The free market is failing us

The Thinker by Rodin

Are you feeling freer yet? From all the free market stuff happening, I mean.

What I’ve been noticing – and what you are probably noticing too – are all the vacant storefronts. Retailing must be in recession.

We have a tiny mall across the river from us. I was in there the other day looking for Christmas presents. It was in sad shape. It still has a couple of anchor stores: a JC Penny and a Target, but inside there were a lot of spaces for rent.

It’s similar in the little downtown in our city of 30,000. When we arrived four years ago, it was vibrant. It’s doing better than some but now there are plenty of storefronts to rent on what should be prime property: Main Street.

It’s not entirely bleak. Despite these empty storefronts, I still see a new small shopping plaza go up now and then. What’s going in though is not so much retail as mixed businesses: doctors offices, restaurants and maybe a fitness center. Increasingly, if I need to buy something I can’t get it locally, so I have to go online. I’d really prefer not to, but increasingly if I do want to buy it at a brick-and-mortar store, I have to drive twenty miles or so to Holyoke. Our local Staples went out of business. A Petco opened across the river at the mall and closed a couple of months later. Our local Walmart looks anemic. Here in Massachusetts, one of the few growth retail businesses is Dunkin Donuts. Apparently we can’t have enough of them.

Our city is at least trying to keep a local economy vibrant. Chain stores are fairly rare around here. We have one Starbucks downtown, but otherwise all our restaurants are local. There are local hardware stores, mainly because few want to cross the river to Hadley to go to the Home Depot or Lowes over there. While there are plenty of Dunkins, we don’t have a Wendy’s, and just one McDonald’s and Burger King on the north side of town. The reason these chains largely avoid us is probably that it doesn’t make economic sense: our market is too small and too far away. We have too few customers and too much hassle to truck stuff in, I’m guessing.

Another sign of the retail times: Amazon put up a new warehouse in Holyoke. It’s probably stocked by now, which means they probably have hired legions of employees at $15/hour to fulfill orders twenty four hours a day. Amazon pushes these people to crazy levels of productivity. They can walk nine miles or more day pulling stuff out of bins and they get metered to make sure they don’t take too many bathroom breaks. They might as well be cattle. They may get treated worse than cattle. Also new: Amazon trucks are making deliveries to the home. A couple of months ago, I never saw an Amazon truck.

Our area is trying to keep a local banking sector, with some modest success. The success is because they had one before the big banks arrived, but it’s not too hard to find a vacant bank storefront. Community banks are clearly suffering but fortunately seem to still dominate the local mega banks here. There is one Bank of America downtown, but they apparently don’t care about the local villages.

I confess I am part of the trend. While I’d like to set up an account at a local community bank, I can’t justify it. Online banks like the one I use, Ally, can offer us a much better deal because they don’t have expense of storefronts. We will get more than 2% interest on a CD at Ally. No community bank around here can compete with that. I also never changed my credit union, which recently offered a deal too good to pass up, though they are 400 miles away. I now get 2% cash back on my purchases, and no annual fee for their card. No local bank can match that either.

We are lucky though to have community banks. In many communities, they are gone. Back where we used to live in Northern Virginia, they were pretty much gone. There was a Citibank or Bank of America store every couple of miles or so, and if not a storefront, at least one of their ATMs. And you paid for the privilege with misery interest rates and plenty of creative fees.

Community banks at least tend to keep the money local, helping to stimulate the local economy. I’m sure Bank of America makes loans locally, but the profits don’t tend to stay in the area. They go to shareholders, or to inflated salaries. During the last recession, it was the big banks that tended to be most vulnerable, mostly because they were the most exposed. They held lots of toxic assets. Pushing those dubious home loans increased their profits in the short term, but when the recession hit it pushed them toward insolvency. Judged too big to fail, Uncle Sam largely bailed them out, letting them keep their short term profits while pushing the long term costs for their risky behavior onto taxpayers. There is every indication that we’ll see this scenario play out yet again in 2020 or 2021.

What I see is not so much competition as consolidation. I see lots of monopolies. I have no choice with my ISP, so it’s Comcast, unless I and a group of citizens can convince our city to create a municipal network. We pay Comcast close to $100 a month for 300 mbps download to the home. Airlines consolidate and raise prices. Entertainment companies consolidate and do the same thing. We saw a movie yesterday at the local Cinemark. We were assaulted but what felt like endless commercials before the movie, including three clips of popcorn popping and Coke fizzing. Need a potty break? They are playing in the restroom too.

These days, you buy out your competition while setting higher barriers for new entrants into these markets. The result is not really more efficiency, but a whole lot less competition, which makes these companies fat and sloppy. If they excel in anything it’s in buying out the competition and paying their employees poorly. Where else are they going to go? Their competition doesn’t largely exist anymore.

To me the worst of these is not Amazon, but ride sharing services Uber and Lyft. They represent everything that is wrong with our “free market” today. Their “innovation” was to sidestep regulators entirely, creating facts-on-the-ground of independent contractor drivers. Yes, it lowered fares, but it’s clear now that they are doing it by cheating their drivers, who largely don’t understand they are working for negative wages when you factor in the depreciation on their cars. Oh, and if you are a female passenger, you stand a decent change of sexual assault. Uber reported more than three thousand sexual assaults in 2018.

What we needed but don’t have is some sort of regulatory authority to decide whether these businesses should be allowed to start up in the first place. Uber and Lyft have, in effect, bypassed our wage and hour laws. In many areas of the country, you can’t get a taxi anymore. You must use Uber or Lyft if you don’t have a car.

What all this proves to me is that money talks. It gets us an oligarchy that is clearly in charge, at least at the federal level. For the rest of us, it just squeezes us more. It’s a new gilded age where only those with money get to profit. The rest of us are just lemon for the squeezing.

Monetary policy and the danger of revolution

The Thinker by Rodin

My recent post on quantum computing and its impact on cyber currencies like BitCoin have taken me exploring the world of money some more. This exploration took me to this video, which discusses who controls money and how it is created.

I think this video is meant to be shocking. Most of us are painfully aware of how important money is, because we cannot survive without it. While vital, money is also completely abstract. We like to think money is a form of permanent liquid value. This video points out the “shocking” fact that money is not this and that it is created almost universally by central banks, the Federal Reserve in the case of the United States.

As you get on in the video, you also learn that banks create money when they issue loans. If you were hoping to trade in your dollars for gold bullion, those days are gone. President Nixon turned the U.S. dollar into a fiat currency. This essentially means that the dollar has value because the government says it does. If it’s backed up by anything, it’s backed up by your faith that our government can manage money intelligently.

But really, the only ones managing money is the Federal Reserve, since they are the sole suppliers of money. The degree to which the Fed controls the spigot of money generally determines the health of the economy. Quantitative easing, which the Fed (and other central banks) have been doing since the Great Recession is basically the creation of lots of money which are then used to buy assets. Doing this helped pick up the economy and over many years took us out of recession.

So one might extrapolate that it’s not how much money that gets printed that is important, but how frequently it gets circulated. If circulated a lot, the production of goods and services continues apace. If it gets circulated too much, you end up with inflation, which means the same money buys fewer goods and services. If it’s not circulated enough, you may end up with deflation, which seems worse than inflation, in that the same money tomorrow buys more than it will today. In a deflationary environment, you would rather hold onto money than spend it, and that tends to stifle economic activity.

Lots of people like Ron Paul don’t like the way money actually works, which is why they would prefer the dollar be based on a gold standard, or some standard which equates a dollar to some amount of something precious. These people are probably economic Don Quixotes chasing electronic money windmills that may have existed at one time but which are probably gone for good. They look for impartial standards of value instead, which is why they turn dollars into BitCoin and similar electronic currencies.

The video says that central banks, being run by bankers, are a system that essentially pumps money from the lower classes to the upper classes. There’s a lot of recent evidence that they are right, as our middle class seems to be disappearing. Americans owe a lot more than they used to and in general earn a lot less in real wages than they used to. It used to be that wage increases followed productivity increases, but for decades that has not been the case. Today, the level of personal debt is staggering. Without meaningful raises, it gets harder and harder to pay off debt or do things we used to take for granted, like buy cars and homes. The Uber/Lyft phenomenon may be in part a reaction to these new facts of life.

Something ought to be done. In part, Donald Trump’s election was due to these economic anxieties. Trump was going to be our fixer to these various problems by bulldozing his way through all obstacles. Of course, he has done just the opposite. There is more than $1 trillion in outstanding student loan debt, but Trump’s education secretary Betsy DuBois is actually making it harder for people to pay off their student debts, and is promoting pricey private education at the expense of relatively affordable public education. So Trump is turning the screws even tighter on the working class.

Democratic presidential candidates have all sorts of ideas for addressing these problems. My senator, Elizabeth Warren, is distinguishing herself by having the most comprehensive set of policies for addressing these issues, including a lot of student loan debt forgiveness. All these policies though are basically ways of trying to solve the fundamental problem of more of our wealth going to the wealthiest and to put more money into those who need it the most. They all depend on redistribution of income from the wealthy toward the poor.

This “socialism” of course has the wealthy up in arms, since maintaining and increasing their wealth is all they seem to care about. So they are dead set against any of these ideas. Based on how our money supply works though, all this will do is keep pushing more of the wealth toward the wealthy.

It makes me wonder how all of this economic anxiety ends. And that gets me to figuring out what money really means. Money is essentially a social compact for the exchange of wealth, and whoever sets the rules controls the flow of wealth. The Fed is essentially accountable to no one. At best, all you can do is wait for someone’s term to expire. Trump’s inability to get people like Herman Cain on the Fed speaks to Republicans true values: they want the Fed to be populated with people that think like them, and that’s not Herman Cain. He’s too out of the mainstream.

To cut to the chase, the real threat to the wealthy is revolution. That’s exactly what happens if you screw the working class for too long. Revolution is upsetting the whole apple cart and starting over because the system is fundamentally broken and cannot be fixed. I believe this is the root of the partisan tensions we see these days. It’s not about value, or whether you are white or not; it’s about money and who gets to control it and how it should be distributed and used. Revolution though is very dangerous. It brings severe economic disruption, likely civil war, complete upheaval and a fundamental reordering of society. Hopefully when it is over the new system is more fare, but as we watch these things play out in places like Brazil it doesn’t look like that’s likely.

Ideally, rich Americans would understand that giving more back to society is in their interest. Sucking ever more wealth from the lower classes exacerbates tensions and increases the likelihood of revolution. They don’t seem to believe it though, and want to maintain control of the levers of power. If they succeed they will likely bring about the real revolution that will destroy their wealth, because wealth is predicated on connected economic systems that work. Unfortunately, the rich seem to be deliberately tone deaf, increasing the likelihood of the exact outcome they fear the most. Should it occur, BitCoin is not going to save them.

As billionaire Nick Hanauer puts it, the pitchforks are coming.