Sunday, March 15, 2009

Free Market Maxims II: Greed is Good

Or alternatively, “Altruism is Great…but is unsustainable…”

Although twisted in its ultimate objectives, Gordon Gekko’s memorable speech in the 1980’s thriller Wall Street resonated with this key Free Market Maxim.

Recent proposed tax hikes on the rich recommended by the Obama administration and the Pelosi-controlled Congress has been greeted with cheers – the Robin Hood mentality of society is starting to run amok.

Listen up America: we do not solve our economic problems by taxing the very people who are the engine to our economy. People who make over $250,000 are not evil wealth-hoarders – they are hard-working, thoughtful, innovative and self-motivated individuals just like each and every one of us - they have just have decided to take on a little initiative and a ton of risk. By taking on this risk, for mainly their own reward, they create employment for millions, tax revenues in the billions and grease the engine of this economy. All of a sudden, it has now become popular to vilify these individuals and these corporations.

So what if, every once in a while, these individuals decide to spend their hard-earned wealth and take a vacation. We should be delirious if they choose to fly first class, stay in fancy hotels, eat expensive food and drive nice cars. This may possibly irk us (who secretly wish we could do the same) but certainly the companies which receive these revenues and the employees earning their daily wage from these same companies are probably very thankful for this group's willingness to take on this risk and willingness to happily spend their profits! But now "our protectors", the Barney Franks and Harry Reids of the world, want to tell us that this is bad, that earning too much and spending money is a bad thing and thus, the wealthy are our enemy!

No one bothers to note that, when these "enemies of the state" are finished with their infrequent vacations, these risk-takers are often back in their offices (or steel mills or restaurants), working hard to identify and satisfy society's NEEDS and WANTS, continuing to give employment to many millions, and gladly paying a far greater percentage of tax dollars than most Americans. For this, our government rewards them by asking them to pay even more taxes.

One of the proposed tax hikes is a ceiling on deductions for charitable contributions. The proponents say that people will give regardless of the tax break they receive…an interesting theory - possible but highly unlikely. Without arguing with the proponents, just tell me this - wouldn't people give MORE if they get a tax break?

Oh no – the altruists say – people should give more without needing a tax break…well newsflash, these people have worked hard for their wealth and maybe a little encouragement doesn’t hurt. Don’t we want to encourage this greedy behavior which encourages larger charitable giving? Because the alternative – the belief that altruism is perpetually self-sustaining is simply naïve and has led to plenty of failed projects in the past, including Cuba, Eastern Europe and, of course, Russia.

Milton Friedman, hailed by the Economist magazine as “the most influential economist of the second half of the 20th century…possibly of all of it,” said it best in this interview from almost 30 years ago…


Murad's Blog said...

Wow, excellent video. Is that Phil Donahue???

I like the article and I understand the reasoning but I think all of America, me including, might just be a bit tired of ExxonMobil posting huge profits and, yet, we continue to see rising gas prices. I know that they don't exactly correlate but it sure seems like it.

Also, I don't like seeing companies continue to post profits, either large or small, and then announce thousands of layoffs only because the "market" continues to expect rising profits and rising returns. That is unrealistic and to place the blame on the hardworking employees of the companies rather than the crazy expectations of the market is frustrating and scary.

Muizz Kheraj, CFA said...

Well put...but it ignores the fact that companies are rewarded for success. ExxonMobil posts huge profits because they are selling enormous amounts of gasoline. That's due to two reasons: a) we use lots of gas and b) they invested billions in extracting that oil from very difficult locations.

It's starting to become fashionable to just lay the blame on anyone and everyone whenever there are layoffs or whenever your own pocketbook is hurting, when the reality is that a capitalist society works as one would expect. Those taking the greatest risks reap the greatest rewards (or fall flat on their face and we never hear about them). As employers, a Company's desire to survive should be applauded by employees as this ensures that they will have a job (any job) in the future.

The market does have some unrealistic expectations, but these are expectations created by these same companies who like seeing their stock rise, their stock-based compensation balloon and their debt get priced so low. These same companies (and unfortunately, this includes employees) must "pay the piper" for underperformance, no matter how minor...

Muizz Kheraj, CFA said...

btw - a good way to look at this is sports.

Basketball players always complain that owners don't share enough with them when they reap profits...

What players ignore is that owners invest hundreds of millions in buying a sports team, then lay out tens of millions in arranging media requirements, building stadiums, paying employees and generating buzz. Then they have to provide players guaranteed contracts no matter how the player performs.

Even after all this, they are referred to as crooks and wealth hoarders when they turn an extraordinary profit...seems a little ridiculous, wouldn't you say?

Murad's Blog said...

Well, sports is a little bit of a different animal because of one aspect. The involvement of the local government in subsidizing the building of the sports arena. For example, when Seattle moved to OKC, the OKC government provided a high number of subsidies to allow the arena to be built for "free" for the franchise.

Also, there has been a recent trend by many franchises to threaten to move if the local government doesn't build a new arena for a veteran franchise. Sometimes, this is done without the threat (Boston Celtics), other times, the threat is carried through (Vancouver to Memphis/Seattle to OKC).

These things also occur with business in the form of tax subsidies, property tax subsidies, etc. I have seen it where Radio Shack has moved from their longtime home of Fort Worth to another location because the tax subsidies had run out and the government didn't want to extend the subsidies.