Tag Archives: economy

Business leaders are going John Galt

ANDREW ABELA writes that in today’s difficult and over-regulated economy, many business leaders are dropping out of the marketplace–to the detriment of the entire economy. He suggests that business leaders engage rather than retreat by helping young and upcoming entrepreneurs learn to navigate today’s challenging business climate . . .

Andrew Abela

Andrew Abela

There’s a growing, disturbing phenomenon among business leaders and entrepreneurs. Perhaps you’ve noticed it among some of your acquaintances; perhaps you’ve even been tempted by it yourself.

The phenomenon is called “going John Galt,” named after a leading character in Ayn Rand’s novel Atlas Shrugged. Fed up with the socialistic world he’s living in, Galt decides to leave and encourages numerous other entrepreneurs to follow him. As a result, the economy more or less grinds to a halt.

At Legatus chapter meetings across the country where I’ve been speaking — and with individual and groups of Catholic entrepreneurs and business leaders who visit us at the Catholic University of America — I’m meeting more and more people who are basically just walking away. Whether because they have had enough of fighting the EPA over every aspect of their business or they are concerned about going to jail because they didn’t comply with the umpteenth new regulation this week, they believe that the fun and sense of accomplishment in building a business is being sucked away by big government.

Blogger David McElroy posted a real life example of this from a hearing on environmental issues in Birmingham, Ala. At one point, a man stepped up to the microphone:

“My name’s Ronnie Bryant, and I’m a mine operator. I’ve been issued a [state] permit in the recent past for [waste water] discharge, and after standing in this room today listening to the comments being made by the people…. [pause] Nearly every day without fail — I have a different perspective — men stream to these [mining] operations looking for work in Walker County. They can’t pay their mortgage. They can’t pay their car note. They can’t feed their families.

“And as I stand here today, I just … you know … what’s the use? I got a permit to open up an underground coal mine that would employ probably 125 people. They’d be paid wages from $50,000 to $150,000 a year. We would consume probably $50 million to $60 million in consumables a year, putting more men to work. And my only idea today is to go home…. If there’s so much opposition to these guys making a living, I feel like there’s no need in me putting out the effort to provide work for them. So as I stood against the wall here today, basically what I’ve decided is not to open the mine. I’m just quitting. Thank you.”

The implications of business leaders “going John Galt” are obvious and dire: declining competitiveness, decaying economic dynamism, and lack of employment growth. Pope John Paul II, in Sollicitudo Rei Socialis, wrote that “experience shows us that the denial of this right [of economic initiative], or its limitation in the name of an alleged ‘equality’ of everyone in society, diminishes, or in practice absolutely destroys the spirit of initiative” (#15).

Pope Benedict XVI affirmed in Deus Caritas Est that “the State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person — every person — needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces” (#28).

Earlier this year, CUA created its own School of Business and Economics. One of the major motivators in creating the School is the urgent need to re-propose to society that business is a moral endeavor, that business leaders serve society by their very actions of creating products and services, wealth and employment.

How can you help? By doing whatever you can to educate others on the value and values of ownership. Do you have a successful business model? If so, have you considered franchising as a way to grow your business without additional capital investment on your part — and as a way to help others become business owners? Do you have an Employee Stock Ownership Program (ESOP) so that your employees can become owners too? Have you considered “spinning out” parts of your business by selling ownership stakes to the management teams that run them?

The greater the proportion of citizens who are owners and investors, the less ability others have to vilify the business economy. The more people who understand how a culture of ownership brings political and economic stability, the less temptation there will be to attack business, and hopefully the less of a tendency to “go John Galt.”

ANDREW V. ABELA, Ph.D. is the dean of the newly created School of Business & Economics at The Catholic University of America, and a charter member of Legatus’ Northern Virginia Chapter.

What we still haven’t learned from the financial crisis

Dr. Sam Gregg argues that as time passes, armies of doctoral students will explore every nook and cranny of the ’08 meltdown. But if most governments’ policy responses are any guide, it’s apparent that many lessons from the financial crisis are escaping policymakers’ attention. He gives five important lessons policymakers should take note of . . .

Dr. Sam Gregg

Dr. Sam Gregg

It’s been more than a year now since the 2008 financial crisis spread havoc throughout the global economy. Dozens of books have attempted to explain what went wrong. They identify culprits ranging from Wall Street financiers to ACORN and politicians.

As time passes, armies of doctoral students will explore every nook and cranny of the ’08 meltdown. But if most governments’ policy responses to the crisis are any guide, it’s apparent that many lessons from the financial crisis are escaping policymakers’ attention. Here are just five of them:

The moral hazard issue. The message conveyed to business by many governments’ reactions to the financial crisis is this: If you are big enough (or enjoy extensive connections with influential politicians) and behave irresponsibly, you have a reasonable expectation that governments will shield you from the consequences of your actions. What other message could businesses such as AIG, Citigroup and Bank of America have possibly received from all the bailouts and virtual nationalizations?

Big government. Once you allow governments to increase their involvement in the economy to address a crisis, it is extremely difficult to wind back that involvement. Indeed, the exact opposite usually occurs.

Who today remembers the stimulus and bailout packages so heatedly debated in late 2008? They pale next to the fiscal excesses of American governments throughout 2009. Recessions and subsequent government interventions create an atmosphere in which the hitherto implausible — such as trillion-dollar 1,900-pages-long health care legislation in an era of record deficits — becomes thinkable. Likewise, the Bush administration’s Chrysler and GM bailout morphed into the Obama administration’s virtual appropriation of the same two companies.

Negative complications. We seem unwilling to accept that government policies initially presented to us as the only thing standing between stability and economic Armageddon invariably have unforeseen negative consequences that are not easily resolved.

FDIC chairman Sheila Bair recently claimed, for example, that the American government’s decision to purchase capital in failing banks was, in retrospect, a mistake. Not only has government semiownership further complicated the moral hazard problem, but it has created dilemmas that flow directly from the fact of government intervention. “Do we contain the bonuses and the compensation,” Bair asked, “because they are partially taxpayer owned, which might make things worse because they can’t bring in new and better management, which in some cases might be necessary?”

The knowledge predicament. Today there is widespread acknowledgement that the 2008 financial crisis owed much to the Federal Reserve keeping interest rates too low for too long. Yet we persist in imagining that a group of people — the Fed’s seven governors — can somehow manage the credit and monetary environment of what was a $14.4 trillion economy in 2008 in pursuit of often mutually-exclusive goals: stable prices, optimal employment and moderate long-term interest rates.

Fiduciary responsibility. We’re reluctant to acknowledge how much the financial crisis reflects the breakdown of concepts of fiduciary responsibility — the moral and legal obligations that someone acquires when entrusted with another person’s resources. Many CEOs have been rightly pilloried for their failures. But what, for example, of those boards of directors who presided over fiascos such as Lehman Brothers and the 147 American banks that failed between January 2008 and November 2009?

Why were board directors not asking questions about a bank’s heavy reliance for its profits upon the alchemy of mortgage-based securities and other financial products that no one apparently could understand? Why did they not query reports advising that particular investment models could mathematically fail only once in a million years? Why did boards only take action to replace fund managers when companies were teetering on bankruptcy? Why did some directors imagine that a firm’s generation of quarterly profits was sufficient indication that they were fulfilling their fiduciary responsibilities?

Of course, it’s usually counterproductive for directors to immerse themselves in the micro-details of a firm’s operations. But it is part of their fiduciary obligation to investors to question company employees and take action when the answers are not forthcoming or unsatisfactory. Indeed it’s more than a fiduciary responsibility: It’s the moral duty of anyone placed in a position of stewardship of others’ resources.

But perhaps my bigger fear is that these developments suggest that America is slowly but surely moving towards what the great French philosopher Alexis de Tocqueville called “soft despotism” — a Faustian bargain between the political class and the citizens. Tocqueville predicted that “an immense protective power” might assume all responsibility for everyone’s happiness — provided this power remained “sole agent and judge of it.” This power would “resemble parental authority” and attempt to keep people “in perpetual childhood” by relieving them “from all the trouble of thinking and all the cares of living.”

Is America on the road to comfortable servility? “The American Republic,” Tocqueville wrote, “will endure until the day Congress discovers that it can bribe the public with the public’s money.”

One measure of a society’s inner strength is its willingness to learn from mistakes and alter behavior appropriately. Sadly, in America’s case, the 2008 financial crisis’ long-term significance may be its illustration of how unwilling to learn we seem to be.

Dr. Samuel Gregg is research director at the Acton Institute. He has authored several books including “On Ordered Liberty” and his prizewinning “The Commercial Society.” His latest book, “Wilhelm Röpke’s Political Economy,” has just been published.

The risk of repetition without repentence

John Dalla Costa writes that an unsettling revelation attending the current global financial crisis is that some of those who structured the most problematic credit derivatives that put the economy in jeopardy were alumni of Enron. Additionally, some CEOs in the financial sector are pushing back on demands for better regulation and more moderate compensation. . .

John Dalla Costa

John Dalla Costa

Among the many unsettling revelations attending the current global financial crisis is that some of the traders who structured the most problematic credit derivatives that put the whole economy in jeopardy were alumni of Enron. Rather than learn lessons about the excesses of the dot-com boom, investment banks and insurance companies readily employed what one author famously called “the smartest guys in the room.”

Economists tell us that markets are cyclical and that busts or failures are part of the self-correcting mechanism of self-interest writ large. But that pattern may itself be more of an excuse than inevitability. One study of cycles shows that the frequency of crisis has in fact accelerated and that each successive wave wreaks significantly more damage.

Some of us will remember the scandal-plagued failure of junk bond innovator Drexel Burnham in the late 1980s. But few will know that the person at the center of AIG’s current debacle (and until recently head of its U.K. derivatives business) was one of the swashbucklers from long-deposed Drexel Burnham. In effect, the business meltdown now causing so much grief to investors, workers and communities is not a distinct event but part of a continuity of malfeasance. Our failure to learn history’s lessons means more than risking the repeat of its excesses. In fact, our forgetting, amplified by technology and intensified by globalization, begets ethical failures that are ever wider in scope and graver in their impact on society.

How can this be? Why are we so willing to quickly adopt technological or knowledge innovations to reduce risk, while resisting the prudence and moral care that are in fact intrinsic to stability and fairness? We know from long experience with business ethics that great mistakes by boards or CEOs rarely come from intentionally choosing to do the wrong thing. While the press and public look for sinister subterfuges or high profile scapegoats, the reality is that business leaders in the middle of ethical storms are often not only accomplished in their field, but of responsible personal reputation. The mystery that deserves serious scrutiny is not that a “few bad apples” disregard the rules, but that so many that we would generally regard as “good persons” also lose sense of ethical proportion or decency.

Experts have coined terms like “group think” to explain the momentum of expedience that opens the way for mass amorality, but this psychological model tends to let us all off the hook too easily. One report of a recent national meeting of mainstream economists observed little-to-no self-critical analysis. Session topics included some admission that the profession had made mistakes, but the general assumption of presenters and participants was that models, not people, were to blame.

Similarly, some CEOs in the financial sector have now begun to push back on public demands for better regulation and more temperate compensation, essentially disregarding that their companies had off-loaded the moral hazard from their practices onto the public — which has so far spent hundreds of billions of dollars bailing them out. Such resistance to explore personal culpability in the face of the greatest financial calamity in 70 years means that we may already be planting the seeds for future irresponsibility.

The Jesuit theologian Bernard Lonergan recognized that the group thinking that led to a moral breakdown could not in itself resolve the problems it created. Lonergan explained that only conversion could release the human heart and mind from what he called “the bias of common sense.” As it has throughout Christian history, such conversion hinges on a confessional moment of recognizing one’s inadequacy before God.

Importantly, this sacramental moment is not to wallow in guilt, but rather to resume our relationship with holiness — to recognize our human frailty and needs, to take responsibility for what is broken in our souls or society, and to welcome the grace that is the ultimate resource for hope and renewal. Repentance is a sacrament for this reason: It frees us by God’s love from the “habitual imperfections” that otherwise keep us locked in the prison of repetitive disregard for what is right.

Catholic business people have as their vocation that extra duty to bring an imagination for repentance and reconciliation to their workday responsibilities. As Jesus taught about prayer and fasting, this need not be a public display of piety. The charge, instead, is for daily internal prayer that transforms one’s daily external actions.

Saints have taught us to pray on waking so as to discern the terms of God’s call or will in the day ahead. They remind us to withdraw from busy activity during the day, if only for a few seconds, to recall the close proximity of Jesus walking with us. And many saints modeled an evening prayer based on examination of conscience, to tally the gifts of the day we have offered to God, and to see patterns where we missed heeding the moral need of moments or situations we encountered. Recent events show that we cannot bring ethics in business up to the challenge of systemic impropriety without changing the system that denies personal responsibility. Confession is a creative act, without which we paradoxically remain in repetitive destruction.

John Dalla Costa is funding director of the Centre for Ethical Orientation, a Toronto-based consultancy providing ethics, governance and integrity services. He is the author of five management books.

A way out of the economic crisis

Thomas E. Woods Jr: Stimulus spending raids the private sector for money-losing ventures. . .

Thomas E. Woods Jr.

Thomas E. Woods

For years, the authorities told us everything was fine. Former Treasury secretary Hank Paulson said the world economy was in the most robust shape he had ever seen it. There was no housing bubble, said the Federal Reserve’s economists; rising housing prices were the result of real factors and more or less sustainable. Those who warned that much of the apparent prosperity was illusory and that a crash was inevitable were laughed at and dismissed.

It’s impossible to devise a way out of the economic crisis without first understanding how it occurred. Our policymakers, none of whom saw it coming, have no idea what caused it. Most of their proposals, as a result, have involved treating symptoms rather than addressing root causes.

This article is an extremely truncated look at the causes and solutions to this crisis. My new book Meltdown explains all this, in layman’s terms, at greater length. I intended it as an antidote to the atrocious economic advice we’re hearing from those who claim the free market has failed and that our wise rulers must rescue us.

The housing boom and bust is directly attributable to the Federal Reserve System, which is not a part of the free market. Created by Congress, the Fed enjoys government-granted monopoly privileges without which it would be nothing. Without the Fed, banks would have run out of loanable funds when the public demanded an abnormal number of homes. Interest rates would have shot up, thereby ending speculation in real estate. The Fed made sure this healthy process did not occur. The bubble and its madly inflated prices continued onward.

F.A. Hayek, who belonged to the Austrian school of economic thought, won the Nobel Prize in economics for showing how interventions by a central bank (like the Fed) into the economy create only apparent prosperity instead of real growth. This phony prosperity has to end in a bust. Note the implication of Hayek’s argument: It’s not the free market but intervention into the free market that causes the problem.

Instead of coordinating production across time, interest rates tampered with by the Fed become the source of discoordination. Investors begin projects that will not, in the aggregate, all be able to be profitably completed. Consumers, meanwhile, misled into thinking themselves wealthier than they really are (they were sitting on a forever-appreciating $500,000 house, right?), go on spending binges that later catch up with them, and that they would not have engaged in if the Fed had stayed out of the economy and allowed them to see their true financial condition clearly.

The market needs to be left alone to sort out which of the activities funded during the bubble years is a genuine, wealth-generating activity, and which is a bubble activity that can survive only as long as the monetary spigots are flowing. For the sake of American prosperity, the latter activities need to be discontinued immediately.

Government refuses to allow this process to occur. “Stimulus” spending raids the private sector for funds to spend on money-losing ventures, thereby weakening the wealth generation process. (If they weren’t moneylosing, private firms would be engaging in them already.) And it interferes with the market’s attempt to reallocate resources rationally in the wake of an artificial boom.

Monetary stimulus — or, more bluntly, creating money out of thin air — is no better. That’s what caused the problem in the first place. Merely creating more of the medium of exchange cannot repair the real, structural problems in the economy caused by the artificial boom. It can only encourage further distortions and wealth destruction.

Japan got more than a decade of the economic doldrums thanks to its government’s disastrous program: eight stimulus packages, interest rates forced to zero, partial nationalization of the banking system, zombie companies propped up and bailed out. The list should sound familiar.

When the U.S. economy fell into depression in 1920, a depression whose first 12 months were worse than the first 12 months of the Great Depression, the federal government was largely passive. In fact, the federal budget was actually cut in the face of the depression (a course of action we’re told today would be disastrous), and the Fed, for its part, essentially stayed out. By the summer of 1921, recovery had already begun. That wasn’t supposed to happen, according to today’s economic orthodoxy.

Let failing firms go bankrupt so they can stop clogging the production process and their assets can be taken over by more competent actors. Forget monetary and fiscal stimulus. Let prices of all goods, housing included, go to wherever supply and demand converge; any other policy amounts to waging a war with reality — a war government is unlikely to win.

And stick to this program. The business community is so uncertain about future government policy that it’s no wonder so little long-term investment is going on. The same phenomenon plagued the country in the 1930s. According to economic historian Robert Higgs, businesses held back from investing because of what he calls “regime uncertainty,” a real concern about future government policy that could damage business profitability. Now that would be change we can believe in.

Thomas E. Woods Jr. is a senior fellow at the Ludwig von Mises Institute and the author of nine books, including “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.”

An election year thought

Throughout Advent, we hear the message loud and clear: “Prepare the way of the Lord!” The Church calls us to prepare our hearts for Christ’s coming — not just his coming as our Savior, born 2,000 years ago in Bethlehem — but for his coming anew into our hearts during Advent, for his second coming in glory, and for the moment we leave this life and see Him face-to-face.

But how do we prepare our hearts for Christ when we’re living with a difficult economy in a secular world that cares little or nothing for Judeo-Christian spirituality? Saint Augustine had some advice for us: “The times are bad! The times are troublesome!” This is what humans say. But we are our times. Let us live well and our times will be good. Such as we are, such are our times.

Augustine’s point is simple: Live your faith and you will be a bright light in dark times. But living our Catholic faith in the world seems to be getting more and more difficult, especially when many our fellow Catholics seem to have abandoned themselves to a secular worldview. In November, 54% of Catholics voted for the most radically pro-abortion presidential candidate in American history despite the urging of more than 50 bishops to support pro-life candidates. Among those who go to Mass every Sunday, however, Sen. John McCain captured 55% of the vote.

Exit polls indicate that even many faithful Catholics chose Presidentelect Barack Obama because they believe he can do a better job of rebuilding the American economy. What they failed to recognize at the voting booth is that Obama has promised to sign the Freedom of Choice Act (FOCA), legislation that would eliminate virtually every pro-life law and policy in the country. Funding limitations, informed consent, parental notification, clinic health/safety regulations, conscience protections for healthcare providers and hospitals — all would end under FOCA. Times are indeed difficult when even the faithful put the economy ahead of the lives of the unborn.

The new political climate requires that faithful Catholics be engaged like never before to demand that all human life be respected. Despite the tidal wave of new abortions that will follow his signing FOCA, President-elect Obama has pledged to help reduce the number of abortions and help women with unplanned pregnancies who choose to keep their babies. As one of my friends rightly stated: “He works for us now.” It’s our job to keep him accountable to the electorate.

It’s also our job to study, live and spread our faith. The Legatus mission has never been so relevant. The more we know our faith, the more we immerse ourselves in the wisdom of the Church, and the more we prepare a place in our hearts for the Lord, the bigger impact we will have on our families, our parishes, our communities, our nation and our world.

Patrick Novecosky is the editor of Legatus Magazine.