Oct. 10, 2022

A Half-Capitalist Country

William Galston, writing for the Brookings Institute, recently wrote an article entitled: “The US Is Still A Capitalist Country.” I think he was half right. At least parts of America are capitalist, but there is real doubt about the other half.

There are large swaths of America where free enterprise is at least frowned upon, if not actively discriminated against. That discrimination usually takes the form of increased regulation and taxes. But don’t take my word for it. Take the word of those companies fleeing high tax, high regulation cities and states for areas that are more friendly to business.

I was reminded of this again last week as Tyson Foods announced they would move from Chicago to Arkansas. The move is a significant step for any corporation, one that takes months of planning and the dedication of a substantial portion of a company’s resources.

Anyone who has moved residences knows how difficult moving can be. Just imagine a corporate-level move. Companies must transition everything from their mailing address to IT Equipment and bank accounts, and of course, their employee must also relocate. As announced last Wednesday, Tyson will take the better part of the year to prepare.

Years ago, citizens would view this move as the significant blow to Chicago’s economy that it is. Millions of dollars of tax revenue are walking away from the city. To say nothing of the hundreds of high-paying jobs of people who also pay taxes to the city and state. Those jobs are also going.

And yet the mayor of Chicago, Lori Lightfoot, casually sits back as if nothing is happening. It’s all just part of the long list of companies leaving her city, joining such significant companies as Boeing, Caterpillar, and the giant Hedge Fund, Citadel.

Although diplomatic, each of these companies has laid out the reasons for their departure. It’s a toxic concoction of high taxes, high regulation, and, don’t forget, high crime.

Recently Chris Kempezinski, CEO of McDonald’s, the hamburger people, outlined this hostile business climate in Chicago and listed the three major companies leaving: Boeing, Citadel, and Caterpillar. As if to say those companies weren’t going? Mayor Lightfoot famously replied that Kempesinski needed to “get educated before he spoke.” Another indication that Mayor Lightfoot listens to all her constituents except her business constituents.

However, the politician most hostile to his business community is likely Governor Gavin Newsom of California. In the middle of an oil crisis, when the price of a gallon of gasoline in California just topped $6, Newsom is now calling for additional taxes on oil companies. As if the price of California gas wasn’t high enough.

Put yourself in the shoes of Chevron CEO Mike Wirth. Your company has been in California for over a century. Yet California is the most difficult of all states to do business. You must provide a unique “California Blend” of gasoline that you can only refine and sell in California. The Governor just announced that all new cars sold in the state beginning in 2035 must be electric, thereby eliminating your product. And now he calls for a special “Windfall Tax” aimed directly at Chevron.

How long do you think Chevron will remain in California? As they join California’s list of ex-pats. On that list are such significant companies as Hewlett Packard, Oracle Systems, and Charles Schwab & Company.

Like Chicago’s list of movers, these are major companies, all of which will be impossible to replace.

Newsom and Lightfoot know this. They know they are sentencing their state or city to a declining future. And they don’t care. Better to make the cheap sensational headline today than to take the tough stance of fighting crime and lowering anti-business regulation.

With instant communications, Newsom or Lightfoot can pick up a microphone, and a dozen TV, Radio, and Internet outlets will broadcast their argument around the country. But have you ever heard of Mick Wirth, CEO of Chevron? Or David Calhoun, CEO of Boeing? Probably not. Wirth, Calhoun, and dozens of other CEOs are trying to present the other side of the argument, but they are absent from the national dialogue and without a voice.

We currently have a group of politicians running roughshod over their state and city’s business environment — driving businesses out of their communities, making their current existence so unbearable that business move elsewhere.

The actions of these politicians will result in fewer jobs and less tax revenue in the future. But to them, it doesn’t matter. They will be out of office, long gone when the consequences come.

Today, these politicians have found an easy target, “big, bad business.”

NOTES

Global markets are headed for another down Monday, led lower by Hong Kong, currently down by about 3%. Markets are declining as Western Central Banks announce their commitment to tighten monetary conditions.

Last week, the Bank of England raised hopes when they announced they would purchase up to 10 billion pounds of Gilts, the UK’s government bonds. Traders hoped that the Bank was moving back to everyone’s favorite Quantitative Easing.

Unfortunately, that’s not going to be the case. The Bank’s move was just a temporary two-week re-balancing of the books. As Bank of England Governor Dave Ramsden put it:

However difficult the consequences might be for the economy, the MPC, Monetary Policy Committee, must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term, consistent with the remit given to us.”

With inflation in the UK running at nearly 10%, we have a long way to go before we see any cut in interest rates in England or anywhere else.

And that’s weighing down markets this morning.

Later this morning, we will have two Fed Governors speak, Evans and Brainard, and I suspect they will be singing from the same hymn book, no interest rate cuts soon, tight money until inflation gets back to 2%.

It’s a tug-a-war between the Central Banks and stock traders, and the banks are winning right now.