Does Congress Hate Workers?

This week, Congressman Sherman (D-CA) called on Wall Street CEO’s to sell their corporate jets in order to raise capital. Last week, when Senator Levin (D-MI) said basically the same thing, I started wondering, “Why do these guys hate workers?” Levin represents a state that practically identifies itself by its blue-collar roots (“the working man”). So, why does he want to put blue collar workers on the street?

I mean the folks who build the jets. Do you think they come from a magic jet fairy? They are built by blue collar workers. They are fixed, flown, and fueled by workers. They cost about $2000 per hour to fly. Where do you think that money goes, Senator? Congressman? It goes to pay the salaries of the people who keep them in the air. So they have jobs. Jobs our President wants to save, as I recall.

Oh, but it’s a terrible perk and sets the wrong example? Ah, like luxury boats—the kind President Clinton put a tax on? And then people realized they were putting the boat builders out of business? Selling that jet also means one less jet the workers need to build. Oops.

And let’s look at that “perk.” Let’s say your CEO earns $10 million per year—a lot less than most of them, but I think most people could agree that a successful CEO might be worth that. That works out to $5000 per hour, assuming a 40 hour work week and 50 weeks per year. (Certainly they work more, but let’s assume they just do the extra pro bono.)

By my math, if they fly commercial—or drive, like the idiots from Ford, GM, and Chrysler—then every hour, they are stealing $3000 in value from the company. They’re stealing from me, their stockholder. (The jet costs around $50 million, but it lasts 10 years and flies lots of suits at once, so let's not do more math.)

The head of my own company (which, let’s just say, is REALLY big) recently mused at a gathering that perhaps he should’ve driven down from corporate headquarters, instead of flying. It would’ve taken him 4 hours instead of 1 hour, each way. I know he was trying to be considerate, and I didn’t want to be rude, so I bit my tongue. What I really wanted to say was, “Sir, respectfully, if you don’t have something better to do with your time than spend 4 hours driving here, we have the wrong boss.”

We need to get past the idea that CEO’s fly on corporate jets because it’s fun, or fashionable, or chic. They do it because their time is really that valuable. If they screw up the company, then fire them. But that doesn’t change the fact that the company needs someone whose time is really that valuable. America is an egalitarian society, so we don’t like to think like that. But let’s get serious for a minute—that’s what we say we want in our nation’s leaders. Why would businesses want someone who’s just mediocre? Who, exactly, do we expect to end up in the cabinet?

Economics and the Factors of Production

Happy New Year.

I’ve been pondering, recently, what to believe about the economy. Sadly, there aren’t many reporters with enough grasp of economics to provide much of use, and most economists seem more interested in their pet positions to actually look at what’s really going on and what the real root causes are.

So, I’ve been rereading my economics books, checking out analytic pieces on both sides, and doing a lot of thinking. A lot of thinking. And here’s what I’ve come up with.

From “Economics Explained,” I recall that there are only a few things you can really do with money: you can spend it, you can save it, or you can invest it. (I had forgotten that saving and investing have a different effect on the GDP when you’re talking about consumer activity.)

If you spend it, your purchase contributes to the GDP: you bought a product or service, and in the process, used some of the factors of production—labor, capital, and land.

If you save it, your purchase does NOT contribute to the GDP: you chose not to buy a product or service, and in the process, you freed up labor and capital to be used elsewhere—especially by businesses, who will borrow your savings from your bank and use them to buy equipment, start a new business, etc. That’s a good thing if there’s a demand for labor and capital, because by making some available for businesses, you are helping to prevent inflation. (Otherwise, business demand has to compete with your demand by bidding up labor prices, interest rates, etc.) That’s a bad thing if there is little demand for labor and capital, such as occurs in a recession. All you’ve done is decrease consumer demand, which decreases GDP. In a recession, businesses don’t want to borrow your money.

If you invest your money, most of us are really just buying business ownership rights (or a claim on business debt) from someone else, unless you got in on an IPO. What effect that has on the economy depends on what the person who sold you the stock (or bond) does with your money.

So, it follows that government transfer payments don’t contribute to GDP, but government spending on stuff does contribute. Naturally, the recipients of transfer payments will probably spend them and contribute to GDP, but that money came from somewhere. That “somewhere” has less money to spend, so the economic question is which group would’ve made a better contribution. That’s key question #1 to ask.

The second key question is what happens when the government spends more than it takes in. Proponents of government spending to jump-start the economy argue there is unused labor, so putting it to work builds useful stuff (e.g. bridges) and puts money in the hands of folks who will spend it, thereby increasing demand for goods and thus helping GDP. In a recession, the capital necessary to put the labor to work is just sitting around unused, since businesses aren’t borrowing it. That makes sense as far as it goes, but I see a couple problems. First, the debt must be repaid, so the future interest payments will steal capital for decades, creating a drag on economic growth. Second, if the program creates an entitlement, then the need for funds will stretch to doomsday, and so will the economic drag. Third, if the capital is borrowed from other countries, they can’t put it to use in their own economies and employ their own labor. That seems like a problem, but I haven’t resolved it, yet. Finally, the implicit assumption of government spending as stimulus is that both labor and capital are unused. In the current financial crisis, a major problem seems to be that businesses can't get capital.

The third key question, in light of today’s never-ending government bailouts, is what that is doing to the economic need for creative destruction. The buggy whip industry had to die, and bailouts would’ve just delayed the inevitable. On the other hand, I recall an interview with Richard Branson in which he pointed out that the bank his airline uses nearly failed—and when he went to move his business’s money, he was advised to read the fine print; it wasn’t that kind of an account. He would have been in serious trouble through no fault of his own and despite the fact that his company was a solid going concern. That has me pondering…