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Jail House Rock Solid Investment

October 28, 2010

This guest blog entry is courtesy of my dear friend, Xuan. I appreciate her efforts of taking a quick break from her dissertation work and making a contribution to the Chatter. I guess all that nagging finally paid off. Cam on, Chau! 🙂

The standard definition of the term “investment”–as it is taught in every principles of economics course–is the firm’s expenditures on machinery, equipments, and human capital. Investment is a prized concept in economics.  Microeconomics argues investments are how a firm maintains its competitive edge or gets ahead of the competition. Macroeconomics notes investment is a critical determinant of the wealth of a nation.

John Maynard Keynes showed the total output of a country is a function of four variables: 1) consumption expenditure, 2) investment expenditure, 3) government expenditure, and 4) the difference between imports and exports (also called “net exports”). Keynes even made the case that the slowdown of investment expenditure is what causes a decrease in total output and, thus, puts a country in a recession. Keynesian economics is centered on the belief that government expenditure can–and should–replace investment expenditure in recessionary times. If the firm is not going to buy that fancy piece of machinery or employ workers to maintain or increase production capacity, the government has the obligation to step in.

Alfred S. Eichner, following in Keynes’ footsteps, noted that although investment expenditure is a driving engine of capitalism at the macro level, the manner in which thousands of individual firms carry out its investment activity is quite peculiar.  The goal of a firm’s investment is to dominate its market(s). A dominant firm has the power to influence everything from prices to profit margin and from how much to produce to the level of paid wages. In order to gain such a dominating market status, the firm has several strategizing options: 1) engage in technological developments (learn to do things and then learn how to do them better!); 2) buy out one’s competitors (mergers and acquisitions); 3) lobby with governmental entities supporting legislation favorable to the firm’s survivability; and 4) engage in miscellaneous illegal activities to bolster its position against competitors and workers.

The news that the Corrections Corporation of America (CCA) was the key force behind the recent passage of Arizona’s anti-immigration law is not surprising. The CCA was simply carrying out the third strategy option discussed above. The passage of the anti-immigration law ensures CCA would get the Arizona state government’s contracts to build and run new prisons for illegal immigrant women and children. The CCA is now ensured a continued (and increased) stream of revenues as long as the anti-immigration law is enforced.

If we are to assume that the CCA is able to run these prisons at a profitable rate, we should also expect the CCA to continue using its retained earnings to lobby with officials in other states to pass similar anti-immigration laws. The CCA would then get more contracts to build more immigration prisons. As the CCA expands its operations, its powerful grip over the prison building and maintenance market would only be enhanced. The CCA is, and will continue to be, the dominant firm in the prison market.

From the CCA’s perspective, it is simply doing what it must to maintain its competitive edge. But from the societal perspective, what are the costs of the CCA’s business model? The costs are quite simple to quantify. Arizona, via CCA’s lobbying effort, has turned its state into a corporatized slave market.  Arizona politicians, prison lobbyists, and the CCA are buying and selling women and children to make a buck. The buying and selling process is not direct, which makes it easier for us to cloud our reasoning into thinking it is about keeping our borders safe and upholding our laws.

The CCA’s lobbying efforts to get an anti-immigration legislation passed in order to get state prison building contracts is no short of the CCA handling money over to the Arizona government and receiving slaves in return. The CCA then resells the slaves back to the state of Arizona at a handsome profit, and Arizona returns the slaves back to their respective countries. If the CCA is lucky, the same illegal immigrants will cross the borders and be captured again just so they can reenter the same prison system. Corporatized slavery is a cycle with no end in sight.

Our examination of the CCA’s business model brings up another question. Do we as a society need firms like the CCA to carry out such investment activities in order for us to not be thrown into a deeper recession?  Investment is expenditure, no matter what that investment happens to be. Each investment activity is a contribution to our national outputs. Is the promotion of corporatized slavery necessary for us to keep our economy running? Should people be hired to build prisons and keep watch over illegal immigrant women and children?  What would these construction workers and prison guards do without their jobs? Is that these workers’ problem, or CCA’s, or Arizona’s, or, worse, our problem? If it is our problem, what are we going to do about it?

4 Comments leave one →
  1. Bryony Carson permalink
    October 28, 2010 4:54 pm

    Has anyone done any studies to predict what possible cost benefits could be if all these illegal folks actually were able to work in our country and how much of an increase in tax revenues it would create. Or how about if everyone were legalized and could qualify for Medicaid or Medicare in the long run or Obama’s health care deal how much costs would decrease for our hospitals ER’s, free health clinics, etc? I can’t imagine that employing a handful of guards or construction workers would out way the benefits in the long run if the government made becoming a legal citizen easier. The big issue that no one seems to ever talk about is that if conditions were to improve in Mexico not as many folks would come over here to the U.S. and why doesn’t the U.S. government work harder to help Mexico. We’re everywhere else right? Maybe it’s because we make more money off illegals like this article says and the same with the war on drugs. If drugs were made legal in the country all sorts of dynamics would change. Call me a socialist or what you will but perpetuating systems that perpetuate poverty makes no sense to me.

  2. October 29, 2010 9:24 pm

    If you are citing the CCA’s approach to business as an example of post-Keynesian Prof. Alfred S. Eichner’s business-strategizing option 3, then you hit a homerun. However, “Nothing about this is illegal,” admits the NPR article by Laura Sullivan that you cited to corroborate your view about CCA’s involvement in the passage of the Arizona immigration law. As an economist, then, you should have no objection to recommending CCA’s stocks as a “rock solid investment.”

    What you object to, in other words, has nothing to do with economics, as conceived by J. M. Keynes and his followers. And I am sympathetic to your point of view, though not to your weak, non-economic argument against CCA. The objection rests neither on economic nor on legal but on ethical grounds, but your argument sadly cites no ethical evidence for it. (It is actually fallacious on two counts: ad populum and diversion; the NPR article is guilty of diversion and poisoning the well.)

    But putting aside the substance of the immigration issue, I want to comment rather on the assumptions underlying your economic thesis. I am questioning two assumptions underlying the Keynesian doctrine that, as you say, “government expenditure can–and should–replace investment expenditure in recessionary times. If the firm is not going to buy that fancy piece of machinery or employ workers to maintain or increase production capacity, the government has the obligation to step in.” I am questioning its premises because this very doctrine is what opens the Treasury’s purse to expenditures that attract and popularize Eichner’s 3rd strategizing option.

    One underlying assumption is that government spending can be thought of as investment of last resort. This is false. In the final analysis, the government is an end consumer, never a producer of economic goods and services. To the extent that a special consumer suddenly makes large purchases, it may stimulate the producers to adjust their output to meet the new demand. But this is merely exchanging the supply of one kind for another or of shifting the timing from one period to another, nothing more. Government money, after all, is taxed, borrowed from the future, or inflated from the citizenry, not another separate source of wealth or demand.

    The other assumption, more fundamental, is that GDP, or national income (as a function of C+G+I+nX), gives an accurate picture of national economic activities. This is false and is wildly inaccurate. To be sure, nations the world over rely on GDP calculations as a measure of their total outputs. But sheer popularity does not an argument make. (That would be fallacious, too.) One can glimmer its the falsity in its direct application: since, as oft-quoted, consumer spending (C) constitutes 60-70% or 2/3rds of the economy; therefore, as the exhortation goes, every consumer in the economy–both the individuals and the government–should take those credit cards out and spend their way out of any slowdown. A moment’s reflection reveals the institutional fallacy. If in a private microeconomic setting an individual cannot spend his/her way out of bankruptcy, how then can a whole nation of them macromagically spend their way out of a recession?

    I am sure economists more credentialed than I can outline better arguments against these assumptions that underlie the Keynesian economic theory. But it is suffice to end here with one other observation. You have stated it: “Investment is expenditure, no matter what that investment happens to be. Each investment activity is a contribution to our national outputs.” But I wonder if we both see its full implication. So, I want to tantalize you with two questions: 1. If investment is just another expenditure, what is the nature of its contribution to national outputs? And 2. Why is there a need for investment in the first place if government spending can be readily substituted for it?

  3. Ollie D permalink
    October 30, 2010 11:24 am

    Will you put the economic weaponry down? The theories mean nothing to criminalized and enslaved people. Capitalism and western culture has a love affair with symptom cure economics. Instead of tackling the reasons behind northern migration, we tackle what to do after they are already here. Let me ask you this, if you were allergic to peanuts, would you avoid eating peanuts, or, eat whatever you feel like and carry around a backpack full of epi-pens? The two responses look at this question, and then paint with far too wide of a brush. Who cares about personal or government spending if all the economic activity is concentrated among less than 20% of the society. Civilized nations are obsessed with trying to tie economic growth to prosperity, when they should be focusing on how to tie happiness to equality. Frankly any investment is worthless if it is tied to exploitation of labor, the environment, or social capital. What exactly are these illegal immigrants guilty of? Walking where you or someone else has decided they cannot walk. To me this sounds like “blacks ! stay in the back of the bus !” Please help the economy collapse, so the CCA won’t get paid and then they will have to set these poor people free. Then even better would be if the U.S. bankrupted and couldn’t support all of its farm subsidies and Monsanto protections, and the Mexican people could go back to the land they have lived on for 6 thousand years and produce corn again without the perpetual threat of US dumping agri-products below their production costs.
    Keynes was at the right place at the right time, and that time is no more. Solve civilizations problems by getting rid of over-civilization.

  4. Anne R. Key permalink
    October 30, 2010 11:27 am

    Trung…………….. good participation on this blog, mad props!

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