The Company Store
by Richard
Younger readers will not be familiar with the term.
In years past, small factory or mining towns, dominated by one major employer, would often pay the employees in scrip redeemable only at the company owned store.
Of course, they abused their monopoly pricing power, and held the hapless employees in thrall to their meager, overpriced menu of goods.
The solution is to have multiple producers vying for the customer’s dollar, to ensure lower prices and higher quality.
The company store is making a comeback. With a vengeance.
Think of the post office. Then think of Amtrak. Then extrapolate these thoughts to the much larger markets of home mortgages and college funding.
Then…be afraid. Be very afraid.
As a result of the 2007-2009 meltdown, we now have Uncle Sam as the virtual monopoly provider of home mortgages. Well over 80% of all loan originations are now guaranteed by the government, and the percentage is still increasing.
The firms we think of as loan originators are simply agents who have been subcontracted out to do the grunt paperwork. They can earn a profit from originating and servicing loans, but bear no risk. All risk is carried by the clueless taxpayer.
Ditto for student loans. Private lenders have fled this market, and are not likely to return. So we’ve nationalized and socialized virtually all college loans.
These are not just two random markets.
The three largest expenditures most families incur are: home purchasing, college loans, and health care expenses.
Naturally, the full might and weight of the imperium in Washington is now focused on health care, so that they will then have a chokehold on this last redoubt.
What distortions are created by having monopoly providers in these areas?
- Capital will be disproportionately diverted to residential real estate, at the expense of far more productive investments…due to the subsidized rates and ironclad guarantees.
- College expenses will continue to multiply at more than twice the core inflation rate, since demand will be artificially inflated and stimulated by the indiscriminate funding of anyone who can fog a mirror.
The result will be a generation of walking wounded graduates, carrying the equivalent of a luxury home mortgage when they graduate, but with no house securing the mortgage.
This will have implications on relocation, employment, marriage and family.
Your whole life, in other words.
We will, in effect, forever impoverish our children with a crushing debt burden.Neither housing or education will respond to the normal ebb and flow of supply and demand. By continuously goosing demand, we ensure both the scarcity of supply, and shoddy product offerings that could not survive in a state of equilibrium.
Be very afraid.
September 22nd, 2009 at 10:39 pm
Younger people may not remember the Company Store, but they might remember food prices at airports, where stranded passengers are willing to pay a pretty penny to eat at the only Crap In The Box. Or Microsoft, a company whose engineers are the joke among Computer Scientists for their incompetence, but whose effective office desktop monopoly has lead to a bloated operating system (Vista) that, after 20+ years of development, still crashes, stalls, and just plain dies. So, indeed, monopolies are problematic.
But cultivating fear about the future is a counterproductive solution. Monopolies are a fact of life in any society: private security firms have nowhere near the power of police, so police is a monopoly, and yet we (libertarians aside) are OK with that. Same with bank account guarantees — FDIC has an effective monopoly on this, but does that translate into people favoring bank accounts over the stock market? No, it has a stabilizing effect in bad times, not a negative effect on the stock market. Similarly, cultivating the fear that ironclad guarantees on real estate will cause residential real estate to blossom and other kinds of real estate to falter is pointless fear-mongering: if there is opportunity in commercial real estate, it will do well.
Fear mongering is a useful political strategy. It worked for President Cheney and his wars…
“The Sky is Falling” said Chicken Little, “The Terrorists are Coming” cried Dick, and the people spend their tax money protecting against a threat far, far, far smaller than the threat of, say, highway fatalities from badly maintained roads. Last decade, fear mongering tanked health care reform leading to a drastic hike in health care costs over the past 15 years. It remains to be seen whether the public can recognize fear mongering for what it is — irrational manipulation — and act in a rational manner instead to put together collaborative solutions.
Yoda put it best: “Fear is the path of the dark side. Fear leads to anger, anger leads to hate, hate leads to suffering. […] I sense much fear in you.” And he was right as Anakin Skywalker turned into Darth Vader.
The smart reaction to this trend? Not fear, but opportunity. If real estate stand to blossom, earn from it. If college loans will go to everyone, the private college will blosson so get a college job with a pension (and tenure too, if you can teach).
June 5th, 2010 at 11:00 am
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