08 September 2012

Back to Work

Anyone miss me?

I want to start by saying I don't care for Mitt Romney, nor do I particular care for Paul Ryan.  And if time allows I will expand on that further at some other time.  They may be fine human beings, but since the odds of our crossing in any meaningful way is nil I don't care.  I don't care for them as politicians and I don't want them to win the election.  I don't care for Obama either and the same corollaries apply. Biden, however, I think is a snake and is the main reason I hope Obama remains healthy so long as he is in office.

So I don't care for any of the principals

But what I really don't like are asinine, hackneyed, ad hominem attacks by alleged journalists.  I don't care who the attacker is and I don't care who the target is.  If you wish to attack a politician's policies or an economist's analysis, a court's opinion or a coach's strategy, fine.  Do so with gusto.  But you are obligated to stick to facts and stick to the policy or analysis or opinion or strategy, at least if you are to be taken seriously.  Some consistency can be helpful as well, but isn't necessary.  See Emerson if you need to learn the dangers of foolish consistency.

And this brings us to Matt Taibbi, a writer for Rolling Stone, among other publications, a frequent guest on Bill Maher's HBO show and he looks, acts, talks and writes like a douche.  Sure, it's ad hominem but he's earned it.

He wrote an article for Rolling Stone.  I read Rolling Stone not too long ago when Howard Stern was on the cover and rather enjoyed the issue.  The writing wasn't half bad.  Beyond that, I hadn't seen the magazine in well over a decade and haven't picked one up since.  I get the feeling that the Stern issue was an exception and the muck Taibbi rakes is the rule.  Regardless, a friend posted the article on facebook, so that's how I came across it.

I didn't finish the article.  I gave it the old college try and slogged through the first eleven paragraphs.  Some tidbits (emphasis added for added emphasis):
·      the drama of this rhetorical high-wire act was ratcheted up even further when Romney chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher who'd be honored to tell Oliver Twist there's no more soup left.

·      He said as much when he unveiled his choice of Ryan, the author of a hair-raising budget-cutting plan best known for its willingness to slash the sacred cows of Medicare and Medicaid. "Paul Ryan has become an intellectual leader of the Republican Party," Romney told frenzied Republican supporters in Norfolk, Virginia, standing before the reliably jingoistic backdrop of a floating warship.

·      Our collective debt is no ordinary problem: According to Mitt, it's going to burn our children alive (italics in original).

·      But what most voters don't know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. (Italics in original, this isn't necessarily inflammatory, but do keep this in the back of your head).

·      By making debt the centerpiece of his campaign, Romney was making a calculated bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of the American press corps.  (I would take that bet).

·      choosing as his running mate perhaps the only politician in America more pompous and self-righteous on the subject of the evils of borrowed money than the candidate himself.

·      No one in history has ever successfully run for president riding this big of a lie. It's almost enough to make you think he really is qualified for the White House.

·     it stands as an emblem for the resiliency of the entire sociopathic Wall Street set he represents

·      Mitt Romney, it turns out, is the perfect frontman for Wall Street's greed revolution
·      A takeover artist all his life, Romney is now trying to take over America itself. And if his own history is any guide, we'll all end up paying for the acquisition.  (Again, please keep this last clause in mind).

These are all just from the first eleven paragraphs, mind you, of a 7,800 word article with 79 paragraphs.  One might get the idea that Taibbi not only doesn’t like Mitt Romney personally, but that he might have some sort of axe to grind.

I made some snide comment to the friend who posted the story about having wasted my time and though that would be it.  Then I saw this:








And then I got pissed.

Because Matt Taibbi doesn’t know what he’s talking about.  Personal attacks aside, when you go to such lengths and make so many personal attacks while demonstrating an extraordinary ignorance of fundamental concepts you deserved to be called out.

What do private equity firms do?  Here is a great piece by the Planet Money guys at NPR that actually gives a case study on a Bain Capital investment:

(Also, a very insightful podcast from Russ Roberts with Steven Kaplan on EconTalk here.  And a paper by Roberts here.)

Basically they will raise funds and take over a company (the investors’ money is the “borrowed money” Taibbi is referencing when not knowing what he is talking about).  They will either make the firm profitable or, failing that, liquidate the assets.  They get a management fee and an share of the profits, usually 20%.  So the Private equity firm wants profits.  The investors want return on their investment.  Profits and returns on investment are known, in the fields of finance, accounting and economics as “good.”  Let me know if I get too technical here.

The added benefit is that if the company that is taken over runs more efficiently, delivers more profits, the investors and the equity partners aren’t the only winners.  Everyone is.  And if the firm ends up being liquidated, that means that there are more effective uses of the capital that the firm employs.  All of the capital: the land, the machines and the people, those resources will get reallocated to more efficient uses.  And that benefits everybody.  Yes, those who lose a job may not appreciate the macroeconomic benefits, and that’s why I am a supporter of unemployment compensation.  Not the way that it is currently funded and managed, but that is another matter.

And if the firm fails?  They don’t get paid and the investors lose their money.  Society may or may not be better off by the reallocation of resources, because they may have been best used where they were.  So it is good for everyone when private equity firms do well, not just for the members.  And if the private equity firm continues to make bad investments, they won’t be a private equity firm for long.  Investors typically don’t like to lose money.

So when Taibbi says, “How is it that no one is bringing up that the fact this guy was a leveraged buyout expert.  I mean, this is how he made his fortune.  And what is leverage?  Leverage is debt.  What this guy did for a living is he borrowed money that other people had to pay back,” it becomes painfully obvious that he’s an idiot.

But this is also a nice segue to idiotic point number 2: “They’re (Romney, Ryan, Republicans, conservatives, infant eating monsters all) trying to make this a referendum on the irresponsibility of the Obama administration borrowing tons of money, pouring it into stimulus, to a lesser degree the bailouts, though they complain a lot less about that for some reason.  But it’s this massive national debt that they’re focusing on and I think that this really strikes a chord with a lot of ordinary Americans despite the fact that I think that a lot of people don’t really don’t understand how deficit spending works and whether it’s always dangerous which is an open question, I think, um, but ordinary people respond negatively to the idea of spending beyond their means.”

In honor of the late, great Ron Palillo

I know how deficit spending works.

And Matt Taibbi may think it’s an open question, but it isn’t.  It’s always bad.  Because the government doesn’t create capital when it gets something right.  It destroys capital.  Now there are trade-offs.  Let’s take the roads that the Democrats just seem to love talking about.  Yes, we need roads.  And police.  So we need taxes to pay for these things.  And when legislators, or despots for that matter, want to spend more than they take in in taxes they can issue debt.  And right now, it doesn’t cost a lot of money at all for the United States to issue debt.  Interest rates are incredibly low.  But low interest isn’t no interest, so there is a cost.  Government borrowing also increases interest rates (long story, but the short answer is “market for loanable funds” and "the quantity of loanable funds"; negative government spending reduces the quantity of loanable funds, interest rates go up*).  The Federal Reserve can do some things to mitigate these factors, and boy howdy have they been doing them.  It also helps to have the rest of the world doing far worse than we are, making our bonds seem the only safe form of sovereign debt out there.  Suffice to say that without Federal Reserve tinkering, interest rates would be (marginally) higher than they are due to the deficit spending.  And the credit downgrade that the US earned would have also hurt much more were it not for the Europeans.  But we can’t count on the Europeans being worse off than we are forever, because we’re going to pass them and become less attractive.  And the Fed keeping rates even marginally lower than they otherwise should be means more capital is borrowed and poured into housing and other long-range investments rather than saved.  Which is what caused the current financial crisis.

But Taibbi’s fatal flaw is his inability to see the difference between private and public finance.  If Mitt Romney makes a bad investment, yes, he may still make money and a firm may end up in ruins, but if the investors don’t make their nut, he won’t have investors.  If banks are left holding the bag, banks won’t work with him.  There are repercussions, consequences that will force the capital (money and otherwise) to its most (more) efficient allocation.  These repercussions and consequences don’t exist when the government spends other people’s money.  For our “investment” in GM to break even, GM shares need to be worth about $53/share.  It closed today at $23.37, so we’ve lost half that money.  And all of the money in Solyndra, after the government insisted on not having lien position in case of liquidation.  These are not the sort of stupid investments that private firms make because they are stupid investments.  But governments do, because Matt Taibbi, the readers of Rolling Stone, the Huffington Post are the ones who don’t understand how deficit spending works.

But keep attacking Mitt Romney personally, for the things he actually did well.

* This is no Austrian theory, this is no Friedman-esque monetarist theory, this is Keynesian economics and is Econ101 stuff.  Yes, Lord Keynes thought, other things equal, deficits are bad.  Short-term deficits during a recession are not to be worried about.  I can agree with Keynesians on this.  I don't think there needs to be concern about cutting government spending, when it comes to government spending on legitimate functions of government (see here for a handy list of what those functions are).  But those arguments go out the window when you're accumulated debt is >$16,000,000,000,000; annual GDP is about $14,500,000,000,000 and annual deficits are >$1,000,000,000,000.  What this means is that if all of the country's production for one year went not to wages, not to firms, not to revenues or profits, but if everything produced in one year were able to be liquidated and that money sent to Washington, we'd still have over $2,000,000,000,000 in debt and it would still be growing.  Oh, and you'd have not the United States but a country poorer than Congo.  The ability to print money to dodge the consequences of this profligacy is no solution.  As Hayek noted, "A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy."