Literal Mayhem » Economics

Goldman Sachs About to Ditch its Golden Flack… for a bad PR strategy?

letterhead — Tue, 08 Dec 2009 02:51:48 +0000

No one seems to be dancing to Goldman's tune these days. No matter how hard they crank the 'ole gramophone. But they are trying a new approach, actually publishing dance steps to Goldman's Bonus Hustle… a 14-page presentation on why they make so much damned money.

First though… who's getting the blame for Goldman's missteps? According to Charlie Gasparino it's the highest paid PR guy in the business: Goldman PR chief Lucas Van Praag. (Well… it's hard to say in fact he is the highest paid. Maybe George Sard makes more. But $1 million + probably puts Van Praag close to the top.)

According to the Charlie:

"a much-needed shift in public-relations strategy is in the works, sources close to the firm say"

Hmmm… interesting that this news appeared on the same day that Bulldog Reporter's newsletter (The Daily Dog) reported that Goldman has put out a 14-page slide presentation explaining why its executives deserve to make so much money. And boy is it a dooozy!

DO THE HUSTLE!… THE NEW GOLDMAN DANCE CHART

If this represents the company's "much-needed shift" in PR strategy then it is in big trouble.

The charts and graphs are pretty, if entirely abstruse. Its main point seems to be that Goldman does much better than its peers, which is why its execs get paid more. What it doesn't address are all the issues that people actually have a problem with… like:

– Why does the entire sector suffer from bloated salaries and bonuses?

– Why is your bonus pool so stupendously huge… less than a year after you nearly went bankrupt?

– How did you TRIPLE firm revenues in just three years (2004 – 2007) after five years of relatively flat earnings?

– Could it possibly be that you attached a Hoover to the mortgage and derivatives markets — sucking out tens of billions in earnings and leaving the nation's pockets empty?

THE ZERO-SUM END-GAME

When this game of musical chairs is over, Mr. Van Praag may be without a seat at the Goldman buffet, but my guess would be that Goldman's C-Suite is so hidebound and tin-eared when it comes to reputation risk, that no one could talk sense to them. Even if one dared.

But it does show to go ya, you can bite your tongue in the presence of sr. execs and execute on all their bad ideas to save your job and not rock the boat. But bad ideas are bad ideas and they never work. And the one who ends up executed is you.

The short-term incentive is to shut up and salute. In the long-term it gets you the same place you would have if you'd spoken up and challenged them in the first place.

Kinda makes you think…maybe speaking up and challenging the powerful is worth the risk.

Who knows, you might succeed. At least you can say you tried. And you won't end up the scapegoat for all their bad ideas.

WordPlay Weekend: Cut “Workers’” Wages?… A Vector of Orthogonal Dimensions

letterhead — Sun, 06 Dec 2009 01:39:55 +0000

One of our chief entertainments here at LiteralMayhem is the contortion, manipulation and general abuse of language — primarily at the hands of PR and marketing folks. But sins abound throughout the worlds of business, academia, and politics… and when those worlds collide, watch out.

You're certain to get some truly head-spinning, tongue-teasers like this one:

"We come together to offer a tangential view, not a consensus view, and not the average view. We seek to synthesize information and ideas from different vectors and extrapolate a resultant vector in an orthogonal dimension."

Sometimes you read something and you feel like you've just had brain surgery. It hurts so much you have to ask: Oh for Heaven's sake, what on Earth were you thinking? What does it MEAN??? Please, someone pass the Vicodin.

The quote comes from a blog on Huffington Post by Leslie Pratch, an executive coach who "assesses the leadership potential of executives." Ms. Pratch appears to be a highly qualified academic who:

"helps executives strengthen their capacity for active coping and bring about dramatically improved performance in a relatively short period of time."

In other words (less than the 1,500 or so used on the firm's website to describe its service offering), she counsels CEOs on how not to act like dickweeds.

REDUCING WAGES TO "MARKET-CLEARING LEVELS"

What caught my eye was a recent post by Ms. Pratch entitled: "Are U.S. Workers Overpaid?"

Hmmm… But who, pray tell, is a "worker?" Don't we all work? Doesn't Ms. Pratch herself "work" for a living?

The term "work" comes from Old English "weorc," its original meaning closer to achievement, accomplishment, or deed — the outcome of one's labor rather than the process of one's labor (i.e., doing work). But over the centuries, the term "worker" has evolved to connote more about the process of work, particularly manual, industrial, or manufacturing labor… or as a catch-all: unskilled labor.

For example, Marxists deepened the association of "worker" with manual labor in mid-1800s, as did the U.S. trade union movement during the Industrial Revolution, and Maoists in the 1920s with their identification of "workers and oppressed peoples."

All this is a neat preface to Mr. Pratch's point when she says:

"U.S. workers are overpaid relative to equally-productive foreign workers doing the same work. If the global economy is ever going to get back into balance, that gap needs to be closed…

"It's possible to run the numbers to show that U.S. manufacturing workers should take average real wage cuts as much as 20% to get into global balance. The required cut may be smaller."

[emphasis added]

And if one follows today's economic debate — about jobs, wages, inflation, and middle class prosperity — the crux of the problem always seems to be these pesky "workers" wages. U.S. "workers" are uncompetitive and they have to suck it up and take a pay cut.

Pay has to be "equalized" to "market clearing levels," according to Pratch, so that poor countries no longer outcompete "rich" countries simply on wages and productivity. The threat hanging over our collective heads is… "something approaching 1930s levels of unemployment."

A "WORKER" HERE, A "WORKER" THERE…

What's interesting here is that the cultural definition of "worker" (i.e., our notions about who is and isn't one) is central to the economic debate and greatly influences its outcome.

The products that all "workers" make are pretty much the same (notwithstanding Chinese drywall, pet food, kid's toys, heparin, etc.). A running shoe made in India is usually not materially different from one made in Indiana.

So it begs the question: If that shoe up on the shelf is worth $100 no matter where it's made, then why shouldn't the worker's share of the price be the same no matter where he or she lives? The aggregate work contribution is the same, whether it takes two man-hours on an expensive machine, or twenty man-hours at a wooden bench in thatched hut.

The answer is that if we can get away with paying less to "workers" who live somewhere else, it's better for profits… and thus, shareholders.

But such wage penalties are only applied to a subset of "workers"… only those whose jobs are mobile. It's mobility that's being penalized. Not intrinsic talent, contribution or worth.

The relevance of linguistic hair-splitting becomes clear when one considers other types of "workers"… say, of the over-paid, linguistically challenged consultant variety.

These "workers" get to charge $200 to $300 an hour to tell a CEO not to act like an asshole because that particular job isn't mobile… the CEO lives in a rich country and won't move to a poor country to save the company money.

THE DOUBLE STANDARD FOR EXECUTIVE "WORKERS"

Here's a funny thing about executive "workers": Even if the CEO did decide to move to a poor country, he'd probably get paid MORE to do so. It's called a "foreign service bonus" or a "hardship bonus."

When "work" shifts overseas for the LOCAL talent to do it, the "worker" gets paid less. But when a U.S. "executive" has to move to such a country, he actually gets paid MORE. Living with substandard amenities earns you a premium, but only if you're starting out from a place of privilege.

There's something pretty hinky about insisting that I deserve to be paid more to go live among you in your foreign, peasant shithole… but since you already live there and you're used to it, you deserve to be paid a lot less than a non-shithole-dwelling (i.e., Western) "worker" gets paid for doing the same job.

Economists will no doubt tell me I have it all wrong. It's all about capital flows, and efficiency gains, and labor cost equalization, and productivity measures, and a whole lot of other intricacies that the un-schooled do not understand. I would reply that it's about language: meaning, understanding, and perception.

Instead of saying that U.S. wages are too high, why can't we just say that really really poor "workers" deserve a really really big raise?

After all, whether I pay the "worker" 15 dollars an hour to work on a machine, or 5 cents an hour to work at a wooden bench, I'm sill going to charge you $100 for the sneakers. And I'm still going to pay Ms. Pratch her First-World salary to show me how to do it in the nicest, most humane, gender-neutral kind of way. With an "active coping style" of course.

The question gives lie to Pratch's assertion about the "required cut" in U.S. wages. There is nothing "required" about it. No invisible hand is signing U.S. pink slips. No unseen irresistible cosmic force "requires" that poor workers get paid less.

These are choices that people make because we can. And while we may look to the complex jargonistic labels of economics for rationalizations and justifications, there really aren't any. Wage levels (for both the unskilled and skilled alike) are a relative value based simply on an accident of history: where you were born. Keeping them that way is a choice, not an act of God.

LEVELLING THE CEO

To the author(s) partial credit, in the comments section of the blog post, Ms.Pratch's colleague clarifies their position on CEO pay:

"In our article we classify CEOs as workers. CEOs are employed by the shareholders via the board. Most CEOs are not owners of their business. CEO wages need to get normalized as well."

Well actually, in the article Ms. Pratch says no such thing. There is no mention anywhere of "CEOs as workers." And CEO wages being equalized DOWNWARD is about as likely as Rush Limbaugh tongue kissing John McCain on the Capitol steps.

All the references in Ms. Pratch's piece clearly are to "workers" of the manual, industrial, manufacturing, unskilled, under-educated variety. And her partner Raj's hostility to "workers" of this ilk is evident in his comment:

"Lazing in a recliner, claiming exploitation, blaming the world and reminiscing about past glories is not the playbook to compete globally."

Unless of course you're an ousted CEO who flew off on his golden parachute to a comfortable retirement in Boca. Or an academic with a thriving CEO baby-sitting practice.

Economists treat "workers" akin to vivisection subjects only because they don't identify with them. The word "worker" has a precise cultural meaning that splits them off from all of us who "work" for a living, but whose jobs are not mobile enough to be vulnerable.

All of that is changing. For those of us lucky enough to have jobs these days, "work" is a blessing. But it's also a source of angst. Even many "workers" of the executive variety are now finding themselves just as vulnerable as workers of every other kind.

Figuring out a solution to our employment, wage and quality of life issues requires dropping our current limited concept of "worker" — as well as its narrow implications. Everyone is vulnerable, even Ms. Pratch and her fellows in the consultant class. Have you seen the quality of the robots coming out of Japan these days?!

[P.S. "orthogonal" = perpendicular; and if you teach yourself how to "extrapolate a vector in an orthogonal dimension" you'll have job security for life!]

BS of the Month Award: Why I’m Not Fit For GoldmanFlacks

letterhead — Fri, 04 Dec 2009 02:33:51 +0000

Calling the Goldman Sachs $500 million small business initiative "philanthropy" or "lending" is like saying that frosted Pop Tarts are made with "real fruit filling."

Thankfully most media types called it for what it was: BS, BS, and more BS. But it got me thinking about my career in PR… I know two people who work at Goldman in PR. Both of whom are very smart and talented. One of whom actually has a conscience.

After my last in-house gig, I just couldn't take working in financial PR anymore and opted for a poorer but more low-key life of writing. ("Scrivnering" for those who insist on verbifying everything.) And as I was walking home from work one sunny, breezy day in San Francisco, I was cursing my decision.

A place like Goldman was the next step for me. I had even interviewed with the hedge fund arm of Citigroup in its heyday and walked away before the talking really started. (It would have been great money, even if it was a soul killer.)

On that sunny, breezy walk home I imagined that my life would have been much much easier (financially) had I just stepped up that one last rung on the ladder. The people I know at Goldman are probably making $400K a year, maybe even $500K or more. Cushy perks. Great benies. What a life.

But the PR debacle of the "loan" initiative, made me realize that I'm just not cut out for it. And all you PR students and wannabes listen up, because that initiative on its own should capsize any illusions you have about being "the conscience of the corporation" as PRSA ~~blowhard~~ chairman Cherenson put it.

IMAGINE… ALL THE MEETINGS, CLOGGING UP YOUR WORLD…

I imagined sitting in a meeting with senior Goldman executives trying to explain why the $500 million boondoggle wouldn't fool anyone and was just a total waste of 1/8 of the CEO's bonus money…

"We're going to give a million dollars to charity," says one.

"Brilliant idea," says another. "But better make it $5 million. Sounds more generous."

"I have it!" shouts another. "$500 million!! It will knock their socks off. Take all the heat off us. Make us look like we care. We've got to give til it hurts to show them that we're serious. We need to make it serious money!"

Eyes are popping. Hands are shaking. Smiles are beaming all around the room. I'd probably be sitting there with my head in my hands.

"Gentlemen, let me play devil's advocate here for a minute. $500 million isn't squat. From a PR perspective, it's dangerous. It's cynical. It looks like a payoff on the cheap. Especially since after the tax benefit it will only cost us $150 million. You might as well hunker down and keep all the bonus money because that piddling amount will NOT get you the absolution you're looking for. It will just engender more resentment."

Angry glares.

"Well, snot nose… how much should we give?"

I'd say: "All of it."

"ALL OF IT!?!?!?!"

"Yes all of it… The whole $20 billion… At the very least… half of it."

"HALF OF IT!?!?!?!! But that's OUR money!"

"Again… I say this as a devil's advocate gentlemen… not at all as a Goldman communications officer (though some might say they are the same thing)…

"Aren't you people rich enough already? Can't you forgo your bonus for ONE year??? Especially as MILLIONS of people and businesses are on the brink of financial extinction? Can't your… excuse me… OUR… exorbitant base-pay suffice for just ONE year? Just ONE year. That's all I am suggesting.

"Next year we can all go back to business as usual making (and keeping) trillions of dollars and say we've done our part. And the money will buy you, literally, DECADES of goodwill, not to mention the Secretary of the Treasury slot for all of eternity."

Imagine all the open-mouth stares.

"Gentlemen… seriously. This is a bad idea. If a wholesale change in perception is what you're looking for, it will only come from a wholesale departure from business as usual. This is not change. If anything it reinforces the perception of Goldman a bunch of greedy, manipulative shysters.

"Plus, you are ensuring that the next Secretary of the Treasury will come from… … a community bank… or worse… … ACADEMIA!"

AND THE AWARD GOES TO…

I wouldn't last 5 minutes at Goldman Sachs. I barely lasted the 20 years I did spend in PR, and I have very little of my tongue left… from biting on it all the time.

The Goldman initiative is pure, unadulterated bullshit. But what's most galling about it is that they really thought (or why else would they have done it), that it would buy them some goodwill. And my smart, talented friend in Goldman's PR department (the one with a conscience), probably just sat there… with a bleeding tongue. The one without a conscience probably thought it would be a good career move to champion the idea, no matter how bad it was, because the senior executives wanted it.

And you know what… in reality, championing a rotten idea because the C-Suite wants it is often the best career move in PR. Sad but true.

But it still doesn't make a rotten idea into a good one.

And so Goldman Sachs… for your corporate arrogance, your cynicism, your anachronistic faith in propaganda, and your outright shamelessness, we grant you the BS of the Month Award, for November 2009.

Use it liberally. Use it often. But just remember that it won't fool anybody, because it still…

Hair on Fire: Banks Fight Consumer Protections (Again)

letterhead — Mon, 12 Oct 2009 01:35:15 +0000

Way back in the mists of time… somewhere around the end of the 20th Century… America’s banks were up in arms about pending consumer protection regulations. The issue was ATM safety. And how they handled the issue should be of interest to consumers, legislators, p.r. pros, and banking industry execs alike.

A headline in EFT Report, an industry newsletter, blared… “Beware of ATM Security Legislation: You May Be Next” (12/9/91). And indeed, ATM safety legislation soon sprouted from coast to coast, in cities big and small.

One might wonder what horrifically onerous demands were being made on behalf of customers.

Well, the most horrific and onerous demands were being made in New York City, the epicenter of the ATM safty movement. NYC was about to destroy the fabric of the American banking system by mandating “expensive safety features” at ATM terminals. Features like “surveillance cameras”… “adequate lighting”… “mirrors and reflective surfaces”… and “locking devices” that only allow cardholders to enter.

All of these safety precautions we take for granted today. And in no way have they dented the banks’ ability to profit from their ATM networks. In fact, ATMs are a robust profit center: according to bankrate.com, banks haul in more than $2 billion annually from ATM charges.

BANKS’ PR STRATEGY: PULL OUT YOUR HAIR, DOWNPLAY THE PROBLEM, AND ACT LIKE A VICTIM
The idea of questioning the need for ATM safety precautions may seem like a fool’s errand today. But at the time, the industry was running around like its hair was on fire… like it was the end of the world. According to the industry publication, ATM & Debit News: “a black cloud continues to loom over ATM deployers.” (9/12/93)

A mushroom cloud no doubt.

John Byrne, who at the time was senior counsel to the American Bankers Association (ABA), tried to wiggle out of the issue by blaming the media and downplaying the significance of ATM crime: “The national statistics suggest that the incidence of ATM-related crime is very low, but if you read the papers you’d think exactly the opposite is true.”

The same article in the American Banker had this to say: “To place the statistics in an anecdotal context, one banker compared ATM crime to airplane crashes. Both are attention-getting, he said, but not particularly common.”

Wow. Somebody was really off his talking points that day. What do you suppose would happen to an airline that tried to fight passenger safety regulations with a claim that crashes are too rare to be worth the effort?

RAISE FOOT… POINT GUN… PULL TRIGGER

What’s most instructive about the banks’ approach to messaging is not how lame it was… it’s the fact that it was entirely self destructive. It was, of all people, an industry consultant who hit the proverbial nail on the head with this insight:

“It is as important for customers to feel safe as it is for them to be safe. You can throw around all the numbers you want, but studies show that threats to safety — whether real or imagined — can curtail transaction volume.” (American Banker, 12/7/92)

So there you have it. If people don’t feel safe using your product, then they won’t.

Banks were faced (as they are today) with a classic perception problem: one of their own making that couldn’t be solved except by embracing an enlightened approach to doing business. Unfortunately (and with futility) they stuck to their guns and refused to see how doing business differently might actually HELP them.

Instead, they chose simply to deploy lame p.r. messages to defend the status quo.

It didn’t work then and it won’t work now.

EVENTUALLY BANKS LEARNED (AND PROMPTLY FORGOT) A VALUABLE LESSON

Several years into the ATM safety movement, the banks finally started to figure it out.

In Chicago, the local ATM network operator worked directly with the City Council to head off mandates. In Florida, the president of the southern AMT network (HONOR) actually lobbied in favor of statewide rules — he was afraid of a patchwork of local rules that truly would would make compliance difficult and costly. In Georgia the same lobbying trategy was implemented, successfully.

In New England, then-president of the YANKEE-24 ATM network, Richard Yanak, said: “It makes sense to be proactive to the extent that we can take responsible steps to put in place a framework that protects the consumer and is not overly burdensome.” Despite the mangled syntax, it’s a nice thought.

And John Bannion, then president of the HONOR network admitted that while most areas of [ATM] operations should not be regulated, “It makes sense for ATM safety.”

Lessons: sometimes the critics are right; some things that look purely like perception issues are revealing fundamental flaws in your business; sometimes fixing them (as opposed to fighting them) can actually create new opportunities and improve your business.

DEFENDING THE STATUS QUO: THE BIGGEST MENTAL BLOCK OF ALL?

As Washington debates new consumer protections, the financial services industry has forgotten some key lessons of the past…

Take the credit reporting agencies for example: they fought transparency tooth and nail, claiming that they owned all rights to consumers’ credit histories. Yet, after a bruising p.r. battle that lasted more than a decade, they lost. And guess what: now they make oodles of money selling consumers credit reports, identity protection products, and other types of services that would never been possible if they had not lost that war.

The same can be said of the ATM safety movement. ATMs are now more profitable and plentiful than ever.

The US auto industry successfully fought fuel efficiency and other regulation for decades; it ended up entombed by its own negligence and poor strategy.

Right now, banks and other financial services companies are in a similar mess. Their reputations are in tatters, and deservedly so. They are getting pummeled in the press, and deservedly so. They are being hit from every angle to provide consumers more help, and take a breather from fleecing them for every possible nickel and dime — e.g., having to roll back overdraft fees.

They are losing the war. But if they were smart, they’d admit the limits of “messaging” and address the weaknesses in their business model. They’d also take a lesson from the past and see that “threats” to their way of doing business might actually be opportunities in disguise.

The odds of that happening are pretty slim. But one can always hope…

Taxpayers Choking on Detroit's Free Market Malarkey

letterhead — Tue, 18 Nov 2008 01:19:18 +0000

So Detroit wants a bailout. Wonderful. The question is, why?

Yeah, they’re waving the red flag of economic catastrophe to blackmail taxpayers and steamroll Congress. But let’s take a quick trip down memory lane and review the industry’s recalcitrance over the past few decades before we bite off a big chunk of what they’re now selling.

Detroit is on a PR tear, using the latest tools like web-based video, and old-fashioned media outreach. It was amusing to see a recent NY Times piece on the Chevy Volt, and how GM is trying to pump up the car’s mileage to 100 mpg. Presumably we should assume that Detroit has turned over a new leaf spring and is committed to a new way of doing business.

Um. Not so fast. Here is what the Volt article made me think of: the “Supercar.”

All Hail The Supercar

Back in 1993 Al Gore pushed Detroit into participating in a Federally sponsored program to build an 80 mpg passenger car and get it to market within 10 years (which would have been 5 years ago if the car companies had not killed the program.)

Gore offered to back off higher CAFE standards in exchange for a Supercar commitment. The Feds ended up spending more than $1.5 billion on the program. But in the end the car companies dragged their feet and Bush 43 killed the program in 2001.

The Chicago Tribune has an EXCELLENT three-part series on the life and death of the program… here.

It’s an eerie foreshadowing of today’s situation… optimistic liberal minded president takes office… amid energy chaos and sliding domestic auto sales… car companies resist and then capitulate to an aggressive technology program…politicians fail to keep Detroit’s feet to the fire… Detroit moans about how hard it is and then sticks in the shiv.

It’s even interesting, and a bit infuriating, to note that one of the main areas of technological development for the Supercar program was regenerative braking. It’s the exact same technology that Toyota uses in its category-winning Prius… technology Toyota is now licensing to Ford, among others.

1989 — Taking Credit While Killing CAFE

Following 10 years of success in raising mileage standards, Detroit was quick to claim credit for itself, denying that CAFE had anything to do with it, and at the same time pushing back on any further demands on their technological and managerial prowess… (NY Times):

Those car makers that oppose mandated mileage requirements contend that it was largely market forces in the form of high gasoline prices that led to their production of more efficient vehicles. But Clarence M. Ditlow 3d, executive director of the Center for Auto Safety, a Washington-based consumer advocacy group, insisted that the Government standards were ”a spectacular success” and were responsible for two-thirds of the improvement.

General Motors and Ford contend that satisfying a demand for bigger cars will make it very difficult to meet higher efficiency standards. William Nowack, a spokesman for General Motors, said that the efficiency standards ”restrict the production of full-size cars and that makes a buyer hang on to an older, less efficient car or maybe buy a truck or van.”

This is the “free market” position that Detroit will use for nearly two decades to fight any steps to force them to produce more efficient cars and trucks.

1996 — Killing Zero-Emission Vehicles (ZEVs)

California and other states (NY and MA) once had in place requirements for a certain percentage of cars to be zero-emission vehicles. What happened? California backed off its plans in 1996 (NYT). Oil and car companies killed it. They said that car companies needed more time to develop technologies. (Like, um, the exact same ones they were in the process of undermining in the Supercar program.)

And they claimed that consumers would not want the limited range vehicles. For an alternate take, watch “Who Killed the Electric Car.” Actual living breathing people who drove them loved them. (As opposed to the brain-dead auto CEO’s who bad-mouthed them.)

Industry claimed that the product just would not be competitive in its current state. By the way… this is the same year that Toyota begins road testing the Prius.

1997 — Killing CAFE… Again

In 1997 the Clinton Administration tried to force a foot-dragging Detroit to boost mileage on trucks. Domestic automakers were increasingly reliant on trucks for sales and profits, but selling more trucks lowered the companies’ overall mileage figures. In response Detroit howled…(from NYT):

The auto makers argue that Americans like their trucks sturdy and powerful, and that it would be too expensive to make engines for such vehicles burn less fuel. Further, the Big Three auto makers say, any stiffening in the regulations would hand a chunk of the light-truck market, which they dominate, to Japanese companies, which make more efficient truck engines.

Instead, the auto companies’ own research shows, it has become a nation of overprepared commuters, as millions of Americans use the rugged vehicles only to drive to work and haul youngsters and groceries.

“It’s utterly outrageous,” said Daniel F. Becker, director of the global warming and energy program at the Sierra Club. Because of the lower standard for trucks, he said, “we have more pollution, more oil consumption and a higher trade deficit in oil.”

The Big Three say that strengthening the truck mileage standard would benefit the Japanese auto makers, just as they contend that strengthening the car standard did in the late 1970’s. Then, the Japanese sold a higher proportion of fuel-efficient small cars, just as they now sell a higher proportion of fuel-efficient compact trucks.

In the end the industry killed higher CAFE standards with the argument that it would hurt competitiveness and kill jobs.

2002 — Killing CAFE… Again and Again
Detroit mounted a huge advertising campaign to defeat a Senate proposal to increase CAFE standards. As usual, Detroit won. But what was interesting was the position adopted by Honda, which refused to take part in the campaign. Honda told Senators that mileage standards should indeed be higher.

Detroit, as usual, howled about the Fed’s job killing, anti-competitive regulation. But the truth is not quite so neat … (SF Chronicle):

General Motors, Ford and Chrysler say they can remain profitable only by selling sport utilities and pickups because they lose money on their cars. By contrast, Honda is making money in the United States and elsewhere by selling mostly passenger cars.

Indeed, the company’s profit was four times that of GM, the most successful among the Big Three, even though its revenue last year was less than a third of GM’s.

The average new vehicle sold by Honda in model year 2000 got nearly 30 miles per gallon, about 6 miles more than the average American automobile and more than any other automaker.

2004 — Killing John Kerry

One of John Kerry’s campaign promises was a $10 billion program of incentives for Detroit to improve fuel efficiency of cars. In gratitude, the auto industry fought tooth and nail to keep him out of the White House. Why? Because the money came with strings attached: higher mileage requirements.

Only this time, Detroit had two friends in the White House. Once again Detroit trotted out the job-killing anti-competitive ruse, enlisting the help of the Bush Adminstration to come up with lots of scary numbers about how much Kerry’s plan would cost in jobs and lost productivity. (NY Times).

2007 — Still Whining, and Still Trying to Kill CAFE

I know… this is getting boring. But just last year Detroit was up to it all over again… (Ward’s Auto):

… fuel-efficiency improvement contained in the EPA report shows the gains are “incremental” and “hard-fought.” The clear suggestion, the GM spokesman adds, is that the Senate’s CAFE proposal is unreasonable.

“The standards proposed in the Senate far exceed what auto makers can attain in their timetable,” he says.

Meanwhile, The Whole Entire Time…

The entire time that Detroit has been fuming, fussing, and fighting any and all attempts from outsiders to push them toward new markets and new technologies, their market share has been in free fall. And now they are broke, can’t sell so much as a damn spark plug, and are about to take the whole economy down with them. Just look at these numbers from The Wall Street Journal.

The top three lines (from top down) are GM, Ford and Chrylser:

For years they have ignored the writing on the wall, designed uncompetitive products, weighted their product lines toward a vulnerable segment, and crushed anyone who dared challenge their wisdom. Now… tell me again who are the job-killing, anti-competitive zealots?

Over a Cliff, Without a Barrel

Every step of the way… for decades… Detroit failed to see market trends, failed to pay attention to their falling market share, made bogus claims about customer preferences, floated bogus free-market arguments to defend their misguided strategies, failed to see new product niches, failed to see new competition (e.g., Kia, Hyundai), stymied every attempt to increase efficiency, stomped all over those who would help them…

And now the rabid free-market loving Detroit CEO’s don’t think that government intervention is such a bad thing. But should we?

The blog The Truth About Cars put it this way:

“Detroit wants a re-do after chasing SUV profits off a cliff… clearly we haven’t lost our ability to create or manufacture things. After all, auto factories in America build competitive products for profitable companies every day. They just happen to have names like Toyota, Honda and BMW.

“The American ‘automotive sector’ has not failed. Nor have Americans forgotten how to make stuff. The Big 2.8’s plight is the simple, inevitable result of tragic mismanagement. Using tax money to enable them, promoting this policy, is not patriotic. It’s a complete betrayal of the principles of hard work and fair competition, and the necessary balance of risk and reward, that made this country great.”

Another choice quote:

“As anyone who’s ever worked for a company with its head up its ass will tell you, giving copious amounts of fresh capital to execs in charge of a dysfunctional corporate culture to ‘fix’ their business is like trying to extinguish a log fire with gasoline.”

From ABC News:

“Ford and GM really haven’t done a very good job of understanding what consumers want,” said Global Insight auto analyst Rebecca Lindland

And from the Cleveland Plain Dealer:

“They handed that market over to the competition. The Big Three really put no resources in the passenger car side of the market,” Merkle said.
Erich Merkle, an analyst with IRN in Grand Rapids, Mich.

Detroit Needs To Fail

The irony should not be lost on us that the free-market GOP is hanging their one-time ally out to dry. It appears that the labor friendly Dems — long the nemesis of Detroit’s freewheeling free-market-obsessed CEO’s — are offering the only friendly ear in Washington right now. Also no surprise that the unions are making no consessions. (Though they are far from innocents in this debacle.)

So we are faced with two questions:

#1) What happens if we don’t bail them out? They file chapter 11. They lay off hundreds of thousands. Retirees get dumped on the PBGC and other federal agencies. The companies stay in business, in smaller, leaner form. They limp along, probably with help from the taxpayer, until they have a competitive product to sell. And then the resurgence can begin. Likely cost is in the billions… but one day we just might see the return of American power in the auto industry.

#2) What happens if we give these chumps $25 billion? They limp along until next year when they comeback for $25 billion more. Then they file Chapter 11 in 2010 or 2011, and then we are back to option #1, above, $50 or $100 billion the poorer. And in the meantime we are treated to wonderful new products from the executive geniuses who brought all this down on our collective heads.

If past is prologue, then our taxpayer investment will bring all-new American vehicles that the world market will gobble up… more of the auto industry equivalent of spam we’ve been seeing for the last 20 years… behold America’s newest SUV:

The Spam Utility Vehicle!

How is this all relevant to PR pros?… More on that to come…

Financial Crisis for Dummies: Lies, Bailouts, and Hank “Fudgie the Whale” Paulson

letterhead — Sun, 21 Sep 2008 21:47:54 +0000

The financial crisis that’s convulsing Wall Street and Washington can be offered up as Exhibit A in what we mean when we say “Literal Mayhem.”

The situation is quite literally mayhem: economically and politically.

But there’s a bigger fish to fry here: what we might call mayhem of the literal.

This crisis is, in many respects, the culmination of years and years of “perception management” and manipulation of language (by powerful, monied, self-interested parties) around key public policy issues such as “regulation,” “free markets,” “ownership society,” and “private investment.”

Our common language around these issues — and taken-for-granted understanding of their meanings — shapes how we perceive (or don’t perceive) the current calamity (and it is a calamity), as well as our instinctive responses to the language of the proposed “solutions.”

That’s the “literal” part of Literal Mayhem. It’s this manipulation of language — and consequently perception — that leads to large-scale misunderstandings of purpose, apalling lack of foresight, and piss-poor decision making… all on the part of those who are most responsible for looking out for our interests… namely ourselves.

And the current bailout plan is nothing more than a continuation of the talking-point kabuki dance that has been going on for decades.

Exhibit B: Hank “Fudgie the Whale” Paulson

Knowing how fungible meaning is in this world, my motto is: pay attention to what people do, not what they say. And in this regard, understanding the Treasury’s current bailout proposal, as well as everything Paulson and his spokespeople say about it, you have to understand who Treasury Secretary Hank Paulson is from a psychologiocal perspective.

As former CEO of Goldman Sachs, he is… a whale.

According to the DoubleTongued Dictionary: a serious, heavily funded bettor; a high roller.

According to the Urban Dictionary: a person who spends extremely large sums gambling (from hundreds of thousands to millions of dollars). Hotel and casino management will go to great lengths in the perks and luxuries they will offer whales to entice them.

And as such Hank is… he himself, the man, personally… is among the worst offenders in this sub-prime debacle.

According to a Bloomberg news article from last November:

Goldman, the most profitable investment bank, was one of 14 primary dealers of U.S. Treasuries who contributed to a three- year binge as $1 trillion of subprime mortgages were packaged and sold to investors.

Goldman ranks 10th among 118 issuers, based on the amount of subprime loans still on the market. Bonds with a face value of $484.6 billion remain from those created in the years Paulson ran Goldman.

Goldman under Paulson created 58 mortgage pools branded under the acronym of GSAMP, which originally stood for Goldman Sachs Alternative Mortgage Products, starting in July 2002. The value of the loans at risk of default is almost 50 percent for one Goldman pool, according to Bloomberg data, which includes pools identified as containing home equity financings as well as subprime mortgages.

The average delinquency rate for subprime bonds sold from May 1999 through June 2006 is 19.3 percent as of yesterday, according to data compiled by Bloomberg. Among the top 20 issuers that have more than $5 billion outstanding, Goldman’s GSAMP ranks ninth with 21.7 percent for delinquencies of 60 days or more, foreclosures or real estate that has been taken away from borrowers.

Sec. Paulson sees this “market” challenge from a whale’s perspective, and no other: they made the market, and so to Hank, he and his cronies ARE the market.

Thus, providing “liquidity” and “relief” to the “market” means propping up their shaky investments with tax payer money until they can be unloaded. Then the whales can get back about the business of sensible lending and investing, with no scars, and none the worse for wear… because their health is a mandatory pre-requisite for America’s economic health.

I call him “FUDGIE the WHALE” because his entire plan is a “fudge”…

It avoids the real issue…

Reward the wrong behavior (leverage and mis-pricing of risk)…

Compensates the wrong people (speculators)…

and basically makes him U.S. Debt Czar, with a $700 billion dollar checkbook… and no oversight of Sir. Hank… one of the top-ten culprits in this whole mess.

I also call him “FUDGIE the WHALE” because he is full of fudge.

The Most Dangerous Lies of All

First, the best place I have found on the web for informed, rational, hype-free, breaking analysis of these issues is a site called NakedCapitalism, especially the post called Why You Should Hate the Bailout. (And the comments are well worth reading, too.)

I am not going to get into the details of the bailout proposal, only examine its fraudulent narrative underpinnings, the goal of which seems to be keeping the public anesthetized, so that “experienced leaders” in both political parties can ram through a “solution” before taxpayers know what hit us.

These are the three big lies… the three conceptual lies at the heart of current debate, and they are all summarized in a nice little quote from Czar Hank in his interview on ABC:

“Once we stabilize the market, we need to ask ourselves how did we get here and how do we avoid getting here again.” (Watch the clip only if you can stand watching Hank bloviate without serious challenge from Boy George.)

Lie #1: We Don’t Know Why It Happened and How to Avoid It.

We know exactly why it happened:

Since the early 1990s, the Feds (the President, Congress, and various regulatory agencies) steadily abdicated responsibility for imposing sane credit/risk standards on the market — for both lending and investing.

(In this regard, some of nakedcapitalism’s quotes from insiders about the casino-like atmosphere in the financial services industry are quite illuminating.)

And avoiding a repeat requires putting toothsome regulations back in place and then enforcing them.

Lie #2: We Don’t Know How It Happened.

We know exactly how it happened. In broad scope:

1) Investment bankers figured out how to game the system: selling below-investment-grade assets with investment-grade ratings through the magic of securitization — thus creating an enormous new market for something that once only had limited appeal due to its high risk.

2) Mortgage lenders and originators rushed to meet the huge new demand from investment banks for below-investment-grade paper… making hundreds of billions of $ in bad loans to people who had no more collateral than pocket lint and a pencil eraser.

3) The new rush of cheap money led to rapid house-price inflation — rising more than 3-times the rate of overall inflation in some markets (even higher in others) — and homebuyers got greedy. They bought more than they could afford… speculating either on flipping, or on ever increasing equity of their primary residence. They bought mortgages that left them vulnerable to interest rate increases. And as prices inflated, lenders and originators could write ever more and larger loans to keep the system (bubble) growing.

4) The Fed colluded by keeping interest rates at historic lows year after year.

5) All kinds of financial companies, including the shadow banking system, took the cash flow from these shaky loans and manufactured “securities” that were then sold to other institutions and hedge funds, which often bought them with borrowed money. Many of these buyers turned around and packaged their cashflows into new “derivative” securities and sold them to investors who bought those with borrowed money. And so on, and so on… with the ultimate buyer owning a cash-flow stream that had a frighteningly low level of real assets underlying it, and was leveraged to the hilt.

6) The ratings agencies colluded by rating the “security” of the senior cash flow holders as AAA, even though the ratings were based on poorly understood default scenarios, little in the way of real assets, and layer upon layer of leverage, which amounted to double- and even triple-digits. (The speed and scope of subsequent ratings declines showed how little the ratings agencies truly understood the “risk” they were rating.)

7) These crappy “securities” were sold back into regulated financial institutions as AAA-rated debt, and institutions far and wide gobbled them up because they thought they were getting a free lunch: i.e., higher returns, without taking on commensurate risk.

There was greed, froth, and reckless disregard for risk at every step of the game, by every player, with the government fanning the flames with persistent low interest rates and lack of oversight.

Lie #3: We Don’t Know What Needs to Be Done

The idea that we need to keep the bubble bouncing for financial institutions with a $700 billion bailout because we need time to figure out what to do… is complete BS. We know exactly what needs to be done. We just don’t have the stomach for it.

And we do ourselves a disservice by using spin to hide behind the tactical complexity, obscuring what is, in reality, a very simple conceptual problem.

The problem was best summarized (if somewhat erroneously) by Princeton economist Alan Blinder, who told the New York Times:

“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices. If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”

Here is the core conceptual problem: you can’t “reverse” the problem of declining house prices.

This is a non-starter being peddled by the home-building lobby, the lending lobby, the securities lobby, and an army of other culprits. They are trying to sow and then exploit false hopes among the public that their houses are still worth what they think they are worth… when all these liars know that is not the case.

House prices reached all time highs based on increases that are ridiculous on their face. As one commenter on nakedcapitalism pointed out, at its peak, the implied rate of inflation for housing was for a compounded annual growth rate of 10% or more, which would mean that a home worth $1.5 million today would be worth $26 million by 2038.

To get back to historically rational price levels, house prices would have to fall another 15% to 20% on average. And so, the truth is, at the highest level of the problem we only have two choices:

1) The reality-based choice: bite the bullet and accept that much of the debt-fueled American economy is built on inflated housing prices; mark these underlying “assets” (houses) down to their “fair market value”; then sort out the impact.

There will be shock and pain in the financial system as layers and layers of debt unwind. A lot of firms and funds will go belly up when their “margins get called”… so to speak. And homeowners will have to take their medicine too.

But the dust would settle in short order, and we’d get a much clearer picture of where the pain is most acute. Then the Feds can structure a real bailout for legitimate victims, instead of speculators. This would ensure that taxpayer money (yours) recapitalizes the financial system in a rational way — i.e., allowing the healthiest, most sensible institutions to continue living. The benefit of this approach is that:

it’s HONEST… faces up to reality and fixes the core problem

it’s ADULT… makes each of us bear our respective and appropriate burden

it will cause sharper short-term pain but enable a faster and better targeted recovery

Then there is the other option…

2) The Mr. Hanky solution: continue the charade that housing prices will “recover”; buy a boat-load of assets that Paulson continues to assert will eventually be sold at a minimal loss; push this spiraling debt onto multiple generations; insulate his buddies from their bad behavior; and destroy the value of the dollar.

Once the dust settles on this one, we will find this “solution” to be inflated rhetoric, not reality. The whole reason that these assets are “illiquid” is because no one knows how much they are worth!! The market has been unable to accurately value them. That’s why they can’t be sold.

On the other hand, there is no shortage of liquidity for the circling vultures who are willing to buy them for pennies on the dollar. Asset holders just don’t want to sell that low. They think they ought to get more, but no one in the market is willing to pay more.

So along comes their buddy Hank (with our money), who agrees to pay them whatever they want. He says that he will eventually sell these assets, but he cannot honestly tell you for how much. Any claims in that regard are PURE SPIN aimed at reducing opposition to his plan.

But most important, this approach does not fix the underlying problem: asset prices are still inflated, and leverage remains in place. Those structural issues will sink the plan eventually… if not now, then a few years from now with the same, or even worse consequences.

This disadvantages to this option:

it’s INTELLECTUALLY DISHONEST

it’s IRRESPONSIBLE and PASSES THE BUCK

it virtually guarantees to drag out this disaster for years (potentially 10 years or more), solving nothing and causing even greater pain down the road

Now We Have Seen It All…

What we have been witnessing over the past week or so amounts to a lot of talking doo-doo. A great many terms are bandied about, like “illiquid assets,” and “market correction,” and “free market solution,” etc. But the simple reality is that the US financial system is built on a big pile of worthless debt that likely will never get repaid.

Like most financial catastrophes, it started with a financial genius who had a brilliant idea, and it went straight downhill from there.

The problem will not fix itself. We have to fix it, and the first most important step in that long, surely tortuous path is to admit the truth — about what caused it and what will be required of us (not our grandkids) to right the ship.

Continuing to blur the issue with mayhem of the literal sort — fraudulent frames of reference, false choices, and linguisitc half truths — will only exacerbate the current political and economic mayhem.

And short of total linguisitc and conceptual honesty, I can only make….

One Alternative Suggestion for “Market Discipline”:

BRING BACK THE GUILLOTINE!!

Bryan Caplan’s Free-Market Malarkey: Why We Should Be Terrified of Economist’s “Rational” Electionomics

letterhead — Wed, 19 Sep 2007 20:53:32 +0000

This is Part I of an ongoing series.

Arguing with an economist is like trying to eat spaghetti with a spoon. It’s slippery, messy and seldom worth the effort.

But occasionally the claims are so outlandish and the affront so egregious that one can’t back away from a confrontation. Such is the case with a screed called “The Myth of the Rational Voter,” by Bryan Caplan and reviewed (glowingly) in the New Yorker by Harvard English professor Louis Menand.

The dubious point of the book is that “those who worship at the temple of democracy,” as Caplan derisively calls the majority of the U.S. population, do more harm than good by voting. The reason: we are “morbidly ignorant” of the laws of economics and therefore vote for unsound economic policies, harming society’s economic well-being.

In his view, we’d all be better off if the only people whose votes counted were economists and like minded “economically literate” people. He also argues that a market-based political system would take care of social needs more efficiently and better than a democratic one.

Now, there are a lot of problems with the book. (Too many to cover in a single post.) But the initial problem is one of scale: when faced with a mountain of bullshit so enormous as this, it’s difficult to know where to dig in the shovel first. But here is a clue: you know you’re in trouble when the author quotes Ayn Rand in the very first chapter.

(I will leave it to the Philosopher’s Playground to place her inhuman philosophy in the proper context: it’s the best rebuttal of the Randian outlook I’ve ever come across. Read it here.)

As is the point of this blog, however, I will take on the PR snow job that is the unrelenting case for “free markets” – a bludgeon with which the public is frequently beaten. The main problem with “free markets” is that, as a concept, it falls within an odd linguistic convention: words-for-things-than-don’t-exist, like “panacea” and “utopia.” They are concepts, but concepts only. Their infinite scope precludes existence in an finite realm; especially a flawed human one. They don’t, and can’t ever exist.

Yes, markets properly harnessed (with mandated openness, enforced transparency, and maybe a bit of government-supplied cheap credit) fuel the growth of material wealth, and can be yoked to deliver social benefits. But economists, enthused with the idea that more is better, exaggerate the markets’ socially beneficial character and relentlessly force the paradigm, arguing that the economic model provides the best explanation for all human behavior… that we are all essentially economic in nature and all our endeavors (including social ones) can be productively managed under the yoke of economic science.

So economics is not yoked to benefit mankind. We are yoked to its rules in order to… in order to what, exactly? To increase the power, scope and freedom of markets, because social benevolence is their byproduct.

A virtuous circle, no?

The idea would be just plain sad, if it weren’t so scary. The objections are too many to cover in a single post, but here’s a Top 10 list from this reader:

10… He’s Disingenuous

Caplan goes to great lengths to strike a fair-and-balanced pose. He talks up disagreements within his own field: the self-doubts and the examples of market failure discovered by economists themselves. He claims to be anti-fundamentalist.

His words, however, betray him. He has nothing good to say for democracy and vilifies those who “worship at the temple of democracy” as being “enthusiasts,” who “embrace dubious ideas on emotional grounds.” He alternately describes such people as:

ignorant, completely ignorant, morbidly ignorant, irrational, naive, hopelessly uninformed, leftists, Hollywood leftists, partisans, religious devotees, ungracious, dogmatic, protectionist, stubbornly wrong-headed, prejudiced, credulous, unenlightened, fundamentalist, and biased.

Economists and their ilk, on the other hand, are showered with praise. In his world, such people shine with goodwill and beneficent intention. Such people:

think like economists, are economically minded, deeper thinkers, sophisticated, informed, well-informed, well-educated, enlightened, expert, economically literate, and less biased

And he complains about all the name calling against economists! As the book progresses, he shows less and less discipline in restraining his contempt for non-economists in general and voters specifically.

This book is less an economic treatise than a political manifesto. His goal is to promote markets through political means, and he believes that the primary purpose of government is to act as a gas pedal, not a brake. Every argument advances the idea: markets good, democracy bad. No nuance. No moderation. No balance. No perceived trade-offs.

Though he claims such a thing barely exists in his profession, his method and tone of attack leaves one with the distinct impression that he is, contrary to his loud denials, a market fundamentalist.

9… Rhetorical Belching

The book is chock-a-block with gaseous pronouncements. One of my favorites is: “Brand names help shoppers far more than Consumer Reports ever will.”

His claim is totally divorced from reality. Had Dr. Caplan spent even one day on a corporate branding team, he would know that brands are designed to lead consumer choice through emotional decision making. They are a compressed message system that aims to circumvent rational faculties. Sometimes brand values reflect reality. More often, especially in consumer products, they make “distinctions without difference” and sell perceived benefits that are only marginally present, if at all.

Caplan’s inflated assertion about the value of brands also runs counter to his claimed respect for rational thought, as well as contradicts his contempt for “embrac[ing] dubious ideas on emotional grounds.”

And how about this gem: “Worldviews are more a mental security blanket than a serious effort to understand the world.”

His own included? And his well-educated economist pals? Or the legions of informed and sophisticated captains of industry who are expected to save the world through the magic of markets? What Caplan’s really claiming is that any worldview other than his own is ill-informed and erroneous.

This kind of arrogant, universal dismissal of other people’s views is nowhere more apparent than in his derision of religion. For example, consider the idea that Caplan himself uses to burnish the reputation of his compatriots: economists themselves have identified most all of the significant cases of market failure.

Theologians can make exactly the same claim about their field. Religious people have, for hundreds of years, been discussing and debating the tension between faith and reason, and many of the thorniest problems have been raised by people of faith themselves. For Caplan, such distinctions are helpful in defending his own profession against charges of fundamentalism, but he is less generous with others. He is also mistaken.

He quotes Gaetano Mosca’s insulting claims about the inherent superiority and self-satisfaction of the religious mind. In the case of Buddhism: “The Buddhist must be taught highly to prize the privilege of attaining Nirvana soonest.”

What? Clearly Mosca and Caplan are clueless about Buddhism. If that religion had “sins,” comparative thinking would be among its worst. The idea that “soonest” equates with “best” or “better than someone else,” is anathema to the most basic Buddhist teaching. Indeed judgmentalism – asserting oneself at the expense of someone else or as better than someone else – is one of its most grievous wrongs.

Caplan is a rhetorical gas bag. He pulls unfounded assertions out of his hind parts and uses them as proof to support his ideas, or trots them out as unquestionable truths on which he can build an argument.

He gets the facts wrong, and in reality his bloviations have almost no resemblance to… um… reality.

8… Mangled Terminology

The problem with all this rhetorical belching is that it carries over into his key arguments. And when he starts contorting the meaning of words to support his claims, things get serious. Take his analysis of voter altruism. It includes two key ideas:

A) In his tortured logic, altruism and morality are “consumption goods like any other.” The idea itself is bizarre, but let’s focus on his core economic argument: “If people [can be expected to] buy more altruism when the price is low… and altruistic voting is basically free… then we should expect voters to consumer more [altruism].”

B) He sees this “altruistic” behavior as proof that voters are not selfish. So he claims that, based on this un-selfish behavior, voting must be seen as the antithesis of shopping.

Here’s the first problem: altruism is never free. It is by definition selfless, and altruistic action, in particular, necessarily entails personal sacrifice. To speak of “free altruism” is to be utterly oxymoronic!

He then mangles “altruism” further by claiming that free altruism leads to voter over-consumption, which he describes as: “‘stuff[ing] themselves with moral rectitude.” Hmmm… Altruism equals cheap moral rectitude? Did he flunk high school English? (And Prof. Menand ought to be ashamed for not calling him on it.) To sum up:

Voters act altruistically (i.e., give of themselves) only when costs nothing.
The cheaper it is (i.e., the less they have to sacrifice) the more of it they “consume” (the more they give).
Which logically implies that the more expensive “altruism” is (i.e., the higher the personal cost) the less they “consume” (give/sacrifice)?

What he’s describing is selfishness, not altruism. And the tendency to over-indulge when it’s on sale is absolutely typical shopper behavior. His example actually reinforces the connection between voting and shopping.

This kind of literal butchering, pervades the book. Another example is his assertion that democracy is not a market but a “commons.” It’s neither. In reality, it’s a cartel.

To wit: It’s a consortium of two. They strictly control production, distribution, and market access to the product. Barriers to entry are prohibitively high and competitors are systematically squeezed out or barred from participating. And the two key participants regulate their own marketplace.

Consider: In 2004, by the end of the “Super Tuesday” primaries, when the major party candidates were a foregone conclusion, only 7 percent of the eligible electorate had voted. And as a registered “Independent” I was not even allowed to vote in the primaries.

The bad voting behavior cited by Caplan all took place in a cartel political-economy in which the only “choice” that the vast majority of voters got was the dregs of what the parties put on the ticket. He is comparing apples and oranges, indicting “democracy” with evidence gleaned from a system that’s only partially democratic.

Moreover, he is too enamored of his own ideas to point out, never mind reconcile, the tensions between “democracy” as a concept (one person one vote) versus the real-life election mechanisms of party politics.

7… Unhinged From Reality

By now, the pattern is plain to see. Caplan lives in world of graphs, demand curves, integers, equations, and illiterate illogic, not real people doing real things. He replaces a complex human social enterprise with a single mathematical paradigm, and shows no inclination to consider what might be lost in translation.

We can call this malady Anti-Social Dissociative Theoretits – this is a condition in which theory swells to the point of displacing the real-world situation from which it was derived; advanced cases become dissociative in that the derivative theory is considered more real than the underlying reality; the most serious cases are anti-social in that the theory is used as a tool of social control in an attempt to extinguish all incompatible activities and beliefs.

Caplan is hermetically sealed inside his own thinking, unhinged from the day-to-day world in which we all live – like so many overzealous academics and think tank policy wonks. And nowhere is this more apparent than in one of his central theses: what I’ll call the “probability discount” theory of voting.

Here’s the idea: The true cost of a bad policy to any voter depends on the odds that he or she will be the one to cast the deciding vote in the election – i.e., if a bad policy costs you $1,000, but your odds of casting the deciding vote are 1/1,000 then the actual cost of your vote is $1.

In an election with millions of voters, your odds of casting the deciding vote are practically zero. Therefore, he says, the cost of bad policy to each voter is really “close to zero,” and he argues that the discounted “zero” cost leads people to over-consume bad policy. This, he claims, is a classically “rational” economic choice. Consume more of what’s cheap.

I have one question: on April 15 when the tax man comes with his hand out, does he ask for $1,000, or does he give me a probability discount of $999 and only bill me $1?

Caplan’s assertion is totally unreal.

In another example, he undoes his own argument. He says that when “Hollywood leftist millionaires” Tim Robbins and Susan Sarandon voted for Bill Clinton in 1992, his victory over Bush probably cost them “hundreds of thousands of dollars in extra taxes.” But in the very next sentence he takes it all back: “In the astronomically unlikely case that Clinton won because of their actions, they would have lost a large sum.” [italics original]

Since they did not cast the deciding votes, he argues, the real cost was only “expectational pennies.”

OK. Head scratch: On their 1040 form, was the “due” amount pennies, or hundreds of thousands of dollars? He admits himself it was the latter! So what gives with the “expectational pennies” BS?

It’s Theoretitis plain and simple. He is totally unhinged from reality.

6… Dishonest Double Standards

His inventive, if unreal, “probability discount” might be more plausible if it were applied fairly and even-handedly, but Caplan is as dishonest as he is unhinged. Here’s the rub. He never applies this same discount method to the question of policy benefits! In every example (pp: 18, 106, 131), he accrues to every voter the full dollar value of free-market policy benefits.

Caplan wants us to believe that discounting is a fact of life whose consequences are unavoidable. But if it’s true, then “probability discounting” should be applied to benefits as well as costs! If the individual cost of voting for bad policy is discounted to zero (leading to over-consumption), then individual benefits of voting for good policy should be discounted to zero as well (leading to under-consumption).

In his analysis, over-consuming bad policy is a “rational” economic choice, given the zero cost; to be consistent, under-consuming good policy must also be a “rational” economic choice given a discounted zero benefit. Why would you over-consumer something with no benefit?

The result is logical spaghetti: voting against free-market [beneficial] policy is an economically “rational” [wise] decision because such [beneficial] policies offer individual voters no tangible benefit.

Caplan is either oblivious to, or dishonest about the self-defeating implications of his own argument.

5… Cultural Prejudice

If Caplan has a childlike faith in his own fantastic concoctions, his faith is even more pronounced when it comes to the goodness, social benevolence, and “magic” of markets. He quotes Adam Smith often and at length, using as a common theme The Wealth of Nations: “…the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to society.”

In Caplan words: “For economists, greedy intentions establish no presumption of social harm.” Another whopper of a rhetorical belch. It’s a quaint idea, but belies a distinctly Western (and rather Edwardian) cultural prejudice toward commerce: attributing innate goodness to an intrinsically amoral social system. And it has been disproved by a hundred years of direct experience not with markets alone, but with market participants whose bad behavior is legion.

Take monopolies, which Caplan gives the warm-and-fuzzy treatment, saying that their negative impacts are “marginal.” For a moment, let’s leave aside the base cost of price-fixing in everything from airline tickets, to auction markets, to food additives, to computer memory, to pharmaceuticals and vitamins, to electrodes, even to funerals! Let’s instead focus on the social impact.

Enron manipulated markets in the western U.S. for years and raked in more than $1.5 billion in illegal profits. All the while, heartless cowboys on the trading desk gloated over “Grandma Millie’s” complaints about exorbitant rates, which the traders had joyously “jammed up her ass.” Not to mention the untold loss of productivity and revenue by companies affected by blackouts. How’s that for “marginal” cost?

And here’s an even bigger story:

Los Angeles used to have the largest interurban rail system in the in the world! What happened to it? General Motors and a consortium of others (Mack Truck, Standard Oil, Phillips Petroleum, and Firestone Tires) created a shell company to buy the LA system and rip it from the ground, replacing it with bus lines. GM and Mack built the buses; Firestone provided tires; the oil companies sold the fuel.

Rather than compete in a fair and open market, they mugged the competition, dragged it behind the assembly plant, and put a bullet in its head. In one way or another GM participated in or directed the destruction of about 1,200 interurban electric rail systems with 44,000 miles of track and carried 15 billion passengers a year, and this was back in 1921.

The cartel was convicted on federal conspiracy charges. The other key result was the destruction of public rail transport in just about every major US city, which ushered in an age of suburban sprawl, choking pollution and a national addiction to gasoline.

4… His View is Ahistorical

The only way that someone can be so entirely unhinged from reality and so addicted to his own fantasy world, is to be in complete denial of history.

Example: Caplan’s take on Thalidomide.

He says that drug policy experts take the “low road” in telling a “credulous public” that drugs need to kept off the market until effectively tested, even if it means people go untreated. He says that some take the “high road” instead. His example: “The public might be sure that Thalidomide should be totally banned, but defer when the FDA approves it as a treatment of leprosy.”

The “low road” is drug testing? Has he been living in a cave for the past fifty years??? The reason Thalidomide was pulled from the market was that it caused horrific birth defects in children around the world and more than 3,500 hundred babies died in infancy from their deformities. The horrendous cost of this blunder was due to INADEQUATE testing!! Proper testing to establish appropriate guidelines could have saved thousands of lives – those properly treated as well as those saved from fatal improper treatment.

Another example: Sweatshops des Miserables

Caplan quotes a lyric from the show Les Miserables, sung by a villainous innkeeper: “Charge ‘em for the lice / Extra for the mice / Two percent for looking in the mirror twice…” He uses this example to scoff at the public’s urge to demonize greed, claiming that greed is intrinsically “intelligent” because self interest “militates against ‘deceit, unfairness and dishonesty.’”

Consider this reality: In the sweatshops of New York City in the late 1800s seamstresses were charged rent to use the employer’s sewing machines, rent for the stools and boxes they sat on, rent for space in the coat closet, even rent for their needles; they were charged for thread; charged for drinking water at work; they were fined for talking or laughing. And there were 60,000 children working in those sweatshops. (References here and here.)

“Intelligent greed” my ass. Even a cursory tour through the actual history of commerce (as opposed to the fantasy world of economic theory), shows that concentrations of capital tend to foster distinctly anti-social behavior among market participants – who, after all, ARE the “market.” The “market” is not some abstract concept, it is real people in the real world doing real things, and those things are often very ugly.

3… He’d Toss Out the Constitution

One of Caplan’s scariest contentions is actually a small aside, near the end of the book, which knocked me flat. He writes:

If a [Supreme Court] justice defies public opinion by protecting flag-burning, his decision should diminish the popularity of the president who appointed him and the senators who confirmed him. This assumes, however, that the average voters correctly perceive the chain of responsibility. If they systematically underestimate the strength of its connections, delegation undermines the popular will. Politicians have to denounce flag-burning to win voter approval, but it remains legal as long as the decision is in the hands of subordinates who demur.

Caplan, it seems, wants to subject the Constitution to market testing. He is dead silent on the fundamental rights of citizens and appears to be totally ignorant of the complexities of Constitutional law. He seems quite happy to govern according to the popular whims of the market. I guess he believes that liberty is a “consumption good like any other” and ought to be managed as such.

But he says not a peep about how to correct the market when it encroaches on liberty and public good. I wonder what he’d say about the recent censorship of political speech by AT&T, Fox and Fox again here. Probably nothing. Or worse, that commercial entities have a right to control what they distribute.

2… He’s a Wimp

I say “guess” and “probably” about the tangible consequences of his beliefs because there aren’t any specifics. The only direct claim he makes is that markets work better than democracy. (Next we will get to the question of: “Work better” toward what end?)

When he gets close to a recommendation, he wimps out. He talks up English election laws circa 1948, which allowed plural voting for the elite, and adds: “there is much to be said for such weighting schemes.” But then he punts: “I leave it to the reader to decide whether 1948 Britain counts as a democracy.” Boo hiss. Wimp out!

For clues about how Caplan’s brave new world might work, we have to read between the lines. The most telling snippet – aside from his admiration for Ayn Rand – is this claim:

“Before the 1930s… many areas of U.S. economic life were undemocratically shielded from federal and state regulation. The market trumped democracy, on everything from the minimum wage to the National Recovery Administration. And unless you are a democratic fundamentalist, you have to agree that this was all to the good.”

Ah, the truth will out, as they say. Caplan wants to repeal the New Deal, because that would solve everything. And anyone who disagrees with him is an idiot. That’s basically his argument.

Let’s see. We could ask the sweatshop workers in the Triangle Shirtwaist Factory about the minimum wage. But… oh yeah, they’re all dead. Locked in a dank, filthy hovel of a factory and left to die in a fire.

I have no doubt that Caplan would return us to the robber baron capitalism of the late 1800s, quoting Rand along the way:

Robber barons were the “greatest humanitarians and the greatest benefactors of mankind who had ever lived because they had brought the ‘greatest good’ and an impossible standard of living – impossible by all historical trends – to the country in which they functioned.”

The looking glass is getting very twisted indeed. Let’s just finish here with an observation: In 1897 a NYC tenement dweller had about a 1 in 800 chance of having a toilet in his or her apartment. Most toilets were communal and placed in the backyard. In 1901 the city enacted new regulations requiring toilets in each apartment.

What did Caplan’s enlightened, benevolent, humanitarian real estate moguls do? Did they show “socially beneficial behavior?” Did their “intelligent greed… militate against deceit, unfairness and dishonesty?” Did the “magic invisible hand” of the market motivate them to provide better conditions to better compete for tenants? Hmmm???

Hell no! They fought the new regulation all the way to the Supreme Court! And they lost every single case.

1… Inhumanism

Caplan’s most despair-inducing claim comes at the very beginning of the book: “Economic policy is the primary activity of the modern state…”

Ugh. The man is alternately crude, delusional, illiterate, illogical, in denial of history, and plagued by an exponential swelling of the ego. His ideas are also shockingly inhuman. As an antidote to Caplan’s claim, let’s go back to Thomas Hobbes, who originated the concept of self-interested cooperation. In his view, without a central government to restrain our natural war-like condition of “every man against every man,” or “all against all,” we would revert to a “leviathan” life that is “solitary, poor, nasty, brutish and short.”

Caplan’s world, in which government’s primary role is protector and enabler of markets, is terrifying. There is no humanity in it anywhere. Consider one of the heroes of “pre 1930s” capitalism, Alfred P. Sloan, CEO of General Motors and the architect of the destruction of urban rail systems in the United States.

He was also an admirer of Adolph Hitler. Sloan insisted on retaining operational control of German car manufacturer Opel, even as it was building armaments for the invasion of Poland, which Sloan called a “petty international squabble.” GM retained board control of Opel well into the war; the Reich protected GM’s 100% stock ownership; and Sloan appointed to the position of president of GM, the former president of Opel, an American who was awarded the “German Eagle” medal for service to the Nazi Reich.

Sloan, an “economically minded” man through and through, saw the escalating war in purely economic terms and claimed in 1941 that: “I am sure we all realize that this struggle that is going on though the World is really nothing more or less than a conflict between two opposing technocracies manifesting itself to the capitalization of economic resources and products and all that sort of thing.”

But here is the most chilling quote of all:

“It seems clear that the Allies are outclassed on mechanical equipment, and it is foolish to talk about modernizing their Armies in times like these, they ought to have thought of that five years ago. There is no excuse for them not thinking of that except for the unintelligent, in fact, stupid, narrow-minded and selfish leadership which the democracies of the world are cursed with.… When some other system develops stronger leadership, works hard and long, and intelligently and aggressively – which are good traits – and, superimposed upon that, develops the instinct of a racketeer, there is nothing for the democracies to do but fold up. And that is about what it looks as if they are going to do.”

[Thanks to Edwin Black of The Jerusalem Post for the thorough reporting... read it here.]

This is, admittedly, an extreme example. But with someone as dogmatic as Caplan, extreme is the only way to go. Caplan is dangerously wrong to assert market supremacy over democratic politics.

Civil government in general, and democracy in particular, is NOT primarily charged with protecting markets. Their primary responsibility is protecting PEOPLE by acting as a brake on human indecency. If people are biased, irrational and selfish in a democratic enterprise, what would they be in an unrestrained economic one? History gives us too many clues to ignore. Markets do work – of course they work. But they do not automatically do anything, except foster the creation and concentration of capital. And absolutely “free markets” have a proven tendency to squeeze out the “free” part.

Certainly, markets do not automatically provide socially beneficial ends. They need to be managed, like any other social enterprise, to minimize corruption and malignity while maximizing the liberty and welfare of participants… if that’s the goal.

Unfortunately that’s not Caplan’s goal. His aim is more markets, always bigger and less restrained. Using markets as a tool of social engineering is anathema to his thinking because markets are adequate in themselves to deliver the goods, so to speak.

He is wrong in fact, and wrong in principle. A “market” is a means not an end. Without a defined goal, markets just reproduce capital and themselves. Any other result, beneficial or malign, derives from the human social circumstance in which the market operates.

Democracy is also a means, but ours does have an end in mind: balance. Democracy not only balances majority and minority rights, but also balances popular will with enduring principle. As was their wont, the men who wrote the Constitution chose a definition of enduring principle and created a political system to protect it, while also striving to respect the will of the polity. It’s not an easy task. And, if anything, one of the great strengths of this form of government is a built-in braking system that forces restraint. And history shows that this restrained form of democratic capitalism is a lot better at promoting free markets than free markets are at protecting the commonweal.

Caplan will have none of it. He squeezes all non-economic factors and benefits out of policy decision making. In fact, out of human decision making entirely. All aspects of human nature and behavior are “consumption goods” subject to the laws of economics. To him, every aspect of human life is simply an economic variable. (e.g., He believes literally that “Time is money.”) He treats “personal wealth” as the entire scope and limit of human interest.

Caplan would entrust our fate to the captains of industry. I shiver at the thought. Subjected to the whims of the market, liberty does not stand a chance.

Caplan would no doubt scoff and bluster… deride and dismiss… but his magical electionomic machinery is built in a land of make-believe, out of iron-willed self-deception and unyielding superiority — it also comes without any damn brakes.

At worst, it’s a recipe for disaster. At best, it’s an ugly world, and all it provides for its people is unlimited incentive to act like a$$holes.