"Dodd-Frank - Bounty for Lawyers, A Bane for the Economy"

                                     Sydney M. Williams

Thought of the Day

“Dodd-Frank – Bounty for Lawyers, A Bane for the Economy”

July 31, 2014

It was four years ago this month, that the President signed the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. Wall Street doesn’t appear particularly reformed and consumers remain at risk, now more from predatory politicians than overly aggressive bankers. Worse, the bill never addressed the role played by politicians, or the part played by Fannie Mae and Freddie Mac in forcing a lowering of mortgage underwriting standards, in order to meet government housing policies. It ignores the maxim that the threat of financial loss, including bankruptcy, remains the best retardant against reckless behavior.

More accurately, the bill is known as the “Lawyers’ and Consultants’ [read, lobbyists] Full Employment Act of 2010.” At 2,300 pages, with another estimated 14,000 pages of regulation, the bill created a maze for banks’ compliance departments and a boon for the lawyers necessary to guide the banks through its over-reaching tentacles. NPR reporter Gary Rivlin wrote that the financial industry has spent more than $1 billion on hundreds of lobbyists trying to chip away at the bill’s regulations. Patrick McHenry of CNN estimates that Dodd-Frank has imposed $21.8 billion in compliance costs and its regulations require 60 million hours of paper work. A single example of the latter was pointed out by Peter Wallinson a few days ago in the Wall Street Journal: J.P. Morgan Chase plans to hire 3,000 more compliance officers this year, to supplement the 7,000 added last year. At the same time, they announced the firing of 5,000 people – a swap of the non-productive for the productive.

The purpose of the legislation was to promote the financial stability of the United States by improving accountability and transparency, two traits disagreeable to lawyers who prefer chaos to simplicity and obfuscation to clarity. It was supposed to protect the American taxpayer by ending bailouts for banks “too big to fail, and it was designed to protect consumers from abusive financial practices and products.

Has it accomplished these goals? Financially, the U.S. is more stable, at least for the moment. But that may simply be a natural and rational reaction of businesses and people who have had a near-death experience. The near-collapse of the financial system in 2008 was enough, as we used to say in New Hampshire, to scare the “bejesus” out of one. It would have been odd if borrowers and lenders had not become more cautious. I suspect they still are. Keep in mind, a near-collapse of an entire financial system is extremely rare. Regardless, consumer debt remains a problem. A recent study by the Urban Institute suggests that one in three adults with a credit history – 77 million people – are so far behind in their debt payments that their accounts are now “in collections.” As the French would say, plus ça change, plus la meme chose.

But to return to the questions at hand: Are bankers now held more accountable than they had been? Chief executives have always been accountable to shareholders by way of the directors who represent their interests, but surely that was not the intent of legislators in creating this leviathan. The heads of the banks have been asked to testify and made to squirm; in some cases, they have been vilified in the press. But none of the CEOs of big banks went to jail, nor did the heads of Fannie Mae or Freddie Mac, nor any politicians. Financially, bankers have not suffered. Fines were imposed, but they were paid out of shareholders’ funds – individuals and institutions whose only offense was to own shares. (As an aside, it should not be forgotten that equity holders stand last in line when it comes to bankruptcy. It is the risk they assume for the opportunity to realize outsize gains.) However, politicians who created the environment that allowed these transgressions got away scot free. In fact, two of those responsible for the cataclysmic events of 2008 have had their names embedded in the bill’s more common name – former Connecticut Senator Christopher Dodd and former Massachusetts Representative Barney Frank. The simple answer to the question: there has been no accountability. As for transparency, the size and complexity of Dodd-Frank assures that opacity will persist, which is likely what many parties wanted. 

As Mr. McHenry of CNN (quoted above) noted, the costs imposed by the enormous complexity of the bill’s regulations can be devastating to small community banks. The consequence has been a shrinking number of banks and an increase in the size of the nation’s largest banks. There are 300 fewer banks today than there had been in 2008; though that is the continuation of a trend that has been on-going for several years. At the same time, big banks have become bigger. The four largest banks, as of a year ago, held $7.8 trillion in assets, or 47% of U.S. GDP. Six years ago, the four largest banks held $6.4 trillion, or 43% of U.S. GDP. The nation’s largest bank, J.P. Morgan, has assets that are ten times larger than the tenth largest bank, US Bancorp. Size alone does not make banks riskier, but their debt costs imply that lenders assume they will again be back-stopped by the federal government. And easy money breeds frisky bankers.

It is true that the Volcker Rule will prevent (or make more difficult) big deposit-taking banks from engaging in the type of speculative trading that can precipitate big losses. Though, it should be remembered that Bruno Iksil’s antics at J.P. Morgan Chase occurred two years after Dodd-Frank was signed. Capital requirements have been increased, but, according to Bloomberg, a recent New York University study estimates that the six largest banks are “almost $300 billion short of the capital they would need to survive a severe crisis.”

The Consumer Financial Protection Bureau (CFPB) was set up by Dodd-Frank to be funded directly by the Federal Reserve. “This,” according to the Journal’s Mr. Wallinson, “is a clear evasion of the constitutional structure in which Congress appropriates funds for executive-branch operations.” Adhering to the Constitution does not rank as a top priority with this Administration, but is the consumer safer? The answer is, we don’t know. The agency has gone from 970 employees in 2012 to 1,335 in 2013, with a budget of $518 million, three times its size two years ago. While all of us would like to protect every consumer from every charlatan, the job is impossible. Con artists come in every guise, from smooth-talking hucksters to priests to politicians. (State lotteries play to the human characteristic that man is always looking for big returns on small investments.) Experience and a skeptical mind are the best defense. At any rate, we don’t have the manpower, or the willingness, to enforce laws already on the books.

Would, for example, the CFPB have protected a low-income borrower with little prospect of repaying his or her mortgage from Congressman Barney Frank, who had been demanding that banks make such loans? Would it have deprived a low-income borrower from taking out a payday loan – albeit at a high rate of interest, but the only loan available? The Washington Post claims that the CFPB’s consumer complaint process “has already made banks more responsive.” But, in fairness, it is too early to say whether the consumer will be better off. We do know that public sector unions will be enhanced, as the staff voted to join the National Treasury Employees Union, an indication that the agency’s employees were skeptical of their employers.

Politicians, like most of us, inevitably address the causes of the last war. Financial meltdowns, like any crisis, definitionally occur because of the unexpected. While taking precautions is sensible, being prepared for every eventuality is impossible. Not even government is omniscient, though many who work in its bureaucracies believe they are. Emphasis placed on character development at home and in schools would be more fruitful than trying to anticipate everything that could possibly go wrong. People of character tend not to engage in activities that lead to disaster. Simplicity in legislation is preferable to complexity. The Glass-Steagall Act of 1933 consumed only 37 pages, and even the 2002 Sarbanes-Oxley bill is only 66 pages long. In contrast, Dodd-Frank is 70 times longer than the Act that established the Federal Reserve in 1913.

The bill never addressed the root causes of the meltdown, which had more to do with government policies to foster affordable housing for low-income and minority borrowers. It was passed in a rush, so that sole blame for the crisis could be placed on Wall Street. This was to be the “new, New Deal,” in the words of Barney Frank. However, nothing good comes from laws that get passed unilaterally, as this one did, without one Republican vote in the House, and only three in the Senate. I am not one who believes banks need no regulation. They do, as do many aspects of our everyday lives. But rules should be written in understandable English and be simple to implement. Violators should be promptly brought to trial and, if found guilty, punished. If a bill has to be passed in order to understand what’s in it, like ObamaCare, inevitably it will prove to be an expensive disaster.

Dodd-Frank is so long and so complex that as of July 18 only 208 of 398 regulations required by the Act had been finalized. More than 45% of Congressional deadlines had been missed. It was inferred that the bill would address all the factors that led to the meltdown, but that was not so. Banks certainly played a role, but so did many consumers who let the possibility of wealth dictate behavior, and it glossed over government that had set the table.

The bill regulates all types of minutiae, including such unrelated activities as corporate uses of tungsten from the Congo. It vastly enlarges the size of government. It was a bill designed by lawyers, passed by lawyers, to be administered by lawyers. It will keep them and their offspring employed for generations and will swell courts’ already overwhelming schedules. It ignores many of the root causes of the crisis. Its regulations will hurt small business and inhibit economic growth. It is a bad bill. 

"Debt - Still a Problem"

                                   Sydney M. Williams

Thought of the Day

“Debt – Still a Problem”

July 28, 2014

We should all feel better. Paul Krugman, Nobel Prize-winning economist, columnist for the New York Times and apologist for the Obama Administration recently headlined an op-ed: “Newsflash: There was no debt crisis.” He references the Congressional Budget Office (CBO) projection that the U.S. federal debt will be no higher in 2039, as a percent of GDP, than it had been at the end of World War II!  In doing so, Comrade Krugman accepts as absolute the prophecy of a vision-impaired seer. He appears unconcerned that today’s federal debt borrowers lack the discipline of their post-World War II compatriots. He seems unwilling to account for the fact that while the last baby-boomer turns 65 on 2030, life expectancy continues to rise. Given current trends, there will only be two workers for every retiree in 2039. No matter. He sums up his opinion, in case anyone misunderstands him: “We don’t have a debt crisis, and never did.”

The federal deficit has declined from a $1.4 trillion peak in 2009 to an estimated $500 billion this year, which is good news. The reasons: slowly rising GDP has resulted in rising tax revenues; sequestration helped on the expense side; and the wind-downs of the wars in Iraq and Afghanistan have reduced defense spending. Those three points are positives. But two other factors exude a whiff of the ephemeral: One, the real cost of ObamaCare has not yet kicked in. Keep in mind, nothing is ever free, especially a government program that is advertised to be so. And, two, average interest rates on federal debt are currently 450 basis points below where they were in 2000 and 300 basis points below where they averaged during the post-War years. Were rates at their long-term historic levels, interest costs on $17 trillion in debt would be $500 billion higher – a meaningful increase on a $3.9 trillion budget.

The CBO’s projections, as to the future of interest rates, assume that markets have down-shifted permanently to the current level. Perhaps the Federal Reserve can work its magic and keep interest rates low. But history has shown that price fixing (including the cost of money) does not work over the long term. In times of crisis, for brief periods such as we had in the fall of 2008, it may be necessary for government to intervene in an extraordinary way, but over time free markets self-adjust and work best. I may not have learned much in forty-seven years in capital markets, but the one thing I feel pretty comfortable forecasting is that prices of all asset categories, including money, will fluctuate. At any rate, combined, all of the above factors have produced an unusual level of complacency about the possible threat of rising debt.

An injection of reality should be considered. Over the past six years, the rate of increase in federal debt has greatly outpaced the growth in GDP. Total national debt was just under $12 trillion in 2009, at the height of the financial crisis, $3.5 trillion above where it had been three years earlier. This year it is forecast to be $17.9 trillion – an 8.3% annual compounding over five years. On a per capita basis, the national debt is 40% higher than it was in 2009. Publically-held Treasury debt – that portion which is not held by various government agencies like Social Security and the Federal Reserve – is forecast by the CBO to increase from $12 trillion today to $52 trillion in 2039, a 6% compounded annual increase. The CBO’s optimistic forecast is that nominal GDP will grow at 4.3% over the next twenty-five years, 180 basis points faster than it has grown over the past six years and 50 basis points above where it has grown since the start of the century. In an equally Panglossian projection, the CBO expects tax receipts to average 19.5% of GDP by 2039, versus the 17.5% they have averaged over the past forty years. It makes one wonder: has pot has been legalized at the CBO? As most economists acknowledge, higher taxes tend to impede, not abet, economic growth.

Total federal debt today, including interagency debt, exceeds 100% of GDP, for the first time since 1947. Back then the country was coming out from under the massive debt that had been incurred defeating the Axis in World War II. This time we are paying for a stimulus that did not stimulate, but mostly for increases in a variety of public assistance programs, like food stamps, mortgage abatements and unemployment insurance. Entitlements are something that every politician likes to grant, but none want to pay for. Since recovery began, the number of Americans living in poverty has climbed by 2.9 million, while the number of those on food stamps has increased by 11 million.

Consequences of low interest rates include concomitant rises in asset prices, again at levels that exceed the rate of increase in economic growth. The result has been an assist to the wealthiest, as they are the preponderant holders of stocks, bonds, gold and energy. The mirrored reflection of those asset price increases has been a rise in the price of necessary consumer goods, which act as a regressive tax on the nation’s low and middle-income people. Stated CPI may make government bureaucrats and left wing media types content. Overall inflation, as measured by the CPI, has risen by a manageable (but still too high) 10% since recovery began in June, 2009 – or about 1.9% annually. But families that must feed themselves, fuel their vehicles and warm or cool their homes on an average income cannot share in that opinion: According to a recent article in Investors Business Daily, Milk is up 25%, meat up 27%, eggs up 33% and gasoline up 40%. At the same time, median household income is 4% below where it was in June 2009, with the bottom 60% of households suffering far more than the top 40%. The country’s poor and middle-income citizens have been unfairly hurt by the policies of the Obama Administration, so eloquently defended by Comrade Krugman. When will mainstream media assign ownership to the Obama Administration for an economy that has been so detrimental to the nation’s most vulnerable?

There are steps that could be taken. The tax code (both corporate and individual) should be greatly simplified and broadened, with stated rates lowered. The effect would be to diminish the clout of lobbyists, reduce the complexities on which lawyers and accountants feed, and improve the visibility and confidence of those making long-term investment, business and personal decisions. Second, regulations should be simplified and/or eliminated except in those cases where the safety of the consumer is at risk. Third, entitlement reform is badly needed. As people live longer, the retirement age should be upped, and means-testing should be employed for upper income employees. And, fourth, broad-based, patient-centered healthcare should be pursued.

Those steps would lead toward less dependency, and greater personal and fiduciary responsibilities, all necessary if we are going to leave our children and grandchildren a better place. The risk of excessive federal debt is not default – we are, after all, the world’s reserve currency. The risk is persistent and accelerating dollar depreciation – a form of regressive taxation that primarily hits the poor and those in the middle. Five years into recovery, we should all feel better. But we don’t. Comrade Krugman, for all his credentials, has it wrong.  

"Character in Politics - Nothing More Important"

                                     Sydney M. Williams

Thought of the Day

“Character in Politics – Nothing More Important”

July 23, 2014

Elizabeth Warren was the star at the annual Netroots Nation conference in Detroit last week. Netroots Nation is the largest gathering of left wing activists, the Left’s answer to those on the extreme Right of the Republican Party. A kiss on the cheek by the Massachusetts squaw, after her talk, left a gay-rights activist “verklempt.” “I want to bottle her and take her everywhere,” said Debby Dingell. (As an aside and totally irrelevant to the subject at hand, Ms. Dingell, wife of retiring Congressman John Dingell, is running for the seat her husband is vacating after 59 years, and which his father occupied for twenty-two years before that. Perhaps, like 19^th Century European royalty, a Dingell feels entitled to represent Michigan’s 15^th District!)

Liars can be found in abundance in Washington. In fact, it may be that the ability to fabricate is woven into the fabric of a politician. But there are few you can tell whoppers with such aplomb, while exuding such innocence, as the senior Senator from Massachusetts, Elizabeth Warren. Standing before a crowd of adoring worshippers, as she did recently in Detroit, she shamelessly called out Republicans for “rigging” the system. Yet “rigging” is exactly what she did in securing her teaching job at Harvard Law School. She brazenly lied, claiming to be of Cherokee descent, in order to be considered a minority. And Harvard, arguably home of the nation’s finest law school, never bothered to investigate her claim. She lied to get to Harvard. She lied to secure her Senate seat. She is a student of Saul Alinsky’s Rules for Radicals in political warfare – don’t debate your opponent; demonize the person, freeze the image, personalize the target in whatever slanderous way you choose and then polarize the pulverized individual to avoid any possibility of sympathy. History is replete with political leaders like Ms. Warren, but very few of them served in a democratic republic.

What is it about the illiberal left wing of the Democrat Party that likes people for what they symbolize, rather than for who they really are? Such attitudes mean we nominate and elect people with little understanding of their true underlying character. Barack Obama was elected President because he had great oratorical skills that allowed him to promise much, but neither the Press (other than some on the right wing), nor most people inquired into his background. His lack of experience in any leadership roles, or, for that matter, his very limited time in Washington was ignored. His associations with those like his minister Jeremiah Wright and mentors like Frank Marshall Davis, Edward Said, Derrick Bell and Bill Ayers did not ring alarm bells. People saw the package, and not the contents. He was intelligent, articulate, good looking, and African American. Voting for him allowed people to feel sanctimonious, and cleansed from any deep-rooted tinge of racial prejudice they might previously have felt.

Prejudice still plays a role in our daily lives. But, as a nation, we have come a long ways in the past fifty years. Biases toward people because of race, gender, sexual orientation or religion still affect the way many of us act and vote. We should not let personal biases of any kind influence our decisions. But reverse discrimination is not uncommon and is equally pernicious, though more generally accepted. People should be judged by their character and their ideas, not for what they symbolize.

It is fascinating to note that conservative women rarely campaign on gender, and very few get support from women’s rights organizations. Margaret Thatcher was never part of the woman’s liberation movement. Her success, as a politician and as Prime Minister, was due to her ideas and her character. The same could be said of Israel’s Golda Meir. Condoleezza Rice, who has been slandered by feminist groups, was nominated as Secretary of State not because she was a woman and African-American, but because she was qualified. Jan Brewer, Susan Martinez, Mary Fallin and Nikki Haley are Republican women governors of Arizona, New Mexico, Oklahoma and South Carolina respectively. They ran and were elected based on their character and the ideas they espoused, not because they were women.

After speaking in Detroit to huzzas of “Run, Liz, run,” Elizabeth Warren signed copies of her mis-titled autobiography, “A Fighting Chance,” while fans held signs of “Ready for Warren,” an obvious takeoff on the Political Action Committee, Ready for Hillary. Women’s rights advocates came out in droves for female Democrat candidates, but when a successful Republican women politician appears they find endless excuses for not supporting her. What is remarkable is that Ms. Warren’s fans don’t care about her lies. Character plays no role in their support. Ends justify means. And Ms. Warren displays no embarrassment for having succeeded on a flotilla of falsehoods. Her ‘fighting chance’ was not a fighting chance. She used deceit and hyperbole to succeed.

The left wing of the Democrat Party has become less liberal, in the classical sense of the word. As the state assumes more responsibility for the welfare of its citizens, by definition people give up some basic freedoms. It is a trade-off. In January 1941, Franklin Roosevelt gave his “four freedom’s” speech. He added freedom from want and freedom from fear to the existing freedom’s to speak and to worship. Freedom from want meant bigger government, meaning that people would be less free to keep what they earned. Those are trades that civilized societies accept, and intelligent people can debate exactly how big government should become. But there is now a more threatening movement underway that would have profound implications for our nation and its government if it succeeds. With the Supreme Court’s recent decisions in defense of free political speech, there is a movement in the Senate to amend the First Amendment, allowing Congress to limit campaign funding and free speech in political campaigns. Permitting passage of such a bill (which I believe is unlikely) would be equivalent to allowing the nose of an authoritarian camel to enter the tent. If spending on elections were controlled by Congress, one can only imagine how polarized our system would become. Full disclosure about all contributors to campaigns, whether direct contributions or through PACs, is the best answer.

As Elizabeth Warren tests the political waters – and it would be my guess that she will run, as she is the natural political descendant of Barack Obama – voters should keep in mind that the most important aspect of any candidate is character. Candidates of both parties will say almost anything to get elected. Supporters of almost any view can find evidence in one speech or another that supports their position. What does not change, but what requires some effort to discover, is the character of the candidate. By character, I mean the way the individual thinks, feels and behaves.

The most important ingredient of character is integrity, but good character embodies honesty in one’s dealings, respect for the opinions of others, loyalty to one’s friends, being ethical in one’s behavior and virtuous in one’s life, and being considered trustworthy by all those with whom one is in contact. The consequence is a good reputation. Friends and foes always know where a man of character stands, and is never be surprised by the individual’s actions and/or reactions. (By-the-by, political correctness is not an aspect of good character.)

There is risk, of course, of trying to learn too much about any candidate, or of uncovering too many details of their past life. We may discover we are unable to find anyone who lives up to our standards for President. In considering those who might aspire to the job, conservatives should not rely only on Fox News or other right wing outlets, and progressives should not depend on the New York Times, the Washington Post, CNN, MSNBC or network TV. All of media is slanted. But fortunately, and thanks to the internet, there are myriad sources of news. But sifting through numerous sources requires effort on the part of the electorate. It is the single most important reason why emphasis needs to be placed on education.

An educated electorate is democracy’s best defense. If we allow government to become too authoritarian, we risk losing the freedoms we have had for over two hundred years; the effect would be devastating. There is no way anyone, including a Vice President, can fully prepare for the job as President of the U.S. The job and its demands are unique. The President of the United States is the most powerful person on earth. That is why the one trait that we should always look for in a potential candidate, no matter our personal political preferences, is character.

"Shutting Down Corporate Inversions - A Dumb Idea"

                                    Sydney M. Williams

Thought of the Day

“Shutting Down Corporate Inversions – A Dumb Idea”

July 21, 2014

Asininity is a common malady of the political class. Nevertheless, one of the more moronic examples I have seen was a letter by Treasury Secretary Jack Lew to House Committee on Way and Means Chairman Dave Camp on July 15th. In the letter Mr. Lew argues we should fence in American corporations, calling for “a new sense of economic patriotism.” He argues that American companies, in being responsible stewards of their owner’s wealth, are “effectively renouncing their citizenship.” That was a curious metaphor for an Administration that argues, in cases like Citizen’s United and Hobby Lobby that corporations are not individuals. To whom is owed a corporation’s primary loyalty – the government of the United States, or their shareholders, customers and employees?

Most importantly, the letter was not a serious attempt to resolve a real problem. It was political spin. Mr. Lew is upset about the practice known as corporate inversions. A corporate inversion is a strategy employed by companies with significant overseas operations to reduce U.S. taxes on earnings generated abroad. The United States, besides having the highest corporate tax rate among major countries, is the only one of the Group of Seven to tax earnings generated abroad, even though these companies have already paid taxes in the country in which the earnings were generated. It is the main reason why multinational U.S. companies keep high levels of cash abroad. Inversion is a legal strategy, permitted under the U.S. Tax Code.

What made the letter especially feeble was that Mr. Lew knows what should be done. He begins his fifth paragraph: “The best way to resolve this situation is through business tax reform that lowers the tax rate, broadens the tax base, closes loopholes and simplifies the tax system.” Amen and Hallelujah! Bipartisan support could be found for such proposals. These are all ideas recommended by Republicans like Paul Ryan. So why not work with Congress to pass tax reform?  Mr. Lew urges that time is of the essence, but the question goes unanswered.  There is little doubt, however, that Mr. Lew would raise such standard objections that obstreperous Republicans in Congress have no interest in working with selfless Democrats like himself. Instead he decided to pursue a cockamamie idea that will cause political opponents to retreat even deeper into their respective corners.

What the Treasury Secretary would like Congress to do is to pass legislation that would negate the aspect of the Tax Code that specifies the terms and conditions under which inversion is permitted. His wording is disingenuous. He makes no mention that corporate inversions are legal under the tax code: He writes, “Congress should enact legislation immediately – and retroactively to May 2014 – to shut down this abuse of our tax system.” His claim is that companies adopt such measures to avoid paying their “fair share of taxes,” as though obeying the law is not what corporations should do. There is, of course, no attempt to define “fair share” – a meaningless phrase solely designed to provide the speaker or writer a sense of moral superiority.

The reason Mr. Lew would like legislation made retroactive to May 2014 is because it was in May that AbbVie (a spinout two years ago from Abbott Labs) made an offer to acquire Shire Plc, a $54 billion deal. Shire Plc is a specialty biopharmaceutical company, domiciled on the Isle of Jersey with headquarters in Ireland. Shareholders of Shire will own 25% of the combined companies, above the 20% needed to pursue an “inversion.” According to the New York Times, the corporate tax rate would be reduced from 22.6% in 2013 to an estimated 13% in 2016. While neither the Times nor Mr. Lew make the point, the operations of U.S. companies that undergo inversion would still be subject to U.S. corporate taxes for income generated in the U.S. It is the income from moneys earned overseas and reinvested in the U.S. that would no longer be subject to U.S. taxes. In fact, it could be argued that AbbVie might well invest more in its U.S. operations after inversion. It is the consequence of taxing repatriated earnings that explains why so many U.S. companies have so much cash on their books in overseas banks, and which reveals why so many companies have undertaken the legal process of inversion. If Mr. Lew doesn’t want AbbVie to be based on the Isle of Jersey, work with Congress to amend our corporate tax laws.

We are now more than five years into an economic recovery, which has proved to be the slowest recovery in the post-War years. There has been no fiscal stimulus. Other than the aborted $800 billion American Economic Recovery and Reinvestment Act of 2009, enacted shortly after Mr. Obama took office, neither the Administration nor Congress have made any attempt to meaningfully stimulate the economy. In early 2010, by Executive Order, Mr. Obama created the National Commission of Fiscal Responsibility, a commission headed by former Republican Senator Alan Simpson and former Clinton White House Chief of Staff Democrat Erskine Bowles. Its findings were ignored by the President and ultimately not acted upon by Congress. The country has had to rely solely on monetary policy. The Federal Reserve cut the Discount Rate to a range of 0% to 0.25% in December 2008. Since then, they have employed various means of quantitative easing – expanding the Fed’s balance sheet by buying up mortgages and longer dated Treasuries, keeping long term rates low. While the economy has bounced back some, the perverse effect has been to raise asset and commodity prices and to penalize savers – helping the wealthy and hurting the poor, middle class and elderly. Long term unemployment and underemployment represent serious hardships for millions of people.

In the meantime, and aggravating recovery, the tax code has become increasingly complex. Almost 7,000 pages have been added to the code in the past five years, bringing it close to 73,000 pages. High tax rates and complexity, along with excessive regulation, have impeded economic growth and reduced corporate tax income as a percent of national income from 4% to 2% since 1960, according to Bill White, former mayor of Houston, writing in Barron’s. If we want companies to contribute more in taxes, it will require improving the business environment.

Without business there can be no employment or economic growth. Most new employment comes from small business. One of the great ironies of this populist Administration is that tax reform, as mentioned by so many including Mr. Lew, but never pursued in earnest, is that small businesses would be beneficiaries, as they do not have the lawyers and accountants to navigate the maze-like web of taxes, rules and regulations. Complexity in the tax code, as well as in regulation, reflect the successful efforts of Washington’s lobbyists, and serve to help the largest corporations and the richest individuals. It should come as no surprise that big business and big banks are big supporters of both Democrat and Republican policies. They are, to coin a phrase, apolitical, caring only about their particular interests. Though, it is interesting that lawyers, especially those who feed on tort cases, tend to support Democrats, while small business tends to support Republicans.

There is no question that corporate inversions are a loophole, but loopholes exist because basic tax rates are too high and because lobbyists work their magic with members of Congress. And this particular loophole exists because Congress, in their infinite lack of wisdom, decided that repatriated profits should be subject to U.S. taxes, despite local taxes already having been paid. If the United States reformed the tax code, allowed for the repatriation of foreign earnings, lowered statutory rates and eased stifling regulatory burdens, total tax payments, in time, would increase, as the economy improved. Confidence would return and small businesses would begin hiring more aggressively.

An appeal to patriotism can be very effective in times of deep economic or physical distress, but Mr. Lew’s words ring hollow. His letter is a political manifesto, not aimed at correcting what is a real problem, but at scoring political points. Businesses have responsibilities to their stakeholders: shareholders, employees, customers and communities. They have obligations to their debt holders. They must balance those demands with running a profitable business. Without profits, responsibilities and obligations go unfilled. Big companies, as well as some small ones, operate globally. And global companies are good for consumers around the world.

But it means businesses in the U.S. must be more competitive. Mr. Lew, and those in similar positions, wields enormous influence. But this letter did little to aid the economy or abet differences in Washington. The answer: reform the tax code. Simply shutting down corporate inversions is a dumb idea.

"Immigration in Today's America"

                                     Sydney M. Williams

Thought of the Day

“Immigration in Today’s America”

July 18, 2014

America is about protecting the rights and freedoms of its individual citizens. In doing so, it allows them to pursue their dreams within the confines of a society that functions under the rule of law, without fear of persecution for reasons of race, religion, sex or political affiliation. A government that is comprised “of the people, by the people, for the people” is, by definition, more concerned with individual liberties than administrative efficiency. As such, it has long served as a beacon for the aspirant. We all know of stories from the thousands of men and women who came to these shores with nothing but a few dollars to their name, yet who stayed, saw needs, worked hard and built fortunes.

But America is more than that. It is also a lodestar for the oppressed. More than any other nation, America is compassionate. “Give me your poor, your tired, your huddled masses,” are words on a plaque on an inner wall of the Statue of Liberty – America’s great symbol of immigration. But, keep in mind, in 1903 when that plaque bearing Emma Lazarus’s words was erected the promise of aid embedded in her words would be from individual donations. Laws for public assistance had yet to be enacted. Ms. Lazarus was not thinking of the government when she wrote those words; she was expressing the compassion of the people.

Today, about half the federal budget, or roughly $1.8 trillion, goes to social service programs like Medicare, Medicaid, Social Security, unemployment, food stamps and disability payments, veteran benefits and other social programs. Additionally, according to the National Philanthropic Trust, individual Americans donated $241.32 billion to a variety of charitable causes in 2013. Because of government involvement, the definition of poor has changed dramatically from when I was young. And that has been a good thing. But it has come at a cost. One has only to drive on New York’s pothole-infested streets, or deplane at LaGuardia Airport to experience our crumbling infrastructure. One has only to consider the test scores of our students to understand how poorly we have prepared our youth for the dynamic world they will inherit.

Understandably, that roughly $2 trillion which is spent on social services and myriad charities, along with the American character which is renowned for its generous spirit, act as a magnet to the world’s oppressed. Each individual child that has trekked or been bussed across the roughly 1500 miles between Honduras, San Salvador or Guatemala and the Rio Grande has a heart-rending story. However, commonsense says the U.S. cannot accommodate them all. It is well and good for reporters to detail the individual sad stories, and it is easy for Pope Francis to say that everyone should have “a new outlook toward migrants and refugees.” No one wants to play Lionel Barrymore’s Mr. Potter in this real-life saga, yet decisions will have to be made dispassionately.

There are evil people in this story, but they are not Republicans and they are not Democrats. They are the rulers of those nations whose policies have bankrupted their people and chased children from their homes. They are the smugglers who made parents pay a year’s wages and more to transport their children, on the promise of a new life in the United States. They are the church and intellectual leaders of those countries who have permitted a culture to take root that encourages tyranny and its offspring – corruption and poverty. As a country, we have been placed in a situation that requires the wisdom of a Solomon, but there is none to be found – not in the White House, and not in the halls of Congress. Every crisis is seen as a political opportunity to blow one’s horn and/or castigate the opposition.

Unfortunately, as big as our country and our hearts may be, we cannot save every child, nor can we derail every dictator, nor imprison every child smuggler. What we can do is follow the lead of Herbert Hoover 100 years ago this summer, when he established the Commission for the Relief in Belgium, by helping those in need in their own countries. We can live our own lives as exemplarily as possible, with the hope that some of what we might do proves contagious. We can provide our own citizens the tools they should have, especially in terms of education, where the interest of the child should always come before the demands of unions. We must acknowledge that much of our strength is in our diversity, yet recognize that the vast majority of those living here illegally represent one of the most uniform waves of immigrants in our nation’s history. We must wean those who are capable off the corrosive path of government dependency. We must learn to live within our means, with the understanding that we cannot be all things to all people.

We must reform immigration laws to encourage the most productive to emigrate to our shores, and we should offer work permits to seasonal workers, so that they can come and earn money, pay taxes and live outside the shadows of the clandestine existence they are forced into under today’s rules. We need to tighten the borders to dissuade those coming without visas, and to stop terrorists and the illegal transportation of drugs and weapons.

We should also never forget we are a nation of immigrants and thank God everyday for the fortune that finds us in this country. Socially, culturally and economically anyone who is willing to invest time and effort can become American. Immigrants to Germany, Bolivia or Japan do not become Germans, Bolivians or Japanese. For selfish reasons we should want the best and the brightest to become citizens, but in a nation of our complexity and size we need and should welcome all sorts – everyone from engineers, to artists, to field hands. But that will require better control of our borders. Immigration is a positive. There is no need to consider it negatively.

We must be compassionate, but we must also be realistic. We cannot let videos of frightened, scared children dictate our behavior. Escorting children back to where they came may seem cruel and hard-hearted, but it may be the only way to stop the smuggling and the heartless way children have been yanked from their homes and sent on dangerous voyages across an inhospitable land. America stands unique among nations for many reasons, but it has been a successful, liberal, democratic republic for over 200 years because it functions under the rule of law. Adhering to existing laws, with an Executive charged with their implementation, a Congress to enact new ones or amend old ones, and courts to determine their constitutionality, is integral to our future as a people’s republic.

Even as time alters the world, people and the way we live, a beauty of America is that institutions endure, as should our moral fiber. The characteristics we look for in immigrants have not changed. Nor should they. We want those who will help keep this nation exceptional. No matter the urgency of the current crisis, writing a check for $3.7 billion, without qualifications, is not the answer. It surrenders Congressional oversight responsibility to the Executive Branch. It implies that solutions are determined by dollars spent, it ignores reality and it only postpones a growing problem that will have to be addressed at some point. Why not now?

"Amazon - An Unjust Predator, or Just Amazonian?"

                                    Sydney M. Williams

Thought of the Day

“Amazon – An Unjust Predator, or Just Amazonian?”

July 16, 2014

As business owners, we should look upon competition as the tonic that increases our strength. The threat of competitive destruction is one reason we work harder and smarter. As members of society and as consumers, we benefit from the good things competition brings – lower prices and better products or services.

On the other hand, when businesses become monopolistic, consumers suffer. Monopolies, which may be efficient and are sometimes government granted, tend to hurt consumers, as they exclusively have the ability to control price and service. Definitionally, they reflect the absence of free markets. And, of course, when they don’t operate under a government license, they violate the Sherman Antitrust Act. The debate about Amazon, especially in its role as the dominant book retailer, incorporates all of these issues. Is it or is it not predatory and monopolistic? Or is it a good business that is destructive to existing retailers, but positive for consumers?

Disruption is painful for existing businesses, as many of us know from personal experience and as can be read in stories like The Magnificent Ambersons (or seen in the Orson Welles movie of the same name). Booth Tarkington’s novel relates the story of an Indiana family whose fortune was tied to 19^th Century carriages at a time when the automobile was proving to be the 20^th Century’s greatest invention. Dynamism in business is healthy. Family fortunes have risen and fallen throughout history, and they will continue to do so.

Amazon’s war with Hachette is what prompted these musings. Hachette, a wholly owned subsidiary of Lagardère Group (the world’s third largest book publisher), is in a dispute with Amazon over the disposition of e-book sales. While specifics in this case have not been disclosed, the consensus suggests that under the current contract the publisher retains 70% of all sales and the retailer 30%. Typically, the author gets 25%, which comes from the publisher’s share. The sense of most observers is that in negotiating a new contract Amazon wants to split revenues from e-book sales 50-50 with the publisher – with the publisher continuing to pay the author from its share.  

Hachette is not a small company. As mentioned, it is a wholly owned subsidiary of Lagardère, France’s largest production company, with 2013 revenues of €7.2 billion ($9.8 billion). Nevertheless, it is not in the same league as Amazon, which had sales last year of $74.5 billion.

Negotiations over a new contract have been going on for some time, with Amazon, which sells 65% of all online new book units, print and digital, pressuring authors by delaying the release date of their books. (As an aside, and as a minuscule example, I have been “victimized” by Amazon, as they seemingly have delayed availability of my book, One Man’s Family; though, in this case, my brother, the owner of the Toadstool, is a beneficiary. Also, I do not own stock in Amazon.)

It is my understanding that Amazon operates on thin margins. They are primarily interested in volume. Recently, and in a move designed to drive a wedge between Hachette and the authors they publish, Amazon dangled a “carrot” to a few authors and agents, by proposing – so long as negotiations continue – that both Amazon and Hachette forgo their revenues from e-book sales and allow the authors to get 100% of the proceeds. The publisher, naturally, spurned the offer, taking a chance they could convince their authors that such was not in their long term interest. Whether that proves true or not remains to be seen. What we do know, as regards this offer by Amazon, is that Hachette is being asked to give up 45% of revenues (70% less 25% paid to authors), while Amazon is offering to give up 30% – hardball on the part of Amazon, as some might term it.

It is understandable that many people in the book trade have become incensed with Amazon, but the real test is whether consumers have been hurt or helped by the competition they bring. At this point, it seems to me that the benefits of lower prices and ease of ordering outweigh any inconveniences, apart from the closure of neighborhood stores and the foregone delight one gets when browsing their shelves. Of course when Amazon deliberately delays shipments of Hachette titles, the consumer is disadvantaged, but that is a business risk Amazon has assumed. In the meantime, one can always go online to the Toadstool: www.toadbooks.com.

Creative destruction has been a mainstay of development and advancement, at least since the advent of the Industrial Revolution – steam engines, railroads, the telegraph, telephones, photography, etc. They all displaced previous ways of traveling, communicating or capturing an image. We are in the midst of another revolution of sorts, this one driven by technology. Consider Uber, an app that allows riders to call and pay for a cab via a “smart” phone, or Airbnb, an on-line service that connects people with rooms to let with travelers who have such needs. The first has already disrupted the highly regulated taxi business; the second looks to disrupt the highly taxed hotel business. When disparities exist, entrepreneurs see opportunities. Something similar will happen (or is happening) in the lending business; as unusually wide credit spreads between payments on deposits and interest charged less-credit-worthy borrowers seemingly has created opportunities. Granted, we need government to protect against fraud, to set ground rules and to provide oversight, but to impede development is to deny consumers their best options. Free markets are what have allowed societies to become rich.

But to return to Amazon: an irrelevant and frankly silly argument against the company arose when well-known British children’s author, Allan Ahlberg, turned down the inaugural Booktrust Best Book Award, because it was sponsored by Amazon. Mr. Ahlberg claimed that Amazon was “immoral,” because it paid too little in taxes. The company’s European operations are based in Luxembourg; so Mr. Ahlberg claimed they were “cheating” by not paying more taxes in England. The accusations are absurd and demonstrate why successful authors are not necessarily harborers of common sense. Whatever else we may think of the company, Amazon has a responsibility to its shareholders, employees and customers to operate as efficiently as possible. Like all companies, it also has a responsibility to the community in which it operates. It must balance its various constituencies. A significant responsibility of management is to operate as tax-efficiently as possible, within limits prescribed by law. If Mr. Ahlberg has a gripe, it should not be with Amazon, but with the politicians who govern his country.

Is Amazon the devil, as some of its critics claim?  I suspect not, even though I feel somewhat personally victimized by the company. Certainly, they dominate the on-line sales of books. A Bowker study last August found that 44% of all 2012 U.S. book sales, including e-book sales, were purchased electronically, up from 39% in 2011. Those numbers would suggest that Amazon accounted for about 30% of all book sales, but a smaller percentage of “print” books – big, but not monopolistic.

In Greek mythology, Amazons were a nation of female warriors, and included powerful women like Queen Penthesilea and her sister Hippolyta. It is a fitting name for a company that chose to challenge conventional retailers. The company continues to innovate, as can be seen with their attempts to develop and promote “Prime Air,” a delivery system using Drones. But make no mistake. Amazon, in its time, will be challenged by new entrepreneurs and in ways most of us cannot imagine. Nevertheless, as long as the company does not have monopolistic advantages, the consumer should be the beneficiary. Existing competitors will have to work harder and smarter.

"Support for Israel - Are We Wavering?"

                 Sydney M. Williams

Thought of the Day

“Support for Israel – Are We Wavering?”

July 14, 2014

A lot of ink has been spent in recent weeks – and deservedly so, given the gravity of the situation – on the Israeli-Palestinian flare-up that followed the killing of three Israeli teenagers, and the subsequent revenge killing of a Palestinian youth. People far more qualified than me have written endlessly on the subject, but I did want to insert my oar.

What is concerning is the growing animosity on the part of the media and people around the world toward Israel. The media is careful that their criticisms are not cocooned in terms that could be interpreted as anti-Semitic; nevertheless they are disturbing. They are subtle, but insidious in their subtlety. Examples of what I mean could be seen in a couple of front page photos in Wednesday’s newspapers. One by Mohammed Saber of the European Pressphoto Agency that appeared in the New York Times showed smoke billowing “after an Israeli attack on Gaza City.” Another, an AP photo in my local paper, The Day, by Khali Hamra, showed Palestinians trying to salvage what they could from the rubble of a house “destroyed by an overnight Israeli airstrike in Gaza City.” Should either paper be accused of bias, they could point out that on inside pages reporters do mention rocket attacks on Israel. That is true. They do, but that doesn’t take away from the visual image one gets from skimming the story – that Israel is the aggressor, using overwhelming force against a smaller and weaker neighbor.

But it is Israel that responded to the killings in the way civilized nations ought. They arrested six Israeli youths as suspects in the brutal killing of the Palestinian teenager. Has Palestine arrested, or held anyone in connection with the equally brutal murder of three Israeli teenagers? Of course not. It is Israel that has made an effort to limit civilian casualties. They call occupants of houses known to harbor terrorists, urging them to get out, and fire warning shots in attempts to reduce civilian casualties. It is Hamas that indiscriminately lobs rockets at Beersheba, Rehovot, Jerusalem and Tel Aviv. And it is Hamas that urges occupants of targeted homes to remain as they are, to act as human shields, to be used as pawns on the PR battlefield being fought in world-wide media.

A sentiment often attributed to Joseph Goebbels or Adolph Hitler, but one which is true is that if you repeat a lie (or a story) often enough, it becomes accepted as gospel. George Orwell made a similar observation in his dystopian novel, 1984. He wrote, “In a time of universal deceit, telling the truth is a revolutionary act.” That, in my opinion, is what is happening in the saga between Israel and the Palestinians. The Israelis are being portrayed as the aggressor, against less well-equipped Palestinians. Little is made of the terrorist organization Hamas, which occupies Gaza and shares power with Mahmoud Abbas’ Fatah Party, a political party that emerged from the Palestinian National Liberation Movement.

In this battle between Jews and Muslims, it is David who is considered the bully, not Goliath. Jews, like Muslims, descend from the Aramaen people who lived in the region during the Bronze Age, about 5000 years ago. Ironically, the Jewish religion spawned Islam 1500 years ago, just as it did Christianity 500 years before that. Two thousand years ago, the ancestors of today’s Middle Eastern Muslims, including Palestinians, were Jews. It is religion, not blood that divides the two; it is religion and the different cultures those religions have produced that have created much of today’s animosity.

We should not lose sight of the fact that instinctively we hold the Jewish people to a higher standard than their Arab neighbors. Nor should we forget that that distinction is due to cultural differences. But that recognition should not mean excusing the hatred of Arabs toward the Jews; nor does holding Israel to a higher standard justify the unnecessary blaming of Jews for acts of self-preservation.

Sixteen countries comprise the Middle East, ranging from Egypt on the West, to Turkey on the North, Iran on the East and Yemen on the South. Approximately 360 million people live in the region, with three countries – Egypt, Iran, and Turkey – housing 240 million, or roughly two thirds of the region’s population. Roughly 95% of those three countries’ populations are Muslim. Iraq and Saudi Arabia are the 4^th and 5^th largest countries, with a combined population of about 65 million, of which 97% are Muslim. Other than Israel, the country with the smallest Muslim population is Lebanon, which is 60% Muslim. Israel, the only democracy in the region, sits in the midst of this tinder box with a population of just over 8 million, of which 17% are Muslim. In other words, with less than 2% of the region’s population, Israel is confronting 350 Muslims, many of whom have sworn to “wipe her off the map.” Only three Middle East countries have diplomatic relations with Israel – Jordan, which has full relations, as does Egypt even though polls indicate that 92% of the population sees her as an enemy. Turkey, the third nation to have ties with Israel, has recently downgraded relations. Israel is an island in a tempestuous sea.

Yet, the world increasingly blames Israel. The Financial Times editorialized more flatulently than diplomatically, when they suggested both sides show “restraint.” That’s easy to say when one is in a fancy office in London’s Threadneedle Street, or wherever the editors of the FT sit. But restraint isn’t exactly what comes to mind if you are responsible for the people of a country under persistent rocket attack and under the threat of terrorist kidnappings. It wasn’t restraint that Churchill deployed when London was under attack.

Israel is a narrow country that runs from the Negev Desert in the south to the Sea of Galilee and the Golan Heights in the north. It is about 280 miles long, south to north, and perhaps 80 miles across at its widest point. The country is smaller than Lake Michigan and about 30% larger than New Jersey. The West Bank takes a sizable bite out of its eastern border, while the Gaza Strip removes a smaller piece from its southwestern border. Both are now Palestinian territories, with Gaza under Hamas control. While Israel withdrew from Gaza almost ten years ago, that has not stopped a rain of mortars and rockets fired into Israel.

Gaza, which borders on Egypt, the Mediterranean and Israel, is a narrow strip of land with a long history. It is the crossroads of two continents, Asia and Africa. It has long been home to the Jewish people. It has repeatedly fallen to invading armies, from the Assyrians to the Egyptians, from Romans to Alexander the Great, from Christian Crusaders to the Ottomans to Napoleon. In each instance, in some cases years later, Jews have returned. In 1967, Israel liberated Gaza from Egyptian occupation. In 2001, the Palestinian Authority began pounding restored Jewish settlements in Gaza. In 2005, as part of the Disengagement Plan, Israeli Prime Minister Ariel Sharon forcefully evicted 10,000 Jewish villagers and farmers, on the expectation that a civilized and peaceful society would emerge. But, instead of peace, 20,000 rockets have been launched at Israel in the ensuing nine years. Three times since, the Israelis have had to send troops into Gaza to stop the shelling of Israeli villages and cities. They may do so again, even if it does upset the United Nations, especially Europe and the United States.

My intent is not to suggest that Israel is beyond all blame, but to try to put in perspective the difficulties the people and the nation face. Israel has been a state for just over 65 years. From what was largely a desert wasteland, without any oil, they have created a nation that today has the fourth highest GDP per capita in the region (after the oil-rich countries of Qatar, Kuwait and the United Arab Emirates.) They have done so with the only truly democratic state in the region, and against overwhelming odds, as most of their neighbors do not recognize them as a legitimate state. It was Europe and the United States that sent the Jewish people to Israel following a war in which their ranks were decimated.

Israel has few friends, as can be seen in numerous United Nation resolutions. And, if the reports we read are accurate and if columnists are reflective of current moods in European capitals and the U.S., then the number of friends is diminishing. The bulwark of their support comes from the United States. Yet major U.S. newspapers, like the New York Times and the Washington Post, appear to blame the Israelis more than Hamas for the hostilities. What they fail to realize is that if we hesitate in our support, Israel could cease to exist.

It is this fundamental possibility that should be considered by all those who increasingly seem to be wavering in their support of Israel. While our economic interests and ties have long been with Arab dictators, our moral and cultural ties are with Israel. That should not be forgotten. Benjamin Netanyahu is usually portrayed as belligerent – unwilling to compromise, unwilling to settle, unrestrained, to borrow a phrase from the FT. I agree. He is. But how can he be otherwise given the enemy he faces, and the history he and his people have experienced? 

"Principle, Price, or Creative Destruction?"

                                     Sydney M. Williams

Thought of the Day

“Principle, Price, or Creative Destruction?”

July 9, 2014

Years ago, probably in the mid to late 1950s, Grand Union opened a grocery store on the outskirts of Peterborough, New Hampshire, thereby ringing the death knell for the two or three small, independent grocery stores in the village. It was my first experience with Joseph Schumpeter’s dictum of creative destruction. For a few months, my mother hung to her principles and refused to enter what she called, the “grand onion.” But eventually, lower prices and dwindling products on the shelves of the financially-strapped independents forced her to change.

What prompted this subject was an article in the business section of Monday’s New York Times, headlined, “Principles Are No Match for Europe’s Love of U.S. Titans.” The article discusses how tech behemoths, like Amazon, Google and Facebook create a love-hate relationship, with consumers. Many feel principled when independent stores are placed in jeopardy or by the perceived ill-treatment by “Big-box” companies of warehouse employees. But for Guillaume Rosquin of Lyon, in the Times article, a $200 savings on a Blackberry was enough to put his “issues with working conditions aside.” Seven of the ten most visited websites in Europe are operated by American companies. Google has an 85% market share for search in Europe, compared to 65% in the U.S. Facebook, the target of several investigations for its tax practices in Europe, continues to add users – now numbering 150 million Europeans, or roughly one in three.

Amazon is the most visited website in Europe and the world. In June, they had a total of 282.2 million visitors, 35% of which were Americans and 31.8% were Europeans. Twenty years ago, the company did not exist. Principle versus price/convenience is an issue with which we all struggle. But it is also “creative destruction” that is at work. I have a brother who owns what some people claim is the best independent bookstore in the United States, the Toadstool in Peterborough, NH. In full disclosure, I own one share, or four percent of the business. Yet, on a Sunday morning, reading the New York Times book review section, I often – shamelessly – log onto Amazon.

Creative and aspirant individuals have always led innovation. When they live within a democratic capitalistic society they thrive. It is no surprise that American companies dominate web-based businesses in Europe rather than European, because America’s culture has allowed and encouraged the creative forces to be unleashed that provide for a dynamic society. However, a natural consequence of unleashing the creative spirit is inequality in terms of outcomes. For those who are bright, creative and aspirant will do best. However consumers benefit as well. Two principal benefits of creative destruction are reduced prices and greater availability of goods and services.

In business, as in life, time doesn’t stand still. In an interesting front page article in Tuesday’s Wall Street Journal, “Wal-Mart Looks to Grow by Getting Smaller,” the reporter Shelly Banjo writes of the new CEO, Doug McMillon, “…the problems of the past are forcing him headlong into the future.” Besides admiring the syntax of her sentence, the point Ms. Banjo makes is a good one: no matter one’s past successes, future success depends upon adapting to constantly changing circumstances. Wal-Mart, the world’s largest retailer with half a trillion dollars in revenues, is at risk because of companies like Amazon and dollar store chains, just as they (Wal-Mart) forced out of business, in its time, thousands of smaller department stores. So they must innovate. Conventional wisdom says that internet-based technology, like on-line shopping, is the future for retailing. Certainly it has been. In twenty years, Amazon has grown to become a $68 billion business, while Wal-Mart’s online sales are now $10 billion. But it is interesting that Mr. McMillon is experimenting with smaller, 10,000 to 40,000 square foot, stores – becoming a more integral part of the community, perhaps combining both principle and price? Perhaps recognizing that some consumers like to be coddled? As Mr. McMillon says, they must experiment.

The health of an economy, and in fact of a nation, can be measured by its friendliness toward innovation and is manifested in the number of business startups. I have been accused of spending too much time harping on the inhibiting nature of too much government, whether it is in excessive regulation, redistribution or in a tax code that penalizes investment and wealth creation. And I admit to that accusation. Inequality is a fact of life in capitalist societies, as intelligence, aspiration, creativity and diligence get rewarded. But, inequality is also a fact of life in socialist and authoritarian societies. Wealth in those societies accrues to those in government and their favored business cronies. The difference is that in democratic, capitalist societies innovation lifts the tide on which consumers float, raising everyone’s standard of living. Poverty in America today is very different than it was when I was young, a fact that often gets lost amid the heated political rhetoric in Washington.

The vast majority of Americans are employed in mid and large businesses, those employing more than 1500 workers. Yet, according to a study done by the Small Business Administration (SBA), businesses with fewer than 20 employees were responsible for 97% of all new jobs between 1988 and 2004. One of the more disturbing recent trends in the United States has been the decline – albeit modest – in the number of new start-ups. Besides, regulation and taxes, the two reasons most often mentioned are an excess of student loans and a paucity of visas for skilled workers. A Kaufman Foundation study noted that of the engineering and tech companies founded between 2006 and 2012, 24.3% had at least one founder who was foreign-born. As Adam Smith taught us many years ago, successful capitalist societies grow, at least in part, because people act in their own self interest. It is always been fascinating, when looking at villages, to note that people naturally fill roles that are needed – a lawyer, a pharmacist, a miller, a doctor, a green grocer and a cobbler. No government official told the village fathers what was needed. When a need appeared, someone arrived to satisfy the demand. This happened absent any government bureaucrats telling one man he should be a baker and another, a farmer. Entrepreneurs, like nature, abhor vacuums.  

The principle versus price conundrum is one we face every day, in different aspects of our lives. It has a lot to do with the ever-changing nature of commerce – of entrepreneurs discovering new ways to bring old products to market, and of discovering new products that render old ones worthless. It is the dynamism of a healthy society. Peter Drucker once wrote: “The entrepreneur upsets and disorganizes …his task is ‘creative disruption.’” While the Kindle threatens independent bookstores like my brother’s, he and other survivors like him innovate and fight back. The winner is the consumer, because he is every businessman’s ultimate customer. It is no surprise that four of the five largest companies by market capitalization today did not exist when I entered the brokerage business forty-seven years ago.       

Nevertheless, I still prefer to use local merchants in Old Lyme, versus big-box stores, and I admit to feeling good about what I have done – supporting someone I know, or at least someone with whom I am acquainted. We all want to live comfortably, and we love the idea of permanence. But to live is to be in constant motion. To stop is to die. We live in a world where price, convenience and even availability impact our purchase decisions. If my wife and I need to buy something that involves laying out a large sum at the hardware store, my wife whisks me to Home Depot, or to one of the warehouse clubs, BJ’s or Costco. I feel sorry for the local proprietor, but then she points out what we saved, and I recognize the necessity of adaption and understand that the owner of the local store must as well.

What gives me confidence for the future is the sense that the principles of innovation and entrepreneurship and the creative, but necessary, destruction they bring, are alive and well. I hope they remain so. Businesses better serve their customers under the threat of competition. Sad would be the day, were we to let concepts of equality and fairness, and politics of redistribution become so doctrinaire they overwhelm and inhibit our natural inclination to create, improve and grow. A nation that is rich serves all of its people far better than one that is poor.