Progressives Are Not Cynical Enough About Business

Friday, July 16, AD 2010

One thing my study of economics has taught me is that businesses will tend to act in whatever way they think will bring them the most profit. There may be rare exceptions, and of course businessmen often have mixed motives. But the overall tendency in this direction is very strong.

My guess is that if you surveyed people, many more self-described progressives would say that they agreed with the statement than self-described conservatives. Indeed, progressives often criticize conservatives and libertarians for being insufficiently attuned to the rapacious self-interest motivating businessmen.

Yet oddly enough, it seems to me that one of the main problems with progressive thought is that they don’t take the idea that businesses act to maximize profit seriously enough. For a group that claims to have a low opinion of businessmen, progressives have a strange habit of advocating policies that will only work on the supposition that businesses won’t act to maximize profit, and then react with shock when they proceed to do so.

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0 Responses to Progressives Are Not Cynical Enough About Business

  • ” If progressives would only be more consistent in their cynicism, their policy prescriptions might improve.”

    Progressives who become more consistent in their cynicism become Marxists.

  • It is not a question of progressive’s being cynical enough, more like being clueless enough of how economic life actually works. Government always trumps private, Federal vs. local. They are extremely ideologically consistent in this. The law of unintended consequences is automatically ignored in staying true to this worldview.

  • Progressives who become more consistent in their cynicism become Marxists.

    A more consistent cynicism might lead progressives to become Marxists, or it might make them into libertarians.

  • Whether it leads to marxism or libertarianism is unimportant. The Progressive movement is utopian, denies original sin, and Jesus Christ. It was condemned prior to Vatican II and Catholics can not be Progressives. Thought you’d like to know.

  • @Tim McCarthy
    What you’re saying isn’t completely right. The Vatican always argues for a “balance” between pure capitalism and socialistic capitalism. I think, for instance, that they would’ve agreed with the raise of the minimum wage; even though some companies are now apperently cutting working hours, a large share of companies simply can’t so their poorest employees are earning more.
    Sure, the idea that we can create a utopia with socialism is obviously not realistic and not in line with Catholic teachings, but I certaintly believe that a Catholic or christian government or business must protect their poorest employees or citizens. We can obviously not stop sin but caring for our brothers and sister is most definitely effective. Again I’m not saying people should adopt socialism, just that there should be some social elements in capitalism.
    See for instance Rerum Novarum and the social teachings of the church.
    Maybe you know all this and I just understood you wrong, I don’t mean to be patronizing (or socialist BTW), but at least others should know this.

  • Richard, you’re right on track. And we can all thank you for reminding us here of what the Church actually has to say about the matter as opposed to letting people like Glenn Beck define our terms for us. Actually, I don’t feel any strong desire to rehabilitate the term Progressive. I do want to point out, though, that when liberals or progressives or Democrats or whatever you want to call them decry the abuses of big business, it is actually an opportunity for conservative enablers of big business (through irresponsible deregulation) to wake up from THEIR doey eyed naivete.

  • Mark,

    Here’s a list of the irresponsible (bank) deregulation since 1864.

    1. National Bank Act of 1864 (Chapter 106, 13 STAT. 99). Established a national banking system and the chartering of national banks.
    2. Federal Reserve Act of 1913 (P.L. 63-43, 38 STAT. 251, 12 USC 221). Established the Federal Reserve System as the central banking system of the U.S.
    3. To Amend the National Banking Laws and the Federal Reserve Act (P.L. 69-639, 44 STAT. 1224). The McFadden Act of 1927. Prohibited interstate banking.
    4. Banking Act of 1933 (P.L. 73-66, 48 STAT. 162).
    Glass-Steagall Act. Established the FDIC as a temporary agency. Separated commercial banking from investment banking.
    5. Banking Act of 1935 (P.L. 74-305, 49 STAT. 684).
    Established the FDIC as a permanent agency of the government.
    6. Federal Deposit Insurance Act of 1950 (P.L. 81-797, 64 STAT. 873). Revised and consolidated earlier FDIC legislation into one Act.
    7. Bank Holding Company Act of 1956 (P.L. 84-511, 70 STAT. 133). Required Federal Reserve Board approval for the establishment of a bank holding company.
    8. International Banking Act of 1978 (P.L. 95-369, 92 STAT. 607). Foreign banks in the federal regulatory framework. Deposit insurance for branches of foreign banks engaged in retail deposit taking in the U.S.
    9. Financial Institutions Regulatory and Interest Rate Control Act of 1978 (P.L. 95-630, 92 STAT. 3641). FIRIRCA. Created the Federal Financial Institutions Examination Council. Established limits and reporting requirements for bank insider transactions. Electronic fund transfers.
    10. Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221, 94 STAT. 132). Established “NOW Accounts.” Began the phase-out of interest rate ceilings on deposits. Granted new powers to thrift institutions. Raised the deposit insurance ceiling to $100,000.
    11. Depository Institutions Act of 1982 (P.L. 97-320, 96 STAT. 1469). Garn-St Germain. Expanded FDIC powers to assist troubled banks. Net Worth Certificate program. Expanded the powers of thrift institutions.
    12. Competitive Equality Banking Act of 1987 (P.L. 100-86, 101 STAT. 552). CEBA. Expedited funds availability. Recapitalized the Federal Savings & Loan Insurance Company (FSLIC). Expanded FDIC authority for open bank assistance transactions, including bridge banks.
    13. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (P.L. 101-73, 103 STAT. 183). FIRREA – restore public confidence in the savings and loan industry. Abolished the Federal Savings & Loan Insurance Corporation (FSLIC), and the FDIC was given the responsibility of insuring the deposits of thrift institutions in its place. FDIC insurance fund created to cover thrifts was named the Savings Association Insurance Fund (SAIF), while the fund covering banks was called the Bank Insurance Fund (BIF). Abolished the Federal Home Loan Bank Board. Two new agencies, the Federal Housing Finance Board (FHFB) and the Office of Thrift Supervision (OTS), were created to replace it. FIRREA created RTC as a temporary agency of the government. The RTC was given the responsibility of managing and disposing of the assets of failed institutions.
    14. Crime Control Act of 1990 (P.L. 101-647, 104 STAT. 4789). Title XXV of the Crime Control Act, known as the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, greatly expanded the authority of Federal regulators to combat financial fraud.
    15. Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105 STAT. 2236). FDICIA greatly increased the powers and authority of the FDIC. Major provisions recapitalized the Bank Insurance Fund and allowed the FDIC to strengthen the fund by borrowing from the Treasury. The act mandated a least-cost resolution method and prompt resolution approach to problem and failing banks and ordered the creation of a risk-based deposit insurance assessment scheme. Brokered deposits were restricted, as were the non-bank activities of insured state banks. FDICIA created new supervisory and regulatory examination standards and put forth new capital requirements for banks.
    16. Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672). Established regulatory structure for government-sponsored enterprises (GSEs), combated money laundering, and provided regulatory relief to financial institutions.
    17. RTC Completion Act (P.L. 103-204, 107 STAT. 2369.
    18. Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160). Established a Community Development Financial Institutions Fund, a wholly owned government corporation that would provide financial and technical assistance to CDFIs.
    19. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338). Permits adequately capitalized and managed bank holding companies to acquire banks in any.
    20. Economic Growth and Regulatory Paperwork Reduction Act of 1996 (P.L. 104-208, 110 STAT. 3009
    21. Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338) Repeals the Glass Steagall Act of 1933. Allows national banks to underwrite municipal bonds. .
    22. International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001* (P.L. 107-56) The law requires financial institutions to establish anti-money laundering programs and imposes various standards on money-transmitting businesses.
    23. Sarbanes-Oxley Act of 2002 (P.L. 107-204) Sarbanes-Oxley establishes the Public Company Oversight Board to regulate public accounting firms that audit publicly traded companies. It prohibits such firms from providing other services to such companies along with the audit. It requires that CEOs and CFOs certify the annual and quarterly reports of publicly traded companies. The Act authorizes, and in some cases requires, that the Securities and Exchange Commission (SEC) issue rules governing audits.
    24. Fair and Accurate Credit Transactions Act of 2003* (P.L. 108-159)
    25. Dodd/Frank – In 2,300 pages the culmination of all that preceeded.

  • My opinion of liberals/progressives tells they think businesses and Republicans will to act in whatever manner necessary to make Obama look bad.

    For example, today the racists are selling off the NYSE just to cause people to think that Obama’s socialist agenda is not salutary. The villains!

  • I think you ought to read the documents. It still stands that Progressivism is utopian and as such denies original sin and by extension Jesus Christ. Their was never any teaching allowing socialistic capitalism. What is that ? Socialism and Communism and Progressivism are condemned. Subsidiarity is what is approved. The means of production owned by working men is approved. Re-distribution of wealth is condemned. Moreover what is socialistic capitalism ? Do you mean Distributism written about by Chesterton and Belloc ? Glenn Beck has nothing to do with me, I was taught by the Church prior to Vatican II in the 1950’s. The Church can not change it is until the end of this age, and no lib modernist influence has any place in the Church.

  • Humanistic ideal: “Man is the measure of all things and that our job is to make life worth living.”

    “But it is not necessary here to argue whether the other-worldly or the humanistic ideal is ‘higher.’ The point is that they are incompatible. One must choose between God and Man, and all ‘radicals’ and ‘progressives’ from the mildest liberal . . . have in effect chosen Man.”

    Orwell: “Reflections on Gandhi”

  • @Tim McCarthy Doesn’t subsidiarity imply a kind of involvement of the government in for instance health care? Helping society organise systems like that?

  • The most important goal of business is survival. If a business does not survive it can do no good or anything. The main goal of a progressive politician is to get elected; just like his or her conservative counterpart. Ergo, he or she will do or say whatever it takes to stay in office. Why state the obvious. Everybody knows that business people or politicians or bureaucrats driven by fear or lust for power or greed make poor choices that harm themselves and many others and then try to cover their tracks. On the other hand great leaders driven by Faith, Hope and Love make inspired choices that enrich themselves and the world at large. Let’s quit bemoaning human weakness and spread the One True Faith that will once again make a positive difference.

  • @ Richard. No it doesn’t. It means the decision should be taken as close to the action as possible. No Federal nothing unless it can not be resolved at the lowest level. For example parents decide what their children are taught not the Federal Government. But to the contrary the Federal Government should maintain interstate roads. They should regulate interstate trade, getting rid of obstacles for the free flow of commerce. There is no reason not that by applying subsidiarity and free market principles we couldn’t have better cheaper health insurance than what is currently going on. I’m not for turning back the clock, but if we took a look at how the laws were back then and adapted them to now we would be better off. On the one hand we have the party of death, and on the other the zionist neo-cons, and to paraphrase Fr. Malachi Martin when asked who he’d vote for Kerry or Bush he said he intended to be in St. Pats in NYC praying God would deliver us from both of those evils. Progressives are the enemies of the Church.
    tim

  • Without the assistance of government, business is shackled by the consumer. If the consumer is vicious, the business will be vicious. If the consumer is virtuous, the business will be virtuous.

    Government has a role; however, a vicious electorate will elect a vicious government and business will secure its authority through the power of the gun. Then there is no check on evil.

    Progressives, especially well-intentioned progressives are dangerous and destructive.

    Capitalists, as capitalism has come to be practiced are corporatists. They secure profits and eliminate competition with the power of the guns of government.

    To think that modern capitalists and progressives are different is simply foolish – they are exactly the same. Big Business and State Socialism are very much alike, especially Big Business – Chesterton.

    A government of virtuous men will curtail our disordered appetites and leave the natural free market to serve. No one goes into business, in a genuinely free market, unless they think they have a way to serve others and their profit is the measure of the degree of success they achieve in serving others.

    In a progressive corporatist capitalist construct only those with the lust for power will go into business and should anyone else manage to get in, they will be crushed by the corporate government.

    Debating capitalism, socialism, progressivism, etc. in the current paradigm is a fools errand. The terms we are using are incorrect, the intentions are masked and the idea of Christian justice doesn’t enter into the equation.

    Progressive aren’t cynical about business. Progressives are very much in favor of business provided they control consumer choices – no happy meals with toys, plenty of prescription drugs with deadly side effect, no guns in the hands of the common man, the right to murder a human being simply because of their current location – inside the womb or in the nursing home. They also want to control the businesses – no free market in insurance, managed pools of mandatory insurance instead, no parochial schools, plenty of government indoctrination centers.

    This is the stuff of a ‘scientific dictatorship’, one in which the slaves enjoy their servitude. It is a technological feudal system – we are the serfs and the progressives are the lords. The first thing our lords must do is eliminate the only Lord we should have – His Name is Jesus Christ.

    No King but Jesus Christ for me.

  • Psalm 146:3, “Put not your faith in princes . . . “

  • Someone help me out here – is there a reason the author of the article is not posted with the article – I have never seen a blog that doesn’t list the author. It is EXTREMELY annoying an unprofessional.

  • Jim, the author shows at the bottom of each post on the main page. The individual pages don’t for some reason (and I agree it’s unfortunate, but it’s not that big of a deal once you know where to look). Blackadder was the author of this post.

  • “It is EXTREMELY annoying an unprofessional.”

    Professional? Jim, we are just a rag-tag bunch of unpaid volunteers! 🙂

    As RL said you can see the authors on the main page for each post before clicking on the post. Alternatively, on the main page clicking on a contributor’s name will bring up all the posts of the contributor clicked on.

  • That businesses optimize is a useful assumption in constructing ideal types. I think you will find in practice that businesses satisfice rather than optimize.

    In the case of wage and hour laws, rules on the terms on consumer credit, and the regime in health care finance, public policy imposed costs. Parties to economic transactions make adjustments which distribute the costs between workers, proprietors, and customers. Some of the politicos who imposed those costs did so with the assumption that proprietors would eat all the new costs.

    It may be that these pols are insufficiently cynical. It may also be that they are ignorant or have not come to the realization that other people have their own agendas and their own fish to fry and are not merely characters in Henry Waxman’s doll house. I come from Upstate New York. We have twelve members of Congress. Perhaps four have some familiarity with business or economics from the occupations they have followed or from academic study. Ignorant would seem likely. The extent of narcissism would be harder to determine.

  • After reading this discussion I’m baffled by the republican party. They seem to get the vote of most serious christians (and rightly so, as they are against abortion), but they often seem very unchristian. Seen from Europe I get the impression that they are often a little xenophobic and very warlike. Also the ties politicians in the United States often have with the business world seems very unhealthy for a democracy.
    Are these impressions just wrong? BTW the presidential candidates are obviously the most visible in Europe, so that’s most of all where I’m basing these conclusions on.

  • “Are these impressions just wrong?”

    Yes.

  • ““Are these impressions just wrong?”

    Yes.”

    OK

  • American Knight’s analysis is spot on. The question is how do we affect real Catholic change. The right are corporatists or zionist trotskyites ( Krystal and Strauss founders of neo con were trotskyites first)
    The Dems are the party of death and it matters little which modifier you use; liberal, socialist, or progressive. My latest suggestion is to keep throwing the incumbents out until they listen to us.
    We are to bring forth the Social Kingship of Christ, not play patty cake with evangelicals that think they are bringing the latter day rain.

  • I find it difficult to understand what this blog post has to do with Catholicism. Following the author’s logic, we should abolish minimum wage, indeed, all regulation of business, because it will affect prices. And it is of course not true that “progressives” are surprised by the reactions of (certain) businesses. If I may quote from your own comments’ policy:
    “I will not exaggerate others’ beliefs nor make unfounded prejudicial assumptions based on labels, categories, or stereotypes. I will always extend the benefit of the doubt. (Ephesians 4:29)”

  • Perhaps a better title for this post would have been “Progressives Are Not Skeptical Enough Of Business.” You see, there’s a big difference between being skeptical and being cynical.

    It’s OK to have a healthy skepticism of business, government, or even (up to a point) the Church. Ronald Reagan’s “trust, but verify” rule encapsulates that quite well. Blind and unquestioning faith in the fallen human beings who comprise any institution usually leads to trouble. Being prepared for the POSSIBILITY that one might be decieved, or that the other party has ulterior motives, doesn’t hurt.

    However, that is not the same as cynicism — the attitude that automatically ASSUMES people or institutions to be stupid, evil, or corrupt until (or even if) proven otherwise, and never expects any better from them. Cynicism, like flippancy (an attitude that automatically treats everything as a joke) dulls the intellect instead of sharpening it, and if unchecked turns into a cancerous contempt for others that is extremely toxic to one’s spirtual life.

  • “Seen from Europe I get the impression that (the Republican party) are often xenophobic and very warlike… Are these impressions just wrong?”

    What you are seeing, Richard, is a focus on the most extreme elements of the conservative movement/Republican Party. Every movement or political faction has its “fringe” elements, which don’t represent the majority of people involved, but which unfortunately tend to attract most of the media attention. I’m sure the same thing happens in your country.

    In fact, we in America probably get an equally simplistic, stereotyped or distorted view from OUR media of what’s happening in Europe and elsewhere in the world. It’s just the nature of the news media to do that. I hope that answers your question.

  • America is large and not Europe, though our politicos wish it were and work to change it into it. Look at the stats when this country was strong and wealthy after the last war we did not export but 5% of GDP. We made all kinds of things and now we do not. This is key to prosperity we make things to create wealth we do not take in other’s laundry that’s called service. It is parasitic. This is part of the reason for this crisis we have more parasites than are healthy for a political organism. We must rid the
    body of these parasitic diseases and promote healthy activities like small businesses, while getting rid of the terminal diseases like the Federal Reserve and fractional banking, the IRS, reduce the Federal Government to about 10% of it’s current size. Well you get the idea. We need to stop supporting Europe and pull all of our Nato troops and war machines out. Let the Russians take over. The EU has put obstacles in the way of American free trade in Europe so have a nice day, we are out of there. We can do it alone just like we did in the past and be the wealthiest country on the globe. The US is fighting a proxy war for the EU, or the Mohammedans would have taken over the Continent due to their physical superiority to the fighting forces in the EU. Remember France it was on TV and the French police looked like little skinny girls and could not control the Mohammedans. Fortress America with Catholic Ghettos are what we need again.

  • Tim,

    I agree on many of your points especially the Fed and fractional-reserve banking (usury); however, I would not call service oriented businesses parasitic. All businesses serve, some provide and intangible benefit, some provide manufactured goods, some facilitate (service). All are legitimate; however, we do need to get back to having a manufacturing base, not because there is something wrong with service, but because wealth is created by mixing man’s labor (with the intent on sanctification) with God’s creation for His glory.

    In truth the USA barely needs to import anything and we should be exporting our massive surplus to help the world and enculturate the world to freedom.

    As for letting the Russians take over – I am not cool with that at all. I do think we need to stop our imperial military and have the biggest baddest military around, but not send them anywhere without a firm purpose for defeating an enemy – utterly defeating an enemy. Our military should not be the policeman of the EU, we should not be nation-building and we should most certainly not be using our soldiers within the borders of the USA (on the borders – I am all for that). That being said, we cannot create a vacuum because the Russians, the Muslims and the Chinese will fill it – we can’t have that.

  • We have no surplus to export. We don’t make anything any more. Agri-business has killed vegetable farming we export corn syrup, soy oil, corn oil, etc. We need to import everything, we need food, we need clothes, we need tv’s nothing is made here any more.
    The service industries like accounting are now counted as part of the GNP thanks to Billy Clinton. Accountants do not make anything they count what has been done. This is perverse. It adds no wealth. Service business are a cost of manufacturing which produces wealth. They do not create wealth they suck it out of the economy, but they are clean jobs for college educated clerks.
    The most important thing is this the Chastisement which Our Lady explained at Fatima has not been fulfilled and Russia has not been consecrated. This chastisement which is coming will be worse than the Deluge.

    We have protected Europe it is time they grew up. If they can protect themselves Russia will not take over but I’m betting on Russia, because EU is effeminate

  • @tim mccarthy Russian is Orthodox now, and the EU atheist, so, it’d be an improvement.

  • Tim,

    Most accountants are progressives because they earn their livelihood as a result of burdensome government regulation and graduated income tax scheme. However, their are some services that are useful. Retail is one of those. Most people purchase the goods we used to manufacture through service retailers. Financial services professionals are usually progressives too because they tend to favor the evil Fed and corporatism. Some actually help people make smart decision about the stewardship of their wealth, sadly those are few and far between.

    Not having a manufacturing base is part of the globalization plan to erode the sovereignty of the United States of America. The intent is to kill the shining city on the mountain and it eventually will happen, but it does not have to be now.

    The kings of the earth who had intercourse with her in their wantonness will weep and mourn over her when they see the smoke of her pyre.
    They will keep their distance for fear of the torment inflicted on her, and they will say: “Alas, alas, great city, Babylon, mighty city. In one hour your judgment has come.”
    The merchants of the earth will weep and mourn for her, because there will be no more markets 5 for their cargo:
    their cargo of gold, silver, precious stones, and pearls; fine linen, purple silk, and scarlet cloth; fragrant wood of every kind, all articles of ivory and all articles of the most expensive wood, bronze, iron, and marble;
    cinnamon, spice, 6 incense, myrrh, and frankincense; wine, olive oil, fine flour, and wheat; cattle and sheep, horses and chariots, and slaves, that is, human beings.
    “The fruit you craved has left you. All your luxury and splendor are gone, never again will one find them.”
    The merchants who deal in these goods, who grew rich from her, will keep their distance for fear of the torment inflicted on her. Weeping and mourning,
    they cry out: “Alas, alas, great city, wearing fine linen, purple and scarlet, adorned (in) gold, precious stones, and pearls.
    In one hour this great wealth has been ruined.” Every captain of a ship, every traveler at sea, sailors, and seafaring merchants stood at a distance
    and cried out when they saw the smoke of her pyre, “What city could compare with the great city?”
    They threw dust on their heads and cried out, weeping and mourning: “Alas, alas, great city, in which all who had ships at sea grew rich from her wealth. In one hour she has been ruined.
    Rejoice over her, heaven, you holy ones, apostles, and prophets. For God has judged your case against her.” – Apoc 18:10-20

  • The lunacy on this blog is beyond belief. Certainly beyond catholic belief.

  • Why thank you for your kind remark Professor Simons. I am sure you are used to an ideological spectrum at Dartmouth that goes from far left to lunatic left, so I can understand your distress at being exposed to uncongenial currents of thought.

  • I understand the importance of having a strong manufacturing, and for that matter an agricultural, base to the economy — i.e. making, selling, and buying stuff — but since when are service jobs now classified as being bad and unnecessary? Doesn’t this imply that the ONLY “real” economic wealth or value lies in material goods? Aren’t knowledge, independence, skill, and just plain enjoyment of life economic goods as well?

    Service jobs are simply doing for others what they do not have the time, ability, or inclination to do for themselves — thereby freeing them to devote their time to do the things they CAN do, or want to do. When this comes about as a result of genuine demand — and isn’t artificially forced on people through excessive government regulation or other causes — how is that bad? And finally, isn’t the notion that real wealth only lies in “things” and not in serving others basically un-Christian?

  • Spot on Elaine. Although material wealth is measured only by the things produced, so in that sense service isn’t wealth; however, some services enhance wealth. Education and apprenticeship for example, without those how will most people have any idea how to create material wealth?

    As for the true wealth – we know that can’t be measured.

    Look where your treasure is, for there your heart will be also.

  • Simons,

    Care to elaborate? Levying an attack like that without any substance, hmm? When did that stop being beyond Catholic belief?

    You may have a little something in your eye.

  • We have no surplus to export. We don’t make anything any more.

    This is a myth, albeit a widespread one. America’s manufacturing output is actually much much higher now than in previous decades.

    What trips people up is that while the U.S. is making more stuff than ever before, we’ve gotten so efficient at doing it that it takes fewer people than before, so manufacturing employment has declined even as output has risen (the same is true, btw, for agriculture).

  • Bravo BA! That is a simple fact, but one that seems to elude most people.

  • I was a Manufacturing Engineer for thirty five years. I worked start-ups and turnarounds I am the wrong guy to try to bamboozle. This idea that we make as much now as then is another Progressive piece of bent truth. The dollars as a number have remained the same but our share of the industry as a percentage has diminished. I saw it, I fought against it. A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100. These companies were forced out of business by the progressive force of ISO conformance to the EU. The regs were intended to put America out of business. Nafta sent the rest of the jobs to China and India. It is all about how little they pay them, it has nothing to do with anything but that.
    What you really need to do is stop getting you info from the liberal news, watch fox news, but not the talking heads like Hannity etc, they are apostate Catholics which endorse contraception.

  • This idea that we make as much now as then is another Progressive piece of bent truth. The dollars as a number have remained the same but our share of the industry as a percentage has diminished. I saw it, I fought against it. A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100.

    I’m not saying that the U.S. makes as much now as in the past. It makes more. That’s just a fact, as the chart I linked to illustrates.

    It’s true that as a percentage of the world total, U.S. manufacturing output has declined in recent decades. But it doesn’t follow from this that U.S. manufacturing output has declined. Suppose, for example, that total manufacturing output worldwide doubles while America’s share of output falls from 20% to 15%. Our share of industry as a percentage would diminish, but we would still be making more stuff and before. This is basically what has happened (though the numbers are just for purposes of the example).

    Likewise, as I noted previously, a decline in manufacturing employment doesn’t imply a decline in manufacturing output. Indeed, one of the reasons manufacturing employment has fallen is that the manufacturing sector has become so productive that they can produce lots more stuff with fewer people.

  • Today’s Sunday I’m taking a day of rest.

  • A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100. These companies were forced out of business by the progressive force of ISO conformance to the EU.

    In addition to Blackadder’s point, which is undeniable, it’s worth noting that the upper midwest does not the entire US make (although in regards to manufacturing they’re used to thinking so.) The amount of manufacturing employment in the South and in Texas has increased over the last couple decades, even as the Great Lakes states have seen decreases in manufacturing employment (though not necessarily output.)

On Certification Instead of Regulation

Thursday, January 7, AD 2010

What started as a “Ha, do you libertarians endorse this?” dare by Mike of Rortybomb has turned into a somewhat interesting discussion between him and Megan McArdle about to what extent it’s possible to protect people who are not good at understanding complex financial products (the elderly, or people who just aren’t good at understanding complicated service agreements) from being victimized by banks without in the process hurting the people you’re trying to help. This as the new credit card legislation is going into effect, trying to crack down on banks which raise interest rates quickly if you’re late paying, have hidden fees, or move due dates around (theoretically in an attempt to keep people from paying on time.)

Mike suggests that banks should be required to offer a “plain vanilla option” of products such as credit cards or checking accounts.

And that solution would be mandating financial services to provide Vanilla Option financial products. Boring, low-reward trap-fee products you’d probably have to pay a yearly fee for.

So much of our financial services are predicated on tricks and traps but also have a lot of benefits. You get free checking, but if you overdraft you lose more than you gained. Now with a vanilla option, you could pay more upfront to not take the risk of losing later. This is banking how it used to be, boring. And this is exactly the kind of product that people with weak cognition would want to have available. Someone approaching older age, but before getting there, could opt for the “extra boring” financial services package. People buy renter’s insurance; some might view a yearly-fee on their checking account or credit card as a “trap insurance.”

Megan doesn’t think the idea would be very successful:

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One Response to On Certification Instead of Regulation

  • The Thaler and Sunstein book Nudge made some similar recommendations regarding what you might call “plain vanilla” options for things like credit cards, mortgages, etc. In general they think that you could get around the problems noted by Ms. McArdle by making the plain vanilla the “default option” rather than just one option among many. The idea is that most people tend to stick with a default option whatever it is, and the few who don’t tend to be the ones who are more knowledgeable and capable of comparing the pros and cons of other options. I’m not sure how that would translate into things like health care, but it’s an interesting idea.

9 Responses to Regulation & Credit Card Companies

  • I have small love for the credit card companies, as my hundreds of bankruptcy clients can attest, but you can either have easy credit with little regulation, or you can have tight credit with lots of regulation. Credit card debt is a classic unsecured debt. Those type of debts are going to have high interest rates unless the government subsidizes the loans. Who knows? Perhaps the government will be doing that in a few months. The Federal government is doing precisely the wrong thing with the bailouts, and I imagine this philosophy will spread with the government taking on additional obligations that the taxpayers will never be able to pay. Far better to let debtors, both individual and corporate take bankruptcy.

  • I am relatively open to regulation, and I hold no love for credit card companies, but capping their interest rates just drives people to pay day lenders and loan sharks, with worse outcomes than bankruptcy.

  • Pay day lender loans often have rates, in Illinois, that work out to about 345% per annum or worse.

  • Donald,

    I agree that unsecured debt is going to carry a higher interest rate, but it seems to me that it would be relatively easy to cap the interest rate at something like the the prime rate plus 6-8 percent. This would undoubtedly reduce the availability of credit to some borrowers, but many of these borrowers are simply postponing the inevitable. On average, a person who is willing to borrow at an 18% APR for a significant period of time is not in a good position to repay it.

    This would mean that people would probably have to declare bankruptcy earlier, and perhaps on the margin it would force more people into bankruptcy because of the lack of available credit. It seems to me that this might be a better outcome. People would not be able to incur as much debt, which would mean less crushing levels of debts for debtors and less write-offs for financial service companies. It would also protect individuals who are not particularly financially savvy from excessively high interest rates.

    Zak,

    You raise a good point about pay-day lenders. Any reform would have to encompass pay day lenders as well (necessarily with somewhat higher interest rates), so that the situation would not be made worse than it currently is.

  • “but it seems to me that it would be relatively easy to cap the interest rate at something like the the prime rate plus 6-8 percent.”

    It’s certainly very easy to do John Henry by government fiat, but it would also place credit cards out of the hands of most people who believe that they need credit. Today the prime rate is 4.00. Limit credit card rates to 10.00 or 12.00 and only people with pristine credit ratings will be able to have credit cards. Banks are in business to make money and they are not going to give unsecured loans to people with less than stellar credit histories without the ability to charge interest rates commensurate with the risk. I believe adults should be able to decide for themselves whether an interest rate on a credit card is too high. Careful buyers with good credit ratings can get low interest credit cards. For the rest, let them make the decision as to what is in their economic interest rather than have the government take that decision from them. The vast majority of credit card debt is repaid so I would submit that only a small minority of credit card holders are unable or unwilling to live up to the terms of their agreements. I prefer a society with easy credit and high interest rates on unsecured debt to government regulation which artificially lowers interest rates and dries up credit.

  • On average, a person who is willing to borrow at an 18% APR for a significant period of time is not in a good position to repay it.

    Generally speaking, an interest rate will reflect convenience (both convenience of the borrower and potential inconvenience for the lender) as part of the interest rate. One of the things about credit cards is that they allow you to take out a significant loan (up to a certain amount) at any time, and pay it back whenever you want, so long as you’re making a pretty minimal payment. That naturally increases the interest rate — both because the lender doesn’t know when they’ll get their money back, and because the borrower can take out money based on circumstances that he knows about but the lender doesn’t.

    So for instance, if I lost my job, and then we had a major medical expense, I could run up a few thousand dollars on my credit card without any clear idea of how I’d pay it, using it as a way to get a 5k loan without collateral or any fixed pay-off period and wait till I had work again — but if the lender had to evaluate me at that moment they would certainly not offer to give me 5k given that I had no income.

    In other words, it give the borrower the edge in terms of information.

    Now, I agree that credit card companies are often, to some extent, predatory in their approach. They know that if they have good enough ways of calculating who really needs money but will eventually pay it all of, they can successfully land long term borrowers who will net them a lot of interest.

    However, that the CC companies even make much money in the first place suggests that much of the time they do indeed get paid off — which means that most borrowers aren’t simply postponing the inevitable. (While nearly everyone who declares bankruptcy doubtless has lots of CC debt, most people with CC debt never declare bankruptcy.)

    I suppose a lot depends on what you mean by “significant period”. We’ve had a pair of nearly year long periods in our marriage when a combination of unexpected expenses and low income resulted in carrying a balance — though for a slightly lower interest rate.

    The trick is, I was fairly confident in my ability to earn and save my way out of those situations — but a government regulator is not really in a good position to determine if a given borrower is.

  • Donald,

    “I prefer a society with easy credit and high interest rates on unsecured debt to government regulation which artificially lowers interest rates and dries up credit.”

    As I said there is a trade-off here. I guess my problem is that credit card companies frequently (still more, pay-day loan companies) engage in predatory lending tactics that increase profitability but harm financially unsophisticated individuals. I think this is immoral in some cases, although I am not going to grab a pitchfork and start chanting ‘usury! usury!’. Just because something is immoral does not mean it should be illegal, and usum non tollit abusus.

    Nevertheless, I would be interested in looking at ways to curb the more questionable practices. As you note, this is a paternalistic approach that would constrict individual parties’ freedom to contract. I have not conducted the type of empirical studies that would be necessary to identify the best ways to change the existing law (the 6%-8% plus prime figure was intended as an example rather than a proposal). In any system there will be individuals who make irresponsible decisions with their freedom, as well as some level of regulation to protect consumers. The question is: have we struck the best balance between freedom of contract and regulation? I am not sure that we have, and I can think of explanations for that state of affairs (credit card companies likely are more effective lobbyists), but I am open to being persuaded otherwise.

  • Darwin,

    “In other words, it gives the borrower the edge in terms of information…but a government regulator is not really in a good position to determine if a given borrower is (likely to be able to pay back the money).”

    A well-thought out response (as was Donald’s). I agree, of course, that the government is not in a good position to determine if an individual borrower would be best served by additional debt. At the same time, it seems to me that there is often an information asymmetry between borrowers and credit card companies. For instance, a credit card company can increase the interest rate rather suddenly on a borrower – and borrower’s often do not consider this ex ante. In the article cited below, an individual missed one payment and immediately their interest rate increased from 9% to 30%.

    That individual was able to pay off the balance and immediately did, but those types of practices are not uncommon, and not everyone can pay off the balance that quickly. The incentive structure for credit card companies is to push people just to the verge of bankruptcy with higher interest rates, before working out a payment plan at a lower rate (e.g. somewhere between 9% and 30%). And, of course, it is the least sophisticated borrowers who are disproportionately impacted. It is fair to respond to all this that the inability of some people to manage their finances should not deprive the sensible majority of a very useful financial planning tool. I am not proposing that we do away with credit card companies; simply suggesting that this is an area (and there aren’t many) where I might support more regulation. Although I wasn’t aware of this when I wrote the post, it appears that the Federal Reserve and Congress are considering additional regulations that would take effect next year (in fact, if the article is correct, that may be one of the reasons why the interest rate for carrying a balance on our card is being raised now). It seems to me that there is a real difference in information between borrowers and credit card companies, that credit card companies often have greater bargaining power after the initial transactions, and that credit card companies are a sophisticated party with an incentive to encourage people to make unwise financial decisions. In such cases, I am more sympathetic to a higher level of regulatory oversight. In any case, it will be interesting to see what happens next year.

    http://www.businessweek.com/magazine/content/08_42/b4104024799703_page_2.htm

  • And similarly, I’m not necessarily totally against regulation of such companies per se — but it strikes me that most of the regulation ideas which are developed specifically by those wanting to “protect the poor from predatory lending” aren’t unhelpful. Maybe in part because those with that specific aim often attempt too much.

    I could potentially see things which are fairly circumscribed working well — designed more to change the weighting of the game rather than “protect” people. For instance, one might allow rate changes at most once a year and limit the amount a rate could be increased as a “penalty rate”. (Though one would need to understand this would result in higher rates over all and weigh the two possibilities.)