Billionaires are often paraded as the "saviors of the economy" with their ability to create jobs. With Capitalism relying on the efficient flow of capital, we examine what that efficient flow means and who is best equipped to supply it. In this episode we investigate the difference between business and government and how applying business principles to politics can be deadly to the State.
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Today I want to take a look at Senator Romney's opposition to the proposed Tax Bill. More broadly, I want to talk about how trying to apply the rules of business to the government on a one-to-one basis can often lead to well-meaning, but disastrous results. Let's have a listen.
Mitt Romney, Fox News (00:21):
Well, first of all, it's not a good idea to tell billionaires, don't come to America, don't start your business here. To tell the Steve Jobs and the Bill Gates and people like that, this isn't the place to begin your business go somewhere else. That's a bad idea. But number two, you're going to tax people not when they sell something, but just when they own it and the value goes up. And what that means is that people, these multibillionaires can look and say, I don't want to invest in the stock market because as that goes up, I'm going to get taxed. So maybe I will instead invest in a ranch or in paintings, or things that don't build jobs and create a stronger economy.
Come On, Don't Bullshit Me!
It's not like the Saudi crown prince or a Russian oligarch, you know, Oleg Smichnaev, is going to come here and build businesses.
Welcome "Come On, Don't Bullshit Me", where we peel away the messaging of talking heads to get to the crux of today's issues.
You know how there's this expression that you learn best from your failures or your mistakes? Well, one of the mistakes that I've made that lives rent-free in my head is: during HSBC -- an AeroSpace Basic Course, which is a finishing school for the Air Force officers, so during that course, they have this knowledge exam. And one of the questions on the exam was: the Department of Defense, DoD, wants a jet fighter, a new jet fighter; what jet fighters should be funded? And there was a bunch of choices. One of the choices was, whichever one fits the overall mission of the Department of Defense, of the DoD, whichever one fits the current prevailing doctrine of the day. Another one was, whichever fighter is the most technologically advanced. Then the third option was, whichever fighter is the most cost-effective. And then the fourth option was, whichever one spreads its costs out the most amongst all the different states of the union. And then they had different options: A only, A and B, or A and C. It's like the classic SAT test.
Being a scientist. I picked the answer "Whichever one is most technologically capable" and "Whichever one fits the prevailing doctrine of the day". And in my rationale, well, obviously as a scientist, clearly, I was a dead ringer for the "Whichever one is technologically most advanced", because that was my whole purpose of being in the military -- to make the most technologically advanced weaponry. And then my logic was: we are in a military school here about officership, so, obviously, the other answer is going to be about how the jet fighter fits into the doctrine. Because if your doctrine calls for more tactical fighters, rather than bombers, then you're not going to waste money on a bomber.
Uh, actually, an interesting story. The F-117, which is now retired, is obviously a bomber, but the reason why it's an "F" was because the prevailing doctrine of the day was that we were not going to spend any more money on bombers. So the Air Force with infinite wisdom created a bomber, but then gave it an "F" designation. Oh yeah, this is totally a fighter, the F-117! And Congress bought it! And we got it funded. And of course it was awesome for two wars that it was in. But then, obviously, it outlived its purpose. But anyway, that is a side note.
Anyway, so, I was like, okay, clearly, because this is an officership finishing school, it has to fit the prevailing doctrine. And I'm a sucker for technology, being a scientist, so, obviously, technologically advanced one was there. Because I thought, oh, the cost-effective one is a complete trap because that's the thing that they're trying to teach us here: that you don't go for the cheapest thing. You go for the thing that's most effective for the money that you have. So there's that old joke: oh, military equipment sucks, because it goes to the lowest bidder. Well that actually is not really true anymore. It's more about where it can give you the most benefit for the lowest cost, not necessarily purely lowest costs. So I was like, okay, cost-effective answer. That's purely bait. And then I didn't even look at the "Whichever one spreads the cost amongst all the states", because that was obviously a stupid answer. So I was like, all right, l was confident.
And of course, when we got our test results back, I got that answer wrong. The actual answer was "E: all of the above". I was like, what? This is ridiculous! I was like, okay, fine, I could get the cost effective, cause budgetary requirements. But then the spreading the cost amongst all the states? Like, who gives a rat's ass about how the thing is funded?
But then during the post-mortem of the exam question, it was a bait question, because each of those different options was from the perspective of a different portion of the stakeholders, if you will, of the defense industry. The first one, "Whether fits within the prevailing doctrine", was obviously from the perspective of the Office of the Air Force -- the generals and flying community and whatnot. And then B -- the most cost-effective one -- was from the perspective of the accountants or CBO about being a good steward of taxpayer money. So you want something cost-effective. C was obviously from the perspective of scientists and engineers of the Defense industry: you want most of the technological advanced jet fighter. And then D was the perspective of the Congressmen and Senators of the legislative branch.
And that this was the real profound thing, this is why I still lives rent-free in my head until this day, even though it was 20 years ago or whatever. It is that the Department of Defense doesn't live in isolation, neither the executive branch lives in isolation. You have to consider the stakeholders being the legislative branch. And let's say the branch represents the people and the country, and it doesn't live in an isolated manifestation of itself. The government is "of the people, by the people, for the people", blah, blah, blah. But the point here is that the government represents the people. And one of the functions of the government is to provide the wealth spread evenly across the land. So all things being equal, you don't want a jet fighter, that's being built in one specific area, because then only the citizens of that specific area, or that specific state, or that specific congressional district get the benefits from the taxpayers funding. But if you spread the costs of the jet fighter throughout multiple different congressional districts... This actually is a kind of a mischievous thing to it: the more congressional districts that you spread this around, obviously the less of a chance there will be that it's going to get canceled, because more Congressmen are going to support it. So, I mean, there's that, but the higher purpose of that is, of course, more Congressmen are going to support it, and there's going to be less chance of it getting canceled, because the point is that the citizens of the country, represented by their representatives, their Congressmen, they're rightfully owed taxpayers' money that the government spends, right? Because whenever the government spends goes to the taxpayer, ultimately. So you want to spread it out, even at the cost of it being not cost-effective. Because, obviously, it'd be much more efficient to build a jet fighter in one factory, but that's not the point of the government.
The government is not a business. It's there for the general welfare of all, of everyone. So from the perspective of the legislative branch, of the Congressmen, Senators, the best jet fighter is the jet fighter for which the costs are spread amongst the most congressional districts feasibly possible. And that was a kind of a wake-up call for me, because, I mean, we all kind of know this instinctively, when people tell you this, that, of course, the government works for everyone. But you don't really internalize it. And that question really internalized it, because I realized that it was not just about building the best fighter or the cheapest thing for the taxpayer. Because we always think about the taxpayer as like this one monolithic entity. But the taxpayer is not just one person, it is 300 million or whatever the population is. Well, the adult population. And the officers, the leaders in the Department of Defense -- this is something that we have to be mindful of. That whatever decision we make, particularly in peacetime, we have to make sure that not only does it advance the agenda of the Department of Defense, but it also advances the agenda of the people, represented by the legislative branch.
So I still remember that to this day, this question and that concept, that it's not about pure efficiency. It resonates with me throughout my career.
There's a saying in DARPA, that to optimize the whole, we need to sub-optimize the parts. I learned this, obviously, working as a scientist in the Defense acquisition community or the R&D wing of the DoD.
And after I left the military, in Business School they gave us a whole bunch of different literature to read, whether it's case studies or books, or what have you. And obviously, Business School is kind of a party time. So you don't really do most of the reading, or you do a cursory reading of it -- just do enough to pass the assignment. So you do like whatever little readings possible and get it back to partying.
So, one of the assignments was to read about operational efficiency. And we were tasked to read this book, "The Goal", I think it was. It was a fictional story of this plant manager, and his plant is not working, all the metrics, all the numbers are down. And then the Headquarters is going to shut down factories, and this factory is targeted, because, obviously, the numbers are bad and this guy comes in, the new plant manager, and he has like 90 days to fix the numbers, otherwise plant is going to be shut down and then the small town is gonna lose all these jobs.
And then there's this iterative process where they're trying to deep dive into the problem and try to figure out why the numbers are down. Because everyone seems to be working their ass off. And then he realizes, okay, well, I gotta make this group efficient, because their numbers are down. And then they talk about the lean principles and say, oh, you know, we need to minimize the floor space and the walking around the floor space, or minimize the footprint of the inventory. So they do all these things, but no matter what they do, they realize that nothing is working, because the numbers go down for that specific area, but then overall the plant numbers do a little dip and then they go back up again.
The moral of the story is, what he realizes is that he's been trying to make each of the different departments efficient. So whenever he sees an inefficient number or a department, he tries to do all the efficiency things that he learned as a manager to get those numbers down. But those efficiency numbers don't help the overall plant to get its numbers down.
And then I'll, I'll save you the three hours of reading it, or whatever, especially if you're a business school candidate, you can just listen to this podcast and ignore the assignment altogether and get back to drinking. But the moral of the story is: at the end is that he realizes that he needs to make the numbers inefficient for each of the different departments. And that is somewhat related to Just in Time, but not really, but basically he needed to get each of the departments to work in tandem with the other departments that feed to it and it feeds to. So if it's department B, the department B needs to worry about how they're getting the work load from department A, and then also how the department B gives their workload to the department C, irrespective of the efficiency of B. Because he didn't want apartment B to be super efficient and then waiting around for department A or overload department C. And that was the points, it is that you can be inefficient, you can have some downtime in your department, so long as that workload is continuously moving through department through B, through C. And then only when they did that did the overall plant numbers starting to drop.
And at the end he saves the plant and he's a hero. And then the town is saved from headquarters decision and they keep their jobs. And the whole point, again, is that when you look at each of the departments, they weren't working as efficiently as possible, but overall the concerts of all of the departments working together in tandem -- that overall number became efficient. And that's what ultimately drove the metric of the plant down.
It reminded me of what we kind of just took for granted almost in the military acquisition world, that to optimize the whole, you need to sub-optimize the parts. And I realized that this is not just, you know, a nice thing that we used in the cream of the crop of Defense R&D. This goes for all complex organizations, not complicated, but complex organizations. And the Government is no exception.
So kind of like... I just took you to Switzerland to build the watch, but now we're back. And this is what I want to really address, is that the Government is, arguably, one of the most complex entities out there. And you don't want to look into a specific departments of the Government or sub-agency, whatever you want to call it, and try to maximize the efficiency there, because that may not be necessarily best for the overall Government. Again, just like that test answer to the question on that exam about the jet fighter, it is not necessarily about making the most cost effective jet. It is about spreading the costs out, so that multiple congressional districts get to benefit from the program.
So, what does this have to do with Mitt Romney's answers to the wealth tax bill? He was saying, oh, well we want all these billionaires to come here. And if we tax them, then they won't come to do these jobs. And then, you know, I'm looking at this, ok, this guy, I mean, obviously, everyone knows he is full of shit, right. But there's just talking points that the Republicans have, and then they're just giving them out, because they obviously don't want the bills to pass.
We're not going to talk here about whether the wealth tax in general is good or bad. Frankly, I'm not even qualified to talk about it, because at first glance I'm thinking, right, taxing on unrealized gains is obviously not a good way of taxing. So let's say you just bought a stock and then the stock just ballooned in price, right. And then it dropped in value. And then, depending on the IRS reporting time, you just got stuck with a huge tax bill, even though your realized gain is actually a loss, or whatever. Right? But I think there's a lot of stuff in there in the language of the bill that prevents such scenario. So, I think that's just me being alarmist. But again, not having read the entire thing myself, I do not want to comment on that.
But what I do want to comment on is just this constant mantra, if you will, that people on the Right like to echo. About how billionaires are the saviors of the country, and if we don't appease, the billionaires, somehow the entire country is going to collapse. Never mind the fact that this country wasn't built by billionaires. We like to say, oh, you know, we're a rugged individualist, and America was built by industrial and entrepreneurial people. The middle-class if you will. Right? So the general concept about how billionaires are supposedly the saviors of America, and without them we can't do shit, it's just completely ludicrous.
First off, Mitt Romney's talks about, oh, if we have this bill then billionaires aren't going to come to America and create all these jobs. This is ridiculous. Like, what billionaires are coming to America? It's not like we have multibillionaires queuing up at JFK or LaGuardia, waiting to get into this country to create jobs here. It's not like, uh, the Saudi crown prince, or a Russian oligarchs, you know, Oleg Smichnaev, is going to come here and build businesses. This is targeting currently existing Americans. And the billionaires that we're talking about are Americans that actually live here. So this concept of, "oh, we want to attract more billionaires to come to America", is completely ludicrous. That's the first thing.
And then secondly, it's not about the taxes. It's about the opportunity to make money. No one gives a shit about taxes. And this is another thing that you learn in Business School is that you first worry about the business itself: getting the revenue, gain the Free Cashflow, if you will, because that's another thing, there's a difference between Revenue and Cashflow. Worry about the expenses, the Balance Sheet, and you have your Income Statement, right? That's what you worry about. And then there's even the terminology for it: it is called EBITDA. Earnings Before Interest, Taxes, Depreciation. And that's what people look at when you're talking about investing, when you're trying to court investors, public or private. Everyone likes to talk about EBITDA. And the entire business world is laser focused on EBITDA. Or let's just go with EBIT, because the Depreciation and Amortization aspects of is are relatively a newer or refined concept. So, rather that to minimize the number of syllables here, let's talk about EBIT. So, Earnings Before Interest and Taxes.
And that's the point of these supposedly billionaires or multi-billionaires, as Romney's saying. They don't give a rat's ass about taxes. What they care about is maximizing their EBIT, the Earnings Before the Taxes. And only afterwards, then they have their army of accountants and lawyers or whatnot to find the different loopholes to minimize their tax burden. So, taxes are kind of an afterthought. And if there's an opportunity in America, you bet your ass, these multi-billionaires are going to come here and, quote, exploit us, exploit our country.
And he's a, he's a Bain guy, he's from Bain Capital -- one of "The Big Three" management consultants. He knows this. He's not an idiot. But it's just lip service that he pays, because it sounds, remember last week we talked about "the useful idiots"? It sounds good and resonates with the "useful idiots". Like, oh yeah, billionaires! They care about taxes. And if we tax them too much, they won't come here. It's complete horseshit, because what matters is the earnings before the taxes, and after taxes is always an afterthought.
And now I know that someone here is going to say, well, EBITDA -- that's completely horseshit, because there's the double Dutch, the Irish sandwich or whatever the hell it's called. And there's all these tax schemes, and going to the Cayman Islands, Barbados, or whatever: companies moving their Headquarters outside of the United States to avoid taxes. Well, yeah, yeah, that's true. And that's something that, we should worry about and rightfully so, but the point here is that their Headquarters are moving there. It's on the books. It's not like when Apple moves to Ireland or the Netherlands, it's not like the Apple Headquarters in Cupertino is moving there. No, their actual physical Headquarters of where they're doing their operations, where people are being employed, is still in Silicon Valley. It's still in California, because that's where the talent is. That's where the people who are working are. It's just what is on the accounting books. That ethereal entity is what's moving there. So, I don't really give too much credence to people saying, oh, well, that's ridiculous because you can always move your Headquarters to Ireland or some other tax Haven, and that's why what Mitt Romney is saying is true, and we need to lower the taxes for the billionaires. No, because that has nothing to do with employing people. Well, maybe a little bit, but from the overall grand magnitude of operations for a company, it has no bearing at all. Every Business School will tell you this, any person without a political agenda, who was in the business world will tell you, what matters is your EBITDA, your Earnings Before Interest and Taxes. Later on you can do whatever the hell you want to minimize your taxes, but that's only after the operations and their earnings that you've earned.
The third point goes back to the story that I was talking about: the optimization of the whole implies, the sub-optimization of the parts. The thing is, multibillionaires are not healthy for the economy or for our country. Going back to that test question, it's not about getting the most cost effective jet fighter, It's about spreading the wealth to as many congressional districts as possible. That's the point of the Government.
A side note: this is one of the reasons why you should be very cautious... I'm not going to tell you to not vote for, because who am I to tell you who to vote for, but you should be very cautious of candidates whose whole spiel or their whole shtick is that, oh, I'm a businessman and I've run successful businesses, that's why you should elect me into the government. Even if it's true, which most of the time, it's not: they're usually failed businessmen, because why the hell would you quit being a successful businessman going to a, having a government job, right? But that's besides the point. The thing is that businessmen deal with efficiency and consolidating wealth into the parent's organization. That's the point of business. Whereas the Government is the opposite of that. You don't want the Government to be efficient, because efficiency necessitates consolidation. And the more you consolidate wealth, the more you consolidate power.
I mean, this is why we fought the war of Independence. It was against the monarchy, it was against the king. More generally, we fought war against the British parliament, because the wealth and the power was concentrated with the parliament. And we as colonists, didn't get a say to the laws and the taxes that were being enacted. So the whole founding of our country was about being averse to the concentration of power. Or in the confines of this podcast, it is about the efficiency of power: the more concentrated the power is, the more efficient is.
So if you want a really efficient government, forget about democracy or, you know, liberalism. And I use "liberalism" like little "L". I'm not trying to be a left-wing or right-wing thing, but classical liberalism, if you will. You forget about all that and just have a autocratic monarchy. Kind of like Saudi Arabia, or whatever. And then there you go: you have a very efficient power structure, and power is consolidated in, essentially, one person, and they dictate, whatever they say goes. And that for the rugged individualistic Americans that we are, obviously, that's a no-go. The whole point of the constitutional convention was ensuring that we didn't have another king, right? Remember when we elected George Washington, some of the founding fathers said we didn't fight a war to replace one king George with another king George? And thankfully George Washington retired. He was kind of like Cincinnatus, that famous general from the Roman Republic. That was a big thing. He retired and allowed the next group of leaders to come and take his place. So, we avoided that crisis.
And we did all this stuff 200 years ago, all of that, not to be outdone by some Bain Capital know-it-all Mitt Romney, who thinks that the best thing to do is to have consolidated wealth and to consolidate power in the form of multibillionaires.
I want to make a side note here. We'll get back to this point, because I always like to Steel-Man these arguments, right? So I'd like to take him at Good faith. Let's let's take him at his word, let's think Mitt Romney is at his word, and let's assume we do want multibillionaires, these really powerful entities, whether it's individual billionaires or billionaire estates, we want these big powerful multibillionaires to come here to create jobs. Well, why stop there? Why stop at billionaires or multibillionaires? Why don't we go into the trillionaires and multi-trillionaires? Now you're telling me, okay, well, who the hell is a trillionaire? No one is a trillionaire. I mean, Apple is the first trillion dollar value company, but even Tim Cook doesn't own all the shares, so, obviously, he's not a trillionaire. Well, you know, who is a trillionaire, or what is a trillionaire? The United States Government. So, if you want to take Mitt Romney's logic to the extreme, to its natural logical conclusion, well, what's good for the goose is good for the gander. If you really care about having multibillionaires being the generator of jobs and wealth increase in this country, well, then why stop there? It goes straight to the Government, the Government, being a multi-trillionaire, essentially, because our budget is in the trillions, multiple trillions.
The government is a better purveyor of wealth and economic growth, than any billionaire could be. When you are talking about the difference between a billion and a trillion, that's a factor of a thousand. So, if a billionaire can get you a thousand jobs, well, the Government can get you a million jobs. So, why cater to a billionaire when you can cater to the Government? And going back to my original question and HSBC, when you cater to the Government's about catering to the legislative branch, it's about spreading that wealth out throughout all the commercial districts. Because what's good for the Government, government being for the people, so the people benefit. So, would you rather line the pockets of one billionaire? Would you rather line, the pockets of one trillionaire, the trillionaire being the Government. The lining the pockets of the government implies necessarily line the pockets of its citizenry. So, that was the detour I wanted to make on multibillionaires versus a trillionaire and why the Government, ultimately, is a better purveyor of wealth than any billionaire could be. By at least a factor of a thousand.
Anyway, going back to the point, all business entities have inefficiencies. The best way we can visualize this is through nonprofit organizations, because all of us at year's end, we like to make sure that we're donating to different charities that we like. And at least in the Federal Government, I don't know how it is in the civilian world, but in the Federal Government, there's this thing called the Combined Federal Campaign. And it comes from the fact that there's a law where you can't solicit government employees for money. That obviously introduces a lot of corruption charges and everything like that. So you can't do that, but then how do you advertise charities and well-intentioned non-profits to government employees, because the government's employs are lots of people, right? Not being able to advertise to them, these nonprofits and charities, is not a good thing. So the way to get around that is this specific time period during the year when charities and nonprofits can solicit, if you will, to Federal Government employees. And it's called the Combined Federal Campaign, the CFC, and it's a big deal. Every year it comes, and then all the colonels want to make sure that it is a hundred percent... I don't want to say "participation rate", because they can't solicit people for money, but a hundred percent attention rate. Everyone wants to make sure that everyone knows within their wing, within their group and the squadrons, that everyone knows about all the different charities. And then this is at that time, that they're going to donate to nonprofits and charities.
And so you get this whole list of charities and nonprofits. I don't know how many pages, like almost a hundred pages long, but it's basically a list of all the different charities and nonprofits that have petitioned to the federal government and say, Hey, we want money from government employees. And then part of this CFC is a Combined Federal Campaign booklet. I really shouldn't call it " a booklet", it is more like a book, because there's so many different charities. But anyway, in this booklet part of the listing of the charities is that they talk about the percentage of money that goes to overhead the administration of the charity. And you're just surprised like, oh my God! This charity that I really want to give money to, 80% of it goes to administration and only 20% of it goes to the actual thing that they're trying to do! And then another ones is like, oh, this is a 17% overhead. And this, this was one metric that you may or may not want to use as a government employee to give your money to.
A charity I liked to give to was always the baseball hall of fame, but that's besides the point. Like the Cooperstown is an officially sanctioned charity in the CFC. And so it was great to donate to them. Go Yankees!
Anyway, why am I saying this is that every company... And I talk about the nonprofits, because it is very easily apparent there, because they have to report this, they have to report their overhead. That's required. Whereas private companies or profit companies may or may not be required to present this, or may obfuscate it in different Balance Sheets and what have you. So the point here is that every single company has overhead.
And what does that overhead means? It means more jobs for the administrative execution of the company. Now, taking the bare bones example of one billionaire employing all of the country, well, that means you're very optimizing, right? You know, going back to the initial test question, the whole country is very efficient, because there's only one administration, overhead. There's only one management entity, if you will, administrative entity for this one company. And that's that. Now, instead of having this one giant mega corporation, you know, uncle Sam Inc., you have thousands of companies, small businesses, which is what politicians talk about. Well, each of these different small businesses has to have their own overhead. They have to have their own administration, which means more jobs.
And it's the same thing from an operational standpoint. Let's say you're making Sprockets. So you have a company, you have a main corporation, called Spacely Sprockets, for all you, uh, 1980s Jetson's fans. So, you have Spacey Sprockets, and they have their production line, that's creating all these Sprockets. And whether they're selling a million or a billion Sprockets, the whole point of the business is that they become efficient, so they can create these Sprockets more efficiently. From a purely efficiency standpoint this is great. The more Sprockets they make, the more efficient they are, but the efficiency comes at a "cost". I use air quotes, a cost of using less workers, because obviously you're gonna use less workers as you became more efficient, which means less people are employed. But the population of the United States, that's not a business. In a business you can fire people or lay them off, kind of a gentler term. So the more efficient you get, the more you can reduce your workforce, your labor force, and that's the other people's concern, it's not your concern.
But in the United States as a Government, as an entity, does not have the Liberty of firing or laying off people. It's not like, oh, our country's more efficient, so let's start exterminating our citizens and reduce the population of America, because we're more efficient now. Of course not. It's ridiculous. Which is why, again, going back to my point of politicians who tout their business skills, it's not a one-to-one adaptation. Businessmen, if they are going to enter in the politics, have to understand that the business world does not apply to the Government. You can lay off worker, but you can't lay off citizens. Well maybe if you're Stalin, you can lay off citizens, but that's besides the point.
Going back to Spacely Sprockets, okay, so they're great, they've become super efficient, they're very profitable. It's all great. But now, because they laid off a whole bunch of people, there's a bunch of people who are unemployed. Well, what are these people going to do? Because, again, they're citizens, you can't just exterminate them. They need to earn a living. Well, that's where you get another company. And, you know, you get Cogswell Cogs. And then Cogswell Cogs, being a separate entity, has to have its own administration and its own overhead. And operationally, it has to have its own production line. Now, of course, if you're looking at this purely from a business standpoint or from a Bain Capital guy, like Mitt Romney's perspective, they're going to say, well, Spacely Sprockets and Cogswell Cogs -- there should be an M&A, there should be a merger and acquisition to combine those two together. You combine their production lines, which means you can eliminate half the administrative staff and also eliminate a big portion of the operational workers.
And then you'll maximize profits. And that's what Bain did, right? Mitt Romney, before he became a governor, before he entered the politics, that was his whole thing; laying off people, to hell with what their wellbeing was, but laying people off and maximizing the bottom line, the EBITDA of his client companies, that's how he made his wealth.
So we've just seen how having Cogswell Cogs next to Spacely Sprockets is actually a good thing for the country, for the citizens as a whole, because more people are being employed. Again, the each individual company may not be efficient, but as an overall, the whole of the country which inhabits these, uh, are which these two companies inhabit, has become efficient because you have more people being employed. So if you care about the wellbeing of your citizens, you don't want to attract, quote, "multibillionaires" as Mitt Romney says. What you wants to do is what Republicans, before they went completely off the deep end, is to attract middle-class citizens and encourage them to create small businesses. Because each of these small businesses in itself may be inefficient, but that's what employs the citizens. Which means you have all these things that the right wing loves, right: less money on social programs, less crime, because people are working, and overall more orderly society.
If you are a self-identified conservative, though I don't really like labels of identification of political spectrum, which we can talk about in a later podcast, because that leads to a whole bunch of different problems. But for now, let's just talk about if you are a self-described conservative, then you don't want all the power and wealth consolidated in a, quote, "multi-billionaire", because again, it's super efficient for a multi-billionaire to employ the minimum amount of workers, because their operations is so big, that marginal costs, if you will, and thus the marginal benefits of the company are minimized. Which means that, to borrow a phrase from William Shakespeare, a rose by many different names, whether it's the law of diminishing returns, the Pareto principle, or the 80/20 rule, that 20% of your work results in 80% of results and that the more effort you put into it, the less results happen, because you eventually reach some sort of efficiency or a steady state, so that any more effort or inputs that you put into the system, doesn't yield a like kind increase in results. So the more money that you give to a multi-billionaire, at a certain point, again, the law of diminishing returns, it doesn't provide any benefit to the country. And this is the mistake that, I don't want to say it's a deliberate mistake, but, I mean, it kind of is, but up to a certain point, sure, providing additional money or capital to a accompany or to a, quote, "multi-billionaire", sure is going to create jobs and increase productivity. But there's a certain point where a company gets really big and the assets of the billionaire become so large that the company achieves efficiency. Because if it doesn't achieve efficiency, the ruthless invisible hand of the free market is going to smack it down.
So the company, the enterprise of this billionaire, is going to achieve optimal efficiency. So any more money that you give to it is not going to provide more jobs to the citizenry. It's kind of like a... for all the gearheads here, it's kind of like the fuel-air mixture with internal combustion engines. Nowadays is cars are way too sophisticated and you have computers that monitor everything, so there is not much opportunity to work on it, like your dad and your grandpa did back in the sixties, in their garage. But it still exists in the airplane community. And the way that, especially when you're flying single engines, like Cessna 172 or Piper Warrior, you always have to deal with the fuel-air mixture, because if your mixture is too fuel rich, then the fuel's not going to burn as efficiently and you get suet and all the carbon residue, and it's kind of like dunk up your engine, and, obviously, that's bad for your aircraft. Which could lead to a whole host of problems, if you don't do regular maintenance, because unlike a car where if you get into trouble, you can pull off the side of the road, for an airplane, it's not like you can just pull off Wile E. Coyote style in the middle of your flight and take a look at your engine. So there's that. And of course the opposite of that is when your fuel is too lean and there's too much air for the fuel and the causes engine sputtering knocking, what have you. So there's always a big emphasis on the fuel-air mixture when you're getting your private pilot's license. And it's a similar thing with the government's when you're trying to create a jobs program or an omnibus economics package.
You need to balance the needs of the economy with the needs of the citizens, in the sense that citizens need to be employed. You don't want the economy to be super efficient. You don't want it to be Ayn Rand-paradise, because then only one company controls the governments, and then what do you have? Humanity, we tried that with things like the Dutch East India Company, and look how that came out. That wasn't really the best of times for the people. We had the VOC, which is the Dutch name for the East India Company. It became too efficient, it became too centralized and incredibly concentrated in Asia, which meant that Dutch as a whole were not focused on the other sectors of their economy or their wellbeing. Which led, of course, to the Anglo-Dutch wars, and we all know how that happened. And as we know from The Might Be Giants, "Even old, New York was once New Amsterdam. Why they changed it, I can't say, people just liked it better that way". Well, actually I can say why they changed it. It is because the Dutch got their asses handed to them by a well-diversified economy of the British, as opposed to the highly efficient, multi-billionaire economy, as Mitt Romney would like to say, of the Dutch Empire. Anyway, that's a little minor history detour.
So, going back to the point of this bill, it's not about concentrating the wealth with the multibillionaires, it's making sure that there's opportunities for middle-class citizens to create the small businesses, because that's what actually employs the most amount of people. Many different companies will, because of their own inefficiencies, will necessarily employ more people, will put more people to work, than one single conglomerate, one single company. And that's, what's more healthy for the country. The individual sub-components, the individual, small businesses are themselves inefficient, but as a whole, the country becomes efficient, it becomes more optimized, because that's what produces more jobs and more work opportunities. So when we see it from a macro standpoint of what is good for the country, it becomes readily apparent, the bullshittery, if you will, of what Mitt Romney is saying.
And the fourth point I want to mention here is that Romney says, oh, well, you know, if, if you tax them, then they're not going to put all their money in the Stock Market, and they're going to go put all their money into, uh, what was that ridiculous thing that he was saying? Paintings and art, and land, and all those other stupid things. It doesn't matter what he was saying, it was completely stupid. But the point here is that, first off, the wealth tax, if it's going to be applied, it doesn't matter if your wealth is in the form of stock certificates or art, it's still wealth. So that's the reason why they're so against it is because it's all encompassing of their net worth. So, this whole argument falls flat when he is talking about, oh, they're not gonna invest in the Stock Market and instead are going to invest in art and whatnot.
New Speaker (42:39):
And also just bringing it back in, even if that was the case, again, we like to always steel-man these arguments, even if that was the case, the Stock Market is the secondary market. So the money that a company has raised, they've already raised. Whatever money it was when the initial offering of the stock in the first place. So whatever is going on in the stock market, yes, that may be beneficial for the individual shareholders, but it has no bearing on the operational going on of the company in question. So again, this is what happens when you have some Bain Capital managerial consultant in politics, because he has, well, actually I shouldn't say he has no idea what he's talking about. He knows exactly what he's talking about, to borrow a phrase from Marco Rubio. It's just that he's just couching in a way that again, "useful idiots" would buy on it and then oppose this bill. And gives his party cover, because he's supposedly some sort of an intellectual. The stock market doesn't create jobs. Well, it does in the sense of Wall Street and whatnot, but the jobs that we care about, what we're talking about here, what's relevant, it doesn't do that. The Stock Market is a secondary market. Whatever happens with Stock Market has little to bear with what's going on with the day-to-day operations of a company. Again, little to bear. Obviously there are some effects which we can go into, if we're going to have an advanced business economics podcast, but in the confines of what we're talking about here -- for government financing of its citizens -- it has little to do with it.
And the final thing about this is that right now we have a bastardized version of what Capitalism is. I mean, quite frankly, it's a Feudalist framework from a rentier economy. These billionaires, they are not like the monopoly men of 18 hundreds industrialists, where they have all this money and all these factories, and they have to employ all these people, and the more money we give them, the more people are being put to work. The problem that we have today is that these billionaires are not gathering their wealth under a Capitalist framework. They're getting their wealth from their assets, whether as like Mitt Romney so eloquently put, into real estate or art, or even the stock market. They're not actually doing anything with their wealth by employing people to create more wealth. Ultimately, as Americans, as capitalists, what we're against is this rentier economy -- the ability to gain wealth without actually doing anything. I mean, one of the rallying cries of the Republican party is these "welfare Queens" or people who just live off of their unemployment benefits and don't do work. Well, if that's the case, that's equally true for the lower class as it is for the upper class, the 1%. The wealth that they're generating is not actually from doing anything, it is from acquiring all of these real estate and art and whatever else Mitt Romney likes to talk about. Caviar futures, frozen orange juice, concentrate futures? And making money off of that. That's how he made his money, right? That was the whole big thing during his presidential campaign -- capital gains and the carried interest that he made while working at Bain. It's money that didn't come from from labor, it came from holding onto a specific asset, letting it appreciate in value, presumably from a speculative market, and then selling it afterwards. No actual work, no actual labor, no actual productivity for the country came about from there. And this is what we, as Americans, as the government, need to target: the people who make their wealth from a rentier perspective, who don't actually contribute anything to the labor force and improving the productive capacity of the country as a hole, but are increasing their wealth in speculative markets, realizing their wealth from there.
That's ultimately what these bills are all about. And it's precisely the type of people like Mitt Romney and his constituents being these "multibillionaires", as he likes to say, that's what they're worried about because, God forbid, they would have to actually work for their money.
If you would like to comment on this podcast or on the topics covered within it, or you'd like us to raise a new topic in our next episode, please feel free to leave us a message or a voicemail on www.codbsm.com. That's Charlie, Oscar, Delta, Bravo, Sierra, Mike dot com. Thank you for listening and see you at the party, Richter!