Andy Kessler used to be a hedge fund manager who apparently
wrote a book I have not read, do not intend to read and will obviously not
discuss -- all the more so because it is called: “Eat People,” a title I do not
particularly find appetizing. But Kessler also wrote an article that was
published in the Wall Street Journal on September 19, 2012 under the title:
“The U.S. Needs More i-Side Economics” and the subtitle: “The misallocation of
capital is one reason the recovery is stuck between lack and luster.” And this
article is what I wish to discuss.
The writer begins by citing a half-truth which he puts in
the form of a question: “No jobs?” and quickly answers with an ironic attack on
something: “No wonder, given what passes for economic thought these days.” But
the full truth is that there are jobs in the United States; as many as 3 or 4
million for which there are not enough skilled people residing close to where
the jobs are. Such people may live in another state but cannot move because of
one reason or another such as the inability to sell the house at a reasonable
price, for example.
But Andy Kessler uses this reality to advance a theory that
is glaringly self-serving. The way he does it is by challenging a theory that
has been around for a century. The theory was formulated by none other than the
industrialist Henry Ford -- and more than that, he put the theory into
practice. In fact, Henry Ford put his money where his mouth was by doubling the
pay of his workers.
To attack the salutary effect that this theory has had,
Kessler quotes President Obama who used it to describe his own plan for
reviving the American economy. No, says Kessler, it is a myth to believe “that
you can just give money to the middle class and good things happen.” He goes on
to say that the belief in that theory is “why the recovery is stuck between
lack and luster.” With this, he begins the process of advancing an alternative
theory.
To do so, he quotes a passage from the website of the Ford
Motor Corporation where it is written: “While Henry's primary objective was to
reduce worker attrition...” after which he concludes that raising the pay of
the workers did not contribute to the creation of the middle class. Instead, he
attributes the creation of that class to the fact that Henry had managed to
raise the productivity of his operation a year earlier. When this happened,
says Kessler, it allowed Ford to sell his cars cheaper than the competition.
At this point, we see that the Kessler logic disintegrates
because it fails on a number of crucial points. For one thing, he ignores the
fact that attrition existed in Ford's operation before the man raised the pay
of his workers. This meant that the workers had other places to go to where the
pay, the working conditions or both were superior. Thus, the middle class was
being created in America
not because Ford was making more cars but because the workers from those other
places could afford to buy them. And then Ford had the good sense to add to the
size of that middle class by raising the pay of his workers. The truth that
Kessler fails to understand is that more people earning good wages make a
middle class, not more cars that nobody can buy.
But having this colossal failure under his belt thinking it
is a magic charm; Kessler now relies on a tortured logic to advance the rest of
his theory. What he wants us to believe is that the creation of the goods and
services we call wealth, may be produced more efficiently not by industrialists
like the Henry Fords of this world and the workers they employ in their
factories but by people like say, the hedge fund managers who play with other
people's money, and know how to allocate these monies. Give these people the
money, he says, and they will fix the economy. Some magic charm, this is, some
magic charm!
As to the logic on which Kessler relies to make his point,
it is so tortured it cannot be explained. Thus, the thing to do for those who
are interested, is to read the passages where the author of the article
mentions Paul Tough, The New York Times Magazine, Lawrence Summers, Tim
Geithner, Jason Furman, Mark Zandi, Moody's Analytics and Friedrich Hayek to
make the point that the President's plan is “economic malpractice” because it
shows it is a “huge misunderstanding between spending and investment.” You put
it all together; I won't try.
And then Kessler tries to buttress his point not by mixing
apples with oranges which would be bad enough, but mixing hot oil with cold
water which would be explosive. He does that by mentioning “Investor Peter
Thiel [who] put $500,000 into Facebook in August 2004, a company now worth $50
billion.” Without saying that this was purely a gamble that paid off without
Thiel doing anything to created real wealth, Kessler juxtaposes that story with
the following: “This month, after investing billions over the years on R&D,
Apple released the iPhone 5. The company is worth $666 billion.”
Well, Sir, Mr. Andy Kessler, you cannot equate the R&D
of Apple with the gambling act of a Thiel. If you think that the betting of
say, a hedge fund manager such as yourself, is going to invent a new iPhone and
build it by the millions, you believe in the power and the charm of “fairy
dust” like says your President. Get it through your head, a gambler that is
bathing in a pool of money does not make a middle class; millions of well paid
workers will invent and produce those phones. These people will then constitute
the middle class that can afford buying and using the phones it produces.
For this reason, the best way to revive the economy is not
to give the Andy Kesslers of this world more money with which to gamble, but
use the money to train enough workers to fill the millions of jobs which are
near to them – jobs that could use skills these people do not yet have.
As far as I can tell, this is what President Obama is
striving to achieve.