Considering the Widespread Suppression of Free Markets

Hurray for President Obama insisting on more restructuring in the auto sector. It gives me a little more optimism that the U.S., Canada and other developed economies may eventually produce a sustainable solution to this epic financial and economic crisis.

I see so many articles and books questioning capitalism and free markets these days, when the real problem, in my opinion, is that capitalism and free markets capitulated to rent-seeking behavior over the decades and became sclerotic from allowing domestic monopolies and cartels to take root. Consequently, the developed economies became less competitive.

The U.S. auto companies were once a cozy cartel. They lost that position many years ago, but their unions still had monopoly control over labor markets and maintained the uncompetitive status quo. To insist on more change in the auto industry, especially in the area of labor costs, would seem to be the right step forward.

Unfortunately, the auto sector is just one small part of a systemic problem. The mis-allocation of resources within developed economies remains pervasive thanks to the widespread suppression of free markets. Many of these concentrations of market power have been with us for so long that we don’t seem to see them anymore. I’ve hammered on some of them before. Here are a few choice case studies:

The real estate cartel: If it looks like a duck, quacks like a duck …

School for thought: Some think tanks are asking important questions about the public school system.

Lawyers: Another conspiracy against the laity? The common law system is too complex and costly — let’s fix it.

Milking the Canadian consumer: It’s time to get rid of the dairy industry’s government-backed protection.

No doubt when one complains about vested interests, the complainer’s comments basket is likely to fill up with scathing denunciations from denizens of such vested interests. If that’s the price for saying it like it is, then so be it. I just hope other, more objective readers realize where those commentators are coming from.

Comments

[Fighting Yoda:]

Yes I agree. We don’t have a free market, but we are made to believe there is one. Worst is corporate governance – what rights do the share holders have – but to sell their shares. Even the big activist investors find it difficult to shake entrenched managements. Managements are supported by the big institutions (the biggest investors) – they simply want to maintain status quo – some kind of incestuous relationship.

Firing of GM CEO is a stark case in point, shareholders could not change the Board, Board did not fire Wagoner, it came to the white House to do the dirty work.

Time for a total makeover, if necessary class warfare, we are likely headed that way.

Mar 31 02:35 AM

[jpiretti:]

Here are some numbers I find fascinating. Since 2000 the S&P 500 companies have produced 2.4T in earnings. 1.7T have gone to stock buybacks and .9T have gone to dividends. In other words, zero has gone to R&D, product development or capital expenditure They basically financed their operations through cheap debt offerings. I know I will get some pushback on this, but it seems to me that management and boards used the new tax rates (cap gains & dividends) to enrich themselves as opposed to supporting their long term business plans. It encouraged distribution vs. investment. Can we please dispel the myth of the Laffer curve?


On Mar 31 02:35 AM SB-tiger wrote:

> Yes I agree. We don’t have a free market, but we are made to believe
> there is one. Worst is corporate governance – what rights do the
> share holders have – but to sell their shares. Even the big activist
> investors find it difficult to shake entrenched managements. Managements
> are supported by the big institutions (the biggest investors) – they
> simply want to maintain status quo – some kind of incestuous relationship.
>
>
> Firing of GM CEO is a stark case in point, shareholders could not
> change the Board, Board did not fire Wagoner, it came to the white
> House to do the dirty work.
>
> Time for a total makeover, if necessary class warfare, we are likely
> headed that way.

Mar 31 09:08 AM

[swygert@law...:]

Yes, it is the time to ask the big questions, but it is not capitalism versus socialism, it is about restoring responsible capitalism.

Mar 31 09:28 AM

[Ferdinand E...:]

I'm certainly glad to read that think tanks are concerned about public schools. Of course I would rather hear that no think tank would ever under any circumstance get money from the authorities for attempting to figure out what it takes to fix the public schools. In fact they shouldn't be allowed to do pro-bono work on the topic.

I attended one of the worst schools in the U.S., but at the same time it had some wonderful teachers. As long as discipline was maintained my school produced optimal results - given the constraints imposed by non-academic considerations.

Mar 31 09:38 AM

[ain't no fo...:]

And I would suggest that much of the 1.7T that went into stock buybacks was merely to cover stock option awards to senior management, which I have been screaming about for a decade. These cretins running these companies awarded themselves monstrous amounts of options, exercised them and sold the shares the same day (talk about house flippers, that's all these "C" level guys were - flippers), in effect transferring cumulatively hundreds of billions of dollars of shareholder equity into their personal accounts.

And then they would buy back just enough shares through the buyback programs to net shares outstanding back to where they were before the program was announced.

Meanwhile shareholders who didn't do their homework congratulated management and the BOD on being so shareholder friendly by shrinking the share count... NOT!

Hundreds of billions of $$ were siphoned off the books of American corporations by these crooks who were as reprehensible as Bernie Maddog.


On Mar 31 09:08 AM jpiretti wrote:

> Here are some numbers I find fascinating. Since 2000 the S&P
> 500 companies have produced 2.4T in earnings. 1.7T have gone to stock
> buybacks and .9T have gone to dividends. In other words, zero has
> gone to R&D, product development or capital expenditure They
> basically financed their operations through cheap debt offerings.
> I know I will get some pushback on this, but it seems to me that
> management and boards used the new tax rates (cap gains & dividends)
> to enrich themselves as opposed to supporting their long term business
> plans. It encouraged distribution vs. investment. Can we please dispel
> the myth of the Laffer curve?

Mar 31 11:22 AM

[carey_jim:]

Paradox of government 'regulation':

The last thing businesses want is free markets. Successful businesses everywhere try to force the competition out with 'unfair' business practices.

That's one reason for government intervention into the 'free' market: to try to keep it free.



Paradox of government 'regulation'

Mar 31 12:30 PM

[Moon Kil Woong:]

Hmmm, you can add the Carter peanut cartel and ton's of other silly government protection schemes. When people say the government is messing with the free market today on a level never seen before they must be kidding themselves.

The government has intruded on most every major entrenched business for ages. Try starting a farm and selling your product to the highest bidder. You will be told you must sell into a common pool at their price.

The bright side is that it hasn't been to restrictive against the technology industry which seems to be one on the only bright spots. I guess the duopoly are the regulatory industry of the computer industry lol.

Anyway, the real failure in this whole mess is the fact shareholders and boards can't or don't want to control or hold responsible the executives and management of their companies anymore. Where is the shareholder outrage as the execs fleece the company and keep their positions? I guess mutual funds, ETFs etc, don't really care what happens to a given stock. It's so much easier to sell than fix anything.

To think government has to step in to tell a company the executives have bankrupted the company and management must change is fantastic in itself. Shareholders should have done something about it long before now.

The ultimate fault lays with the ones eating crow, shareholders and soon bondholders.

Mar 31 11:55 PM

[John Tandlich:]

In this Bizarro World we are living in, it sems to make sense that Europe is chastising us for our administration's profligate spending and trashing of property rights.

Apr 01 01:30 AM