Cyreenik Says

February 2011 issues

Collectivism is back! ...and BAD!*: Wisconsin State Budget Battle

(*Bad as in, the athlete doing his scoring dance after a goal, high-fiving his teammates, and announcing, "Yeah... I'm BAD! We're BAD!")

Communism may be dead, but collectivism is alive and thriving. This year's first dramatic example of that is the fight between taxpayers and unions over the fate of the Wisconsin state budget. This 19 Feb 11 WSJ editorial, What's at Stake in Wisconsin's Budget Battle by John Fund, describes the drama of what's happening there.

This drama is frustrating for me to watch because the protesters seem completely oblivious to what they have already lost, and are asking to lose even more. What they have lost is a pro-business, fast jobs growth, environment.

This is the part of the world that just sixty years ago was called the Steel Belt and was the envy of the entire world for its diverse productivity and ability to produce both material and financial wealth. Cleveland, my home town, bought world-class stuff because it had world-class wealth! And it spread that wealth around a lot of people: Cleveland and Detroit were sixth and fifth largest cities in the US at that time! (In 2009 they were 43rd and 11th.)

But, it seems, the people of the Midwest did not understand where that wealth was coming from: It was coming from providing fertile ground for the creation and growth of many capital-intensive businesses -- heavy industries, with railroads, auto and steel being the most iconic. These are called heavy industries not because the products are heavy but because the capital required to create the producing infrastructure is heavy. It's heavy financing which is the source of the "heavy" in heavy industry.

One of the unnoticed side effects of this heavy industry boom was making the Midwest a hotbed for collectivist thinking -- union and other forms of solidarity thinking thrived right along with the heavy industry thriving.

In the 1960's and 70's, when the technological center of increasing productivity switched from those heavily capital-intensive businesses to the medium capital-intensive businesses centering around computers and electronics, the Midwest did not reinvent itself to support them. It dropped the ball and California became the iconic new business Mecca and the American South joined in on the new boom.


People of the Midwest saw and loved the stability that the heavy industry-plus-union system was giving the people of the region. They dearly loved it. They decided to stick with it.

...The ones who stayed, that is. The sons and daughters of those brightest and best who made the railroads, steel mills, and auto plants in the first place... left. They went to California and the South and set up their new businesses built on electronics, computers and software.

They didn't have to leave. They wouldn't have left if the business climate for them had been more favorable. But, as we have seen, they left and the enthusiastic collectivist supporters stayed, and those who stayed continued to work hard to make the Midwest into a workers paradise.

And they succeeded! But it turned out to be a Chinese Curse: What the Midwest is now is a workers paradise... without businesses for the workers to work in. Now the workers have moved on to Plan B, and work for the government.


The Collectivist Blind Spot: Stealing from the Children

Enthusiastic collectivists are deeply motivated by wanting to be fair about distributing the communal wealth. They see the existence of rich people as an indication that something still needs to be corrected in the system. This is a good and noble aspiration, and it has produced a lot of improvement in some areas of our society.

What they don't see, their blind spot, is that the community pie is not static. It grows and shrinks based on many factors, and it can grow and shrink based on the programs they enact to extend fairness.

When the collectivists are not careful, this blind spot can have deeply unfavorable consequences for the future of the community. When they call for choices that slow down the growing of the pie (or even shrink it) in the name of making the pie distribution more fair, they are robbing the children! Because of their choices today, the children will have to live with a smaller pie tomorrow.

One example of shrinking tomorrow's pie that we are painfully living with today is the success of government unions at negotiating defined benefit pensions, and then not supporting paying enough in today's revenue to meet those future promises.

Sadly, this mortgaging of our children's future in the name of fairness in the work environment today is what has been happening in the Midwest for four decades now, and this is why the brightest and best have been leaving.


The Free Marketers' Blind Spot: Killing the children

Free marketers have a blind spot, too. They don't see how scary and painful business cycles are to many people in a community. They also don't see that some people in the community think it's very important to override a person's individual choice.

So the free marketer gets to kill children by starving them in an economic downturn, by offering them harmful work, or offering their parents a difficult, dirty and dangerous job.


In sum, the world is full of difficult choices, and we all have blind spots that make it hard to see the full cost of a choice we make. Seeing all the consequences of an action we take or advocate is something we must continually strive for.


In sum, what the current Wisconsin brouhaha is about is whether Wisconsin and the rest of the Midwest want to continue on with this Glorious Experiment in Collectivism, or whether they are ready to cut bait on it, and get back into the experiment of making an environment that favors thinking about being exciting and productive over one that favors thinking about being secure and fair -- the former being the one that brought the boom to the Midwest in the first place.

Update: Two 1 Mar 11 WSJ editorials talking about the disconnect between union-supporting thinking and productivity-supporting thinking: The Democrats' Collective Bargain by Willam McGurn and Why Koch Industries Is Speaking Out by Charles G. Koch. And for an alternative viewpoint, a 5 Mar 11 Micheal Moore editorial in Huffington Post, America Is Not Broke, explaining that the Midwest's pie is not gone, it's just been stolen by the uber-rich by manipulating the financial crisis.

Update: This 22 Mar 11 Reuters article, Detroit population drops to lowest level in 100 years by Ben Klayman, illustrates the problem succinctly. Detroit is down to 713,777. People are still voting with their feet away from the workers paradise. On the other side, this 10 Mar 11 Economist leader, Bamboo capitalism, talks about where the jobs are going, to China's entrepreneurs, even though it's a very delicate economic blooming. This environment is no workers paradise, and no fat cat capitalists paradise, either. It's a down right spooky business environment for both workers and capitalists, but it's a place where jobs are being created.

Update: This 25 Mar 11 WSJ editorial, Detroit's Decline and The Folly of Light Rail by Edward Glaeser, talks more about the linkage between entrepreneurialism and the Midwest's cities decline.

Update: In February I posted this blog in the Linked-In MIT alumni group. The comments on it have been thick and steady. On 25 Apr 11 the comments passed 1,000 and were still going thick and steady. It's been a fun session! One thing that came out of this was that many people commenting in that group were enthusiastic for social justice. The discussion was lively, but what came out were more examples of places where a collectivist government was installed, and social justice ideas were implemented, and lots of people left! One of the latest examples being Kerala state in India suffering the Kerala Gulf Boom in the 1970's. So far, no exceptions to this phenomenon have been pointed out.

Update: This 13 May 11 WSJ editorial, Boeing and the Union Berlin Wall by Arthur B. Laffer and Stephen Moore, gives some more hard facts about the population migrating away from union-shop states. I quote, "As of today there are 22 right-to-work states and 28 union-shop states. Over the past decade (2000-09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls."

Update: This 15 Jun 11 WSJ article, Escape From Illinois, Cont., talks about another collectivist tactic currently being employed by governor Pat Quinn of Illinois who is trying to make Illinois business-compatible after the state passed a most unfriendly tax. His solution: offer special tax breaks to high-profile businesses he likes such as Caterpillar and CME (Chicago Mercantile Exchange).

Wow! Talk about slipping into a central-planning, government-picks-winners heaven! And all this with the good intention of soaking the rich. <sigh>

Update: A troubling 5 Jul 11 WSJ editorial, America's Troubling Investment Gap by David Malpass and Stephen Moore, indicating that the Midwest Malaise has spread nationwide in investors' eyes. From the article:

"To produce rapid growth, most capital must be allocated by markets. The effect of $4.5 trillion of borrowing since 2009 is that foreigners and Americans are buying Treasury bills instead of investing in the next Google, Oracle, Wal-Mart or biomedical company. Today, foreigners are financing food stamps and the next bridge to nowhere while Americans are building state-of-the-art production systems abroad. This is the real pernicious "crowding out effect" of the federal government's borrowing."

Update: The Eurocrisis and the fate of Greek bonds are very much related to the Midwest Disease. Greece has an advanced case of it. These 14 Feb 12 WSJ articles, Review and Outlook, The Chaos of Greece (What happens to countries that choose economic decline), and Editorial Fear and Loathing in Athens by Brian M. Carney, talk about the social situation behind the Athens Riots of this week as the Greek parliment voted for new austerity measures. This is what the Midwest Disease leads to when it goes untreated for decades and is nurtured by easy lending by the government of the community suffering from it.



Thoughts on the Middle East Turmoil

The turmoil sweeping the Middle East these days makes me think of the Revolutions of 1848 in Western and Central Europe.

What they have in common is:

o Simultaneous social unrest strong enough to unseat many governments in a region.

o The unrest of this magnitude came as a surprise.

o The leadership was almost completely grass-roots.

If this evolution continues to follow the Revolutions of 1848 pattern we can expect the following:

o There is going to be a lot of grass-roots optimism throughout the region for about a year. It will be a springtime for the Middle East.

o These new governments are not going to successfully "get it together" so there will be lots of chaos in this springtime, and a growing counter-reaction in the region.

o The counter-reaction will be successful at reinstalling oppressive governments... for a while, about two decades. But the foundation for those has now been shaken and shattered. In two decades those repressive governments will fall, much more easily the second time, and be replaced with something completely surprising -- neither an old-style repressive nor a springtime optimistic.

So my crystal ball says that in 2030 the Middle East will begin a journey that will be something really wonderful and special -- comparable to the emerging of Germany and Italy in Europe. The unrest we are experiencing today will be a necessary step, but it will not be the beginning step for the surprise that is coming. Sadly, that will take more suffering and sacrifice.

I make this forecast with a caveat: That 1848 cycle happened 150 years ago -- when the printing press, not the Internet, was the main means of communication. Because of the Internet and hand held video, this cycle of "springtime"-"retreat from the chaos"-"return better prepared" could happen both a lot faster and with a lot less violence. I noticed this difference in speed and violence when comparing the toppling of repressive regimes in the mid-to-late eighties to the toppling of those in earlier eras.


What I say with no caveat is that this will be a time of surprises:

o There are going to be first attempts at a new government style, and those first attempts are going to be moderate and attempt to include lots of points of view.

o Those first attempts will be displaced with later attempts that are more radical and not so inclusive. Those who gain power in the second wave will be promoting specific agendas and start actively excluding other agendas. The search for enemies of the revolution will begin and the chaos will deepen.

o Then will begin a seesaw between the excitement of trying new things and nostalgia for the good old days as some people find the new ways don't produce immediate better results for everyone, but they do produce a lot of immediate uncertainty for everyone. In some previous historical settings this seesaw of social revolution has gotten quite violent and made a lot of history... a whole lot.

The details of these trends, and the results of them, will be surprising. But, on the whole, over the next twenty years, the Middle East is going to become very different from what it is today, and unlike what any other region is today.

The Middle Easterners are now living in interesting times. History will be made here.


Egypt's Economy: Showing the value of Enfranchisement

This 3 Feb 11 WSJ editorial, Egypt's Economic Apartheid by Hernando De Soto, talks about how much of Egypt's economy is gray market, and how this is killing the ability of Egyptian companies to grow larger than family-size.

This is an example of the cost of disenfranchisement. Because these companies are operating outside the formal legal system, they are partly disenfranchised.

Enfranchisement is one of the foundations of both American and Western European greatness. Enfranchisement is why democracy works in America and Western Europe. In those places that are democratic but disenfranchising, it doesn't work so well.

So that is a key point that is often lost in the day-to-day shuffle: democracy works because it is enfranchising. There are other ways to enfranchise, but the key point is that any good governing system is one that does enfranchise its people, the more so, the better.

Enfranchisement is also why Rule of Law is so important. It both levels the playing field and it makes what the government is going to do more predictable. Both are key elements to both business and individual enfranchisement.

Update: Further insight into the Middle East unrest: Like Greece, these countries with deep unrest also have large percentages of the population employed by the government. See this 10 Feb 11 WSJ editorial, Is Egypt Hopeless? by Daniel Henniger for details. This means solving the unemployment problem will take as much deep pain as solving the political problem. Massive government employment is a short-term way of building enfranchisement. Sadly, its long-term cost -- killing economic growth -- is rarely considered when it's being used to soothe an immediate problem with social unrest.


-- The End --