Monday, July 16, 2012

President Obama, Capital and Property Rights

If you’ve got a business -- you didn’t build that.  Somebody else made that happen. 
President Obama, July 15, 2012

Having a business requires capital, and having capital empowers an employer to hire employees.  Capital comes in the form of assets, and owners of assets have property rights with respect to those assets.  The owner can sell them or loan them out for a fee or use them to create a product or service.  In other words, assets have productive uses and owners can expect a return on them.  These rights are guaranteed in law.

An expected return on assets is a function of the prevailing competitive rate of return on similar assets adjusted for the risk incurred on the investment in the asset.  Again, the decision to use that asset for a particular reason is the right of the owner.  If the asset is usurped by the government to use on a purpose other than that the owner intended drives up the risk attached to the asset.  Correspondingly, the expected rate or return on the asset goes up significantly to compensate for the increased risk.

The Obama administration has demonstrated that it does not respect property rights.  The most notable example is the auto bailout in which the Obama administration forced General Motors and Chrysler Corporation bondholders to accept stock in place of cash payment for their bonds.   In a bankruptcy, bondholders usually get a first or secondary call to liquidation proceeds.  This did not happen.  The result is that it sent a signal to the investment community that their assets were at a higher risk than they originally planned, and it was one of several factors that persuaded many investors to withhold money from the markets.  There is a high amount of business cash waiting on the sidelines.  One of the reasons why the economy did not grow during the first three years of the Obama administration is because the process of investing private capital in projects was frozen, and one of the contributing factors was the Obama administration attitude on capital.  

President Obama is campaigning for re-election with an 8.2% employment rate.  The President wants hiring to increase.  Now we see his quote from yesterday and it appears the Obama administration attitude on capital has not changed.

The lesson is very clear.  Capital employs people.  If you want hiring to increase, respect capital and the property rights that go with it.  It would be a win-win for President Obama and investors, unlike todays loose-loose.


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