Broken Markets, Broken Economy?

Source: WeWork and Counterfeit Capitalism | BIG by Matt Stoller, 2019/09/25

One of the themes of this newsletter has turned out to be the breakdown of integrity in American business, and the consequences in terms of our increasingly inability to produce the vital systems we need to sustain our civilization. … Today I’m going to continue on this theme, and discuss the increasingly common tendency of capital markets to finance loss-making companies, which is an important trend I call “Counterfeit Capitalism.”

Now, Neumann himself isn’t very important, foolish charlatans are common in society. The question is why he became so powerful despite being so obviously unfit for a role stewarding billions in capital and managing thousands of people. And that’s where we get to the real power centers behind this fiasco, the financiers who lent WeWork large sums of money. … WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services. What predatory pricing does is to enable competition purely based on access to capital.

Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. … [Honest] Competitors have to copy their fraudulent competitors. It’s a variant of Gresham’s Law, which says that “bad money drives out good.” If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity. That is what is happening in our economy writ large, a kind of counterfeit capitalism … eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses.

As it turns out, the S-1 was correct; [Neumann] *was* pivotal to WeWork, because WeWork only exists due to his ability to get money from investors. … if we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away. We can then get back to the business of making and selling things to each other without engaging in celebrated cases of fraud and abuse under the guise of ‘quirkiness.’



Source: How Monopolies Broke the Federal Reserve | BIG by Matt Stoller, 2019/08/13

Negative interest rates are a signal something is very wrong with finance, and the broader economy. … a bank account is essentially a bank borrowing your money and using it to finance other loans that go into productive purposes like building factories. … A government bond works the same way as a bank account, but it finances government … Like a bank account, buying government bonds is a safe way to store assets, and get a little bit of a return.

Very low or negative interest rates mean that investors can’t find any place to place their savings. Investors perceive there are no more factories to build, no distribution centers to create, no new energy systems to research, no more products to create. You can only stuff money under a mattress, and the price of mattresses is going up. Our financial system, in other words, is acting like we have no more social problems to profitably solve.

Maybe what’s happening is that we can’t invest profitably, because there are monopolies everywhere you try to put money to work in the real economy.

Economist Simcha Barkai got to this dynamic in a paper he wrote in 2017. Barkai was interested in the decline in the amount of corporate output going to labor. He concluded this decline is not occurring because capital is getting a large share of income. Capital investment is going down even faster than labor share. There’s less spent on workers, and less than that spent on robots. So if labor share is down and capital share is down, what is up? Profits. The driver, Barkai found, is firm concentration is up across the American economy since 1985. This trend is more pronounced in higher concentration sectors, and less pronounced in lower concentration sectors.

But this works from the other side as well. It’s not just that there’s no place to put money. Even though rates are low or negative, it’s very hard to actually borrow money and put it to work. … who doesn’t have access to low or negative interest rates? Normal people and ordinary businesses. While powerful firms and individuals can borrow at record low interest rates, most firms and individuals cannot.

May 2014 to May 2019 Commercial Bank Interest Rate on Credit Cards, 12.74% to 17.14%
Image from Delinquencies spike with record-high credit card interest rates | Axios, by Dion Rabouin
Data from Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest | Federal Reserve Bank of St. Louis

The Costs of Reliability | LessWrong 2.0

Source: The Costs of Reliability | LessWrong 2.0, by sarahconstantin

“Why can people be so much better at doing a thing for fun, or to help their friends and family, than they are at doing the exact same thing as a job?” … I think it has a very mundane explanation; it’s always more expensive to have to meet a specific commitment than merely to do something valuable.

The costs of reliability are often invisible, but they can be very important. The cost (in time and in office supplies and software tools) of tracking and documenting your work so that you can deliver it on time. The cost (in labor and equipment) of quality assurance testing. The opportunity cost of creating simpler and less ambitious things so that you can deliver them on time and free of defects.

Speed matters: Why working quickly is more important than it seems | JSomers

Source: Speed matters: Why working quickly is more important than it seems, by James Somers

The obvious benefit to working quickly is that you’ll finish more stuff per unit time. But there’s more to it than that. If you work quickly, the cost of doing something new will seem lower in your mind. So you’ll be inclined to do more.

The general rule seems to be: systems which eat items quickly are fed more items. Slow systems starve.

On Inequality and Risk Capacity | The Information

Source: On Inequality and Risk Capacity | The Information, by Sam Lessin

The biggest factor causing inequality is the ability of people to take risk. Those who have already scored a big success have more capacity to take further risks than those who haven’t. … coupled with a changing landscape of the types of risk available to people and their capacity and willingness to take risk.

While I am sure [technology and unequal access to “opportunity”] play a role, I am convinced that they are not the major source of growing inequality in the U.S. The real cause is the compounding advantage that some people have in their ability to take certain types of financial risk in a world where access to capital is commoditized. Real returns come from high-variance, low-probability outcomes.

A smarter, stronger and harder-working person might do better than their neighbor, but at most by a few multiples, not orders of magnitude. Differences in knowledge might at first blush seem like they can provide compounding advantage … But the reality is that knowledge tends to diffuse quite rapidly. It is hard to keep an idea or invention private forever to your own advantage… So, a great idea or a unique piece of information you figure out might provide some advantage for a while, but it is generally not sustainable or compounding.

For most, the risk-taking doesn’t pay off, and these people end up worse off than their non-risk-taking neighbors. … For a minority, however, imagine that their risk taking pays off, and they get dramatically richer than their neighbors… Unlike the first-round risk-taking losers, the winners can now afford to take more and more risks. … over time, we end up in a society where some people can afford to take rational risks with time and capital, but most cannot.

Consumer protections have their place. But there is no question that regulations, which disincentivized companies from going public quickly—and bar unaccredited investors from taking financial risks or investing in funds which do—drive inequality. In the name of protecting people we have set up a world where—quite literally—in order to have access to the best performing investments you need to already be rich.

There will still be inventors, and there will still be hard workers in our future. But as we come to grips with the fact that in modern times economic outcome compounds less on innovation and work, and more on risk taking, either our national identity is going to have to dramatically shift, or we are going to have to think about how we evolve our social structures.

Too Many Companies Drain Value From the Economy | Bloomberg Opinion

Source: Too Many Companies Drain Value From the Economy | Bloomberg Opinion, by Noah Smith

How much of this increase in market value was due to rent extraction, or to the expectation of future rent extraction?

it’s possible that big companies are increasing their market power by using lobbying to capture politicians and regulators. If this is true, it’s very bad news for free markets and capitalism. … Why exactly big companies and their lobbyists might have become more successful in bending regulation to their will since 2000 is still a mystery, but it’s a phenomenon that deserves more attention and investigation.