Wednesday, March 28, 2018

Self-Interest or Bleeding Heart?

I don’t mind if the banks mistreat their customers because it just means I’ll get bigger dividends.
I’ve heard comments like this from several people over the past decade. With stories swirling about bank employees up-selling customers on accounts and loans they don’t need and steering customers to expensive investment products, some bank investors just cheer on fatter dividends.

In the short run, letting the banks do as they please may well make investors richer. But I’m doubtful that this is a good idea for the long run, even for people focused solely on self-interest. I’ll argue that you don’t need to have a bleeding heart to want better behaviour from banks.

This issue is part of the larger trend toward bigger disparities in incomes and wealth. If these disparities keep growing, the masses will continue to call for (and vote for) higher taxes on the rich. To date, higher taxes have applied to incomes, but a day may come when we start applying direct taxes on levels of wealth. I wouldn’t want to see this happen, but too much wealth concentration could bring it on.

So, even those whose concern is self-interest have reason to want to limit income and wealth concentration. We need to balance giving a decent life to the weakest in society and maintaining the incentive to work. We may disagree on the correct balance point, but it is certainly possible to go too far either way.

We do reasonably well with this balance in Canada. We don’t need to live in gated communities to keep the poor out, and we can walk around in most parts of the country without fearing getting mugged. I’m nervous in countries with desperately poor people knowing that the modest amount of cash in my pocket makes me a target. This includes some parts of the U.S. I’d rather see the weakest in Canada have enough that desperation doesn’t drive them to steal from me.

There is definitely such thing as too much wealth sharing, but there can be too little as well. A problem we have now in Canada is that we’re getting some of the worst of both worlds. Our total tax burden is quite high, and this frustrates taxpayers. But a huge fraction of this tax money is being soaked up by public-sector unions that protect vast numbers of unnecessary jobs. This limits the amount of tax money that can go to the needy which frustrates advocates for people with mental and physical problems.

We need the functions our various levels of government provide, but we overpay for them by a wide margin. Saving money doesn’t require that we eliminate any government programs. It would be a matter of identifying jobs that don’t make any meaningful contribution. However, efforts along these lines are likely to be resisted fiercely.

In effect, one of the biggest charities funded by taxpayers is all the public sector workers whose jobs shouldn’t exist. Not that I blame the workers themselves. You can’t blame people for taking jobs offered to them. They do what the system expects of them even if some of their output serves no useful purpose.

It’s in our self-interest to set a sensible minimum standard of living for Canadians paid for by taxpayers, but this goal is undermined every time we grow the public sector payroll and divert tax money away from needy Canadians and into more salaries. Allowing Canada’s largest businesses to abuse their customers undermines this goal as well. Even wealthy investors have a long-term interest in treating the poor reasonably.


  1. Replies
    1. @Deborah: Yes, and as long as I get angry replies from both political extremes, I'll know I'm on the right track :-)

      Seriously, though, I'm fortunate that the vast majority of my readers who comment are calm and thoughtful.

  2. In the past wealth inequality has caused a lot of problems. But it usually came with mass unemployment and starving people. I don't think we have that much experience in an environment where "wealth inequality" means you have to get more food from McDonalds and dollar stores, and then drive home to watch TV.

    That said I would like to see a lot more focus on helping people to do productive work. The thing I can't stand about politicians who have built their brand on attacking the 1% is their implication that if you removed a tiny fraction of the population the rest of the country would be helpless.

    That may buy votes but it's a path to decline. Far better to encourage the right opportunities and incentives so more people can be a part of higher productivity. That is the only true wealth.

    One place governments could help is with infrastructure. It increases productivity and reduces costs for everyone. Both the Canadian and US elections have brought up the idea of borrowing cheaply to invest in this (with a side benefit of employing more workers to build it). I'm not seeing it done well on either side though.

    Unfortunately we are missing big opportunities. Hopefully over time the changes of control and the clear results of bad ideas will allow them to come out.

    1. @Richard: Too much inequality can be a problem, even if the people near the bottom aren't doing too badly. Envy can lead to social unrest. I'm not arguing for some communist utopia. As we get richer as a society, we become more able to easily afford to increase the minimum standard of living for the weakest. Unfortunately, the large fraction of our tax money that gets diverted to salaries for unnecessary government jobs is undermining our ability to help the weak. In particular, we do a poor job of helping those with severe enough mental issues that they can't properly navigate our system of government support.

      I agree with you that there are many improvements governments could make. However, they lack the money to do these things because so much money gets wasted in salaries.

    2. I agree on helping the weak. We appear to be going through a lot of "scope creep" on that at the moment.

      Outside of those who are truly helpless it's hard to see a lot of shortfalls. You don't need to have a great job to get an iPhone for a few hundred dollars, and the comparable (much more limited) technologies would have cost a lot more 20 years ago. Food costs have some inflation but they're not problematic. Transportation generally seems more affordable.

      Housing is the biggest problem we have in Canada (most of the US is better). Government responses are very limited so far.

      Other than that, what benefit do the wealthy get? Buying things that will always be expensive because their appeal is exclusivity?

      They do have increased financial security which is a clear benefit. But I still think just about everyone is well-off by historical standards.

      Low unemployment rates are a form of financial security for everyone else. More support in helping people develop the skills that are needed today (or putting their skills to use if there's a need that isn't addressed by private industry) would improve this further.

      Past instances of wealth inequality were mostly about physical shortfalls on basic necessities. Now it's more about psychological shortfalls on relative status. We're in new territory which means we're unlikely to get it right the first time.

  3. Side note: it would be an interesting test to compare the improvements in efficiency of businesses and governments. There's a lot of talk about businesses that don't deserve to operate if they can't pay enough.

    If they are constantly getting more efficient due to competition then that likely creates lower prices for their customers which is a real benefit. On the other side governments are hardly eager to charge lower prices to their "customers"!

    I'm not sure what would be a good way to measure this but if one was found it could help inform us. My assumption is that if you look at how much better businesses got at creating value over the last 10 years they will look a lot better than governments. I could be wrong though.

    1. @Richard: The fact that businesses can actually fail is proof enough for me that business is more efficient. But businesses won't do things like push for food safety. We need most of our existing government functions, preferably with less waste.

      I fear that any attempt to compare efficiency of business and government could be gamed to give whatever answer is desired.

    2. I've dealt with some regulatory agencies despite my best efforts. They're not always user-friendly but I don't think they're the major issue.

      We're likely to see a lot more inefficiency when governments try to do something that could be done just as well by private interests.

      The waste in a small office that oversees an industry can't be significant compared to the waste in a large department that replaces an industry.

  4. Hi Michael,

    Your always coming up with common sense suggestions, but no one is listening except a certain facet of our population. Unfortunately Politics and our new SJW / PC world covets emotion over intellect + innuendo over facts.

    You may recall a certain Ontario premier wannabe suggesting an organized reduction of 100,000 government positions a few years ago. Makes sense, but when your opponents package it up, change the narrative, spin it out through a biased left media, all the common sense in the world flies out the window.

    You have great thoughts, but the culture and perspective of our young people have been irreparably altered to favor a form of cultural Marxism over any kind of Capitalism and self responsibility. I don't see this getting better at least until it gets worse. I'm concerned about the future for savers and investors as demographics change and Governments want and will need even more from us to pay for all the promises and programs they make.

    1. @Paul: I'm more optimistic. The world is a better place than it was 25 or 50 years ago. Despite all the troubles we can think of, I'd rather be a 21-year old today than go back to when I was 21. Politics is nauseating and yet the world runs reasonably well and our society keeps becoming wealthier.

      I recall the pledge to fire 100,000 people. Done well, it could have been helpful to Ontario, but the way the message came out was terrible politically. Few people like the thought of firing anybody.

      I think young people are smarter than you're giving them credit for. Even if they do have socialist leanings, that's the way it's always been. Young people of any generation tended to be idealistic socialists. Then most of them grew up and saw the wisdom of democracy and some form of capitalism.

      I don't expect to change the world on my own. Maybe some of my ideas will resonate and influence the future in a positive way.

    2. I believe most of those 100,00 jobs were not going to be chopped, they were just not going to replace people leaving, retiring, and contracts ending. Generous early retirements as well. It was painted as firing, and people were reminded that everyone has someone (family) they know in a government position, so it was sold as effecting every family somewhere. Good sell really. The voters bought it, hook, line, and sinker.

      I can't fully agree that today is a better place then it was 20 or 30 years ago. People just don't remember certain aspects. Particularly things like just one person working 8 hours to have a big house, a cottage, and fairly new cars on one paycheck in an average job. Not being connected to work after you leave. There are some studies showing how stressed people are being plugged into constant social media. I would go back in a heartbeat. You didn't feel like you were in a race every day. Everthing seemed to have more meaning and "Goldfish" style attention spans were more rare.

      As a person who hired many people for entry level positions, and had many discussions with placement agencies for multiple years and their experiences with them, I have to say I also disagree with your millennial statement. Maybe there are pockets of educated Millennial's that buy into a good future, but there are a huge block of directionless, entitled and narcissistic ones as well. They're far beyond socialistic and speak from a place as if being completely "beyond reproach".
      It no longer seems to be a phase they grow out of when they hook up and have a child and responsibility lands on their shoulders.

      Just my thoughts and experiences. People forget sometimes that they don't have to agree and can still respect one another. Another negative of these days. Everyone is so sensitive and polarized. Most everything is actually just a perspective, and everyone seems to feel theirs is the right one and shut out or shut down other ones.

    3. @Paul: I think your'e seeing the past through rose-coloured glasses. A great many of my peers when I was young were dull, lazy, and self-interested. Fortunately for me, each major step of my life took me to a more rarified atmosphere. Many of my high school classes were streamed. My university program brought me into contact with an even greater concentration of bright motivated people. Then my working life was spent among very bright successful people. The neighbourhood I live in can only be afforded by those fairly successful in life. It would be easy to forget that the typical student in my elementary and high schools was quite dull and now lives a very different life from mine.

      I see that many children in my neighbourhood are on a less successful path than their parents had. But this is just reversion to the mean. I don't believe that on the whole young people today are worse than our cohort was years ago.

  5. Michael, interesting read. I would be interested in some examples of government jobs that you think are unnecessary or redundant at this point.

    1. @Unknown: There is no category where all the jobs are unnecessary. If you talk to managers in government, it's common for them to say they manage 7 people, 2 of whom can't or won't be useful, so they try to get the work done with the other 5. Then try asking why they don't just fire the 2 who aren't useful, and the manager will laugh. It's almost impossible to fire people in a government union. Few managers even try. They try to pawn off their worst performers on other managers.

      Another problem is slow work. People inclined to work hard hit roadblocks. They might have to wait for input or approval from someone on vacation or some other such pointless delay.

      A problem for groups getting direction from politicians is that they end up thrashing. This is a computer science term for task-switching at a high enough rate that little gets done. Political winds change direction frequently.

      Another problem area is in bureaucracies where administrative staff create all kinds of work for each other that produces little output that helps Canadians.

      In general, I don't blame individual workers for these problems. A small minority seek to game the system. Most try to do good work until the futility saps their enthusiasm.

      All these problems exist to some degree in private industry as well, but the need to survive as a business keeps waste to reasonable levels. The problems are far worse in government.

  6. The exchange below is reproduced to remove broken links.

    ----- BHCh March 28, 2018 at 3:49 PM

    The bank’s job is to maximize profit. That is a moral mission. In order to achieve it, the banks can’t “mistreat their customers”. That’s crazy, the opposite of maximizing the profit.

    And keeping taxes in check, particularly investment, helps the economy and creates opportunities for everyone. The problem in Canada is lack of private investment and stifled economy. Not just taxes, it’s also politics and excessive regulations.

    ----- Michael James March 28, 2018 at 4:18 PM

    @BHCh: Some kinds of mistreatment of customers is profitable and some is not. To say that the banks can't mistreat their customers is obviously false.

    In my opinion, the root cause of the stifling of our economy is too many unnecessary salaries in our public service. Some regulations are good and some are bad.

    ----- BHCh March 28, 2018 at 6:17 PM

    Yes, some are good but right now vital project are being killed and the economy is being stifled because of excessive regulations and politics.

    The only reason Canadian banks can mistreat customers and suffer relatively minor or no consequences is lack of competition. Regulations and variation in legal systems between provinces provide a major disincentive for new entrants.

    ----- BHCh March 28, 2018 at 6:18 PM

    And, yes, unions and bloated public sector are also a major problem.