Over the weekend the Obama Administration effectively fired the CEO of GM, Rick Wagoner, and much of the GM board.  This would not be much to report had the common stockholders of GM voted to replace members of the board and those new members then voted to terminate Mr. Wagoner; it would actually be almost expected and applauded by most.  However, this story becomes very newsworthy as it is the first time that the United States Government, namely the Obama Administration, has effectively fired a member of the private sector.

Due to TARP, the United States Government owns a large share of a number of major U.S. corporations, a gigantic leap in the direction of Socialism.  However, until recently the Government has led us (the citizens) to believe that it would not meddle in the affairs of these private organizations, but rather it would simply be a silent investor in them in some horrible attempt to calm the economic volatility.  The Government’s stance as a silent investor, however, has rapidly eroded and developed into the role of an activist investor that even Carl Icahn would envy.  The United States Government has capped executive income ($500k per annum), capped executive bonuses (1/3 of annual salary or $167k), is attempting to tax any bonus paid to a family earning more than $250k per annum at a 90% rate, restricted the marketing practices of a number of companies (most notably not allowing Bank of America to sponsor the new Yankees Stadium), and now deciding who should is worthy or unworthy to be a CEO or board member of private companies.

The members of Congress and the Obama Administration seem to believe that they are more fit to run private companies than anyone else in this nation.  A few months ago we were led to believe that we must bailout the domestic automobile manufacturers in order for them to avoid bankruptcy (see my article on this topic).  The Government, in all its wisdom, has now decided that the only way out for these very companies to restructure and survive is to go the route of bankruptcy — this only after handing them billions upon billions of dollars in tax payer cash!

We are on a collision course with socialism at an incredible rate.  I’d usually offer a relatively simple solution here, but given the above absurdities offered to us by our Government, I think that the solution is more than apparent.

Update:

It should be noted that President Obama has explicitly given GM sixty days to completely restructure and Chrysler thirty days or both firms will be forced into bankruptcy by the United States Government.  Obama has demanded, as an activist investor/chairman of the board might, that Chrysler merge with European automobile manufacturer, Fiat, within the next thirty days.  In addition, the Obama Administration is now insisting that members of the United Auto Workers Union give bigger concessions than they had previously been willing to give and that holders of GM debt agree to take a steep discount on that debt and could be required to convert it to GM stock.

Again, this would be fine and well if a private equity group purchased a good chunk of one of these companies then demanded changes be made – it is the legal way of doing things in this nation.  However, in this circumstance we have the Federal Government not only intervening in the private markets, but completely controlling them.  President Obama commandeered complete control of General Motors and Chrysler and that should not sit well with the American people.  What happened to our guarantee of Life, Liberty, and the Pursuit of Happiness?

Sources: WSJ1, WSJ2, Reuters

In an article entitled “A War You Can Stop”, David Frum a resident at the American Enterprise Institute argues that drug users are to blame for gang violence and the devastation that is currently ongoing in Mexico and in border states such as Arizona, whose capital city, Phoenix, was second in the world last year in kidnappings, second only to Mexico City.

Frum says: “Every time a North American indulges in illegal drug use, that user subsidizes and incentivizes the gangsters who dump charred, decapitated bodies in Mexico’s cities. It’s our buying that creates the profits for which the gangsters kill. An estimated 2.8% of American adults and 2.3% of Canadians use cocaine at least once a year. If they quit, they’d put the gangsters out of business. This is one war that ordinary individuals have the power to stop. So here’s a challenge next time you meet a campus peace activist. Ask them: What are you doing to put an end to this murderous trade?”

I agree with Frum that if Americans would stop using drugs, the drug lords in Mexico would stop making drugs for export to the United States, and there would be less drug related killings in the United States.

Realistically, can we expect that Americans stop using drugs? For anyone who truly believes that drugs can be successfully eradicated in the United States, I ask you this one question: How can we possibly keep drugs out of the hands of free men and women when inmates (who have very limited rights and freedom) can get drugs in prisons?

I doubt there’s much debate among the well educated that drugs are detrimental to a drug user’s health, but can we stop drug use any better than we can stop people from over eating, over exercising, bulimia, gambling, or any number of behaviors which are detrimental to physical and mental well being? If someone wants drugs, they will get drugs: End of story. Until we find a way to affect free will, we must accept that some people will want to use drugs.

What if instead of fighting the drug war by trying to end demand and throw suppliers in prison, we allowed Americans to produce and sell drugs? What if we used good old fashioned competition to drive Mexican drug lords out of business?

Today, drug s are sold at a massive premium to cost of production in order to cover the costs of drug seizures, death squads like the ones mentioned in Frum’s article, and other risks associated with dealing in an illicit industry. That premium makes drugs a desirable business to nefarious people: people who would stop at nothing – not even murder – in order to sell their products and protect their business.

If drugs were decriminalized in the United States, the prices would drop, the quality of drugs would increase, and the war on drugs would no longer exist. Best of all, nefarious people who currently run the drug businesses couldn’t afford to carry on as they do now, and they couldn’t fund the death squads and purchase of government officials that currently wreak havoc on civil societies around the world.

The single quickest way to end the war on drugs is to simply end the war on drugs: decriminalize drug use/production, tax the sale of drugs, and allow Americans the freedom to choose what they do with their bodies. If we really wanted to, we could take all the profits from taxing drugs and put those monies towards drug prevention and education programs.

If we end the war on drugs, we’re still faced with the same education and prevention problems that we face today; however, we don’t have to expend the resources on the drug war: Our prisons would not be overrun with criminals whose only crime is drug use; Our law enforcement officers would not die in gunfights with drug lords, gangs would have to find other means of funding their violence; Drug-related kidnappings would decrease; and, most of all, we’d be allowing people to choose for themselves if they wanted to use drugs.

Frum and I both agree this is a war to be fought economically – a war to be fought using the power of economics and incentives. Where we disagree is on which incentives to use in the fight. Frum wants to essentially guilt people into ending their drug use. I want to unleash the power of the free market on drugs, so that every individual has an incentive to start a business selling drugs, until competition has reduced the profit of the drug business such that the extraordinary profits that buy off our law enforcement agencies and corrupt our country cease to exist. We can always fight to win the hearts and minds of those prone to drug use, but wouldn’t that be easier to do if we weren’t squandering our resources and the lives lost in the drug war fighting a war that has no end?

See Frum’s full article here:

http://www.aei.org/publications/filter.all,pubID.29542/pub_detail.asp

“Economics isn’t chemistry. You can take any theory you’ve got. If people think it’s going to work, it will work. If they don’t, it won’t.” – Anonymous

While the American people deal with a present-day waltz of government intervention with the wealth they generate, it might be a good time to take a look at when this dance really picked up the beat. The year was 1971 and the president was R.M. Nixon.

The country was suffering from a disturbance of its industrial base, and consumer confidence by August 1971 was at a historically low 55%. Inflation was getting out of control, and unemployment spiraled toward double digits. Labor strikes at ports were causing supply disruptions throughout the country. The dollar was still backed by the gold standard of the internationally agreed Bretton Woods system, and thus pressure was on to devalue the currency. The economic picture was bleak, and Nixon,

who wasn’t one to act until the warning signs were breathing down his neck, decided to deal a heavy hand in swiping the problem away.

His solution to the suffering was worked out behind closed doors at Camp David with some of his closest advisors and consisted of three major parts:

1. Any foreign-owned US dollars would no longer be backed by the gold standard nor would be the base currency for international monetary dealings.

2. All prices, wages, and rents would freeze for three months.

3. All foreign goods imported would be subject to a 10% surcharge to be passed onto the consumer.

This move was widely lauded by economists throughout the world as a step in the right direction. They believed with these actions, the US dollar would strengthen, inflation could be curbed, and US goods would become more attractive to domestic shoppers because they weren’t subject to the tax. The 90 days of price wages would at least give the country a little bit of time to think over how it had come to this point. By 1971, high inflation had become part of the daily routine, with a lot of the cause coming from powerful labor unions and a slightly looser money supply. As unions demanded cost of living wage increases, the price of goods increased, causing the overall savings rate to skyrocket. Consumers became uncomfortable with the higher prices. Productivity had also decreased due to labor strikes and shortages. Stagflation was beginning to take hold. The disarray was palpable, and Nixon, never being shy in orchestrating himself as a leader and savior of the United States, decided that he must act. So what happened?

For starters: epic confusion. In Nixon’s speech to the nation, he stated that there wouldn’t be an overreaching bureaucracy in charge of enforcing the price and wage controls but that it would be up to the “voluntary cooperation of all Americans.” A few labor unions had it in their contracts, drawn up long before

Nixon’s plan, that a raise would take place somewhere in the middle of the 90 days of controls. Their “voluntary cooperation” was in question. In addition, many of the influential labor union leaders of that time saw the price controls as a business-oriented instrument at the expense of the working man despite its efforts to whip inflation. Strikes would continue despite Nixon’s protests. Productivity remained low.

So what was the outcome after the baffling 3 months of price controls in the fall of 1971? Very little. While the nation might’ve felt a little more confident in itself that it had sucker punched inflation by creating inefficient markets, supply, demand, and consumer confidence remained historically low.

The blatant heavy handedness of the republican Nixon administration distinctly parallels the current Bush administration with the exception being that Nixon preached that with government at the command, the economic crisis can be solved. Bush, Paulson, and most democrats and republicans alike preach that with government ownership, the economic crisis can be solved.

The theme is this: When people have nothing else to fall back on, suddenly, it’s the government that can provide us with the answers. Two of Nixon’s unrealized programs (partly unrealized due to America’s then-pitiful economic health) were a universal minimum income and universal health insurance, ideas that, while quite noble in theory, sound decidedly socialist and ripe for failure.

Admittedly, the problems and solutions for 1971 are different from today’s, however, it remains that there’s only so much the government can do to alter the will of the marketplace. The government longs for optimism in the markets. Why should an efficient, optimistic market take instructions from the inefficient unmotivated government? In turn, this bailout should immediately help the large companies, while alienating 300 million consumers.

When government has taken their cut off the top, and the people are outraged; careful now.

The recent dramatic and sudden intervention actions of our government to “rescue” the economy come with terrible consequences. The severity of the state of our country cannot be stressed enough: the freedom of the people of the United States of America is rapidly diminishing. America has quickly moved from operating with the efficiency of the free market to relying on the government to control many aspects of the economy. This can otherwise be defined as socialism; the exact opposite of the foundation of the United States.

America was based on notoriously non-socialistic ways, especially in the economic realm, which is what sets the United States apart from others and gives us such a great economic advantage. Unfortunately, as a result of the current financial crisis, the government has steadily increased its involvement in financial markets. For instance, in most recent news, the government has constructed a plan to buy equity stakes in the nation’s top financial institutions. It was stated that “some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson.” This forceful intertwining of the banking sector with the federal government is a perfect example of how socialism is quickly creeping up on the American people. Now is the time to step up and take a stand and not overlook the severity of the new socialistic state our country is in.

This new socialism, or collective ownership (i.e. equity in the major banks, etc.) the government now has in financial markets, is undoubtedly going to lead to a halt in the motivation of the American people to thrive and produce. Motivation is a very simple concept and can very easily be disrupted if freedom and choice are dramatically reduced.

Motivation can be defined as an internal state that arouses, directs, and maintains behavior. The key component is that motivation “maintains behavior.” The free market easily maintains passionate behavior for the people to produce because there are endless possibilities. When a need arises, people have a great desire to succeed at fulfilling that need; simple supply and demand. Further more, this healthy and strong motivation creates competition among others, which ultimately leads to impeccable quality and numerous choices. With the free market, the peoples’ incentive to expand the economy is ever-present and quality is at its highest.

Socialism, on the other hand, dramatically minimizes the motivation of the people because they are restricted by the government’s control. The government is an entity in and of itself, leaving little power for the people. The impulsive broad power the government has taken in our financial markets will without a doubt result in limited competition, poor quality of products, and most importantly, minimal drive of the people to efficiently increase productivity.

As a part of a naturally tendency, when people are restricted and convinced there is no escape, they are left with a feeling of helplessness. This can be described as a concept called learned helplessness. Learned helplessness takes place when we experience repeated exposure to aversive events that are out of our control. Many Americans are most likely currently experiencing this uncomfortable feeling because of the great amount of uncertainty and lack of control.

The scary aspect is that it can lead to the American people surrendering to the government. At first, the vulnerable feeling strikes up fear and panic, but soon after, if people realize their behavior has little effect on the environment, they easily give up. This act of conceding to the government is detrimental. When people feel that have little chance to freely engage in the financial markets without restrictions, it can quickly leads to permanent reduced effort and success.

Do not be fooled that the strong government intervention in our financial markets is needed. Do not quit. Do not give up. Socialism is being pushed upon us and it must not be taken lightly. Before learned helplessness sets in all of us, action needs to take place. Now is the time to stand up and be a voice of reason. It is imperative that the lack of control we are all experiencing is not taken over by the powerful learned behavior of “giving up.” Instead of backing down to the government out of fear, the people of the United States of America must realize the challenge which has arose and persevere for the sake of our freedom.

We always hear about how much CEOs are paid and how horrible it is that they can make millions while they employ people making $10 per hour.  Are they really overpaid?  If they are, how much should they make?  Is $650 million in one year too much for one person, even if they are a CEO?

Perhaps the most absurd example of CEO pay was Steve Jobs, CEO of Apple, Inc., when he was paid $646.6 million in 2007 — one year’s work for enough money to live hundreds of opulent lifetimes.  That breaks down to Mr. Jobs making a little less than two million dollars per day.  Steve Jobs was certainly paid a boatload of money and it is likely that the people assembling iPods in China for less than $60 per month were unable to share in the riches.  Were his efforts as CEO really worth almost $650 million dollars?  Of course he was worth it – and then some.  If you really analyze the numbers you may find that Steve Jobs was in fact underpaid during 2007.

In 2007, Apple saw its net income soar to about $3.5 billion, up more than $1.5 billion over 2006.  Not only did Apple increase its net income by over $1.5 billion in 2007, but the share price went from about $85 at the beginning of 2007 to about $200 at the end of the year.  When you consider that this $115 increase in the price of shares of Apple translates into an increase of about $101 billion dollars in value for the company and its shareholders, you begin to see how $646.6 million is actually a very small number.

The people hiring Steve Jobs are the shareholders of Apple, and their goal is to have Apple increase in value so they can make as much money as possible.  The reason they are willing to pay Mr. Jobs so much for a year’s work is because he is able to give them huge amounts of money in return.  In essence, Steve Jobs was paid $646.6 million to make his shareholders over $101 billion.  He made his “bosses”, as it were, more than $157 for every $1 he was paid.  For comparison’s sake, if the company you work at pays you $40,000 per year and you were as efficient as Steve Jobs, you would be making your boss about $6.3 million in any given year.  Given that situation, it may be time to ask for a raise.

Granted, Steve Jobs does not run Apple by himself, and I can all but guarantee that he has a team of some of the brightest minds in the world around him.  I can also all but guarantee that most of those people are well compensated for their efforts.  You may complain that the people in China manufacturing iPods and other Apple products for $60 per month is not fair and that Steve Jobs should take a pay cut to help them out.  There are a few problems with this suggestion:

1. The people being paid $60 per month are likely very happy with that wage, otherwise they wouldn’t do it.
2. Putting together iPods does not take as much ability or talent as running a successful corporation and deserves far less pay as the supply of people willing and able to do the job are numerous where as the number of people that can run Apple the way Jobs does it is likely one — Steve Jobs.
3. If Apple were to pay its CEO less, then Jobs would have an incentive to work for a company that recognizes his value and pays him more.   The people that would pay the price for losing a talented CEO would be Apple shareholders and everyone Apple employs.

Steve Jobs is but one example of the numerous CEOs there are in the world.  Most CEOs are like Jobs in that they are good at their jobs and deserve every bit of their pay, but there are no doubt bad CEOs that are overpaid.  The beautiful part of it all is that the only people who lose out when a CEO is overpaid are the ones hiring that CEO, the shareholders of that company, so the blame rests solely on the CEO’s boss.  You may imagine that if a CEO is paid less that other employees will be paid more, but that is not how it works for numerous reasons and it is simply never how it will be in the beautiful free market.  CEOs are CEOs for a reason; they are typically well qualified and very good at what they do.

I should note that not all CEOs are paid even close to what Steve Jobs made in 2007.  The average pay for a CEO of an S&P 500 company (500 of the biggest, most successful companies in the world) is $14.2 million per year.  Of course, CEOs of smaller companies make far less than that.

CEOs are paid by their bosses just like the rest of us.  It is safe to assume that they typically make what they are worth because no boss will want to pay their employee more than what they are worth, and if they are being paid more than they are worth they will likely be fired in a very short time.

It’s not hard to find the obvious moral dilemma presented by sweatshop labor.  Wealthy corporations outsource work to nations where people are desperate for jobs and are willing to work for meager wages and in substandard conditions, compared to those we might find in the developed western world.  You have women and children stitching shoes or sewing tags onto shirts in the dead heat of the Indonesian summer.  It’s not a pretty picture to paint, especially when you consider that your dollars are going to support it every time you buy a good produced in these conditions.

As a result of this said moral dilemma, there has been a big push in the last couple decades to rid the world of sweatshop labor.  Students protest, people form non-profit organizations, labor unions give money to protestors, groups refuse to buy products made in these regions, and eventually all of them lobby the U.S. government to put a stop to the problem.  It’s not hard to find these protestors, go ahead and type sweatshops into Google and you’ll yield hundreds of thousands of results, most of which are very anti-sweatshop.

I’m here to ask, are they really that bad?  With all of the groups lobbying the government to not allow sweatshop products to enter the United States you would certainly be led to think that they are indeed that bad.  Given that this seems to be mostly a moral debate, we’ll simply look at the moral consequences of utilizing “sweatshops”.

For some reason unbeknownst to me, people generally think that sweatshop workers do not like their jobs and are undergoing great extents of suffering.  Let us get one thing straight up front, no product you buy, as far as I or anyone else knows, was made using slave labor.  There are no “slaveshops” that produce products we buy and use.  The most important aspect relating to the morality of sweatshop labor is that it is voluntary.  That is, sweatshop laborers get up in the morning and choose to work in a sweatshop instead of doing anyother possible thing on any given day.  Why would they do that?  It’s simple, by working at a sweatshop a laborer is able to earn more for himself and his family than he would otherwise be able to were he not employed at that sweatshop.  The laborer has the choice to either perform some other task for money, produce his own goods and services, or go work for the sweatshop.  He has made the decision that what he gains by working at the sweatshop is more valuable than what he would gain doing anything else.  Simply put, people work in sweatshops because they are happy to work there!  They are happy to work there because they gain much more than they otherwise would.

To us, sweatshop wages may seem absurdly meager.  I personally would never agree to work under such terms, but for these parts of the world, the offered wages are typically far greater than are otherwise available, and usually much less dangerous.  Ask yourself this: how would a sweatshop attract labor without offering wages and a facility that attracted workers?

It should be noted that one of the most important aspects of sweatshop labor is that it builds great societies in that it offers people a way to improve their lives for themselves and future generations.  People that work in sweatshops do not typically end their lives working in sweatshops.  They will typically save money they have made from their labor and open their own businesses, or move up the ladder of employment to hold better, higher paying positions.  South Korea, Hong Kong, and Taiwan began as places for sweatshop labor and because they were left uninhibited by government they were able to grow into some of the most thriving metropolises of today’s world.

So what is the morality of sweatshop labor?  On one side these laborers have to work in less than desirable facilities for lower than expected wages, but these are by the standards of developed western nations in the 21st century.  By worldwide standards, it is tough to see anything at all wrong with sweatshop labor – especially when you consider it existed in the United States for parts of the 20th century and has existed all over the world much more recently.  Additionally, in the areas it has existed, life seems to only improve with time, and at a much more rapid rate than in areas with no available work at all.  So yes, these people are working for less money than we are in worse conditions than we are, but they are working and they are providing for their families.  Wouldn’t the real moral tragedy be to rob these people of their voluntary employment and strip them of fair earnings that they would have never otherwise had?  Is it fair to stifle a nation’s growth and wreck any hopes for a better tomorrow?  It certainly seems that utilizing sweatshop labor seems far more moral than ending it.  By not purchasing products created in sweatshops we are simply taking away jobs from the poorest people in the world.  On top of that we are robbing ourselves because we pay much more for our goods.  If we have governments demand that these workers are paid more and given better facilities, then companies will simply move the jobs to other nations, and if they can’t move then the companies are likely to fold and there will be no jobs where there were jobs before.

Sweatshop labor produces far more good for the world than it does bad.  It is a win-win situation in that the laborers are able to work for a better living than they would otherwise have, and the consumers are able to purchase products for less than they would otherwise pay.  The issue of morality seems to be completely in favor of supporting sweatshops.  Next time you buy a shirt made in some third-world country let it remind you that you are helping to lift those people out of poverty and assisting in putting a meal on their plates every night.  Sweatshops are not evil, to shutdown a sweatshop is the real evil.