Breaking news: some of America’s largest corporations have begun to report declining profits. For those that are offended by highly profitable corporations, this should be really great news.
But nobody is celebrating. In fact, the sagging profits reports are thought to be such a bad thing that some believe they sent the Dow sliding downward last week, for fear that a global recession has arrived.
If profits are such a terrible thing, why aren’t we relieved by their decline?
For the record, I have no idea whether or not a recession is eminent. And to the extent that economic activity is nearly impossible to predict with precision, nobody else knows either.
But regardless of whether the economy is moving up or down, Americans need to grapple with this “love-hate” attitude towards profitable enterprise. And let’s start with a couple of philosophical questions: Are profits always a good thing for a company to produce? And is it okay for one company to be really, really, profitable, even when other companies are not?
In some spheres of life – collegiate and professional athletic competitions, for example –Americans have no problem accepting the fact that with each match-up, some will succeed while others fail. Yet when it comes to business, success in producing profits is often seen as merely a necessary evil – and only acceptable if the profits aren’t “excessive.”
Part of the dilemma may well be that far too many Americans assume economics to be, as the term goes, a ‘zero-sum game.” Just as it is the case in many sporting events that one team wins and the other loses, so also it is assumed that if one individual or group is profitable, it necessarily causes somebody else’s unprofitability.
That, of course, is a false assumption. In our competitive free market economy, success with one enterprise often creates new markets in which other companies can succeed.
An easily understood example of this is the coffee house industry. In the 1980’s, Starbucks took the concept of the local coffee house where people meet and spend time together and drink beverages, and turned it in to a global business phenomena. And since the earliest beginnings of Starbucks, several other coffee house chains have been launched - Moxie Java, Tully’s Coffee, and Caribou Coffee to name a few - as an effort to capitalize on the burgeoning coffee house market. While today Starbucks remains the largest chain of its kind, these other newer and smaller companies have nonetheless benefited from Starbucks’ success, in as much as Starbucks essentially created the market for the modern-day coffee house in the first place.
But economic realities are one thing, and people’s perceptions are something different. And at present America is surrounded by an ever-present hostility towards profitable businesses – much of which emanates from the highest levels of our government.
Some of us saw this era of hostility coming. Back in 2008 while he was campaigning for the presidency, Then-Senator Obama made it a point to chastise American businesses nearly every time a robust earnings report was published. In the summer of that year, as an example, speaking to a stadium full of adoring followers, the President-to-be made it clear his disdain for the petroleum industry:
“First of all,” candidate Obama stated, “you’ve got oil companies making record profits…no… no companies in history have made the kind of profits the oil companies are makin’ right now…They..they…….one company, Exxon Mobil, made eleven billion dollars…billion, with a “b” ….last quarter….they made eleven billion dollars the quarter before that…makin’ money hand-over-fist…makin’ out like bandits…”
Imagine that! “Makin’ out like bandits” – that’s an amazing assessment of a successful business enterprise, suggesting that posting profits is tantamount to thievery. Of course at that moment in time, the early signs of a recession were appearing, and it was politically viable to send the message that “if we can’t all prosper right now, then none of us should prosper right now,” and his vitriol over the profitability of the Exxon Mobil Corporation played well with the crowd.
Yet Mr. Obama’s disdain for business “profits” has continued throughout his presidency. Fast forward to February 7th of 2011 when the President addressed an audience of the U.S. Chamber of Commerce. Speaking of the improving balance sheets that were emerging within many American companies at that time, President Obama stated:
“The benefits can’t just translate into greater bonuses and profits for those at the top. They have to be shared by American workers, who need to know that expanding trade and opening markets will lift their standards of living, as well as your bottom line…”
Of course, we’re talking here about our Ivy League-graduate President. Surely he, of all people, understands that profits aren’t simply “shared” - they are “earned.” And surely he realizes that when a company is profitable, it’s not merely the C.E.O. that benefits (investors, employees, and customers benefit from profitability as well). Certainly the President of the United States understands these most basic concepts of free market enterprise.
But we never hear that from our President. Nor do we hear much praise at all for successful, profitable enterprise from anybody in our government. It’s usually anger and disgust when profits are good, and promises of intervention and “stimulus” when profits are bad.
It’s a very self-serving and destructive game that our politicians play. And they will keep on playing, until Americans come to terms with profits.
Originally Published on the Sultan Knish blog Regardless of how many wars on poverty are declared and how often calls are issued to make the rich pay their fair share, neither the rich nor the poor will be going anywhere anytime soon. The question is what forces will keep the poor impoverished and where the rich will derive their wealth from.
The founder of Subway recently said that he could not have started up his company today. Similar messages have come from the founders and heads of other major companies. That isn't to say that companies will cease to exist. What we think of as business has been changing for some time.
In most countries, starting a business does not begin with a great idea. It begins with connections. Knowing the right people is still important, but in most places it's the most important thing.
Under the current American model, a company becomes successful and then begins to lobby Washington to gain a competitive advantage or to avert hostile lobbying directed at negating its existing competitive advantage. That is a perversion of free enterprise, but in much of the world companies begin lobbying first and then become successful. This is the model that has evolved under Obama. And it's a familiar model to anyone doing business in Russia or China. Political connections come first and then the business becomes feasible.
Oligarchy is the inevitable outcome of an economic climate where the governments acts as a gatekeeper to the country's customers. Measures that began as limited safety and fraud regulations have become a comprehensive political economic system that controls every aspect of every economic transaction.
The government creates markets. It creates companies and customers. It sets prices and taxes industries that it does not favor out of business.
Corporate lobbying isn't just about the proverbial 200 dollar screwdriver. It's about making it more expensive for some companies to make screwdrivers than others. It's also about forcing independent screwdriver manufacturers out of business. It's about government grants to make environmentally friendly screwdrivers and heavy taxes on companies that don't make environmentally friendly screwdrivers.
Tactics like these aren't new. The Esch Act eliminated white phosphorus matches through a punitive tax back in 1910. But a century later, the government wiped out the incandescent bulb industry, not for health reasons, but to comply with a trendy ideology. Microsoft, which had hardly bothered to lobby before, was dragged to Washington on monopoly charges that Google, the ultimate dot com insider, today laughs off. And Microsoft learned its lesson, investing in sizable amounts of lobbying capital.
The government is a bigger factor in business models for both large and small businesses than any other. Whether it's struggling against the mountains of paperwork or looking for ways to profit from the latest regulations, business has come to be defined by government. The tier of governments at every level have accumulated huge amounts of wealth and power. Government power is used to control how business is done while government spending makes political officials into the country's biggest consumers.
The fusion of business with government leads to oligarchy. The rich are not going anywhere, but wealth becomes a factor of their government connections, rather than skill or even inheritance. Government control over business began under the banner of combating monopolies only to end by creating government monopolies. The war against income inequality will end the same way and with the same results as the oligarchies in Russia, China, Mexico and everywhere else.
The future of Obamerica is a country full of corrupt government officials and tycoons. The future is an aristocracy of union bosses running their own guilds, corporate monopolies that change with each election and government officials with mansions and armed bodyguards.
Income inequality will be huge with oceans of poverty and small islands of wealth locked away behind gated communities. Populists will promise power for the people, only to make the system even more corrupt. One company or one boss will be brought down, only to be replaced with the favorites of another party.
Everyone will despise the tycoons and the government. The government will promise to protect the people from the tycoons, even as it works closely with them, and the tycoons will lavish money on certain areas in exchange for loyalty. Both the government and the tycoons will be closely tied up with organized crime which will launder its drug profits through the tycoons and use its political connections to gain protection and sanctions against rival organizations.
This three-sided war between government, tycoons and organized crime will involve members of all three groups using each other against their own rivals. The distinction between all three will be vague at best. Government officials will profit from their business connections and use their power to aid organized crime. Organized crime will have its own businesses and politicians. And the tycoons will run for office and have clean 'white' businesses, dirty 'black' businesses and 'gray' businesses.
Most of the money in the country is in the hands of one of these three groups. The tycoons control the white market. Organized crime controls the black market. Government controls the monetary supply and collects tribute from both markets, officially and unofficially. This is a closed system with very little room for dynamism except through outside intervention.
In an oligarchy, walking in and starting your own business is not really an option. The first bar that any new business has to meet is that of connections. The second bar is the interests of the oligarchy. You don't start a car company if the oligarchy's titans have a lot of money invested in a buggy monopoly. The car company will be either burned out or legislated out of business. Conversely, if you pick your moment, you can get a monopoly on that new foreign automotive technology if you know the right people and spread the right amount of bribes around.
The oligarchy safeguards established interests. It is a mafia whose goal is to control and profit from all wealth. Even when it comes to power as the result of a revolution, it very quickly discovers its own established interests. Its members will knock each other off, but they all agree that the basic nature of the system should not change. What they fear most of all is the collapse of that system.
There is plenty of money to be made in an oligarchy, but there is very little forward motion. New things do not emerge out of an oligarchy of union guilds, politically connected tycoons and politicians who derive their power and influence from their connections to both. Once a new thing exists, then the oligarchy will find ways to profit from it and even improve it, but there is no progress from within the oligarchy.
There is also very little social mobility. Human ingenuity can allow people to become wealthy under nearly any set of circumstances, but it's a good deal harder to do it under an oligarchy. Oligarchies have enough instability that it is possible, but those individual stories of making it up from the slums are usually isolated incidents. The majority of slum-dwellers stay in the slums and become involved with a political faction if they want to improve their lives.
In the oligarchy the wealthy form a natural aristocracy, but it isn't an aristocracy of talent, it's the accretion of closeness to power. This aristocracy changes in composition with revolutions, but its nature remains the same. It is a collection of the people with the best lobbyists, the best bribes and the closest cultural ties to whoever is in power. Any member of the oligarchy can have his wealth and influence stripped away in minutes at the behest of the regime.
Even as American Exceptionalism declined, the remaining free enterprise aspects of the country kept the American Dream alive. For a while that American Dream, the ability to enter the country and move up the economic ladder became the sum of the nation. Generations of politicians reduced the meaning of the United States to a nation of immigrants where any new arrival could launch his own business and make money.
The rise of the oligarchy is foreclosing that dream leaving only the nation of immigrants struggling within a complicated political hierarchy for government handouts from a political movement that denounces some tycoons at the behest of other tycoons. It's the oligarchy at war for control of the dead present, even as it kills the past and the future to accommodate its plans.
It is the end of America and the rise of an Obamerica. Obamerica will still have great reserves of wealth, but on average it be far poorer and far less productive.
Obamerica will be known as a party country, a good place to buy the good things if you are one of the sons of the rich or are a tourist from a rich country. Obamericans will be described as sensuous and spontaneous pleasure-loving people. Obamerican cities will be violent, dangerous and exciting places full of decadence. Its slums will be full of drug dealers and child prostitutes. Most Obamericans will not believe in the future, but will cheerfully accept the misery of the present. They will hate the rich, but long to be in their place so that they can stomp on the poor. The old prosperous nation will be gone and in its place will be the oligarchy.
Critics of a free market economy are also critics of individual responsibility. Because they believe in higher taxes, centralized control, and absolute intolerance to other viewpoints, they find themselves reducing free market ideas to that of human flatulence.
At least the current governor of California--Jerry Brown--did this week.
The seventy-four year old was quite taken aback. He was asked by California media this week if Texas Governor Rick Perry's recent poaching expedition would matter much to the state's future. His reply was direct.
"It's not a serious story, guys. It's not a burp. It's barely a fart," replied Brown.
Maybe Governor Brown is just in just denial but Governor Perry's three fold plan appears to be working like a charm.
In the initial stage the Texas Governor voiced a personal public service announcement to the CEOs and gatekeepers in California's business leadership communities. He placed moderate advertising buys in San Francisco, Los Angeles, San Diego, and other specialty areas. The commercial created a firestorm of attention in the state and gained Perry additional earned media coverage.
He followed that up with a fact-finding mission and personal meetings with some of California's largest corporations. It should also be noted that he was invited to do so by some of California's elected leaders in Sacramento. It was this in-person visit that seemed to rile the California Governor's feathers the worst.
Lastly comes the elbow grease and follow-up with companies that had additional questions, and this appears to be where the real story lies.
Since governor Perry's return home--only days ago--the Greater Austin (Texas) Chamber of Commerce reports a definitive spike by inbound inquiries by California companies. And since the November elections--when California saw state tax increases passed (not even including looming federal tax and Obamacare increases)--businesses in the Golden State are investigating a move to a state that offers much lower regulatory hurdles and ZERO state income tax.
“We have had a spike of double or triple the amount of normal (business relocation) activity since the November election in California,” said Dave Porter, senior vice president at the Greater Austin Chamber.
Critics of Governor Perry's attempts to boost inbound business growth in his state dismiss the efforts out of hand.
Greg LeRoy, long time progressive, and now head of the liberal activist (and heavily pro-union and pro-green) "Good Jobs First" stated, "Interstate job piracy is not a fruitful strategy for economic growth." He argued that "poaching... amounts to a geographic reshuffling of existing jobs." (As opposed to new business activity.)
Recently numbers of governors are joining the open-poaching policy with fervor in a dispute that is raging first philosophically, but secondarily, economically.
Why else is it that states with the strongest economies are poaching from the states in deepest economic trouble?
Governor Walker of Wisconsin, Governor Scott of Florida, Governor Chris Cristie of New Jersey, Governor Daugaard of South Carolina, and Governor McDonnell of Virginia have all made direct plays for companies in California, New York, Illinois, Maryland, and Minnesota to relocate.
So while Governor Brown would like to dismiss the effort, and while leftist progressive think tanks inside the beltway claim a zero sum economic advantage, why would I still argue that poaching is good for the nation?
Significant reason number one: greater, more wide-spread fiscal accountability!
The idea of risk and competition scares progressives because there is no guarantee of "equal outcomes" (which are never actually equal, they only pretend to be.)
Governor Brown--in an already economically near-bankrupt state--could stand to lose massive tax generation from the mere number of employees that one to ten major corporations take out of state (not to even mention the corporate taxes involved.) This reality further hits the pocketbooks of the tax-payers he has promised to solve the economic woes of. If those companies leave he must find alternative solutions for balancing the cost of the state to do business which could mean: spending cuts.
The same for Maryland, Illinois, New York etc.
Significant reason number two: continued job development.
When a company saves money on regulatory costs and on taxes (which serve as a pure burden on the cost that is passed on to tax-payers--remember companies never pay taxes--their customers always do) they can create more jobs in the new location than they previously had in the higher regulatory and taxed region.
Poaching has multiple benefits most immediately for the states that are engaging in it, and long term for the states that are forced to admit that other states are beating them in the contest of ideas, revenues, economies, and contentment.
Governor Perry is right to not only brag about his state's economic growth, but he has a moral obligation to do all he can to expand it.
And while it may give Governor Brown a bit of gas, ultimately he will be forced to accommodate, innovate, or step aside.
It’s not just an out-of-control IRS or EPA. And it’s not merely the punitive demands and restraints of the new federal healthcare law.
American enterprise is being stifled and squelched by state and local governments, in ways that most Americans don’t even see. With increasing propensity, elected officials nationwide are at times suffocating private businesses with regulations, and at other times competing directly against them – and it happens among both Democrats and Republicans.
A striking reminder of this emerged last week, when it was reported that Democrat San Francisco Mayor Ed Lee was contemplating some sort of “ban” on alcohol sales during the Super Bowl. Drunken vandals got out of hand last year in “the City by the Bay,” when the Giants swept the World Series. The same thing could happen on Super Bowl Sunday this year, with either a 49ers win or loss. So, therefore, the city should step in and try to keep the booze away from the bad guys – at least that’s how the official reasoning went.
The news first emerged with local newspaper and radio websites reporting that the Mayor was seeking a ban. By the time global publications like “International Business Times” had picked up on it, the Mayor had tempered his rhetoric a bit, saying that he was “seeking input from business owners” on how to prevent alcohol-induced vandalism.
The irony here is obvious. This is, after all, San Francisco, a place where, in terms of social and cultural “norms,” almost anything goes. It’s the city where elected officials almost did not pass a ban on public nudity for the first time last November, and yet city officials now want to control liquor consumption.
But here’s the part of the story that nobody reports: such mandates by local governments, arbitrary and unexpected as they often are, damage businesses. Restaurant and bar owners all over the country are naturally banking on steady foot traffic and lots of food and beverage sales on Super Bowl Sunday. No doubt some owners craft their monthly or quarterly budgets around an expected uptick in sales on that day. When politicians disrupt this, they hurt small business owners.
But travel northward some 1200 miles or so from San Francisco, and a less imaginable, more difficult to understand phenomena is happening with private enterprise the worse for it. The state government of Idaho has actually developed a voracious appetite for buying and owning for-profit small businesses of a variety of sorts, and competing against private owners.
Language in that state’s Constitution declares that the land originally granted from the federal government for the creation of Idaho must be managed “in such manner as will secure the maximum long term financial return to the institution to which granted.” From that language, Idaho politicians down through the ages have determined that they have a “fiduciary responsibility” to produce investment returns. So once the first of the original endowment lands were sold, a trust account was established, and state politicians have been “investing” the money in for-profit businesses ever since.
In the past four years alone, the state government of Idaho has purchased everything from a neighborhood beer pub to commercial office space, all under the leadership of Republican Governor C.L “Butch” Otter. This controversial practice came under national criticism back in 2010 when the Idaho government bought “Affordable Storage,” a small self-storage business in the capitol city of Boise, and then began telling would-be customers that “our rates are lower because we don’t have to pay taxes.” Ask residents of “red state” Idaho what they think of President Obama’s forced acquisitions of General Motors and the Chrysler Corporation, and they’ll likely tell you it was wrong. Yet most are unaware that their own state government is doing much the same as the President has done, and is competing against their business-owning neighbors.
While it’s hard to find an American politician who will tell you that they are anything short of “supportive” when it comes to small business ownership, it’s even more difficult to find one that really understands what it means to be that type of leader. The change in government policies that our nation needs won’t begin to happen, until American voters start paying attention and making better choices on election day.
Breaking news: some of America’s largest corporations have begun to report declining profits. For those that are offended by highly profitable corporations, this should be really great news.
