jawfish

Value Added, The Standard
john posted in memes, politics & culture on December 4th, 2008

With the current terrible financial weather on top of many years of very bad management in the USA, we need to restructure our economy, and we need a simple common-sense standard to define what we need and what we should jettison.

The Situation
Many of us have been stunned by the size of the banking collapse and bailout. First, old pinstripe investment banks turn out to be mountains of toxic paper and leverage, run by con men, then vast amounts of taxpayer money are thrown at the banking system overnight to no effect, only to be followed by literally trillions of unaccounted dollars from the Fed. Then, when actual manufacturing businesses, the automakers, come to Washington, the New York set couldn’t care less.

Without repeating the details covered elsewhere, let’s just say that the heretofore academic and obscure critique of American business as too little manufacturing and far too much F.I.R.E. ( finance insurance real estate) has become a commonplace in the media. Now we are in real danger of losing the domestic part of the auto industry to bankruptcy.

Some Introspection
Who are we, this nation whose wealth is based on financial transactions? Where is the economy built on farmers, ranchers, and mechanics? Who are these frightened fat people who buy buy buy at Walmart, and have no town pharmacy or clothing store? When did bankers become PT Barnums running a gigantic Ponzi scheme? Is there really no one left outside the Berkshire-Hathaway empire and the computer biz that builds a business year by year?

We Need a Standard
Clearly there are jobs that must be done, like firefighter, cop, and doctor. There are jobs that can make other jobs more efficient or valuable, like sales, accounting, and insurance. There is a powerful fast-moving global financial system that can underwrite world-wide trade. And then there are jobs that make something. These are the jobs that produce real wealth. These are the jobs that provide the raison d’etre for the supporting jobs. The current crisis makes it clear that runaway FIRE business not only detracts from real wealth and prosperity by rerouting resources that should have gone into valuable jobs, but can actually reach a toxic level where it destroys the financial infrastructure. Put differently, we can afford a few residents of Richistan, but turning over the whole banking sector to them leads to a looting of the nation’s wealth.

The nation is in for some tough times restructuring the economy. We need a value standard to use when planning new business and government spending. What jobs are valuable and what are a drain on the society? We can’t go with my personal list or with yours: we need a general way of evaluating work that we can all agree on. For instance, we have to decide what banks will be allowed to do, and what they will be required to do.

Value Added
Here’s a simple way of looking at the value of economic work: Value Added. Value Added simply means that your work took some raw materials and made them into something more valuable. Whether you added dollar value or social value is irrelevant, you made something better. It’s as simple as that, value added is good, value consumed is bad. Any individual job is hard to quantify, and all of us backslide some days and march forward others. But maybe when you are deciding to call your next meeting, you might think, ” Will we lose more production by taking these people off-line, than we gain by meeting?” When you invest, ask, ” Is this a company that makes something, or are they just moving paper around?” When we examine governmental health care proposals, lets ask, “Will this help us compete with foreign sources, will it make health delivery more efficient, will it allow people to work for small companies and start-ups with no insurance?”

Parasitic Work
There has been a ubiquitous de-coupling of wealth from value-creation. We folks outside the inner financial circle hardly knew how much before this collapse, but people of real wealth no longer feed it like the Founding Fathers on trade and agriculture, or like the rust-belt barons on steel and cars. Real wealth today is built like the Robber Barons, on sleazy governmental give-aways and land deals and stock manipulations, and now complex computer-generated pseudo-money-contracts. And giant retailers like Walmart are just growing by squeezing out the smaller competitors, they aren’t making anything new. Or making anything at all.

“The Kept Dollar is a Stinking Fish”
This free-floating wealth is parasitic, it is not beholden or dependent on a region, a nation even. It does not rely on a workforce or raw material. And worst of all, it’s not available capital for businesses: it’s locked up in credit-default swaps, insurance on insurance on paper, and other abstruse and dubious entities. When the wealth has no social ties, it naturally encourages a kind of rich-man’s anarchy. In the past, wealth was based on agriculture, manufacturing, and trade. Sure there were plenty of sleazy deals, swindles, and usury, but they weren’t the majority of the economy. Now, wealth is based on swooping in, and making a bet, gathering up the chips and vanishing.

Let’s test the idea of Value Added:
Farmer – takes soil, and seeds and makes food. Value added.
Hedge fund manager – takes capital, borrows more capital, and risks it all in an attempt to make more capital. The capital never goes to work, nothing is created, so this behavior is parasitic. Value depleted.
Venture capitalist – takes capital and funds new business with it. Value added.
Traditional banker – Lends for housing, construction, manufacturing plant and equipment. Businesses are built, jobs created. Value added.
New style bonus-driven banker – Constantly searching for new and bigger short-term wins to make his annual bonus bigger. Never invests in long-term projects. Nothing created except risk. Parasite. Value depleted.
Corporate raider, CEO, investment banker – they may improve efficiency of system by reorganizing sick companies, but almost always they just spend on non-productive mergers, or loot current value-added assets. Usually parasitic. Value depleted.

Conclusion:
Sure there are lots of edge conditions where its hard to say what value is added or subtracted. Environmental and social costs are not well accounted for in our system, but that’s a subject for the Green Economic Revolution. But two simple words express the general idea- Value Added. If you are not adding value, you are a net cost rather than an asset. Think about it.