Business & Economics: April 2004 Archives

The New York Times has an article that goes on at great length about who stands to make money from a Google public offering, and the last line illustrates perfectly why I'm not going to be buying any shares myself.

Andrew Anker, an entrepreneur and former venture capitalist, said: "This is the deal of the century as far as I'm concerned. No matter how you cut it, this will make a lot of people very happy."

There are apprently hundreds of rich, famous, powerful people who stand to make a lot of money if Google goes public, and the connections of those people are probably driving the valuation of the company more than its actual merit.

Google is a good company, but as many others have pointed out in the past they occupy a very precarious position. The only reason the company makes money is because they're the premier search site on the internet... but think about that. As soon as some new search technology comes around, wham, Google is dead. There's no way to build brand loyalty with a product like search results. If a competitor develops a better search algorithm that delivers more accurate and relevant results, they're only a couple of keystrokes away from replacing Google in the world's shortcut menus.

Unlike other software service providers, such as Microsoft, a user can switch from Google to another search engine for free almost instantly. There's no tie-in, no investment, and no reason to stick with Google once it falls from the top of the heap, as it will almost certainly do.

Everyone knows this, so what makes the company's modest revenue stream so highly valued that an IPO would "instantly make Google worth more than Lockheed Martin, the big military contractor; Federal Express, the package delivery service; or Nike, the sports clothing maker"? Only one thing: the power of the investors who want the company to succeed. Google is the last, dying gasp of the Internet Bubble, and the real suckers are the people who are drooling over the chance to buy up stock from the existing private shareholders.

How do people decide what are, to them, trivial sums of money? For example, if there's something I want on a whim and it's less than $10 I'll probably buy it without much consideration. If it's $15 I'll deliberate a bit more and probably not buy it without good reason.

I know people who make less money than I do who consider larger amounts to be trivial, and I know people who make more than I do who are more frugal. If people were rational there would be some common percentage range of disposable income that would be considered trivial, but I'm not sure if that's the case.

So how small does a purchase have to be for you to consider it trivial? I know some marriages where the spouses have an agreement to discuss expenditures of more than, say, $100, but that seems like too high of a threshold to qualify as "trivial" to most people.

The best way to protect freedom and encourage economic growth is to enforce private property rights, and Peruvian economist Hernando de Soto has been awarded the Milton Friedman Prize for Advancing Liberty for his efforts to bring bring rights to the poorest nations in the world.

It’s not hard to understand why Marxist (search) radicals found de Soto’s ideas so dangerous. They threatened the monopoly the political left (Marxist and non-Marxist) held over solutions to the problems of the world’s poor. For years, statist development experts had sought top-down solutions, operating under the implicit assumption that poor people in the Third World were largely incapable of entrepreneurship. De Soto utterly rejected that patronizing viewpoint, and, beginning in his native Peru, focused on the lack of formal property rights as the source of poverty in poor countries. As an author and an activist, and later as adviser to Peruvian President Alberto Fujimori (search), de Soto worked to bring impoverished Peruvians out of the shadow economy, and unlock their potential for wealth.

When people have public recognition and protection of their property rights the natural economic incentives of capitalism come into play and people are motivated to work hard and produce. What's more, banks can lend money for capital investment if they're assured that the assets of their debtors won't be arbitrarily confiscated by the state on a whim.

The biggest threats to Californian jobs aren't across the ocean, they're right next-door.

"Workman's comp is a big issue, but it's just one of many items," Monia said, rattling off a list of California's comparatively high operating costs: energy, rents, labor, taxes. "Even the garbage costs are cheaper in Nevada." ...

The exodus of businesses and jobs to lower-cost states like Nevada has picked up in the last year, experts say. Now, with the economy gaining steam, many companies are nearing a point where they must decide whether to expand in California or invest and create jobs elsewhere.

Many have already made up their minds. In a recent survey for the California Business Roundtable, consultants reported that nearly 30% of 50 California companies interviewed had explicit policies to move jobs out of state if possible. And half said they planned to avoid adding jobs in California. Some cited high housing costs, others the widening gap between operating expenses in California and other states.

Sacramento can can loosen some expensive regulations and risk the ire of its leftist residents (while pleasing the more conservative people in the rest of California), but it will have trouble matching the financial incentives offered by neighboring states. Corporate taxes are used to pay off special interests, so the leftist legislature can't risk that revenue stream without losing the money they need to buy votes. There isn't much money available to lighten the burden on businesses without cutting spending, which would also alienate the voters who keep our rulers in power.

It shouldn't be surprising that the state with the most natural benefits (weather, resources, size, location) is also the most inefficient. We can treat businesses (and people) poorly and they'll still find reasons to live here... up to a point. I think we're nearing that point now, and our government had better wise up.

The idea that we'll eventually "run out" of oil is a myth, and not just because we keep finding more of it. For details, follow the first link and read the post I wrote last year. In short: Adam Smith's invisible hand will ensure there's always enough oil to satisfy demands at the market price (which will continue to rise).

The most interesting aspect of the local Wal-Mart saga is that the company is using ballot referendums to bypass California's excruciating zoning and environmental regulations.

Inglewood's City Council last year blocked the proposed shopping center, which is to include both a traditional Wal-Mart and other stores, prompting the company to collect more than 10,000 signatures to force Tuesday's vote in the working-class community in southwestern Los Angeles County.

On Monday, religious leaders and community activists including the Rev. Jesse Jackson urged Inglewood voters to defeat the ballot measure, arguing that it gives Wal-Mart license to begin construction without having to go through the usual array of public zoning, traffic and environmental hearings or reviews.

"You don't get to get around all of the environmental impacts accepted in this country," said Rep. Maxine Waters, D-Calif. "You don't get to bypass the city and their building and safety and their planning departments. What they have done is they have gone over the top."

No, Ms. Waters, they've gone to the top and over your head -- directly to your bosses, the voters.

But of course, in America, the voters aren't really in charge....

Opponents have vowed legal action if the measure passes.

Update:
The ballot measure doesn't look likely to pass. I would have voted for it if I lived in Inglewood, but oh well. I may not like the decision, but I'm content that the people have expressed their will. The result reinforces what I consider to be unjust and inefficient regulations, but so be it.

I explained why deficit spending isn't inherently bad last week, and one of my favorite economists, Tyler Cowen, points to a great quote on the issue by Zimran at winterspeak.com:

I don't want to hear anyone complaining about the deficit unless they immediately begin to list ways of taking things away from old people and making them work harder and longer. Otherwise you aren't really bothered by the deficit at all.

Zimran says that the costs of Social Security and Medicare (around 100% of GDP) absolutely dwarf our current cash deficit (around 5% of GDP), and these programs annoy me to no end. They're shining examples of how the irresponsibility of one person can enslave another. Last year I wrote a post titled "Responsibility" and said:

People need to take responsibility for themselves. I find it particularly disgusting that our nation's supposedly most mature citizens are doffing the responsibility for their lives by lobbying and cheering for ludicrously expensive government entitlements, the burden of which must be borne by their children and grandchildren. You may be "the greatest generation" to some, but this selfish foolishness highlights a widespread moral and economic failure on your part. You're supposed to be wise, you're supposed to be an example to we who are following after, but instead you wield your political power not to help or guide us, but for your own comfort and enrichment. Shame on you all. Imagine how great a boon you could have been to your families and your country; instead you're becoming a resented burden.

(Read the rest of the post; it's more compassionate than this first paragraph may indicate.)

One of my commenters has accused me of being anti-elderly -- and this could post could certainly give him ammunition -- but that's not it at all. I have the greatest respect for people of any age who are self-sufficient and contribute to society. But by their very nature, these two entitlement programs are not self-sustaining, and they'll eventually go bankrupt. Members of my generation will have to fend for ourselves when we're old, and we'll have to do so after having picked up the tab for our elders.

The story has been floating around for a few weeks now, but it's finally starting to get some play: the easy movement of jobs between countries is beneficial to America by any measure, because we import more jobs than we export. Even if that weren't the case we'd still be better off due to lower prices and greater competition, but considering the high rate of growth in the number of Americans working for local affiliates of foreign companies, there can't be any doubt.

While reliable figures aren't available for the last two years, the Commerce Department estimated on March 18 that the number of Americans employed by U.S. affiliates of majority non-U.S. companies grew by 4.7 million from 1997 through 2001. In the same period, the number of non-Americans working at affiliates of majority-U.S. companies abroad rose by 2.8 million. ...

The 57-year-old Bush holds up the creation of U.S. jobs by companies from abroad as an example of the benefits of free trade. In a speech in Cleveland on March 10, he said 10 percent of Honda's worldwide workforce lives in Ohio. Honda has two vehicle-assembly plants in two Ohio towns.

"About 16,000 Ohioans work for Honda, with good, high-paying jobs, and that's not counting the people who work at 165 different Ohio companies that supply Honda with parts and material," Bush said. "When politicians in Washington attack trade for political reasons, they don't mention these workers, or the 6.4 million other Americans who draw their paychecks from foreign companies."

Protectionism is rarely the answer. The only circumstances in which is is justified are if there are non-economic considerations, such as national security. I wouldn't want to outsource NSA crypographers, for example.

President Bush will do well to emphasize the reality of the situation; American workers are smart enough to understand it.

(HT: IP.)