The first rail - economics

Today's essay is one of three I'm working on that discuss topics often considered to be radioactive in everyday conversation. But it's my blog, so I can say whatever I want. I plan to post one every few days over the next week or so, and if you offend easily or know immediately that you'll disagree with me, then feel free to ignore these and skip right to my usual mixture of tech notes, daily minutiae, wrestling talk, and notes about the development of my utterly adorable son. This will be a tad more serious, though.

The first topic is on business and economics. As most readers know, I've worked for a long time in the IT field. Right now, I'm struggling to get a business off the ground, and I also bumped up firsthand into the downsizing trend last year. So I have a slightly biased perspective, of course - but anyone who won't admit some sort of bias is either a liar or a Bush administration official (which may be pretty much the same thing).

American capitalism is fundamentally the strongest economic system ever devised by man. I really believe that. But I also believe in common sense, and I don't see much of it. Our economic system is broken - I think that should be obvious to most. I trace much of this to the mutual fund industry.

Mutual funds, you say? What on earth is wrong with them?

Well, the stock market is a wonderful thing. It gives the average person the ability to own a portion of a large company, sharing in the risk and the success alike. Some years ago, somebody had the bright idea to pool stock market risks among multiple companies, and make that pool available to investors. So rather than buying the stocks directly, you bought shares of the fund that then used the total pool of dollars to try and grow wealth for everyone in the fund.

Great idea. But the law of unintended consequences always holds sway, and it was no different here. The sheer size of mutual funds gives them a larger voice than the individual shareholder would have. That's good. But the goal of the average small stock investor is likely to be growth. You buy a few shares of some company as a young person, deposit the dividend checks, and someday sell at an increased value (assuming your stocks grew). Businesses focused on long-term growth, often at the expense of short-term profits.

Mutual funds changed all that. Because of the size and volatility of these funds, the focus of businesses started to change. Where once it was good to grow long-term, the new mantra became one of quarterly growth - increased numbers mattered regardless of the way they were obtained. And the massive stock-based retirement funds (like TIAA-CREF, CALPERS, and others) contributed as well, pushing businesses to generate immediate increased profits often at the expense of the jobs of the very investors they represent. What good are better returns on your retirement fund if you don't have a job today?

The other disaster was the explosion in stock-based compensation. I know people who have already retired as millionaires thanks to options - so they're good, right? Well, they are good in theory - tie compensation to a company's performance and use that compensation as an incentive. Unfortunately, it helped make executive compensation ridiculously disproportionate and created an incentive to game the system in order to maximize short-term value even more. Name me even one CEO who deserves a $10 million and up pay package. Or even $5 million. I can't. Not even Steve Jobs deserves that kind of compensation, and he literally saved a Fortune 500 company from the grave. Unless you own most of the shares yourself, there is no justification for a publicly owned company paying the kind of salaries they pay their top dogs. Compensation has become an executive pissing contest, with execs pretty much battling over whose Gulfstream is bigger. It should stop. Period.

And it's been made worse by the plutocracy that was granted control of this nation by a Supreme Court decision. We thought crony capitalism was reserved for the Asian nations - no, we've got it, too. This administration has been more against the everyday person than any I've seen in my lifetime so far, and I've lived so far through Johnson, Nixon, Ford, Carter, Reagan, Bush 1, Clinton, and Bush 2. Selling cynical tax cuts as their only solution to all ills is inane beyond belief. Paul Krugman has done a much better job than I can of pointing out the horrible economic ideas the Bush gang have been selling us, so I won't linger too much here. But I want to point something out. Notice how mortgage rates are finally starting to climb again? Well, part of that is because the US government is the safest investment bet out there. But every dollar they borrow is a dollar less available to the private sector, because banks and investors send money to the government first for safety. The total pool of money doesn't increase that fast, folks. Something's gotta give.

And it's starting to. It's going to keep becoming more and more expensive for you and me to borrow money, because the supply of money for us is down. Why? Because George W. Bush and his advisors believe you can spend more and tax less. If you make really big money (like over $250k per year), you'll pay a lot less in taxes than you did a few years ago. If you make under $100k, you'll pay a little less. If you're struggling to get by, you'll get screwed. Oh well.

But hey, from what I can tell it really doesn't matter to them. Way too many of the higher-ups for my liking subscribe to the millennialist belief that says we're entering the end times anyway. I'll save that for essay #3, but basically there are people in charge of this country who believe that "hey - deficits don't matter because Jesus is on his way". I think that speaks for itself.

How can we fix this? Well, first of all we can throw this gang of idiots out of office in November. I'm not sure Kerry will be a lot better, but I'm sure Bush is a monumental screwup. Secondly, we need more companies in the public sphere to take the attitude of Google (who hosts this blog, as they own Blogger). When Google filed their IPO statement this week, they essentially said "Screw quarterly earnings. We'll give you general guidance as to what we're doing, but we're not going to worry about quarterly profits. Success takes time and effort, and we don't care what you, Wall Street, thinks about it. And we're structuring our stock in such a way as to let us ignore you".

Companies need to focus on long-term success. Henry Ford was a bastard, but he made sure to pay his employees enough money to afford to buy the cars they made. If we send all the jobs overseas and fire people to meet short-term profit numbers that only raise the price of the stock enough for mutual funds to hit their targets and for executives to cash in their options, we're screwing ourselves out of a future tomorrow so a few people can make more money today. That's bad for society as a whole, and it's bad for the average American, too.

But thanks to cynical marketing by the political class, we think people like Jack Welch are heroes, we think that we're the people getting the benefit from the tax cuts, and we're even gullible enough to think that we're the ones who get screwed by what the Republicans have so cynically called the "death tax" (the estate tax they want abolished hits estates over $2 million in size - if you think you'll be inheriting that much cash then I want to hang out at your country club). There's a disconnect in this nation where everyone thinks they're the upper class. I have news for you. You're not. It's called "upper" for a reason - only a few people are in it. Heck, even my dear friend and former employee the lotto winner isn't part of it. That's upper-middle class, at best.

Hey, I'm cynical too. Do I really think saying this will make a difference? No way. I'm just venting. But when it comes to economics, I consider myself conservative with a small "c", but a realist with a capital "R". I'm sure as hell not a plutocrat. Not like them. Things are broken and we need to fix them, but I doubt there's anyplace in the world that's better overall.

Now that I've pissed a lot of readers off, I'll return to our regularly scheduled drivel. Expect more stuff about David's condition until early next week, when I hit rail #2.