Non-Elected Officials: The New Elite: continued
Government: The Primary Stakeholder
Today's Misery and Yesterday's Progress
President Clinton's Report to Congress in 2000 claimed credit for material and technological progress since 1900, most of which occurred in the first half of the century ('aircraft, antibiotics, air-conditioners, radio and television').
Asserting that his government had found the Virtuous Circle, President Clinton nevertheless admitted serious problems in American society.
The President's economists pointed to inefficient and inadequate schools, unaffordable healthcare, two worker households, the decay of the cities, declining SAT scores, worsening teacher quality, families falling apart, rising out-of-wedlock births, single parent homes, 'rat race' work practices, and people suffering a 'money crunch', despite high employment.
Of course, the purpose of these admissions was not to admit failure of his administration but to make a case for even bigger government and higher taxes.
Although progress was questionable for much of the population, those in public service did well.
Paying Off 'Public Servants'
The Democrat Party gathered votes from public servants who favored Big Government.
The Democrats also drew voters who, although not government workers themselves, were dependent on those on government payrolls or who otherwise were beneficiaries of tax revenues.
Bureaucrats have the power to keep and increase their share of the American pie.
As long as most Americans do not vote, the enduring bureaucracy and their cronies have the power to keep and to increase their share of the American pie.
At one time salaries of public servants were lower than the private sector.
This is no longer the case.
The Civil Service System protects public servants from being fired, not only for incompetence, but also for vagaries in the business cycle.
Tens of millions of Americans in the private sector must get by with temporary work, seasonal jobs, or marginal self-employment, while public servants have comfortable retirement benefits, regular promotions, health plans, and the assurance that their incomes will hold steady or increase, although they may be unproductive, sick, or holding a sinecure.
Government employees, even of high rank, may take full vacations, maternity leave, and allowed-days-off without worrying that their absence will negatively affect their chances for promotion.
Many government employees arrange a public service job for a spouse or relative, without the stigma of nepotism.
They also use their power to get employment in the private sector for relatives.
At the highest levels, American citizens working for the World Bank or International Monetary Fund, find they are free from U.S. income tax and can travel the world first-class, staying at five-star hotels, enjoying the high life, with all doors open and diplomatic immunity from traffic tickets and other annoyances.
Those in positions of particular clout, with knowledge of purchasing procedures or complex rules they themselves may have written, can take leave and top off their wealth in the private sector, cashing in on contacts and inside knowledge.
Fringe Benefits For The Elite
Millions of government employees are union members and have mortgages on special terms and discounts on everything from vacation travel to shipping services.
Upper level public servants attend a string of banquets and feasts at luxury resorts, masked as seminars, educational programs, symposiums, conferences, workshops, and meetings on the topic of the hour.
State department employees can import low cost domestic servants, arranging work visas not available to the less fortunate masses.
American government is run by a powerful, entrenched privileged class.
Members of the legislative branch are no longer the part-time, short-term legislators of early days of the republic, eager to get home to tend the farm.
Today's legislators are full-time, political careerists – sometimes scions of political dynasties extending back for generations.
The people who run American government are a powerful, entrenched privileged class, as secure in their status as European nobility in the 18th century.
Franklin Roosevelt referred to traditional capitalists as 'economic royalists'.
Seventy years later that term could be more aptly applied to the hoards of public servants that he nurtured.
The Bureaucrats' Wedding
Like Kipling's 'colonel's lady and Judy O'Grady', hired-managers that control giant American corporations and the public servants that run the government bureaucracy, are comrades under the skin.
At various levels, there is a revolving door through which corporate and public executives switch jobs and share wealth and power.
The SEC recruits law and accounting graduates who work for a few years as securities regulators before leaving for jobs advising corporations on how to get what they want without breaking the rules.
Executives in the Defense Department accept positions as government contractors.
The wedding of private and public bureacrats explains why corporate managers take shareholders' money with impunity.
Government officials are unlikely to crack down on the excesses of hired corporate managers when they themselves hope someday to be on the other side, cashing in.
The wedding of private and public bureaucrats explains why corporate managers have been able to take shareholders' money with impunity.
A high-level public servant can hope to become a multimillionaire as an executive in a large corporation, using stock options, buybacks, and other schemes to divert shareholder assets.
Corporations lobby to avert the gaze of regulators from their unseemly behavior and later give jobs and riches to those who do so.
Bureaucrats and Profits
Like the giant plant from outer space in the movie, 'Little Shop of Horrors', bureaucrats focus on their means of sustenance.
The motto that could be on the wall of every government office is, 'Feed Me!'
The prime motivation of government as the main corporate stakeholder is to protect corporate income to ensure continuity of taxes.
The objective is to increase tax receipts without killing the geese that lay the golden eggs.
While railing against big business for public consumption, the government is happy to use corporations as tax collectors, automatically taking tribute from the paychecks and grocery bills of the people.
In return, corporations pay a shrinking share of income tax.
Effective corporate income taxes have been falling steadily for fifty years, as shown here:
Share of U.S. Income Taxes Paid by Corporations and Individuals |
|||||||
|
1940 |
1950 |
1960 |
1970 |
1980 |
1990 |
2000 |
| Individuals | 42.9 % |
60.3 % |
65.4 % |
73.4 % |
79.1 % |
83.3 % |
83.1 % |
| Corporations | 57.1 % |
39.7 % |
34.6 % |
26.6 % |
20.9 % |
16.7 % |
16.9 % |
Source: President's Report to Congress 2000 |
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Starving With A Tiger
Throughout the period 1950-1990, both government income and household disposable income increased at an annual rate of about eight percent.
Government is more willing to impose discomfort on the public than on its own class.
In the 1990s, when President Clinton tried to balance the federal budget without reducing the government payroll, household disposable income was increasing 5.2% a year, while federal government income expanded at 6.6%.
The government was more willing to impose discomfort on the public than on its own privileged class.
As the adage from Walt Kelley's Pogo of the 1950s stated,
'When you starve to death with a tiger, the tiger starves last.'
Today, the government is the tiger.
Tax Collectors And Puffy Profits
The insatiable craving of the government for income is one reason that securities market regulators have accepted corporate profits as reported, rather than dissuading companies from marking up earnings.
Low corporate earnings mean lower taxes and less impressive bragging numbers for politicians.
High corporate profits help to justify high stock prices that generate capital gains taxes and create an illusion of wealth that lets citizens feel good while overlooking government excess.
The need of government bureaucrats to inflate corporate profits for tax and political reasons coincides with the interests of corporate hired managers who expect to become rich through stock options.
The Great Hidden Tax
Increasing direct taxation is just one way government imposes a financial load on American households.
Debasement of the currency has long been a sovereign financial trick.
In the Age of Gold, it was difficult to hide currency debasement, since even an unlettered citizen could understand what it meant to clip the edges of coins, mix other metals with gold, or substitute paper for rare metal.
However, since the U.S. went off the gold standard in the 1970s, the public has depended on government statistics to know whether money is worth less.
It is to the bureaucrats' advantage that the craft of calculating Consumer Price Indices is mysterious and controversial.
No one can say for sure what the figures should be.
The cost of inflation for Americans is greater than the income tax.
Even seemingly mild inflation, such as the 3.4% increase in the Consumer Price Index in 2000, represents a brutal levy on the financial assets of the American people.
In the first quarter of 2000, financial assets of households and nonprofit organizations totaled $35.5 trillion.
The 3.4% inflation represented an annual loss of $1.2 trillion dollars to American households.
This is one hundred twenty six percent of the amount that individuals paid in federal income taxes in 2000.
As this massive erosion of values was occurring, the Federal Reserve was crowing its success in keeping down the cost of living.
Inflation and Investment
The perception of inflation is fundamental to the motivation of issuers and investors.
Long-term lending and life insurance dries up when inflation reaches a certain point, while the market moves towards real estate and equity.
Historically, the role of every government has been to deny or lie about inflation.
It is up to the investor to find out what is happening.
In 1912, the economist, Ludwig von Mises, described the sociology of inflation:
In the early stages of inflation only a few people discern what is going on, manage their business affairs in accordance with this insight, and deliberately aim at reaping inflation gains.
The overwhelming majority are too dull to grasp a correct interpretation of the situation. They go on in the routine they acquired in non-inflationary periods. …
The ignorance of the public is the indispensable basis for inflationary policy.
(The Theory of Money and Credit, Dr. Ludwig von Mises, Chapter 21, 1912 )
In the United States, in the year 2000, the government understated inflation by an unknown amount.
Like improved productivity and technological innovation, zero inflation does not mean happiness.
However, ignorance of currency debasement can have devastating results on an investor's future lifestyle.
Living With Inflation
American inflation is low enough to escape attention, when household financial assets are so great that even a small chisel takes away huge amounts.
During the 1960s and 1970s, I spent twenty-three productive and happy years running businesses in Brazil during a period in which the increase in consumer prices was never less than twenty percent.
- Everybody knew about the endemic inflation and managed their lives accordingly.
- The Brazilians had become experts in surviving and prospering despite monetary debasement.
As long as one knows what is going on, there are ways to adjust and even profit.
Protection against inflation can be achieved by using non-indexed loans to buy real assets.
Of course, when everybody knows this, non-indexed loans disappear and investors must seek more subtle defenses.
Investment grade common stock, if cheap enough, can offer protection, as can investment grade bonds, if yield is high enough and if the issuer adjusts the principal for inflation.
Home ownership provides most Americans with some protection against inflation, although property taxes, the expense of frequent job transfers, and rising maintenance costs lessen the effectiveness of this strategy.
The Narcotic Of 'Total Returns'
With mutual fund values increasing twenty to thirty percent a year during the 1990s, Americans forgot that inflation was a threat.
If the increase in stock prices had been accompanied by stable price-earnings ratios and if dividends had exceeded yields on bonds, the millennium would have arrived with little need to worry.
However, stock prices rose because executives manipulated reported profits and created a shortage of stocks through buybacks. Prices increased much faster than intrinsic value.
An essential part of the government's Mantra of the Virtuous Circle was the claim of low inflation.
If inflation was 'under control' as the Federal Reserve claimed, the public might not realize that the hidden inflationary burden of Big Government surpassed the income tax.
However, by examining the consumer price index, we find that the government had jimmied the numbers to mislead the public.
A description of how the government fiddles the Consumer Price Index is covered at length in a separate essay.
Full Employment: A Worthy Goal?
Full employment is generally accepted as a worthy goal.
However, we should ask, what kind of employment?
- How many people are happy in their jobs?
- Is a society better when ninety-five percent of the people slave as sharecroppers, or when fifty percent have factory jobs and can support a spouse at home who raises the children?
- Are less-educated Americans better off when they had highly productive factory jobs, or when employment can only be found in the service sector?
Misuse of macro-economic indicators is the cause of the bizarre contradiction in President Clinton's Economic Report to Congress in 2000, in which the benchmarks heralded by government economists indicated the best of times, while social measures in the same report presented a picture of social decay:
U.S. Employment Trends |
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| 1960 |
1970 |
1980 |
1990 |
1999 |
|
U.S. Employed (Millions) |
180.7 |
205.0 |
227.7 |
249.9 |
273.1 |
Percentage of Population Employed. |
36.3% |
27.5% |
43.6% |
47.4% |
48.8% |
Population Working Relative to 1960 |
100% |
75% |
120% |
130% |
134% |
Unemployment |
2.1% |
1.9% |
3.3% |
2.8% |
2.1% |
Source: President's Report to Congress 2000 |
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Because of deindustrialization, more members of the American household must work for wages than in mid-twentieth century.
However, unemployment has not changed, showing that lower paid service jobs have been plentiful.
What Productivity Gains?
With a greater percentage of Americans working than fifty years ago and with the vaunted productivity gains of the Virtuous Circle, we would expect substantial increases in Gross Domestic Product per capita.
To measure progress, the GDP must be adjusted for inflation and again for the increased percentage of paid workers.
The next tables shows U.S. per capita GDP, adjusted for inflation and the increased working population.
There was distinct progress in economic output during the sixties.
However, real output on a per capita basis has shown less improvement thereafter.
U.S. GDP Per Capita, Adjusted |
|||||
| 1960 |
1970 |
1980 |
1990 |
1999 |
|
U.S. GDP Per Capita (Deflated) |
$ 9,111 |
$ 12,688 |
$ 15,944 |
$ 19,967 |
$ 23,310 |
Deflated GDP Per Capita, Adjusted for Increased Working Population |
$ 9,111 |
$ 16,917 |
$ 13,286 |
$ 15,359 |
$ 17,395 |
Source: Presidents Report to Congress 2000 |
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The Widening Wealth Gap
Economic policies during the 1980s and 1990s resulted in a widening gap between rich and poor.
Since we know that incomes are highly concentrated in the upper quintile of society, it is clear that the per capita share of GDP for most Americans fell after the Baby Boomers came to power.
However, when we consider how the GDP is calculated, claims of government economists having found the Virtuous Circle are open to further dispute.
The way that government economists and politicians use GDP statistics to fake progress is discussed in a separate essay.
In terms of the well-being, deindustrialization has been a heavy burden for most Americans, forcing more people to work at lower real wages.
However, economists who tout the Gross Domestic Product as a surrogate for improved living standards use GDP growth to conceal the long-term stagnation in American economic progress.
Undoubtedly, further increases in monetary wages due to postponement of retirement by those who lost their savings in the Crash of 2000 will further boost this spurious measure of improvement.
Layered Motivation
In this series of essays, we examine the motives of the principal stakeholders that determine corporate actions in the capital market – management and government.
The importance and motivation of each of these groups is evolving and changing.
We have shown that there is a difference in the motivation of owner-managers and hired executives.
Investors' motives also change, depending on whether they have a controlling interest or not.
Government motivation regarding corporations is to create an efficient ally in collecting taxes.
Retirement and mutual funds have supplanted individual investors and often have impaired understanding of their fiduciary duties.
Finally, government is the ultimate interested party in corporate behavior and political motivation is changing.
Government officials and employees of all stripes share the common goal of enhancing the funding and permanency of the civil service bureaucracy.
Consequently, over the last fifty years, as the corporate efficiency as tax collectors has increased, the share of income taxes paid by corporations has fallen.
Our skeptical interpretation of some widely touted measures of economic performance contrasts with the extreme optimism that has molded common stock valuation in recent decades.
The primary motivation of government with regards to corporation now seems to be simply that of harnessing an efficient ally in the collection of taxes.
