Posts Tagged ‘investment’

Stop Corporate Charity

December 29, 2010 2 comments

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There are many reasons to oppose corporate charity. It is deceptive, immoral, and border-line criminal. It hinders economic growth for the wealthy as well as the impoverished, and promotes a culture of ambiguity, pompous grandstanding, and anti-productivity.

Under a strict construction of the ethics of contractual agreements, corporate charity is an act of theft against the corporation’s stockholders and other investors. This is obviously so because a corporation is by definition a for-profit entity, and its investors lend their capital to the corporation ostensibly to receive a return on investment in proportion to the corporation’s profits. Investment carries risk, of course, and if a corporation fails to produce a profit by the honest inadequacies of its executives, that is business. On the other hand, if it fails to produce a profit – or fails to produce as much of a profit – because the executives made a decision to donate some portion of revenue to charity, however small a portion it may be, the investors have been cheated out of returns they were owed under their agreement with the corporation. This is exactly the same crime as occurs when executives defraud investors by embezzling company funds into their personal accounts. It is only treated differently because of differing public attitudes about perceived greed and perceived charity, which, right or wrong, should have no bearing on whether theft is a crime.

An argument can be made that the situation is not so clear-cut because corporate charity has gained widespread acceptance, or at least widespread acknowledgment. Since almost all corporations engage in at least some level of charity, it could be argued that investors understand at the time they decide to purchase stocks that some portion of their funds will be given away rather than used for real investment purposes. That’s not a totally invalid point, but it’s extremely shaky. If a consumer buys a sealed box labeled “a dozen eggs”, but knows at the time it probably only contains ten eggs because a short dozen scam is widespread and typical in his town, the fact that he knew he was most likely getting scammed doesn’t make the scam okay. This is what is happening with corporate charity: investors are being scammed out of a portion of their investment, but they expect they probably will be. That doesn’t justify it.

Furthermore, even if we accept the argument that an expected scam is not truly a scam, that leaves open the question of precisely what is expected. Maybe investors only expect that the corporations in which they choose to invest will donate one percent of their money, but the corporations actually donate two percent! Maybe the investors expect that each corporation will steal whatever the average amount of stealing is, but in fact some corporations by definition must steal more than the average. Clearly there is no way to reason out of the reality that deliberately non-profit actions by an explicitly for-profit institution is a criminal act of theft against investors. This alone should be sufficient to compel any honest person to oppose all corporate charity.

This is nowhere near the end of it, though. As with almost all criminal acts, the damage done by corporate charity really extends far beyond the simple breaking of an abstract principle. The principles of contracts exist for a reason, and the violation of them has severe negative consequences for everyone. When executives steal from investors to donate to charities, they decompartmentalize the economy, blurring the lines between production and consumption, and making it harder for investors as well as consumers to make informed choices. Compartmentalization and specialization are necessary in a productive society, because they allow for the greatest success for the most productive entities and the most immediate failure for the unproductive ones. Both production and charity are made more efficient when they are handled separately.

Consider an entrepreneur who innovates in automobile technology, reducing the costs of high-speed transportation sufficiently that millions of families who were previously too poor to afford it now have access. Good for him. His company will likely make a very large amount of money selling these cheaper automobiles, and it should, because that profit is the incentive that brings about innovation. It’s a reciprocal relationship – the entrepreneur is wealthier precisely because he made poor people wealthier. The more people to whom he is able to provide transportation affordably, the more money he will have. In this way he has done a great service to himself as well as to others around him.

Now suppose this entrepreneur donates huge portions of his money to charity, or worse, steals from the investors in his company and donates their money to charity. No matter what sociology professors may say, this is economically a bad idea. It is known that the entrepreneur is talented in production. There is no reason to believe he is talented in charity. He has an inarguable eye for opportunity in investment. He may very well be no more competent than any other bloke when it comes to giving aid. In reality, it is almost assuredly true that he would do a far greater service to the poor – which is to say, would raise their standard of living by a far higher amount – if he would use this money to reinvest in research and development to continue to make his automobiles more affordable, or to add new safety features, or to market a line of trucks, or whatever else he discerns is a wise productive investment. Remember that, if he sells a million automobiles a year, then for every dollar by which he is able to reduce the price of his automobiles the poorer people save a million dollars. Simultaneously, his sales will increase, so he will become richer, and have more money to reinvest. That’s economics, and it works.

When entrepreneurs reinvest accumulated capital and thereby lower the cost of consumer goods, they have another effect which is even more profound. By raising the ratio of value produced to labor required, investors raise real wages for just about everyone. This means that while people need to pay less money at the store to get the things that they want, they also take home more money from their standard day job. That’s a compelling argument against corporate charity and for corporate investment from the standpoint of the working class people. As for those who are too uneducated, disabled, or disinterested to labor for a living, the argument is – believe it or not – even stronger. That’s because it is an empirically demonstrable fact that donations by ordinary people to private charities actually rise super-linearly with income. This means when people make more money, they give even more of the money they make to charity. Thus, a successful investment in research and development will in the long run raise charitable donations more than if the same amount of money were simply given directly to charities – and yet it will do so without the need for criminal deception and the taking of other people’s money. So why don’t these do-gooder corporate executives who want to help the poor start by helping their employees and stockholders, and let people donate to charity with their own money?

One can speculate further that there is yet another mechanism by which corporate charity ultimately reduces charitable contributions, and that mechanism is uncertainty and lack of information. It is assuredly true that, when people donate to charity, they value knowledge of where their money is going, and want to know that it is being used effectively. They want to know how much of their income they donate, and smoke and mirrors surrounding charity will cause skepticism. It is therefore very likely that corporations which engage in charity using money taken from investors without their direct knowledge or consent really discourage other people from donating explicitly and thus reduce total donations. In much the same way that people tend to avoid taking it upon themselves to help the unemployed and homeless when governments claim to provide protection, so also they probably scale back charitable donations when corporations claim to do it for them. This reduction in charity is perception-based, not results-based. So when governments and corporations fail to provide the benefits they claim, and the downtrodden are left to suffer, nevertheless members of the community do not respond, do not take up the burden of charity themselves, because they are told someone else is taking care of it, so it must be someone else’s fault. A mixture of pathological blaming and self-righteous grandstanding takes the place of real work by individuals to help their fellow men, and everyone is worse off.

Finally, corporate charity is used as a rationalization for bad corporate policy, rent-seeking, interference with public policy and government officials, and generally poor quality of products and services. It tends to be a last-ditch effort by inefficient executives to avoid the progress inherent in a free market. Suppose one company is able to sell a product for ninety dollars, while another sells it for the slightly higher price of one hundred dollars, but has a better reputation due to engaging in more charitable programs in local communities. That sounds nice, but almost certainly the latter company’s contributions really do not constitute ten percent of its revenue. Therefore, consumers would do better to buy the cheaper product from the less charitable company and donate just some of the money they save. Some of them will do this, but others will make the mistake of falling victim to feel-good reputation-building that obscures real market efficiency. A greater good is done for a greater number of people by pursuing the most efficient, not the most heartwarming economic goals.

Thus the executive who commandeers funds entrusted to him by others and uses them for his own purposes – even ostensibly charitable ones – is presented with an incentive structure which rewards grandstanding and hollow self-promotion, while the executive who commits the investors’ funds to their intended purpose is required to produce real benefits for the consumers in order to stay afloat. This leads us to a final and critical point which those of you who know me well may have realized was coming from the beginning: So-called corporate “charity” is not charity at all. It is avaricious crime which damages the people it claims to help and helps the people it claims to damage. Executives who presume to achieve moral superiority by being sacrificial with other people’s money are not generous; they are vicious. The particular charities which they happen to favor are deemed worthy of everyone else’s support. So if an executive happens to feel especially strongly about one kind of cancer because of a death in his family, others who suffer from a different cancer must see a loss in funding because the executive is quite happy to steal from the populace and redirect contributions to his favored cause. As a result, charity organizations focus less on creating real results which they can demonstrate to the average person and more on befriending the higher-ups. So-called corporate “charity” robs the investors who risked their money to support entrepreneurship, raises costs to consumers, lowers employee wages, corrupts charities, empowers executives to an even greater extent, and ultimately does exactly the opposite of its purported goal: getting money to charities to help people in need.

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The Collapse of the Brain Bubble – How the federal government will end college education.

May 24, 2010 11 comments

To listen to the audio version, play the video below. To read the transcript, simply scroll down.

Hello, internet. Today I’m here to talk to you about a serious threat to the stability of our economic system and our lifestyle in general. It is the “brain bubble”, a systemic miscalculation of how society’s resources should be allocated to education. To understand the severity of the threat posed by the brain bubble, we must first explore the basic misunderstandings of economics from which the whole problem stems.

The economy is simply the word economists use to describe the aggregate of all the things that people do with their capital. Capital is anything that exists through time and has value. Land and machines are good examples of capital. With capital, people can perform activities that produce valuable output. For example, with land and machines a company can maintain a manufacturing plant that produces stuffed animals or food products to sell.

The decision to allocate some capital, also called “resources”, to a particular economic activity is called “investment”. At any given time, there is only a certain amount of capital in the world, so society must be wise in how it invests. The world should not, for example, use half of all its factories to make stuffed elephants if only five percent of people actually want a stuffed elephant. The economy needs a system by which people can decide whether to invest their capital in a particular venture or not.

Fortunately, such a system exists in the form of interest rates. Money represents capital, in the sense that it can be traded for capital and vice-versa. Loans of money, therefore, are an investment by the lender in whatever the venture for which the loan is made. In a free market, interest rates on loans will tend to equal the average expected return value for investments in general. If a company borrows money to perform an activity, and that activity has a return that is greater than the interest rate, the company will pay off the loan and then expand. If instead the venture returns less than the over-all interest rate, the company will have to close its operations in order to repay the loan.

Suppose, for example, that I have imagined a better kind of soda than what is currently on the market. I think I can provide people with a beverage that tastes better than Coke or Pespi and costs less. An investor can make me a loan, with which I can build a factory and start marketing my product. If I’m right, and people want what I’m selling, then my sales will spread rapidly through the soda market, and I will turn a large profit. With that profit, I will pay back my lender plus interest, thus justifying his initial investment in me. If I am wrong, and my invention was not a good idea, then I will turn a small profit or none at all, I will be unable to make the interest payments on my loan, and my lender will not earn money on his investment. This discourages lenders from investing in products and services that people don’t want. This is the policy by which capital is invested in useful ventures.

Your actions are also business ventures. People can invest in you. They can do this, for example, by granting you a student loan so that you can go to college. If your activities after college prove highly productive, you will earn a large salary, and will pay off your student loan with interest. If instead you are lazy or dumb, or if you simply want to pursue a lifestyle that does not involve a lot of economic activity, your lender will lose money on you. This, of course, creates an incentive for lenders to try to determine the expected productive output of students while they are in college. Students who are likely to pursue high-end careers that require a lot of education will tend to get larger loans, while students who will not apply a degree in a productive fashion will be offered smaller loans or no loans at all.

At least, all of that would be true if interest rates were unregulated, student loans came from private investors with individual responsibility for the success or failure of the loans, and college education had a definable cost to each individual who received it. Instead, investors have been required to issue student loans through federal programs, at federally-approved interest rates, for the past several decades. The cost of college education has been increasingly subsidized and controlled by both federal and state governments. More recently, President Obama nationalized the entire student loan program, with the reasoning that attempts by lenders to profit from their investments were interfering with students’ opportunities for education.

The result of all this is that the discriminating factor in investing – the need for investors to profit on their investments – has been totally removed from the equation of who gets a student loan and how much they get. Student loans are no more or less likely to go to students that will actually make use of them and be able to pay them back than to students who have no future in higher education and have no ability to repay their loans at all. That would be fine if society had an infinite amount of educational resources to allocate to whomever the government pleased. However, resources are finite, and every dollar that is spent educating someone who will not work to pay back his loans is a dollar that could have been spent educating a more productive citizen or building a factory to produce food to end world hunger.

The progressives will tell you that investment in education almost always has a positive economic return. That is emphatically not true. Hundreds of thousands of students with federal loans cannot pay them back, and the problem is so widespread that Obama already has plans to “bail out” the student loans and nullify the debt. Even if it were true that education always produces positive returns on investments, that is still a construct of a government-regulated, artificially low interest rate which ignores the opportunity costs associated with investment. By forcing interest rates to be lower than the free market would naturally make them, the federal government has made it profitable to invest in students whose activities after graduation do not economically justify the initial investment.

By removing the need to allocate resources to education in precisely so far as it is efficient to do so and no farther, the federal government has created a brain bubble. Loads of people are going to college, no matter how much it costs, and no matter whether they actually care about their degree or have any plans to enter a specialized career after graduation. Students who don’t need a college degree can get federal loans, and, if they don’t ever make enough money to justify those loans, they will be absolved of all debt under Obama’s new plan.

The cost of college has soared exponentially above the rate of inflation over the past several decades. Every time book prices, tuition, and boarding costs go up, the federal government has responded by subsidizing higher education even more heavily, enforcing stricter regulation on lenders, and lowering interest rates. These policies are promoted as being necessary to allow people to continue to get a good education in spite of rising costs. The entire strategy has never worked, not even a little bit. At every turn the government has tried to curb rising costs by subsidizing even further, removing even more of the ever-dwindling incentive to allocate resources efficiently. Even as technology gets cheaper, books get easier to produce, dormitories become better-designed, and educational techniques get ever-more refined, the cost of higher education continues to balloon. In all of the government’s attempted analysis of this situation, the one question that is never asked is, “Why are costs going up?”

They are going up, plain and simple, because the interest-rate information, the driving need to supply education to those who will make use of it and not to others, has been destroyed. It has been destroyed by the very same policies that were meant to make education accessible to everyone. Costs will not go down because the government yells or the people protest. The only strategy that can mitigate the cost of college education is the cessation of all subsidies and the release of the government’s grip on interest rates. When lenders are allowed to seek profit in the loans they grant to students, colleges will again have an incentive to minimize tuition, and students will have an incentive to work hard in school to prove their academic worth.

However, it is clear that strategy will not be adopted in America barring massive political upheaval. Instead, through Obama’s recent decision to totally nationalize the student loan program and eliminate any remaining profits, college tuition costs have again spiked. Obama has set a precedent now that loans can be given to anyone for any reason. If the loan cannot ever be paid back, the government will bail out the lender. All incentive for fiscal responsibility and economic efficiency is gone.

The cost of college will continue to grow over the next ten to fifteen years. No later than 2030, the government will go completely bankrupt, and colleges will no longer be able to accept payment promises through Federal Reserve notes. When that happens, the brain bubble will burst. College will be so outlandishly expensive that no one will be able to afford it without federal assistance, and no federal assistance will be forthcoming. The well will run dry. When the government is no longer able to bail out society today with money it hopes will be created tomorrow, the college market itself will collapse. Dormitories will sit empty for years in much the same way that houses have been abandoned since the 2008 housing crisis. Just like all bubbles before it, the brain bubble is a result of systemic over-investment without regard for actual returns. It is guaranteed to burst, and the result will be an entire generation of Americans who will not have any of the skills of higher education.