Is Capitalism Broken?

This article from the WSJ lays out why it is (page #3 is great)...

Capitalism is so broken it can’t be fixed - MarketWatch

Innovation has to wade through regulations and lawsuits. Investors want to take large portions of a company to lend then tens of thousands of dollars, instead of investing in a company and making a percentage of the initial investment back up to a certain limit. Innovators and entrepreneurs should be the ones driving the economy not the financial marketplace. The lawyers and patent lawsuits are also a problem.

Big business is more able to move to a low tax state or country than a small business or individual. If I were going to start an on-line company next month, I would have to spend a lot of time figuring out where I want to move to avoid having to pay hundreds of thousands of dollars in taxes if my business is a success. Let alone if I sell a lot of products to the international market and have millions in foreign currency revenues that I would have to pay the foreign government taxes on, but I would have saved in bank accounts around the world... It would become a problem, not a bad problem, but still...

Now, the computer/automation revolution has changed a lot of things in the past 30 years, but they are also changing the rules of the game and how things work. And I won't even get into the financial market traders/fund managers who are living in a different world. Even the US government is selling off assets and turning over any way of making money to the private sector.

For the individual, we have the cheap or poor consumer who doesn't care about the quality of a product as long as it is free or much cheaper than the competition. And I am living proof that you can spend money correctly and then live well being cheap. But, if too many things are free, and people don't need to earn as much money, what happens then? Will people choose to work less, will that ever be socially acceptable? Will low-income cities be created that work (unlike 'the projects' and trailer parks), but more like hippie communes or does that take a certain mindset and is too public/sharing of resources? Will they work the same and use the extra money to improve their lifestyle? Or will they still have to work any job they can find and work over 40 hours a week just to get by because they price of everything has gone up so much? Even having to support a wife and kid on my salary would be a problem.

The value of the dollar has been tanking because of overspending, tax avoidance by big corporations, and wasteful spending on consumables. The military and healthcare industries don't want to give up anything. The Baby Boomer generation didn't put enough into the SS and medicaid system to offset the life expectancy and expected level of care and retirement income. How could they since they would of needed to have had their investments grow 1000% since 1970 to offset just the inflation rate on certain items. What used to cost 5 cents is now 50 cents, what used to cost $40,000 is now $400,000. And then you get into the whole labor issue and how much should someone get paid. The older generation still remembers when $1 an hour was enough to get by on, now $10/hour wouldn't do much in the bigger cities. However now even with a good average salary it is hard to even be able to afford to buy a new car. New Cars Increasingly Out of Reach for Many Americans - Yahoo! Finance I went to the car show last weekend and they are trying to sell pickup trucks for $34,000. I remember when I first wanted a truck it would cost under $10,000.

I might be able to save $30,000 in two years, but the extra $2,000/year in insurance payments and fuel payments (or electricity costs) is hard to justify when I don't know if I will be able to work in the same job for 30 years, and have to deal with the dollar falling in value another XX% by the time I retire. I travel enough to have been to some countries where things are 20% more expensive and I had a much harder time keeping my bank account in the black.

And as we saw this past week with the whole Yahoo! work from home debate, it looks like there is a big disconnect between management and the workers in this country. The politicians want more scientists and engineers, but even if they do something great, they don't see any share of the profits. The investors get all of those. Science and engineering are fun, but not a good career choice at all if you want to make any real money or feel financially stable for life.

I could probably go on, but what do you guys think? How do you fix the business environment and political environment that we are in? Is there too much corruption and gaming the system, or is it that only a few of the most outrageous companies/people get caught and make the news? Do we need a new model for Capitalism? Do we need a shift in the way the government does business where it can charge people and make money as a monopoly? How much of a role does the individual play in this by not caring where or how power is generated, gasoline is made, waste water is treated when it comes to decisions about what product to use or what the tax rate is somewhere? Is it a problem that can be fixed, or is the boom-bust cycle just something to be expected?

 

Initial thought:

All of this talk about "unable to afford" tends to make me think that Americans have this crazy entitlement complex.

They can afford a car. They can even afford a new car. The problem lies in that they don't want that economy model.

I mean, who can stomach driving a 2012 Elantra ($18k) when a brand new Camaro SS is only $500 a month for 5 years?

A lot of this kind of stuff is covered in all that Rich Dad, Poor Dad zen that has been floating out there lately.

Does the economy suck? Sure. How many of us are living beyond our means anyway? Probably too many.

 

A 2012 Elantra is $17,000 + tax and title though. Plus $1,000 in insurance every year for the next 5-7 years.

A 1990's Dodge Neon was $8,000-$9,000. That new model doesn't exist now (in the USA), and the used car market has high fuel costs or maintenance costs with a lot of the cars there.

But, yes, part of it is entitlement, part of it is that in the mating game, you are at a disadvantage if you look cheap or poor. However, the workers who are doing the work aren't seeing the benefit from their hard work, while the managers and financial people controlling the money are. It is also a problem where they have to save for years and then are still barely able to save after buying it or getting a loan. As a single guy, I can make some sacrifices that I couldn't if I had a family to make it work better money-wise. But if I had to save for kid's college fund, my and a wife's retirement, pay the mortgage, buy two cars, buy health insurance for everyone, food, vacations, etc... I don't think it is possible with how much I make today and I am well above the average around here.

And there is a population issue too, since there are lots of people who are looking for work and would be willing to do your job, there is no pressure to pay more, even as the value of money decreases.

 

The Dodge Neon was reborn in the Dodge Dart.

 

But, let's say the trend continues and in 2025 a new simple car will cost $30,000. GM and Ford still have to pay their workers and retirees expenses... In 2040 when I can 'retire' in the government's opinion, econoboxes might cost $40,000, and the dollar menu might be the $10 menu.

A very nice Corvette cost $5,000 in 1970, yet was a large percentage of what people made back then. (Corvettes for Sale - Used Corvette Classifieds - Corvette Appraisals - Buy Sell Corvettes) But, still I think there is a sizable population that remembers when products cost a lot less than today and want to find 'a deal'. And $17,000 for a basic Elantra or $16,000 for a Dodge Dart is not a deal. Not when your first car shopping experience had cars at a drastically different price point (1995 Elantra was $10,000).

It also seems like there are certain industries that are necessities that are either monopoly or cartel controlled that can raise prices to whatever and demand will still be there. They are squeezing out the other businesses and jobs from things people could live without.

 

Jesus, I think I have a fiscal mancrush on Borla.

 

This isn't supposed to be just about cars. It could be the price of strawberries, meat, gasoline, shipping, guns, airfare, vacations, surgery, rent, houses... Everything outside of computers and TVs has seemed to have gone up in price. Well, Wal-Mart has been able to force some prices to be lower, and if they ever started to produce a car/truck that would be half the price, I bet a large percentage of people would look at it.

But it is the bigger economy in general and how everything is setup, and as a little player in it, it is getting harder to keep up. Or how many people will come to the conclusion that if there is no way to win the game, why bother even playing? I really don't get the reasons some people do what they do for the wage they earn. Or work two min wage jobs to live paycheck to paycheck... Why can't you find a $20,000 container house that generates it's own power and has 16" thick walls to take care of heating and cooling year round? But I can find thousands of $300k homes that look really nice, but will cost you 30 years of your life working to afford them, if you don't lose your job.

 

The cool part about life is that if you don't like the impractical cookie-cutter crap The Man is trying to sell you, you can always build your own.

 

I should note that I am doing pretty well, but it just doesn't feel like I thought it would. I have money scattered across many different accounts and I don't have the time or skill to manage it all. I used to know exactly how much money I had, now I haven't even looked at my 401k account, paycheck, IRA, or company stock account in years... Mint.com doesn't work as good as it should for me. And it's not like I need to take the money out. Compared to other people my age, I am in the top 20% for sure I would bet in terms of savings and investments that they had to earn themselves. Yet, without a big payday, it doesn't seem like I can deviate at all from having a steady paycheck and living the perfect 'millionaire next door' lifestyle.

I have the buy and hold mentality, yet that isn't what it used to be. And yes, if you compare my first world problems to what people in third world countries are facing, it is no contest that they have bigger problems. But, I would know how to solve those problems. This worldwide economic problem that we have now is decades in the making and has way too many big players who all want to win by getting the most money as possible. And getting into the game now in any meaningful way is close to impossible to capitalize on growth or expansion.

 

Now, I don't know what the dollar amount breakdown would be as to what people would end up in which 20% percentiles, or where I stand. I know I was -$5,000 in 2003 for sure. I am doing much better financially now, and I feel like I am at the 50% mark or so on that chart. So, capitalism isn't totally broken, but it isn't to say that it couldn't be improved a lot. And I don't mean that I should be at a higher percentage, I think millions of other people who have worked their entire lives should have more savings and equity than I do.

 

The issue is not that capitalism is irreparably broken, the issue is that what we increasingly have in the United States (the effects of which resound in the global economy) is laissez faire capitalism, and that is not good capitalism.

Capitalism is like a muscular system. It is of good design, and capable of great strength, flexibility, and healthy growth, but in order to do all these things properly, it requires pairing with a skeletal system and a circulatory system. The skeletal system for capitalism is regulation of banking and businesses, including vigorous anti-monopoly regulation and consumer protection laws. The circulatory system for capitalism has to be a strong infrastructure of social service and public welfare services, such as high quality public education, universal health care, quality unemployment/underemployment assistance designed to help people get back to work and get on their feet, quality social work for families in crisis, and other similar programs designed to promote the expansion of the middle class by mobilizing the lower class upward.

Capitalism is a good system in many respects: no one has yet come up with anything else that so readily harnesses human innovation and competitiveness to create wealth and jobs, fuelling a national economy. But it cannot stand alone, without a framework of moderating social and legal restraints and supports, or the whole thing sags into a morass of corporate oligarchy by proxy and plutocracy, which is essentially what we have or are heading toward now.

 

Who exactly is his guy, anyway?

I am one? Are my neighbors?

 

I appreciate that you qualified your statement by saying generally..., however, it depends on a number of factors. Depreciation is a big cost but dividing that cost over a long period of time and the relative difference between new and used gets smaller, in some cases trivial.

The real consideration is what is the total ownership cost and how new v. used compares.

Not to mention the ability of the buyer to buy and sell at the best price - the retail profit margins on new vehicles is usually smaller than on used vehicles. I routinely look at Kelly Blue book to monitor the values of my vehicles and compare that to advertised prices on vehicles for sale from various sources. I have a full-size luxury vehicle that I recently took to a dealer for an offer price, he came in at $7,000, I saw a similarly equipped vehicle with similar miles listed for sale for $15,000. KBB wholesale showed $9,000, retail showed $12,000. If a person buying used pays $15,000 for a car worth $7,000 to $9,000 they could easily have been better off financially buying a new Honda Civic. Considering a vehicle like a Civic, if you compare used retail prices of vehicles less than 3 years old and compare it to buying new - I would buy new - you get full warranty, a lower interest rate if you finance, new tires and the knowledge of exactly how the car has been driven and maintained. On the other-hand I bought a used Porsche once, had it for about a year (with a after-market warranty) and sold it for more than what I paid for it (and got a pro-rated refund of my warranty) - that was a fun deal. My only cost was gas, insurance and an oil service.
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I think the opposite - our current forms of capitalism are overly regulated. Perhaps regulated to the point where market participants have become lazy and engage in market activities they should avoid because they don't understand them. Mortgage back derivatives comes to mind - brokers were selling these to 80 year-old widows claiming they were virtually risk free.