Friday, December 31, 2010

Before He Was Famous: Tim Geithner On Informal Power Grabs At The FRBNY

EPJ's Bob English has recently commented on the role informal, off-the-record meetings between bankers and their regulators play in enhancing the lucre of their business models. And EPJ mastermind Bob Wenzel has also been tracking the way in which the new Dodd-Frank bill will create 122 new power centers in the federal government, power centers which have the task of creating their own rules and means of enforcement with heavy influence from lobbyists hired by the very firms that are meant to be regulated by the bill.

Along those lines, I came across a few quotes from (at the time president of FRBNY) Tim Geithner and former president of FRBNY Bill McDonough in my recent reading of Superclass which I found to be revealing. I reproduce them now in full below for your own perusal and consideration.

Tim Geithner, Superclass, pg. 174-175:
Recalling a situation in which he had to manage a crisis in the derivatives market, he said, "What we did is, we got the fourteen major firms in a room down the hall here with their primary supervisors, a group of the largest global institutions and their supervisors from five countries. And we said to them, 'You guys have got to fix this problem. Tell us how you are going to fix it and we will work out some basic regime to make sure there are no free riders to give you comfort, so you know that if you move individually everybody else will move with you.' And there is nothing written, no guidance, no regulation, no formal process. We did it without a formal request to us. We told everybody we were going to do it but we were not asked to do it."

"These fourteen firms," he continued, " accounted for something like 95 percent of all the activity in this market. The Fed, the SEC, the FSA, the Swiss, and the Germans were there. And those were the principals, and each firm brought three people, they had an executive committee of four firms that ran, almost weekly at the beginning, a conference call among the other firms. And the best thing about the process was that it was efficient, there was nothing written except letters from the firms laying out their commitments. There's no formal mechanism we could have used to force this on anybody so we had to invent it. I think the premise going forward is that you have to have a borderless, collaborative process. It does not mean it has to be universal, every jurisdiction or every institution. It just needs a critical mass of the right players. It is a much more concentrated world. If you focus on the limited number of the ten to twenty large institutions that have some global reach, then you can do a lot. It's interesting, actually. Of the fourteen big firms... [chairman and CEO of Goldman Sachs] Lloyd Blankfein jokingly called them 'the fourteen families,' like in The Godfather... The Japanese were not in it, which was interesting. It is really the Swiss, Germans, U.S., U.K. Really mostly the U.S. and Europe. No Asian firms."
It should be obvious what kind of bold-emphasis I would've added throughout those paragraphs so I won't bother.

Here's Bill McDonough, Superclass, pg. 182-183, at the time of this printing former president of FRBNY and current vice chairman at Merrill Lynch:
"There is a growing view," he remarked to me, "that the modern economy is benefiting the more successful at the expense of the less fortunate. In the United States, the lower half of income distribution has not been keeping up."

"I believe that in all societies, clearly in democracies where the electorate can change the government at the next election, more attention has to be paid to making it clear to all the people that they too can benefit, or at least that the educational system gives their children that opportunity. That is the American dream. But even in less democratic societies, governments govern over the longer term with the consent of the governed. If not, revolutions take place."

"In guiding globalization, government leaders, central bankers, and leaders of the business community simply have to do a better job of taking those actions needed to have all the people believe that the system benefits all."
Note that among other devious insinuations, this confidence man expounds on the importance of spreading faith in the system.

And never mind the fact of a man who is now a vice chairman for a company he once regulated, on the eve of its undoing (2007).

Thursday, December 30, 2010

Book Review: Superclass

Who is the intended audience of this book?

Certainly not the global elites that it purports to be about-- they are too busy running the world to read a shallow book about how they're running the world.

Not the poor and the weak, which this book laments often for not having enough of a voice in l'affairs du monde. Besides, such people are too broke and overworked to afford the time and the money necessary to trudge through such an "erudite" work.

No, this book was written for the rubes, and not just any rubes, but the self-styled informed, politically knowledgeable rubes. This book was written for the rubes who make the whole system of global governance (Rothkopf's favored phraseology, over the alternative of global government) by an amorphous band of interconnected global elite, the titular Superclass, possible, simply by blinding themselves to the reality of the scam being pulled on them.

Rothkopf has written a book for the rubes who diligently go out every election and vote Democrat or Republican. He has written a book for the rubes who read the papers, watch the news and occasionally complain about the state of the union within the comfort-zone of like-minded friends, the people who willfully believe the best of intentions for their leaders who sometimes err from the path of pure nobility.

In other words, Rothkopf has written a book for the people who take the game of thievery called "politics" seriously because mere consideration of the alternative, that is, the reality that it's a mechanism for knavery, is absolutely terrifying to them.

The author himself is as clueless as he is totally interconnected with the elites he intends to observe, and therefore he is compromised.

On economics, the book reads like an especially amateurish Newsweek or Time magazine article-- the fall of the Berlin Wall and the USSR has demonstrated the failure of communist and Marxist ideology, but the rise of the "free market" in their wake has brought with it its own set of problems and inefficiencies, namely a growing gap between the haves and have-nots which threatens social instability... a constantly trotted out meme about the "free market" that is ten times more applicable to actual communist regimes throughout history, as well as their various feudal historical counter-parts. The solution? Why, a compromise, of course! An enlightened middle-ground between welfare and profit-seeking that leaves no man behind, the precise admixture of which shall be derived and administered by our honest and earnest, all-seeing elites.

On politics, conspiracy and corruption it is even worse. Rothkopf spends multiple chapters clearly and unabashedly explaining just how interconnected the global, superclass elite of the business, political and military castes are, the three main social castes which are increasingly blending into one and the same thanks to lobbying and revolving-door retirement arrangements and interlocking corporate directorships. Then, Rothkopf introduces the "fringe" viewpoints of internet crazies who insist there is a global elite pushing for one world government and he quickly dismisses these people as outrageous and pathetic individuals with overactive imaginations and paranoia issues.

What explains the seeming disconnect? Easy! As mentioned earlier, the machinations Rothkopf himself observes are examples of benign, even benevolent and definitely necessary steps toward establishing global governance, while the conspiracy theories of the loonies represent sinister attempts to grab at an anti-social power and control at which no one he is friends with has ever admitted to aiming. Rothkopf's viewpoint is firmly rooted in the post-World War II establishment mindset, which has since the end of that conflict sought endlessly for a solution to ending the competition of various national sovereignties on the global stage without resorting to out-and-out global government itself.

And if, in their quest to help the world to "live as one" these global elites occasionally get rich from their special connections and behind-closed-doors wheeling and dealing, or even do something verging on the tyrannical and arbitrary, how might the good sheeple appropriately respond? Says Rothkopf, don't worry, trust harder. But how do we know we can trust these people to not abuse their power and privilege?

Because they told me so, says Rothkopf. Why would they lie?

Indeed, that's a question Rothkopf doesn't spend any time pondering. Rothkopf is the dictionary definition of credulous. He starts from the premise that the global elites are a force for social harmony and then uses that premise to prove his belief that the global elites are a force for social harmony. The book is a series of conversations with people covered in chocolate and cookie crumbs repeating, over and over, "I don't even LIKE chocolate chip cookies!", to which Rothkopf smiles and says, "Hey, sounds good enough for me, I'm just happy to be invited to the World Chocolate Chip Cookie-Stealers Forum."

The section on the Internet, replete with an explanation of how it has allowed various people who doubt the inherent goodness of the global elite to find each other and communicate their fears in a public manner when they otherwise would've been unheard worriers in the hinterlands, was a major tell. For a faithful tool bent on elite apologia trying to assure the rubes that everything is okay and the elites will take good care of everybody if we just let them, Rothkopf's insistence on this point seemed to hint in a not so subtle manner that the unregulated speech of the Internet is worrisome to these people and their planning efforts. Combine this with his ignorant citing of search result statistics as if this is somehow scientific and indicative of social trends informing the zeitgeist and I am left to seriously question whether Rothkopf even knows how to check his own e-mail.

I give it 1/5. Concerning the Superclass, the book's message could be best summarized by the phrase, "Nothing to see here, folks, move along."


Buy Superclass on Amazon.com:


Tuesday, December 28, 2010

Epitaph For 2010: The Year Of The Zombie Rally

Let this year be known by the insolvent financial companies whose stocks rallied during it, from the WSJ:
Once left for dead, shares of bailed-out American International Group Inc. have defied critics and rallied to become one of the market's top performers in 2010.

On Tuesday, AIG's publicly traded shares closed 45 cents lower at $58.93, capping a nearly 97% gain in the year to date and over 42% in December alone. The insurer is the fourth-best performer in the S&P 500 index this year.
Goodbye, and good riddance!

Book Review: The Science of Success

The holiday season has been a productive one for me this year in terms of barreling through some reading I wanted to do. The latest casualty of my war on unread books was The Science of Success: How Market-Based Management Built the World's Largest Private Company, by billionaire Charles Koch, CEO of Koch Industries.

I've read a number of management books at this point in my life and so I want to say up front that I typically find them to be boring, clich├ęd and overly-general to the point of being almost worthless. It's led me to wonder if good management isn't more of an art than a science. But, I figured it isn't often you have the chance to read management strategy from a guy who employs about 80,000 people and is a personal billionaire himself, so I decided to give The Science of Success a shot.

First, the bad: this is definitely a management book. It wasn't exactly thrilling to read, it's filled with quotes and cliches (aka "Other People's Wisdom") and it manages to be pretty general.

The book isn't a complete failure, however. While it wasn't thrilling, it wasn't pass-out-on-the-couch-head-tilted-back-90-degrees boring, either. The quotes that were picked were well chosen, relevant and at times inspirational. My favorite was the elder Fred Koch advising his son, the author, upon joining the family business, "I hope your first deal is a loser, otherwise you'll think you're a lot smarter than you are."

Consider me sufficiently humbled at this point, to the point that a bit of success would be a most welcome surprise!

As for the generality, Koch at least tried to provide specific examples of the principles being applied in his business here and there.

Overall, the book falls short of true value. Charles Koch is no idiot and I don't think that my lack of enthusiasm for his book says anything about his business acumen. I just think there's more to how he runs his company than what he provides in this short summary of Market-Based Management principles.

I give it a 3/5. Political without being polemical, built on a sound foundation of free market economic theory, it still has trouble overcoming the tendency toward painting with broad strokes on a small canvas. I got the most out of Chapter 7, Incentives.


Somewhere better to go for management principles?
You may be wondering where, if not in the management principles book of a billionaire, one might find the most instructive lessons on sound management?

Believe it or not, I suggest history books. They hold the totality of human experience and at some point you will encounter nearly every management virtue and folly ever made, for human nature is both timeless and unchanging.

Consider the multiplicity of lessons taught by just one brief, paraphrased example from a chapter on the Egyptian pharoahs in Will Durant's Our Oriental Heritage--Ikhnaton, a pharaoh of the 18th Dynasty of Egypt, decided to change the religious culture of Egypt from a polytheistic tradition to a monotheistic one, built a brand new capital city and attempted to remove references to past gods and traditions from official records.

In so doing, he offended nearly the entire class of the wealthy, powerful and influential Egyptian priesthood who had built their public reputation on the polytheistic tradition. Additionally, he offended many common Egyptians who loved and revered his father, the previous pharaoh, and the old traditions he had strengthened, when Ikhnaton attempted to wipe his father and his father's influence from monuments and records. Finally, he ruined many businesses and merchants when he shifted the center of commercial activity to his new capital city.

Suffice it to say, Ikhnaton proved unpopular over time and when he died, the priesthood made a concerted and successful effort to return the country to the old ways, in turn erasing Ikhnaton and his achievements from monuments, records and the collective memory.

Can you see some lessons here in managing people, reforming and implementing change in large social organizations and dealing with the incentives of entrenched, entitled special interest groups?


Buy The Science of Success on Amazon.com:


Also mentioned in this review:

E-mails From China: How A Few Young Chinese Are Experiencing The Chinese Miracle

I queried a few young Chinese for their thoughts on a recent Business Insider slideshow about the Ghost Cities of China.

Below I reproduce their brief, e-mailed thoughts, unedited. This is not meant to be scientific, thorough or necessarily indicative of anything other than these individuals' opinions and perceptions of this issue and those related. I still believe it proves interesting.

1.) Student, female, 25-yo, from Hunan province, graduated from the University of International Business and Economics, Beijing, currently studying communications at graduate school in the US and traveling abroad in her spare time:
I always think that the real estate is a bubble, people just keep investing and hoping the price to go up, fake value.
But about the first link, I don't really believe that, I've been to many cities in China, even some of the ones mentioned in the news, but I never see the emptiness like that. And the way a Chinese city develop is that the government will decide which area will become the next new district, then they will direct the business to that direction. Sometimes it takes years for an area to become the new district - probably that is what this news(1st one) is talking about...?
2.) Student. female, 23-yo, finishing a degree at University of International Business and Economics, Beijing, currently unemployed and living with family in Shanghai:
if ur asking my opinion id say these are probably not real.
there is no such place in china with perfect living condition with out human.
chinese are everywhere, i highly doubt the government could do this with anybody known about it.

realty business in china is a very hot topic. basically u can make lots of money by buying lands at a low price and selling the houses/buildings/apartments at much higher prices. thats what they thought about it, theoretically. but the truth is people who need to buy a house doesnt have money(enough money) to buy it. but there always are richmen buying properties like crazy, they think the price is not gonna go down so its a zero risk investment. in genenral, ppl who needs the house cant afford it and ppl whos actually buying them they dont need to live in them. thats why lots of new buildings are empty.
it happened before in hainan we call that property bubble. but at that time ppl were not interested and all the buildings in sanya were empty.
u can tell what happens right now its quite similar.

chinese government is about to rise a new decree about house duty on the purpose of lower the housing price. it might work, but it rises new problems as well.
i cant predict what will happen, but i think the essential problem is that, there are TOO MANY PEOPLE HERE!!!!!!! and we are all VERY POOR!!!!!
From another e-mail:
there are so many misunderstandings about china, but even we're chinese, sometimes we dont know what the hell is going on. but the inflation here is definitely worse than the government anouced it would be. chinese are buying like crazy but i dont think its because we're rich its because the money we're holding is devaluing better we change it in to goods.
I am waiting on responses from a few other individuals. This post may be updated later if I hear back from them.

UPDATE (1/13/2011):

I received another response to the ghost city links, this time from a Chinese national who is currently a teaching assistant at an American university:
They are very interesting sensational news articles, indicated in the choice of words as "Amazing" and "Ghost". It seems that the authors use satellite images embedded with a strong technocratic rational to establish the authenticity of their bold claims. The general public who are not aware of the facts in China may easily buy into these claims, however, for Chinese audience, they may easily detect the flaws in the arguments. For example, the caption for one image says "No cars in the city except for approximately 100 clustered around the government headquarters." To my knowledge, it could not be an evidence for the claim of "ghost city", since the majority of people in China still don't have their private cars and the primary transportation is public transportation system. Also, I'm not sure about the accuracy of all the statistics.

However, I agree that satellite images do present many meaningful messages regarding cities' construction. In order to convincingly argue for this certain interpretation, as a reader, I expect more recourses from different angles.
Skepticism is a common theme, it seems.

Sunday, December 26, 2010

Book Review: Rich Dad, Poor Dad

During my holiday vacation this year I came across a neglected copy of Robert Kiyosaki's Rich Dad, Poor Dad. Having a bit of free time on my hand, a burning curiosity to see what was inside of this short and popular book and with nothing better to do I sat down for a few hours and read it.

I see now why the book has been so popular-- the advice contained within is sensible and sound enough to be of value to many people, while the story and the book themselves which are wrapped around these few principles are so lacking in technical detail or substance that they are still appealing to the simplistic mental faculties of your average American drone.

That's really the heart of it. Kiyosaki is no story-teller, and he may not even be much of a businessman in real life. It seems as if an awful lot of his financial success has come from self-promotion, the timeless strategy of "fakin' it 'til you make it!" come to life. Kiyosaki's decision to share many of his principles in the form of stories and dialog from his (eight-year-old) childhood are trite and uninteresting. The narrative lacks authenticity when much of what is being recounted has obviously been concocted with a heavy-handed dose of artistic license. And it's apparently come to light somewhat recently that Kiyosaki admits his "Rich Dad" never actually existed.

But the few principles sprinkled throughout the book are worthwhile and likely extremely helpful for the many who would otherwise be totally clueless about their personal financial affairs. Kiyosaki's biggest pitch, you must produce before you can spend, and you should always do so in a sustainable fashion, rings loudest today in light of current economic catastrophes. But that doesn't compensate for the book being overly long. If you want to know what it's about without actually reading it, try this WikiSummary of Rich Dad, Poor Dad.

Otherwise, if you must buy it and/or read it yourself, I highly suggest skimming. You'll easily find the main concepts and ideas and be spared the plodding development. Take the big picture concepts, leave the rest and don't take any of it (or Robert Kiyosaki) too seriously.

I give it a 2/5. The book peaks in the first twenty pages, when you finish it you are left with this odd feeling like something shady has happened but nonetheless it gets a few points for having some worthwhile principles to keep in mind in consideration of personal financial affairs.

For the genre, I much prefer the classic The Richest Man in Babylon, a book full of true wisdom (rather than sound advice) which manages to be told in a captivating manner as well.


Buy Rich Dad, Poor Dad on Amazon.com:



Also mentioned in this review:

Saturday, December 18, 2010

Informal, Unscientific Instapoll On America

The economy is collapsing. The Fed is stumbling toward hyperinflation. The looters on Wall Street continue their charade. The American Empire is waning.

But what do Americans really care about?

Senate Passes Bill To Lift Gay Military Ban, at the WSJ.com: 636 comments and climbing!

This is a truly epic and important legislative event, America, one to top all of the epic and important legislative events caused by the noble, glorious leadership of Congress. Get on that link, login, sound off! Let everyone else know how deplorable it is that gays serve openly (not serve, serve openly) in the military and how being gay is a crime against god and nature, or, let everyone know how only stupid, bigoted redneck religious sheep could possibly find anything wrong with gays serving openly in the military.

Whatever your viewpoint, make it known. It's imperative you voice an opinion on an issue which on its face seems rather trivial compared to everything else going on-- the future of this great nation hangs in the balance.

(Note: Bonus points will be awarded to commenters who familiarize themselves with the fact that homosexuality is a somewhat common and prevalent behavior observed amongst other members of the animal kingdom, as well as for those who familiarize themselves with the fact that homosexuality has been linked to pedophilia and is therefore a deviant and risky form of sexuality.)

Monday, December 13, 2010

Book Review: Diary Of A Very Bad Year

(Image courtesy of Encyclopedia Britannica)

I just finished Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager by Keith Gessen of literary website n+1. A friend and fellow industry member CP has already thrown up his review of the book. His review is thoughtful and thorough so I'll try to keep mine short and not retread the same ground he has already covered.

First, I thought the title and cover of the book were very misleading. There is nothing confessionary in nature here and the "very bad year" being referenced mostly pertains to everybody else-- "HFM", the anonymous protagonist, seems to have suffered some nicks and scratches himself but he wasn't reduced to selling apples on the sidewalks of Manhattan. The book is a collection of interviews of HFM that serve merely to provide him with a medium to share his views of what happened in the financial markets, not pour out his grief about being a casualty himself.

Secondly, I found the admitted economic ignorance of the author amusing (he self-identifies as a leftist, little surprise after admitting he knows nothing of economics). The author states at the beginning of the book how fascinating and impressive he finds HFM to be in terms of how his mind works and how he can explain so much about what happened in the financial markets. I found myself wondering how much more impressed the author would've been had he spoken to an Austrian-minded individual, but just as quickly realized that there's a reason why the literary catalog of post-crisis reflections is nothing but a series of concerned but ultimately clueless mainstream perspectives.

Similarly, HFM's understanding of what took place was both expected and unexpected. Expected, because he concludes that the various bailouts and interventions were necessary and beneficial. Unexpected, because despite such beliefs his analysis was faintly reminiscent of Austrian Business Cycle Theory. HFM repeatedly, adamantly and correctly claimed that the financial crisis was a result of misallocations of capital and resources, that the aftermath is simply about allocating losses that actually occurred in the boom time, not preventing the realization of loss now, and that this process is essentially unavoidable if the economy is ever to get onto sound footing again.

As for what caused those misallocations, HFM knows there was too much lending but he isn't sure why (Austrians blame fractional reserve banking and central bank-induced moral hazard).

There are a number of good-to-great quotes in the book related to these topics and HFM himself offers additional perspective on other topics relating to the theory of finance and investing which are valuable to consider. For anyone looking for a "how-to" of the hedge fund world, or who are hoping to become better investors, this book offers very little. I thought one of HFM's best suggestions was taking a "Black Box" approach to examining poor investment decisions, though I wondered if more might be gained by carefully scrutinizing winning, rather than losing, trades. Perhaps it depends on whether you focus on margin of safety or not.

Overall, the book provided the most utility by demonstrating the mainstream intellectual perspective. HFM is knowledgeable, thoughtful and obviously highly-educated, as are most of his competitors. However, this knowledge, thoughtfulness and education ultimately proves to be superficial-- HFM and his brethren are content to stop at "animal spirits" as an explanation for business cycles, they're happy to employ self-contradictory logic in their thinking about the economy (how do misallocations of resources occur in a world where aggregate demand is the ne plus ultra of economic motivation?) and they routinely miss the obvious in their apparent confusion concerning why, post-crisis, financial players seem to have such incredibly short memories of all the pain and anguish they all recently suffered through.

The reason is simple, and HFM is aware of it in some other part of his mind but can not seem to connect the dots: thanks to government intervention, very few of them have yet paid the ultimate costs of their outlandish economic misbehavior.


I'll use CP's 5-point scale and rate this book a 3/5. It was short, enjoyable and informative for the most part, but it didn't live up to my expectations. I'd recommend it to anyone who is curious to relive the last two years of financial crisis from the perspective of someone inside the financial industry, with the caveat that this is a slightly flawed, mainstream interpretation of those events.

You can buy it new from Amazon.com using the link below:

Sunday, December 5, 2010

Adventures In Competitive Government-Land

Move over Tea Partiers and other participants in the faux-liberty enthusiasm movement, there's a new game in town. It's called "competitive government", it's all about faux-markets and it's starting to gain interest amongst municipal governments and city managers.

Case in point: I sat through a presentation on "competitive government" efforts delivered by one local city manager on the morning of December 4th and it was long on feel-good phraseology borrowed from the best and brightest within the private bureaucracy of America's largest corporations and short on any non-fatally flawed fundamental economic theory to support it.


Competitive Government: What's It About?
As one city's government puts it, the "competitive government" movement is about "the transformation of traditional government into a competitive service business model" which aims to achieve "high quality services at the lowest cost" while "doing more for less" and "maximizing value for our citizens' tax dollars."

On its face, it sounds great! Who could be against doing more for less and maximizing value? In fact, these are such obviously desirable goals that it almost makes you wonder why, after thousands of years of experience (and experimenting) with government nobody thought of this sooner?

"Competitive government" theory doesn't assume to address this fact. "Competitive government" acknowledges that government is "broken" due to special interest group lobbying, union influence and gross cost overruns, all of which contribute to city financing schemes which are generally a shambles.

The solution? "Competitive government" initiatives aim at using the private market for real goods and services as a model to emulate by cutting costs, raising employee productivity, eliminating "luxury" expenditures in favor of "necessary" expenditures and fomenting a sense of respect toward the city's "customers" and a sense of urgency toward work amongst city employees. In other words, pretend government is a legitimate private business while ignoring the fact that it is not.

And for any of you Randians out there who might be wondering-- you have no need to get excited because "competitive government" has nothing to do with Ayn Rand's theory of governments which would compete for tax-payer dollars. Instead of competing with other governments (as the city manager in December 4th's presentation admitted was the existing model), "competitive governments" set their sights on businesses in the private sector in an aim to compete with them on price and quality.


The First Problem: Competitive Government Still A Monopoly
Let's go back to that city manager presentation I was telling you about earlier. And by the way, the individual in question and the city he represents will remain nameless-- this isn't about bullying particular individuals or criticizing the particular implementation of these strategies in one city, it's about addressing the generally erroneous thinking that underlies "competitive government" theory.

The city manager was stopped by some questions from the audience part-way through his slide show presentation about "changing the culture" in government, his personal push for "continuous improvement" and the adoption of "best practices" and some facts and figures on recent cost-cutting successes.

For a moment, I was transported back in time to when I once worked for a major, international corporation. I was reminded of all of the interdepartmental meetings I had sat in on in which one group of employees was eagerly trying to justify their budget and/or existence to another set of employees or their supervisors. I waited for the hands to go down and then I said the following:

"I have two questions. I've enjoyed your presentation and I find the idea of making government more open and competitive, like a business, rather than closed and monopolistic, to be an enticing one. My first question is this: will the citizens of your city be free to not pay their taxes if they don't want your services?"

An uncomfortable silence came over the room. The city manager appeared to be sternly but thoughtfully considering what I was aiming at and then said, "No."

I continued:

"If the citizens are not free to stop subsidizing your efforts with their taxes if they don't want the services you provide, then you are still a monopoly. And if you are still a monopoly, all of what you just discussed is interesting but amounts to nothing more than flowery rhetoric."

The audience, up to this point delivering a series of hoots, hollers and hurrahs every time the city manager exclaimed strongly against waste, inefficiency and taxpayer abuse (you know, the common domain of monopolistic government everywhere) was now outraged at my inquiry. Over cries of, "Let him speak!" and "We don't have time for this!" the city manager advised that "they can move if they aren't happy with their services." Ah! Randian "competitive government" at last!

So, we've established that "competitive government", while interested in emulating the behavior of voluntary, private business, is not interested in actually becoming one and will still rely on the use of coercion to derive its financial resources. In other words, government will still be a monopoly, but a friendlier, more efficient one. What's wrong with that?

The problem is that if government is to remain a monopoly it is likely to continue to behave as one. This is the incentive problem of economics. The commitment to change, new ideas and cost effectiveness of our earnest city manager aside, what incentive does an organization providing services have to act in an entrepreneurial, consumer-oriented way when it ultimately will rob its "customers" to provide them their services whether they like the way those services are provided or not? Surely it possibly could behave differently, but why would it?

Don't get me wrong. Private businesses can treat their customers like crap, and often do. They can charge high prices (relative to their actual costs), they can deliver terrible, clueless and even careless customer service and they can deliver low quality services and products. But in the marketplace, such negligence is an invitation to other entrepreneurs to enter into competition with the accused in what could prove to be mortal combat for the enterprises so engaged. Neglect the consumer and in time he may come to neglect you, as well as your profitability.

It's simply not so with government. If the government screws up and treats taxpayers and citizens -- they're not necessarily one and the same, you know -- with indifference or even callous disregard, the agents of the government are still going to collect their paychecks and their velvet-lined pensions. Everyone would prefer a friendlier government than a meaner one, and it's possible some people who work for the government have, do and will strive hard to be decent, but the general tendency to do so isn't there because government is a monopoly and monopolies lacks the consumer-driven discipline of the market.


The Second Problem: Competitive Government Unable To Calculate
Monopoly is just one problem. Back to the presentation for a moment.

As the aggravated din of the crowd died down, the city manager attempted to carry on with his slide show.

"Excuse me!" I piped up. "I had two questions." The crowd grew noisier again. I had just introduced a major theoretical obstacle, confounding the city manager's entire intellectual framework, but no matter. The participants couldn't be bothered, it seemed, with whether what they were hearing made any sense or not. They just wanted to get on and get to the end of it.

"You have discussed throughout your presentation your efforts in cutting the costs of government services," I continued over the audible disturbances. "What you have not explained is how cost-cutting alone is a relevant metric for success in serving the citizens. Government operates on the welfare principle, while private businesses operate on the profit principle. How do you manage to calculate?"

Frustrated, the city manager sought to make a tangential point. "Some services, like provision of a police force, just wouldn't make sense if you had to wait until the guy had you by the throat to make the call for help. In fact, they tried that recently in Kentucky with that guy whose house ended up burning down. Of course, anyone will say after the fact 'I would've paid, I would've paid!' but the point is, it's just impractical to have a bunch of police sitting around all day waiting for someone to call on them and then pay," he said.

"That isn't true at all," I responded. "Private businesses manage this exact feat every single day. Think about an auto mechanic shop. They manage to make money with a business model that relies upon waiting for their customers to show up, ready to fix their cars. Anyway, that isn't the point. I want to know how you plan to calculate what is the best use of city resources in any given situation? I want to know how you calculate what services are 'necessary' and which are 'luxuries' that might be cut?"

The audience had returned to a dismayed hubbub. Who was this nefarious ingrate in their midst? The city manager blew me off. "Let me just get through the rest of my slides and I think you'll be pretty impressed with some of our cost-cutting successes so far."

It probably does not need to be mentioned that I was not impressed.

The humongous elephant in the room remained-- because the city manager is not operating on the profit principle, where the success or failure of each individual initiative undertaken can be measured by the profitability (or lack thereof) of the consumers' response to said initiative, he has nothing to rely upon but his own ego and subjective insights as to what he imagines to be the "righteous" path to take. As Ludwig von Mises so succinctly explained the economic calculation problem in Chapter 27 of Human Action:
The director wants to build a house. Now, there are many methods that can be resorted to. Each of them offers, from the point of view of the director, certain advantages and disadvantages with regard to the utilization of the future building, and results in a different duration of the building's serviceableness; each of them requires other expenditures of building materials and labor and absorbs other periods of production. Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. He cannot attach either to the waiting time (period of production) or to the duration of serviceableness a definite numerical expression. In short, he cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. The plans of his architects enumerate a vast multiplicity of various items in kind; they refer to the physical and chemical qualities of various materials and to the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them.
He continues:
The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.
In short, the city manager is hopelessly lost. His actions are not guided by the entrepreneurial motive (profit and loss) which is in turn guided ultimately by the action of consumers on the market. There is no profit and loss guide for government. Government monopoly explicitly rejects such a principle. Instead, his actions are guided by his subjective interpretation of his idea of what the citizens he is responsible for "need". As for how he will fulfill those perceived needs, the city manager is equally blind.

For example, does he do the job in house or outsource it to a private contractor? Should garbage be picked up once a week or once a day? Does "waste removal" necessarily entail recycling as well, or just the transportation of trash? When the city manager has to choose between cutting costs and cutting services, how does he know which is the better one to do?


Concerns About Criticism Of The "Competitive Government" Model
"It's not a monopoly! They can move!" a woman beside me said in the midst of the cacophony that arrived following my first question to the city manager. "Sure it is," I replied, "He just said that people will not have the choice to reject paying taxes to support it."

"What's your alternative?" she asked after the city manager had finished his presentation.

"My alternative is the abandonment of government, in its entirety. Don't try to run government like a business. Instead, there should be nothing but businesses," I replied.

"Have businesses provide city services? That seems beside the point," she declared somewhat haughtily. "The discussion is about how to manage those services, not how to provide them."

"That isn't correct," I tried to explain. "I've just raised the point that the provision of those services by government is impossible. If it's impossible for government to provide the services it's certainly beside the point to discuss how government should try to manage to do so."

"What's your bottom line? And hurry, I've only got two seconds," she shot back. I rolled my eyes at this rude and arbitrarily-imposed deadline. What, was I being interviewed on cable news all of a sudden or something? I took one second pondering how to phrase my primary idea and another second verbalizing it.

"How will he calculate?" I said. She scribbled it on a piece of notepaper and proceeded to ignore me.


A Short Demonstration Of Principles Via Example
Not for long, however.

"Now that I've had a chance to calm down a little, I just want to say, don't stop asking tough questions like you did," the woman advised. "Even though it might make people uncomfortable, we need outliers like you to challenge our beliefs."

I didn't need the pep talk as I hadn't managed to find myself in a pit of nihilistic self-doubt following the poor reception of my questioning by the supposedly pro-market audience. If I was an "outlier" by understanding sound economic theory while they didn't, that was everybody else's problem, not mine. Still, I hoped I could leave this person with something to ponder besides the confused, self-contradictory babbling of Yet Another Starry-Eyed Central Planner.

I turned to the woman and said, "Think about the example the city manager mentioned about the implementation of the self-checkout technology at the city library. The city manager said this was a successful demonstration of their 'competitive' principles because it lowered the cost of checking out at the library while other libraries nearby still rely on costly personnel to handle this part of the library process. Ignore for a moment whether the city manager is being honest or correct in determining this to be lower-cost on net. We'll assume he has achieved some financial savings. The question remains, is this the best possible way to serve the visitors at the library? Maybe it is lower cost, but what if library visitors prefer to receive assistance from a real person, for instance? There is obviously more to calculating the success of any of the city manager's proposals than simply examining the cost. After all, the absolute lowest cost process would be to not have any checkout system at all-- no machines, no people. That costs zero. You could instantly make the entire government permanently 'cost effective' by eliminating all spending entirely. But would that leave people feeling better off? Because he doesn't serve a voluntary market but rather taxes his 'customers' beforehand and then provides them with his anticipation of services that meet their assumed needs, the city manager will never know."

The woman got up to leave, but before doing so turned to me and said, "You've certainly raised an interesting problem."

No doubt, I had. Consequently, it is the problem of all socialist schemes and of course the one the city manager was least eager to consider or address.


An Actual Solution: Real, Free Markets
In conclusion, "competitive government" rests upon a farcical interpretation of what drives private businesses and how entrepreneurs ultimately manage to serve their customers.

In a true market, entrepreneurs try to serve the customer's desires in the most efficient way possible by giving the customer that which he demands at the lowest cost possible. "Competitive government", on the other hand, gets it about half-right by trying to cut costs and provide goods and services as cheaply as possible. Whether those goods and services provided are actually demanded by anyone is another concern entirely, one which "competitive government" practitioners necessarily must ignore lest they reason themselves out of a job.

Additionally, in accepting a monopoly role for government, "competitive government" supporters fail to ask themselves what type of incentive structure a monopoly faces in determining how to treat the consumers that it serves. "Competitive government" theorists ignore the historical expression of this perverse incentive structure and choose to believe that all the past problems of government are due to the wrong people running it, or the adoption of a misdirected focus or poor attitude.

The solution to all the problems faced by government, as well as caused by government, is the spread of real, free market conditions as the predominating social institution and the concomitant retreat of governments. In short, the solution is the replacement of "substantially competitive" feel-good efficient-socialism rhetoric (however government agents themselves subjectively choose to define this) with actually competitive, private, voluntary free enterprise reality.

Friday, December 3, 2010

This Is What Honest, Transparent Government Looks Like

City council members duke it out over school lunch legislation in Seoul, South Korea:



Government is violence. Political parties are mafia gangs. When they duke it out like this you're getting a glimpse of how government truly operates, without all the "sirs" and "madams" and "I yield 5 minutes of my time" and the euphemisms about collecting "taxes" (aka armed robbery).

If only this kind of stuff happened more often. It is, of course, totally disgraceful. More people might be wise to just how disgraceful government is if this kind of thing were more common.

Here's hoping John Boehner's first act as Speaker of the House is to deliver a physical Boehner Beatdown to his fellow members of CONgress.