Words of wisdom from Bono

From the WSJ

""Bono has learned much about music over more than three decades with U2. But alongside that has been a lifelong lesson in campaigning—the activist for poverty reduction in Africa spoke frankly on Friday about how ...his views about philanthropy had now stretched to include an appreciation for capitalism.

The Irish singer and co-founder of ONE, a campaigning group that fights poverty and disease in Africa, said it had been "a humbling thing for me" to realize the importance of capitalism and entrepreneurialism in philanthropy, particularly as someone who "got into this as a righteous anger activist with all the cliches."

"Job creators and innovators are just the key, and aid is just a bridge," he told an audience of 200 leading technology entrepreneurs and investors at the F.ounders tech conference in Dublin. "We see it as startup money, investment in new countries. A humbling thing was to learn the role of commerce.""

Words of wisdom from George McGovern

From the Wall Street Journal

"McGovern was an honest, good-humored man, and one of our memories involves an op-ed he wrote for the Journal in 1992 on the perils of running a small business. After retiring from the Senate, he fulfilled a lifetime ambition to buy and operate the Stratford Inn in Connecticut. The inn failed, in part due to a recession that was more severe in New England than elsewhere, but also because of the burdens imposed by government.

"My business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc.," he wrote.

"While I never have doubted the worthiness of any of these goals, the concept that most often eludes legislators is: 'Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape.'" The entire op-ed is available on OpinionJournal.com.

McGovern conceded that he had come to this wisdom late in life, but it's a wisdom that his liberal party heirs could profit from today."

Joseph Campbell Meets Joseph Schumpeter (The Entrepreneur As Hero)

(Published in The New Leaders: The Business Bulletin for Transformative Leadership, November/December 1992.)

Entrepreneurs are heroes. They are not like heroes, they are heroes. Heroes and entrepreneurs are called to and take part in the greatest and most universal adventure that life has to offer: the simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. In fact, the entrepreneur’s journey closely resembles the journey of the “hero” in mythology, as outlined in the book The Hero With a Thousand Faces, by Joseph Campbell. There is an amazing and profound similarity between not only the journey that entrepreneurs take and the adventure of heroes but also in their personality traits. The comparison is profound because the myths are about universal human desires and conflicts that we see played out in the lives of entrepreneurs. 

But what is the hero's adventure? Campbell writes "The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return, which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder; fabulous forces are there encountered and a decisive victory is won; the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man." How is the hero's adventure similar to the entrepreneur's adventure?

The hero's journey begins with a call to adventure. He or she is awakened by some herald which touches his or her unconscious world and creative destiny. The entrepreneur, too, is "called" to the adventure. By chance, he or is discovers a previously unknown product or way to make a profit. The lucky discovery cannot be planned and is itself the herald of the adventure.

The entrepreneur must step out of the ordinary way of producing and into his or her imagination about the way things could be to discover the previously undreamt of technique or product. The "fabulous forces" might be applying the assembly line technique or interchangeable parts to producing automobiles or building microcomputers in a garage. The mysterious adventure is the time spent tinkering in research and development. But once those techniques are discovered or developed, the entrepreneur now has the power to bestow this boon on the rest of humankind. 

Heroes bring change. Campbell refers to the constant change in the universe as "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This is similar to Joseph Schumpeter's theory of entrepreneurship called “creative destruction.” A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. The hero also finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." The changing needs and the deficiency correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive the changing needs. 

Regarding personality traits, the hero and entrepreneur are risk-takers and creators. But what is the source of their creativity? People become creative when in the words of Campbell, they "follow their bliss." This is the message of mythology. It means you should engage in an activity, pursue a career or entrepreneurial venture because it is what you love to do and it gives you a sense of personal importance and fulfillment, not because the social system dictates that you do so. The drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist. This is the journey of self-discovery and spiritual growth. Although it may be long, painful, and lonely, it is very rewarding.

Both the entrepreneur and hero are aided by mentors, are humble enough to listen to others in order to learn (and thus become creative), and face a road of trials where they must continually slay the demons and dragons of their own unconscious (such as fear, their egos) in order to discover their creative ability which ultimately comes from giving themselves up to a higher power. 

Ultimately, they become selfless and can see the creative possibilities that the universe offers. They become masters of two worlds, one of imagination and creativity and the other of material things and business. This mastery makes it possible for them to bestow the boon.

Here is a link to a longer, more academic version.

The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?  

A transcript of an interview when Joseph Campbell called entrepreneurs heroes

On 10th Anniversary of Enron Collapse, Time for Sarbanes-Oxley to Go

Click here to read this post by John Berlau of the Competitive Enterprise Institute Blog.

"Ten years ago today, Enron Corp. filed for bankruptcy. Today, with all of its dealings with banks, it would probably have been deemed “too big to fail.”

But luckily, this was before Hank Paulson and Tim Geithner occupied the Treasury Department. Enron was allowed to fail, and its executives were punished for fraud under decades-old securities laws.

While there was certainly damage to employees and, temporarily, to surrounding businesses in Houston, the bankruptcy barely caused a blip to the larger economy. The economy, already reeling because of the 9/11 attacks three months earlier, soon had a remarkable recovery.

Rather, the most damaging action of the Enron affair occurred in the aftermath of post-Enron reform. This would be the Sarbanes-Oxley Act of 2002. Ten years later, even the Obama administration agrees that Sarbox’s crushing burden of accounting mandates is holding back economic growth.

And Sarbox has little to show in results for investors, having failed to stop Lehman Brothers, Countrywide and now MF Global, which was run into the ground by a former politician who had championed the 2002 law. Jon Corzine’s bio on the website BigThink.com states glowingly, “As a member of the United States Senate, Corzine co-authored the Sarbanes-Oxley Act, a piece of legislation designed to crack down on corporate malfeasance crafted in the wake of accounting scandals surrounding Enron, Tyco, WorldCom, and other major corporations.”

Yes, it turns out Corzine may have been more of an expert than we thought on alleged “corporate malfeasance.” And as noted in the October report of President Obama’s Council on Jobs and Competitiveness, Sarbox has crushed the dreams of thousands of honest entrepreneurs for every scandal it may have stopped (and I don’t know that it has stopped any.)

Pointing out that “the data clearly shows that job growth accelerates when companies go public,” the Obama jobs council noted with dismay that there were fewer U.S. venture-backed initial public offerings (IPOs) in 2008 and 2009 than in any year since 1985. As I have noted previously, the data also show that even the recession years of the early ’90s had more IPOs than any year since Sarbox went into effect.

Obama’s council blamed, among other things, “unintended consequences stemming from . . . Sarbanes-Oxley regulations.” It then amazingly called for exemptions from many provisions of Sarbox for companies with up to $1 billion in market capitalization.

Yet just as amazingly, exemptions that did not go as far as the Obama jobs council recommended were killed this week by three GOP House members who seemed to be in the grip of the powerful accounting industry, which gets rich off the mandates that are so costly to entrepreneurs and the economy as a whole.

This Wednesday, the House Financial Services Committee was scheduled to vote on H.R. 3213, a bill by Rep. Stephen Fincher that would exempt firms with market cap of $350 million and below from the “internal control” mandates of Section 404. This was a far lower figure than the $1 billion put forward by Obama’s council and applied to just one section — albeit the most costly section – of the law.

Yet as I reported Tuesday in National Review and The Wall Street Journal writes up in an editorial today, GOP Rep. John Campbell (R-Calif.) and Steve Pearce (R-N.M.) had actively worked against the bill. House sources also told me that Rep. Jim Renacci (R-Ohio) was leaning no, and his office did not return my query to confirm or deny.

And, as noted by the WSJ and Ben Smith’s column in Politico, committee member Michele Bachmann apparently would not return from her presidential campaign to break the tie, even though she — like fellow candidates Newt Gingrich, Ron Paul, and Jon Huntsman — has called for repeal of Sarbox. Smith notes that in contrast, Paul, also a committee member, was ready to return. So the Fincher bill granting modest Sarbox relief had to be yanked.

As I noted in NR:

A claim made by … Pearce, Campbell, and the accounting lobby is that internal-control audits are essential for fraud detection. Yet financial analysts looking at the subprime scandals in Sarbox’s wake have come to the almost opposite conclusion. By requiring resources to be spent on auditing “internal controls” that were trivial for shareholders yet lucrative for auditors — such as employee passwords and possession of office keys – Sarbox Section 404 actually diverted attention away from ensuring accurate reporting of a company’s financial condition.

Commenting on corporate misstatements during the mortgage bubble, respected analyst Janet Tavakoli had this to say on Sarbox to housing journalist Robert Stowe England in his new book Black Box Casino: “Sarbanes-Oxley did nothing. It didn’t work. It was a total waste.”

But who knows? Maybe Sarbox is doing exactly what its champion Jon Corzine wanted it to do!"

Why We don't Need To Worry About China Or Become Like Them

See The new China Syndrome: Andy Stern writes one of the worst WSJ op-eds ever by James Pethokoukis of AEI.

"Call it the China Syndrome. An American visits Rising China and is immediately gobsmacked by the place. Giant airport terminals, speedy bullet trains, ubiquitous construction cranes, the Shanghai skyline. Everywhere you look, Stuff is Happening. And it’s all shiny new. Compared to China and its seemingly perpetual 10-percent annual growth rate, New Normal America just doesn’t rate. Then the gobsmacked American comes to a realization: America Must Become More Like China. Free-market capitalism is out, state-managed capitalism in. I have seen the future and it works!

I give you Andy Stern, former president of the Service Employees International Union (via the WSJ):

The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic. …

While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Several observations:

1. Last time, I checked, the U.S. is 6-10 times as wealthy as China on a per capita GDP basis. On a purchasing power parity basis, China sits between Bosnia and Herzegovina and Albania.

2. Playing economic catch up from a low level is a lot easier than leading the pack. Indeed, developing nations often never close the gap with advanced economies, especially those with a rapidly aging population, low levels of consumption, and undervalued currency — like China.

3. Building infrastructure is easy and doesn’t take brilliant bureaucrats to do. Innovating is hard, and something government has shown precious little ability to do. How’s industrial policy working for the EU?

4. Stern wants government to intervene more in the market. Yet America’s problem in the 2000s was government interfering in the market and creating incentives that favored a chosen industry, housing. What America needs is more Schumpeterian, creative destruction sans government’s thumb on the scale.

5. As Warren Buffett puts it, ”It’s only when the tide goes out that you know who’s been swimming naked.” When China does slow, we’ll see just how efficient a capital allocator Beijing has been. The Chinese Miracle is stuffed to the gill with bad loans. State capitalism is really Crony Capitalism.

6. Maybe we need more “economic teams” like, say, public employee unions and government. American students are sure benefiting from such teamwork.

7. I think what folks like Stern really envy is the lack of democracy and accountability where technocratic elites can make all the decisions without pesky tea parties sticking their nose in."

Even with cutbacks, cities will have plenty of teachers for our kids and cops to keep us safe

See Joe Biden and the Myth of Local Government Layoffs STEVEN MALANGA in today's WSJ. He is senior editor of the Manhattan Institute's City Journal. Excerpts:

"But this hyperbolic rhetoric ignores a decades-long growth of public employment that has left many municipal governments with nearly historic high levels of government workers relative to the population—even after the cutbacks of the last few years. Hiring increases have so rapidly outpaced the growth in the population that retrenchment is inevitable.

Take local education workers. Hiring has far outpaced the growth in student enrollment, driving down the number of students per teacher in American public schools to 15.6 in 2010 from 26.9 in 1955, according to the National Center for Education Statistics. Robust hiring has continued even during periods of enrollment declines, including from 1971 through 1984, when the number of public-school students fell virtually every year, declining in total by 15%, while the ranks of teachers grew by 7%."

"local education employment is back to about where it was in 2006 after recent cutbacks. Sound terrible? Maybe not so much when you consider that public-school enrollment has been stagnant since 2006."

"In 1955, teachers constituted about 65% of local education workers; today, despite years of rapid gains in teacher ranks, they amount to only about 40% of the eight million local education workers.

Per-pupil spending in public schools has grown to $10,500 today from $2,831 (in 2010 dollars) in 1961, according to the National Center for Education Statistics. Has the spending paid off? Mean scores on the SAT's reading test are down 7% since 1966, while reading scores for 17-year-olds on the National Assessment of Educational Progress test, administered since 1971, are flat over that time."

"Starting in the early 1990s, when America's crime rate peaked at 758 violent crimes per 100,000 people, police departments started hiring rapidly. From 1992 through 2008, according to the Department of Justice's Census of State and Local Law Enforcement Agencies, the ranks of state and local cops and other law-enforcement personnel soared by one-third, to more than 1.1 million. That growth far outpaced the country's population increase in the period, driving up the percentage of law-enforcement personnel relative to the general population by 12%.

Results? Violent crime is down by 47% since 1992. The property-crime rate has fallen by 75%."

"New York City's experience is illuminating. Gotham made a big commitment to expand its police force as murders hit an all-time high in 1990. An income-tax surcharge provided the resources to boost police hiring by about 15%, or 5,000 officers, to nearly 40,000 over the next several years. The city's crime rate then plunged, falling 70% in the 1990s."

"Elsewhere the ranks of police officers have fallen by less than 1% after rising by 9% since 2000 alone."

How Regulators Herded Banks Into Trouble

Click here to read this article by Peter Wallison in today's WSJ. The subtitle is: "Blame the Basel capital standards for over-investment in mortgage-backed securities and now government debt." Excerpts:

"In the U.S., this shock came when the 10-year housing bubble deflated and U.S. financial institutions were weakened by a sudden loss in value of the mortgage-backed securities (MBS) they were holding, especially those based on subprime mortgages. Mark-to-market accounting did the rest, requiring banks to write down the value of their MBS assets until they appeared unstable or insolvent.

In Europe, the problem is similar and so is its source. Europe's banks, like those in the U.S. and other developed countries, function under a global regulatory regime known as the Basel bank capital standards."

"the Basel rules require commercial banks to hold a specified amount of capital against certain kinds of assets."

"Under these rules, banks and investment banks were required to hold 8% capital against corporate loans, 4% against mortgages and 1.6% against mortgage-backed securities."

"these rules are intended to match capital requirements with the risk associated with each of these asset types, the match is very rough. Thus, financial institutions subject to the rules had substantially lower capital requirements for holding mortgage-backed securities than for holding corporate debt, even though we now know that the risks of MBS were greater, in some cases, than loans to companies. In other words, the U.S. financial crisis was made substantially worse because banks and other financial institutions were encouraged by the Basel rules to hold the very assets—mortgage-backed securities—that collapsed in value when the U.S. housing bubble deflated in 2007."

"Today's European crisis illustrates the problem even more dramatically. Under the Basel rules, sovereign debt—even the debt of countries with weak economies such as Greece and Italy—is accorded a zero risk-weight."

"In the U.S. and Europe, governments and bank supervisors are reluctant to acknowledge that their political decisions—such as mandating a zero risk-weight for all sovereign debt, or favoring mortgages and mortgage-backed securities over corporate debt—have created the conditions for common shocks.

But that is not all that can be laid at the door of regulators. Examiners and supervisors operating "by the book" tend to disregard the judgments of bank managements in favor of regulator-approved methods of assessing credits and carrying reserves. As banks begin to conform to regulator preferences, natural diversification declines and all banks start to look pretty much alike. Then, like genetically altered plants, they are vulnerable to a pathogen—like MBS backed by subprime mortgages—that sweeps through the population."