The Failure of Statism - Again

Turmoil in the Middle East has resulted in the fall of governments in Egypt, Tunisia, probably in Libya and Yemen, possibly in Bahrain, Syria, maybe even Iran and more. Protests continue in Greece, London, Portugal and other EU nations. Here in the United States, actions to curb union power in Ohio, Wisconsin, Indiana and Michigan have sparked unrest. Is there a common thread? Yes. Statism or collectivism, has once again proven unsustainable.

Whether it comes about through military coup or democratic elections, the underlying principals of statism, or collectivism are the same. The central authority, which produces nothing, takes from some and redistributes to others. The idea is that a small group of knowledgeable, wise, benevolent overseers can more efficiently and fairly distribute the fruits of the labor of the general population for the benefit of all. Overseers can be unions, elected officials, kings or dictators, but the promise is the same.

It has proven to be a compelling proposal. It’s failed a number of times, yet people still gravitate to it. The idea that you can contribute a little and have all your worries and cares tended to by someone else seems to be quite attractive. In fact people are even willing to give up quite a bit of their own personal freedom in exchange for such security, if you can deliver. Therein lies the rub.

The upheaval in the Middle East is not centered on religion or ethnicity or even political philosophy. It stems from shortages of food, employment, basic services and all the things the totalitarian governments there have promised to deliver. After decades of living under oppression, the people there have finally determined that it’s not working. They don’t necessarily have a new system in mind. They just know the current one is no good.

In the case of EU democracies, politicians have gotten themselves elected by continually promising more and more from government in the form of services, employment, pensions, housing, job security and other entitlements. Now they’re at a point where even the politicians have to admit that they can’t deliver what they promised. People are angry. They are actually demanding a continuation of the status quo, which is impossible. Something’s going to give.

In the U.S., the Great Lakes States were once the center of global manufacturing. There was lots of money and there were lots of jobs, but all was not well. Workers were getting a raw deal. Enter the unions. For a small fee, the union would advocate on your behalf in negotiations with management. This seemed to make perfect sense, until they evolved far beyond employee advocacy organizations. Unions began offering benefits in addition to advocacy. This costs money. Dues went up. They further evolved to take on political advocacy. The idea was that what they couldn’t achieve at the negotiating table, they could accomplish through legislation. They increasingly got involved in funding political campaigns. Of course, the very notion that a group of union representatives can better select your government representatives than you can, assumes that your life is primarily about your work; the work you do for the collective. If you prefer a different candidate, well, you’re just not a team player. As unions increased the mandates on producers, producers left the states and/or the country, seeking more affordable locales and workforces. Some went out of business. All turned increasingly to automation. The more expensive humans become, the more affordable machines become by comparison. The union movement sought more fertile grounds in the public sector. That worked out great for awhile, as the public trough seemed bottomless. It’s not, and once again they and their membership have to tangle with the reality that they cannot possibly deliver on their promise.

The alternative to the collective is self-reliance and a government that provides an infrastructure that makes it possible. Government can remove the threat of force from transactions so that a free market can be developed based on the cumulative decisions of individuals engaging in free trade. Government can also serve as arbiter between parties who disagree in good faith as to whether or not one or the other has upheld their agreement. There’s no guarantee that you’ll get what you want or even what you need, but there’s no fees for empty promises involved either, and contrary to popular belief, charity still takes place and even thrives within free markets.

I don’t know if the current global turmoil will result in a shift away from statism and collectives and toward self-reliance and limited government or if people will opt for a “new and improved” brand of collectivism. I’m inclined to think that most people still hold out hope for state-provided, cradle to grave security, no matter how many times its futility is demonstrated. I do know for certain that if you expect bigger, more pervasive governance to improve your quality of life, you’re going to be sorely disappointed. As Plato put it, you’ve got to tend your own garden.

Free idea - thumb drive vending machines

Here's yet another great idea that I don't have the resources to pursue. I would sign up or the service if it existed however. It involves actually stripping away functionality of existing hardware and software, so it can't be that tough.

First, invent the machine (I'll get to the parameters here in a minute). Next, deploy them around your test market as kiosks or boxes (like a Redbox) in very high traffic, public venues. You, the owner, can log into the machine and upload new files. Users can download files for free, onto a thumb drive. That's basically the extent of the parameters for the machine -a hard drive with monitor, secure upload, users can view icons and/or thumbnails and download only.

Revenue would come from local magazines, publications, artists, who want to make their material available to locals, free from the clutter of the web. It's the new info-tech equivalent of the free publication rack. It would also make electronic media readily accessible, even to people with low quality or no Internet access. But perhaps more importantly, it's a means of spotlighting and promoting locally produced digital content.

You'd probably have to pay for space or split revenue for kiosk placement. You'd also have to track downloads individually and collectively so you have compelling numbers to show potential customers (content creators). It's not without risk, as you may have to offer the service free until you can demonstrate effectiveness.

Have at it.

Why the change in Facebook's news feed?

Although I only have a few hundred followers or 'likes' between my personal and business pages on Facebook. I had resolved to work harder on them, because I recognized great potential value there. Now, Facebook has removed most of that value, and I believe it was deliberate.

Until recently, when you made a post to your Facebook page (business or personal) it would show up on all your friends news feeds, unless they went to the extra effort of blocking you. The significance of this for a business owner is huge. If you have a business page with several thousand followers or 'likes', you could reach the same size audience as a good sized direct mail campaign, at no charge. The fine folks at Facebook must have realized this and decided they needed to put a stop to it immediately.

Now, your news feed on Facebook will only show updates from people with whom you've had some interaction recently (a post on their wall, message or something). You can change the setting so that you'll see all of the posts on your personal page, but there's no fixing the business page, and most people will likely go on using the default setting, having little interest in or knowledge of the omni-setting.

I guess Facebook believes they'll sell more ads if they severely limit their users' ability to communicate for free. Maybe they're right, but I doubt it. My own use of Facebook, as a form of business communication, will likely drop off instead of increasing, as it has now lost much of its potential value. Well, there's still Twitter, and Facebook has now created an opening for an ambitious potential competitor. I really can't argue about the price, but I don't believe the gatekeeper mentality will serve Facebook or its users well in the long run.

The Case for Democracy

The situation in Egypt has put U.S. policy around the world under the microscope once again. People are rallying in the streets, demanding freedom and democracy. Surely, the land of the free and the home of the brave must support that. But wait, the current autocratic leader has been a good friend to the U.S. for thirty years. In return we helped them build a very formidable military machine. The waters are quite muddy.

Some argue that we should tread lightly. If true democracy comes to Egypt, we may wind up with a regime similar to that in Iran or Gaza. The problem with those comparisons is that Iran is far from a true democracy and the thugs in Gaza still rule largely through intimidation.

Free democracy is about more than one citizen; one vote. Freedom of assembly, speech, freedom of the press and rule of law are all absolute requirements. These are the freedoms that guarantee that even if good ideas are put down today and bad ideas are implemented, the good will be back and the bad will fall by the wayside. The power of the people to communicate, observe, evaluate and speak out is what keeps a society moving forward.

We should not be concerned about who might come to power in a free and fair election in countries like Egypt. We should concern ourselves with whether or not their next election and the one after that, and the one after that will also be free and fair and whether the people will be able to interact and speak freely in between.

The United States is at its best when it is a beacon of freedom and hope, not simply an instrument of preserving order. It should always be our position that governments, including their militaries, are servants of the people and that church and state be separate. We may not be able to dictate these things, but we can voice and promote them at every opportunity. The separation of church and state is not ant-religion, it’s anti-autocracy. After all, if someone who claims to speak for God or Allah, is in charge, what’s the check on his or her power? The rule of law must apply equally to all citizens of all religions or no religion. It is not the role of government to determine God’s or Allah’s will, but to protect the rights of individuals on Earth.

We need not be hostile toward countries or populations that don’t exhibit our values, but neither need we be shy or apologetic about what our values and beliefs are. As for me, I don’t believe that the people of the Middle East or Northern Africa or anywhere else are genetically pre-disposed to autocracy and/or theocracy. It may take them generations to work it out, but if we help them keep free, open, honest conversation going, they will work it out. In the tug-o-war between freedom and order, order has been vastly over-rated I think. I hope that U.S. foreign policy starts trending more American in the future.

Why isn't oil soaring on MIddle East unrest?

Before things blew up in Egypt, pundits and market mavens were predicting $100/barrel, even $200/barrel oil coming very soon. Two weeks into the uprising in the country that controls the Suez Canal, oil has barely budged and is currently at around $90. What's the deal?

Well, perception and emotion can be very powerful, but reality usually wins, especially in a market that's as "just in time" as the petrol market. It's much cheaper to leave oil in the ground than it is to store it, long term, in tanks above ground. For that reason, there's not a lot of "extra" petrol sitting around, so when you get a spike in demand, you can get a rapid spike in price as immediately available supplies dry up. By the same token, if demand drops even a bit, you can find yourself with a lot of excess inventory and nowhere to put it. Prices can drop just as fast as supply is unloaded on the cheap.

There is a threat of supply cut off, but it hasn't yet materialized. In addition, the historic cold snap in the U.S. has caused thousands of flight cancellations, school cancellations, business closings and has kept a lot of people who would otherwise be traveling, hunkered down at the house. The increase in energy being used for heat is not offsetting the huge amounts of petrol that are not being used for transportation.

If the situation in Egypt simmers down without anyone disrupting operations at the Canal (and there doesn't seem to be any party that would benefit from such a move), expect to see oil drop 5-10% in a hurry. If the canal is shut down, a huge spike up, and in the meantime a very gradual downward trend as what is actually happening slightly beats out what might happen.

Republicans should take the bait on the President's tax code proposal

Never mind the controversy over extending the Bush tax cuts. I think the much more intriguing development regarding taxes was President Obama's proposal to simplify the tax code. The knee jerk reaction from opposition politicians and pundits may be "What's he really up to?" The better approach is "Let's do it!"

The President has proposed just 3 tax rates ranging from around 8% to 24% as well as a cut in the corporate tax rate. This would be offset by eliminating deductions and loopholes, including the sacred cow; mortgage interest deduction. I think that's a giant step in the right direction.

The mortgage interest deduction, like so many other deductions, credits and exemptions, is designed to short circuit market forces and influence behavior. This is a tactic that true free market proponents should oppose anyway. The mortgage interest deduction is based on the flawed premise that everyone should own a home. Furthermore, it doesn't encourage home ownership, it simply encourages mortgages. After all, once your mortgage is paid off, you no longer get the deduction. Will doing away with the deduction hurt home prices? Probably. Homes values will be based on a home's value, rather than on a combination of the value of the home and the value of a tax deduction. That's not a bad thing in the long run.

I would propose a new deduction however, for medical expenses. This should be a straightforward deduction and not some convoluted scheme based on a qualified account with restricted access. This could open a whole new field for lenders. If you have to take out a 20 year loan to pay for your surgery, at least you can take a tax deduction for the payments - interest and principal.

I would stand firm against any form of consumption tax whether it be on just gas or broader, unless it completely replaces every other tax. Even then, I would wait for a constitutional amendment forbidding the return of the income and payroll taxes.

The average American doesn't have the time or the resources to wade through our current 10,000+ page monstrosity of a tax code looking for exemptions, loopholes and credits. Free market proponents should applaud a tax system that doesn't attempt to influence where, when and how you direct your resources. The government's role is to be referee, not chaperon. Imagine what might happen to productivity if big business made investment decisions based on what consumers want and need rather than on what the government would like them to blow money on.

I'm willing to give the President the benefit of the doubt and assume he has determined that the American people aren't interested in a care-taker government and has decided to change course. Regardless of what may or may not be going on in his head or in backroom discussions with advisers, he has tossed a ball to limited government proponents. Take it and run with it. Never mind who might get the credit or benefit politically. The only way it results in a second term for President Obama is if the U.S. prospers as a result. Is that so bad? Do the right thing. You might be surprised at the results.

Gold Play

With gold making another run for $1400/oz, should you start buying some if you haven't already? If you already own some, should you start selling? When it comes to policy and politics, I rarely, if ever find myself in agreement with multi-billionaire investor, George Soros, but when it comes to the gold market, I believe he's got this one right. He may be evil from my socio-economic perspective, but he's not stupid.

Soros has called gold "the ultimate bubble" and is, in fact, gradually reducing his holdings. He has wisely, not predicted a top or a time frame for a decline. Bubbles are by nature, unpredictable. I'm not going to call a top either, but there are some fundamental things you should know about gold if you're going to play the game.

It's often said that gold has "intrinsic value". That is, that it has value apart from speculative trading or as a currency. That's true. It has intrinsic value to those who actually consume it, like jewelers and space craft manufacturers. But the market price, at the moment, is not being driven by consumers. It's being driven by investors/speculators and that portion of the price is entirely subjective. Contrary to the old real estate adage, they are producing more gold and very little of it is actually consumed. In fact, one could say the only gold that's truly consumed is that small fraction of production that gets shot into space. Much of it is now being purchased by people who just want to store it, or have someone else store it, simply to make them feel better.

At some point, the guru of the week is going to tell folks it's time to sell. Who is everyone going to sell to? It could be days, weeks or years, but when gold falls it's going to fall fast and far. You may be waiting for a "top". So are millions of other people. Good luck with that. At least it looks cool.

So, what should you be investing in? I'm not an investment adviser, so take this as the opinion of just another member of the Peanut Gallery, but if I were trying to preserve currency, I'd buy inflation adjusted Treasuries. If I'm trying to preserve wealth, I'm buying things that I, or my heirs, can actually use regardless of the economic situation. After all, the true value of wealth lies in how it contributes to your quality of life. That's a call only you can make.