Friday, October 2, 2009

On Plumbing in The Two Americas

Increasingly there are two Americas: the first is comprised of investment bankers, commercial bankers, mortgage bankers, professors, real estate developers, judges, and others on government out-patient support. The second is of productive, value-creating Americans on Main Street in the private sector who lose because of government. Increasingly, the values that guide the two Americas are incompatible. The first America believes that they have the right to dispose of the value that the second America creates. The second America works hard and pays. The first America consumes the first America's wealth and boasts of its morality in compelling the second to pay.

Let us suppose the two Americas separate. The first America will see a surplus of theories about why judges create efficiency; why people who do not work deserve ten thousand dollars in health insurance; and why critics of the president are violent racists who deserve jail time. The first America will see a shortage of plumbers and rising prices as each attempts to do as little work as possible and each steals from each. The first America will have plumbing that remains unfixed.

The second America will see a surplus of plumbers. Repair and house prices will fall. But there will be a shortage of academics, judges and investment bankers. Productive people will produce wealth relative to the amount of money in circulation. Innovation will be rampant.

The first America will learn to live with broken plumbing and lots of theories about how to redistribute wealth, none of which work and all of which offer de facto guarantees of funding for investment banks, universities and judges. The first America will print money and hand it to the most powerful, claiming that they are selfless and charitable in doing so. They will become gradually poorer as investment bankers, lawyers, professors, and journalists consume ever larger shares of wealth. The second America will become richer, as America did until 1970, through hard work and innovation.

In which America would you prefer to live?

Monday, September 28, 2009

The Evil of Banality: American Morals in Decline

Perhaps Americans were never really that moral and American exceptionalism was only a hope. Perhaps John Winthrop's "city on a hill" was a pipe dream. It is true that America was never perfect. But it is also true that there always were Americans like Henry David Thoreau who protested injustice and believed in freedom from the state. Initially, much of the impetus for the "Progressive" reaction to big business was moral indignation at its corruption. But the Progressive response was to establish institutions that were even more corrupt than the trusts and cities at which Americans, mostly rural in the late nineteenth century, were aghast.

By the the 1930s industrialization and the expansion of the state had eroded the Christian moral values of many Americans. In Germany, birthplace of the university, the welfare state led to what Hannah Arendt termed "the banality of evil". Adolph Eichmann, a bureaucrat who oversaw the German extermination of Jews and Gypsies, claimed that he acted in accordance with Kant's categorical imperative in that his "duty", which all men should follow, was to obey orders.

The pattern of moral flexibility molded to the dictates of large organizations has been characteristic of American Progressivism as well as German statism for the two have the same origin. One of the ways that Progressivism leads inevitably to authoritarianism and then totalitarianism is the erosion of moral sense that occurs as people relinquish independence in exchange for security and begin to depend on "their betters" to do their thinking for them. This has a great deal to do with the dependent psychology that urban Americans have developed because they work for large organizations and spend most of their lives obeying their bosses and following orders. The concepts of organizational control and organizational culture are tightly linked to Progressivism. Other-directedness, the psychology of reliance on popular opinion for one's own views, is also a function of government authority, large organizations, and tightly configured belief systems under the control of one's boss, the media and the state. Conformity, other-directedness and ethical decline all reflect the economic structure that the large-scale economy has created.

The argument in favor of scale is that it produces consumerism. But since 1970 the real hourly wage has been stagnant. Thus, the large-scale economy has been an economic and consumerist failure as well as a moral failure.

In his classic work on management Functions of the Executive, Chester Barnard, president of New Jersey Telephone, described his success in changing a telephone operator's moral sense around so that she placidly watched her mother burn to death while on duty. He felt justified in having ingrained in the woman the dominant moral belief that her first duty was to the telephone company and that she could not leave her post even if it meant trying to help her mother as she died in her house across the street. Likewise, the notion of organizational culture advocated by William Ouchi in Theory Z and numerous other management books is one of sacrifice of moral sense in the interest of corporate values. Enron is one example of the end result of a century of corporate brainwashing, Progressive economic policies and government expansion. The only reason that Enron was able to exist was credit expansion by the Federal Reserve Bank that was deposited in the money center banks which in turn knowingly provided Enron with the funding it needed to commit ongoing fraud.

Recently in the small Town of Olive in which I reside, population about 3,500, there has been a series of embezzlements. A woman stole $40,000 from a Mobil Mini Mart in Shokan, NY and used it to reopen the West Shokan General Store. Another woman stole from the Onteora* High School Student fund. Another burnt down a local hotel. In fact, there were two cases of arson involving local hotels in the past few years. I checked out the Kingston Freeman's website for "embezzlement" and found the following:

-An obese New Paltz woman was arrested last week for allegedly stealing $700,000 from a local attorney

-In July, a 55-year-old Kingston woman was convicted of stealing $390,000 from a "professional office".

-In April, a store manager was forced to return $25,000 he embezzled from CRSR Designs.

These crimes were not committed by big business or by government. But in a society where taxation, wealth transfer via monetary expansion and the brokerage of special interests have become the chief avenues of success for such professions as law, the judiciary, investment banking, government employees, hedge fund operators and corporate executives, it is not surprising that moral corruption has seeped into the mainstream of American life.

*Onteora was the Native American name for the Catskills. It means "land of the sky".

Coming Chinese Instability

This is a tale of three nines: 1989, the year of Tiananmen Square; 1999, the year of the tech bubble; and 2009, the year of Chinese support of and complaints about the dollar.

The current global monetary regime seems to parallel the 1999 tech bubble. During the tech bubble investors believed that the stock of and Cisco Systems would indefinitely escalate. Like all asset bubbles, the tech bubble came to an unhappy end. Ten years later, in 2009, the Chinese seem to think that if they keep buying dollars with yuan and threatening to withdraw the investments then in the end the investments will hold their value.

The Chinese have subsidized the dollar at the expense of their already low-wage workforce. If they keep holding up the dollar, then the Chinese people will become poorer. But if they pull out of the dollar, then their substantial dollar holdings will diminish in value, the Chinese workers will be thrown out of work and the Chinese people will become poorer because of the losses due to the dollar holdings.

Shall we conclude that the Chinese economy is headed for a rough ride?

What do we know about the stability of Chinese society? In 1989 the Tiananmen Square Protests led to hundreds of communist killings. Anyone who was conscious that year will remember the young man standing in front of the tank (see above). Since then, the Chinese have enjoyed a vibrant bubble economy based on fast money growth. But crashes inevitably follow monetarily induced bubbles.

When the Chinese economy tanks there will be alot of unhappy Wal-Mart-supplying factory workers. Perhaps the power of the Chinese state will prevent social unrest. Perhaps not.