About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Monday, January 9, 2012

Newt Gingrich and Mitt Romney, Two Sides Of The Same Coin

Transcript of Newt Gingrich's comments on "traditional capitalism" in an interview with NBC's Matt Lauer, from Real Clear Politics:

(Newt Gingrich) I think at some point Gov. Romney's going to have to hold a press conference and walk through, with considerable detail, some of the companies that Bain took over where they apparently looted the companies, left people unemployed and walked off with millions of dollars.

Look, I'm for capitalism. I'm for people who go in to save a company. I'm for people who take real risk. I'm for people who grow jobs, and I understand sometimes you fail. I've run four small businesses in the last decade. It gets tough out there. It doesn't always work. I get that. But if somebody comes in, takes all the money out of your company and then leaves you bankrupt while they go off with millions, that's not traditional capitalism.

Readers interested in the truth about "traditional capitalism," as it is practiced in this country, will find this article from Reuters extremely interesting: Special report: Romney's steel skeleton in the Bain closet.

The article is exactly what Dr. Newt ordered, a "walk through, with considerable detail," of Bain's takeover of a steel mill in Kansas City. Read the story more than once. It is a case study of capitalism at work, not free market capitalism by any stretch of the imagination, but crony capitalism as it exists in the United States. It's a
messy, messy business. The government intervention into the market place is painfully obvious and, I think, obviously stupid.

A few interesting quotes from the article followed by my comments:
Armco wanted to sell its Kansas City plant to concentrate on other aspects of its business. Jack Stutz and a few of the other Armco managers were looking for backers to help them buy it. They spoke to GE Capital, which, in turn, contacted Bain Capital because it had earned a sterling reputation for turning companies around.

The risks were obvious. The mill's equipment was out of date and it faced stiff competition from Nucor Corp, which also made grinding balls.

Nevertheless, Bain and its partners decided to buy the mill for $75 million. Bain put up about $8 million to gain majority control of the company, renamed GS Technologies Inc.
In a trade both parties always benefit. This was not a hostile takeover. Armco wanted to sell; Bain wanted to buy. So far, so good.

GS announced plans for a $98 million plant modernization and Kansas City officials agreed to a tax break worth about $3 million, according to press accounts.
Oops! Government intervention number one.

In 1997, with Armco's pension guarantees set to expire in one year, the United Steelworkers local at the Kansas City plant was worried that GS was not setting aside enough money to cover pension obligations and other benefits in the event of a shutdown.

David Foster, the negotiator for the union, said labor talks were typically more tense at companies owned by private equity firms because the high level of debt left managers with less flexibility.

Contract talks foundered and the union went on strike in April 1997. The first standoff since 1959 quickly turned nasty. Workers shot bottle rockets at security guards, tossed nails in the roadways to flatten the tires of nonunion trucks and pounded on the windows of vehicles as they left the plant.

After 10 weeks, the two sides reached a deal that boosted pensions and ensured that workers would get health and life insurance in the event of a shutdown.
Government intervention number two. Missouri is not a right-to-work state. Hence, unions are strong and the right to strike is protected by law. Apparently, the steel mill in question was a closed shop.
Charles Bradford, an analyst at Bradford Research, blames the union, in part, for the failure of GS Industries to survive in the new global marketplace.

"If you look at the steel companies that went under at the time, all of them were unionized," he said. "I'm not saying this was the only factor -- these firms faced other headwinds such as cheap labor and a strong dollar ... but the unions held them back."
Oops. The unionized workers themselves were responsible for the mill's eventual bankruptcy? Is anyone surprised?
The U.S. Pension Benefit Guaranty Corp, which insures company retirement plans, determined in 2002 that GS had underfunded its pension by $44 million. The federal agency, funded by corporate levies, stepped in to cover the basic pension payments, but not the supplement the union had negotiated as a hedge against the plant's closure.

For Joe Soptic, who worked at the plant for 28 years, that meant a loss of $283 per month, about 22 percent of his pension. Others lost up to $400 per month, according to documents supplied by the union.

Comparatively, the GS bailout was one of the pension guarantor's smaller hits. The federal fund swung from a $7.7 billion surplus to a $3.6 billion deficit that year as it struggled to cover bankruptcies in the steel and transportation industries. The failure of LTV Steel, for example, cost the agency $1.9 billion.

The agency's woes prompted Congress in 2006 to require companies to contribute more toward their pensions.
Government intervention number three and it's huge. Note that the U.S. Pension Benefit Guaranty Corp., a federal agency, is funded by taxes levied against all businesses, much like worker's comp. In effect, the system is Marxist: from each according to ability; to each according to need. Losses by irresponsible companies are socialized. The moral hazard is obvious. This is crony capitalism through and through. [Economist Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."] 
Many of the older workers at the Kansas City mill were just a few years away from Social Security and Medicare, but younger workers didn't have that safety net. Even with $600,000 earmarked by the U.S. Labor Department for job retraining, many had trouble finding work.

"They give you a year's worth of training, you're 50-something years old, nobody wants to hire you," said Steve Morrow, who retrained in the field of heating and air conditioning.

After nearly 30 years as a steelworker, Joe Soptic found a job as a school custodian. The $24,000 salary was roughly one-third of his former pay, and the health plan did not cover his wife, Ranae.
Government intervention number four, five and six: Social Security, Medicare and a job retraining program that apparently took a year to teach Joe Soptic the necessary skills to become a school custodian. Of course, the taxes for these programs came out of Joe's salary each year for the previous 30 years. Wouldn't it be great if Joe could have banked that money instead of depositing it in the federal treasury? And Joe was paid quite well as a unionized steel worker: $72,000 per year. Obviously, Joe had no incentive to save. Later in the article we find out that Joe's savings, after 30 years of union wages, amounted to $12,000. Of course, Joe also paid heavy taxes to various local, state and federal governments which also served to keep Joe relatively poor and dependent on others for his welfare.
"I worked hard all my life and played by the rules, and they allowed this to happen," Soptic said. 
This is Joe's final take on his situation. Poor Joe. I don't know if he's talking about the government or his employer or the United Steelworker's Union. But it's what happens when a person entrusts his welfare to crony capitalists, union bosses and big government. Surely Joe would have been far more prudent and self-reliant without government intervention into the free market.
The company, along with other steelmakers, successfully petitioned the U.S. International Trade Commission for tariff rate quotas on imported wire rods and also entered the federal loan guarantee program for troubled steel companies -- two remedies at odds with a free-market stance. Romney now says it was a mistake for the government to try to protect the steel industry.
Wow! Government interventions number seven and eight are whoppers! It seems the US government saw fit to indulge big-time in super crony capitalism. Protect the favored industries from foreign competition (which would have forced the steel mill to get lean and mean). Protect the high union wages and earn some political points, not to mention votes, from the United Steelworkers. And soak the American taxpayer who provided the cash to do all this protection! Isn't this a grand system?

The joke about it is that most Americans probably favor protectionism, Joe included. You know big unions do. Joe's union dues probably went to support the very system that cost him his job. Compassionate conservatives love protectionism. Indeed, Mitt Romney is campaigning on protecting us from those evil Chinese money manipulators.

And by the way, let me say in closing that the foreign competition that helped sink this Kansas City steel mill and poor Joe Soptic was enabled by fiat currency system that all nations rely upon nowadays to lubricate world trade. If the world were still on the gold standard, world production of goods and services would be distributed based on the competitive advantage of individual countries, rather than monetary manipulation.

In my opinion Newt and Mitt wouldn't know the free market if it fell on them. For years, Mitt worked one side of the crony capitalism street, and Newt worked the other.  How wonderful!

Elect either of these cronies and we can expect more of the same from now until the system implodes. 

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