it and are credulous about fairy tales involving evil speculators and high-speed traders in dark alleys. When someone in a position of authority tells you that a particular type of free exchange is bad, it’s usually safe to assume that he has a stake in some crony enterprise that benefits by restricting your choices.

(Via Instapundit.)

On This Texas Independence Day

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What I’m feeling for the GOP is a kind of disinterested sympathy, punctuated with schadenfreude, the disinterest arising from never having been a Republican, the sympathy from the GOP identification of a plurality of my close friends uniformly horrified by what is happening and the schadenfreude from the abrupt collapse of three-plus decades of pharisaical social conservatism. Turns out that eventually enough of the electorate whose resentment you’ve been stoking figures out that it’s a waste of time and fastens on to something else, something that matches their actual resentments a lot more closely.

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Macroeconomic Fallacies, Fed Chairman Bernanke’s Delusions and the Rise of Donald Trump

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The G20 leaders recently called upon the leaders of the developed nations to employ more massive amounts of debt financed government spending to ward off the current economic stagnation and in some instances the early stages of recession. That fits Einstein’s definition of insanity: “doing the same thing over and over again but expecting a different result”. The pursuit of so-called “macroeconomic (fiscal and monetary) policies” has produced a quarter century of economic stagnation in Japan, a $30 trillion debt bubble in China with little to show, and stagnation and looming recession in Europe and increasingly in the US.

Einstein was a genius who remains relevant today. Just within the last few weeks evidence was reported of gravitational waves predicted by Einstein almost a century ago. Proving Einstein’s theories has been the focus of physics during the past century, but he maintained that had he been able to get an academic appointment instead of a position at the Swiss patent office he never would have been able to develop and publish his new path-breaking theories.

In his recently released biography The Courage to Act (2015), former Federal Reserve Chairman Ben Bernanke describes how, initially failing physics, he turned to macroeconomics as an outlet for his mathematical skills. This was auspicious. In physics, when your equations don’t fit the reality it is the equations that must be changed unless there is new evidence to change the understanding of reality. Einstein’s biggest error was rather than waiting for better data when his equations predicted an expanding universe, he fudged the equation (introducing the Max Planck constant) to fit the current understanding of a stagnant universe, then disagreed for most of his lifetime with the next generation of quantum physicists who proved he had gotten it right in the first place. Einstein’s one mistake is the modus operandi of modern macroeconomists.

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Meanwhile, In Europe

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Who does one call to get Europe on the phone? What is causing all the economic problems?

And what is happening in Ukraine and why?

https://youtu.be/pN7ifHzF41g

And what should the USA be doing in all this? And is the USA an empire?

Trump and China

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Trump has, famously, gone after China on its trade policy.

In January 2000, President Bill Clinton boldly promised China’s inclusion in the World Trade Organization (WTO) “is a good deal for America. Our products will gain better access to China’s market, and every sector from agriculture, to telecommunications, to automobiles. But China gains no new market access to the United States.” None of what President Clinton promised came true. Since China joined the WTO, Americans have witnessed the closure of more than 50,000 factories and the loss of tens of millions of jobs. It was not a good deal for America then and it’s a bad deal now. It is a typical example of how politicians in Washington have failed our country.

There is an interesting analysis of China’s stumbling economy in the Observer today.

Here is a top ten guide for the perplexed.

Central Planning: Central planning, central planning. The history of the abject failure the Soviet Union’s five-year plans should tell you everything. Command and control economies that report to one man (in a nation of 1.3 billion people) are doomed from the start. Top down economic decisions often look bold and start out highly stimulative, but then degenerate into inefficiency, waste, politics and fraud.

Political Corruption: As the command and control economy generates liquidity, the demand and direction of the distributed capital becomes a political tussle. Decisions on how much steel, cement, coal, glass solar panels, high speed trains and shopping malls—in short everything—are not done in China as a cost benefit analysis by risk capital, a job difficult enough in itself. (Witness the capitalist economies’ booms and busts.) In China, this liquidity was allocated by political muscle, massive bribery and kickbacks, rather than economic justifications.

Basic Gangsterism: Counterfeiting, knockoffs, copyright infringement, theft of intellectual property these were a part of the booster rockets of China’s economic rise. It was all supposed to go away after China joined the WTO in 2001. It didn’t. It just became more institutionalized. Foreign companies needed Chinese “partners” in auto production, healthcare and technology. These “partners” crippled the potential productivity of the investments and led to frequent disputes and even more corruption… as in the GlaxoSmithKline scandals.

There are a total of nine reasons, many addressed in Trump’s piece above.

Now, the economy of China may be in free fall.

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