The chairman of Sears Holdings Corporation (NASDAQ:SHLD), Edward Lampert, published his annual letter yesterday, and it makes for some interesting reading. Mr. Lampert says he's been reading Thomas Sowell's book Intellectuals and Society, a book that was reviewed here back on January 4, but so far as I can tell hasn't rated a review from the New York Times or the Wall Street Journal. The beginning of the letter is about Sears, but further on it gets into some public policy and even philosophical issues of the sort that are often discussed here:
Business leaders, regulators, public officials, and journalists have become an echo chamber of self-support and self-congratulation, whether on TV, in print or at numerous conferences. Their words and their actions are often self-serving (whether right or wrong), and they are typically regarded and reported on as if they were obvious and selfless. They get repeated as if there were no alternative views or possibility of error in their thinking. Dominant narratives develop and get defended primarily by repetition and secondarily by attacks on those who disagree with those narratives. When these favored people and views become endorsed in laws and regulations, some may benefit, but many get harmed.
There are several examples of issues that have been smothered by dominant narratives. Accepting these narratives without critical evaluation can be a contributing factor to some of the negative unexpected consequences they produce. Did the seizure of Fannie Mae and Freddie Mac (the largest nationalization in our country and likely in history) calm or ignite fear in the financial markets and did those urging or supporting the seizure profit from it? ...Why were some institutions saved and others seized, merged or left to fail? How does regulatory and policy uncertainty impact investment and risk-taking in society?
I fear that Americans have been provided a false choice between a little more and a lot more regulation and taxes. We keep hearing more ideas to create jobs and generate growth that almost exclusively require more government spending. Jobs can come from government, but those jobs get paid for by taking money from the private sector, reducing the private sector's ability to provide jobs. On the other hand, there are many who believe that less regulation, less government interference, less arbitrary regulation when it does exist, and lower government spending will generate more growth and more jobs. I agree with those views....
The straw man frequently used to justify more regulation and to criticize free markets is to assert that the proponents of free markets blindly believe that they always work and that they always produce good results. Most free market advocates don't actually make this claim, and they know that it is not true. Free markets respect individual rights and freedom, preserve choice and accountability, and produce superior results compared with non-free markets. When free markets experience problems and produce poor results, critics are fast to proclaim that things would have been better if only there was more, but better regulation. However, in most industries and societies where there is more regulation, there is typically lower growth, lower employment, and less innovation.
Self-regulation is a better idea and it is a better choice, whether for an individual or a corporation. Any corporation can choose to limit or make investments, increase or decrease compensation, and manage risk at different levels. Companies can compete by promoting their "safety and soundness" or by their "willingness to take risks." Investors, customers, and workers can choose which companies and their associated behaviors and philosophies appeal to them. Let the media and politicians explain, compare, criticize, and contrast the various policies, so there will be little doubt that success or failure is determined by choice and not by ignorance. Then, make sure that government doesn't reward failure and punish success by interfering with outcomes based upon political contributions, undue influence, or the personal beliefs of the policymakers.....
Sears Holdings shares the stated goal of many public officials of creating jobs. But, we don't believe that we need large government programs to generate these jobs. Public officials often fail to recognize the obstacles they place in the way of job creation. For example, over the past year proposal after proposal has been put forward to reform health care, reform the financial system, increase taxes, and add regulations, all with the intention of making the United States a better and stronger country. Yet, as a business, trying to understand which of these proposals might become law, what their impact might be on business prospects and competition, and what additional costs they might impose creates a great deal of uncertainty. It has led our management team and board (and I am sure those managements and boards of other companies) to spend inordinate time trying to determine which investments we should make, defer, or cancel and which jobs to create, maintain, or eliminate. The removal of this uncertainty and the constant drumbeat of new threats against various businesses would go a long way to allowing American entrepreneurial energy to be unleashed.
Our budget deficit has left many searching for ways to raise revenues through new taxes, rather than reducing spending and generating new revenues through growth and through the removal of the impediments to growth from existing regulations and threats of new regulations. Here are a few ideas, none original, that can contribute to reducing unemployment over the near term without additional government spending: reduce U.S. corporate tax rates (amongst the highest in the world), extend individual tax programs that are scheduled to expire or that are subject to debate (freeing up individual time and attention devoted to tax planning and strategies), deal with entitlements and don't create additional ones (we can't afford the ones we currently have), and stop providing selective benefits to individual companies or industries (it creates an uneven playing field).
Capital can quickly reorganize and provide financing for businesses and projects that create value for our society, without the heavy hand of government planning and policy.
It's amazing how quickly Mr. Lampert's point about journalists repeating dominant narratives "as if they were obvious" and "as if there were no alternative views or possibility of error in their thinking" was proven correct by the reception in the press of his own letter. The Wall Street Journal, of all places, the newspaper that styles itself as speaking out for free markets and free men and as the diary of the American dream, reacted with an article that mocked Mr. Lampert as being "cranky." Wrote the Journal:
"It is enough to make one wonder whether Lampert was so busy working to turn around Sears and Kmart that he missed the global financial crisis entirely? Lax regulation was a big reason that systemically risky behavior flourished. Despite Lampert's distaste for government intervention, even some die-hard free market advocates have acknowledged that absent a financial rescue, the financial crisis could have triggered another Great Depression."
What the Journal was doing in that article is exactly what Mr. Lampert describes -- repeating a dominant narrative as if it were obvious and as if there were no possibility of error. In fact, each of the Journal's arguments against Mr. Lampert is highly questionable. Absent a "rescue," the financial crisis could have triggered another Great Depression. But it could not have, too. As Lawrence Summers says, it's hard to say what would have happened, because of what Mr. Summers calls "the difficulty of constructing a counterfactual and knowing what would have happened without intervention."
Other free-market advocates like Clifford Asness and Eugene Fama say that absent the "rescue" things would have sorted themselves out. The term "rescue" is itself tendentious. What happened to Fannie Mae (FNM) or AIG shareholders wasn't a rescue but a seizure of their property. And even if you buy the idea that it was "lax" regulation, rather than clumsy, hamhanded, incompetent or captured regulation, that led to the financial crisis, it doesn't necessarily follow that the solution is more regulation. Maybe the task of regulating these financial institutions is so difficult or complex as to be hopeless. Anyway, it's good to see Mr. Lampert speaking out.
Disclosure: I know Mr. Lampert and like him.