Category: Crony Capitalism

What we have now

Govt Regulation Benefits the Large, Established, Powerful and Rich

I used to own Altria, the tobacco company that makes Marlboro cigarettes.

Since 1978 Altria is up 12,000% while the S&P 500 is up 2,000%.  It also pays a 3.4% dividend.  I figured it was selling a legal addictive substance and therefore should make a lot of money.

I lost my nerve when I kept reading about new regulations prohibiting smoking. When I read about no smoking outdoors in parks or no smoking in your own apartment if it was a connected apartment complex, I sold. The business press was assuring me that Phillip Morris International which was all the cigarette business outside of the USA, was a better growth prospect. It did seem to me that the Japanese and the Chinese enjoyed their smoking and had less regulation of tobacco. I owned that for awhile but it lagged Altria by a large margin so I sold that.

One of the things that scared me was the FDA (Food and Drug Administration) decided it could regulate tobacco as a drug. I pictured having to go to your doctor to buy a carton of Marlboro.  I should have considered my own advice that government regulation favors the large, the strong, the established and the rich, always.

Now I hear that Altria is going gangbusters. It is quite possible that Altria (Phillip Morris) is benefiting from regulation.

 

Philip Morris stands to benefit from this regulation in many ways. First, all regulation adds to overhead, and thus falls more heavily on smaller firms. Second, restrictions on advertising help Philip Morris’ Marlboro, a brand everyone already knows, by keeping lesser-known brands in the shadows. (Existing restrictions on advertising have already helped Philip Morris in this regard, with an added benefit spelled out in Altria’s annual report: “Marketing and selling expenses were lower, reflecting regulatory restrictions on advertising and promotion activities. … ”)

Finally, if the bill passes and the FDA gets added control over the industry, Philip Morris, more than any of its competitors, will have access to those bureaucrats and agency heads making the decisions. For all these reasons, RJ Reynolds and other tobacco companies oppose the bills Kennedy and Waxman are pushing.

 

The End of Work

Conventional economic wisdom is that the world suffers from a lack of [aggregate] demand. In plain words, people and businesses are not willing to purchase as much stuff as can be produced.

There are many suspected causes. Past debt may be causing people to not take on new debt. Stuff purchased with borrowed money is also stuff purchased so reduced borrowing reduces [aggregate] demand.

Another suspected cause is wage stagnation. Wage earners are more likely to spend whatever they get in a paycheck. Wealthier people might save or invest extra money. Less in wages, more in investment returns leads to less spent and more saved and invested.

If these are indeed causes, the proposed solutions are things like asset purchases by central banks to put money in the hands of banks (TARP), or lower interest rates to encourage borrowing, or even negative interest rates to cause savers to spend. A higher minimum wage will place money  in the hands of people who have a propensity to spend.

Still, I can’t help wondering: how did we get to a place where demand is lacking, after so many decades where there was lots of demand supporting the creation of great industries? I mean, human wants are infinite. Introspection shows me that I have lots of demand. Well, I guess it is not demand unless I have the dollars to do something about my wishes. The 2008 stock crash ruined my plans. My assets are returning to 2007 levels today, nine years later. By normal growth expectations my funds would have doubled in nine years. I certainly don’t want to borrow since I have so much less today than I reasonably expected to have. At current projections I have many more years to work after age 65. Looking at things “from the other side” so to speak, my lack of demand is merely a lack of assets/income. If I had more money I would demand more stuff.

So let’s look at ways I could have more demand, i.e., get more money. As I previously said, more borrowing is out of the question, Americans are leveraged up to the hilt.

I could drive for Uber on my days off. People around here actually make good money driving late Friday and Saturday nights so that other people can enjoy a drink or two in the evening safely.

Maybe it is a lack of opportunities to make more money that limits my demand. Why are there a lack of ways to make more money when people all around me desire things and services?

Uber is an example.  Uber fills many people’s desires or needs, and allows others to make money doing it. Obviously where Uber operates more people use it than use cabs where it does not operate. I laugh at the idea of getting a cab in the suburbs at a private house party where I had a few drinks. It would be an hour or more from calling a dispatcher to seeing a ride, if they arrived at all. Yet local governments are waging an ongoing war against Uber in many areas. The existing cab companies have a monopoly and give poor service at low cost, skimming the most valuable customers while ignoring all the others. Millions of dollars of potential commerce are stifled in preserving the  monopoly rent of a few established players. Millions of dollar value units of demand are never created because the potential providers are prevented from providing value to other people.

Those people around here who are making good money driving for Uber could never get a job with the local cab company. The demand for the crappy service they give is limited.  The pay is poor (I don’t know why, when the Uber pay is good for a hustler). The positions are not just when you want to work but you need to fit schedules and shifts and maybe give up other employment opportunities.

There are many other ways to make money that are effectively banned. Peter Schiff reports that financial regulation has become so oppressive that he today could not form his financial firm. I started an ISP in 1987 with a Unix server and a dozen modems in my basement. There were very few regulations applying to someone who wanted to run a computer in his basement and allow other people connect to it over a public telephone line with a modem. I closed down my ISP when the federal government created a law that required me to keep copies of every email my friends and neighbors sent through my system for some months in case they wanted to spy on them. Could you imagine starting an ISP today? What are the net neutrality requirements and where do I get software to implement them? Only a giant corporation could follow the rules.

Right now, in America, it is very difficult to compete with any established business. Big companies are C corps and pay a top tax rate of 35%. A small business or start up is an LLC and pay as an individual at a top federal tax rate at 39.5% A big company can have an HR and a legal department that allow it to navigate regulations. A small business is often a one or two person shop. A big company can get a special tax deal on pain of moving jobs out of the community. A small company does not get its phone call returned.

Main Street, small business, local start-ups are all suffering under our current political system. There is less growth and innovation, which comes mostly from small business and start-ups.

So I think a contributing factor to the lack of demand is the smothering of competition against entrenched interests.

 

 

 

Why College Costs so Much

The US Government (USG) has decided that it is its job to help everyone purchase health care, houses, and higher education. It is not a coincidence that health care, houses and higher education costs are climbing out of control.

I’d like to go beyond generic “USG involvement” to examine some of the mechanisms causing higher education inflation.

A big one is the accepted legal theory of disparate impact. Disparate impact basically holds that if (i) some gateway results in fewer people from a protected class (certain races, certain colors, women, people over 40 years old, disabled, non-citizens etc.) than their share of the population passes the gateway, than (ii) it is presumed to be illegitimately discriminatory. This applies even if the gateway is neutral by any other examination. Once a disparate impact on a protected class is shown, the only defense to a civil rights lawsuit is business necessity. Not only does it have to be proven that the gateway has a demonstrable relationship to the job. Even more, the user of the gateway has to prove that there is no less discriminatory standard that would  do as well as that particular gateway in selecting appropriate candidates for the job.

Needless to say, with such amorphous concepts the party with the burden of proof loses. Just being sued is a sort of loss because if the burden of proof is against you the suit goes on until you affirmatively prove something in court.

In practicality, disparate impact made it impossible for any employer to give an IQ test to applicants. If you give an IQ test to any population we can predict with certainly some racial groups will come out with  higher scores than their share of the population. It has even undermined giving a knowledge test such as the fireman promotion test. The results are always skewed to not reflect the portions of the population each race enjoys. Even if the test is about which saw blade will cut through a metal door to rescue the people inside, if there is disparate impact the poor municipality has to go spend more money in creating another test which will yield more acceptable results, while still weeding out unqualified fire chiefs. How do you prove no other gateway would be more fair unless you try every other possible gateway?

So disparate impact made the employers throw in the towel on any objective test of applicants. How to get smart people, who after all do better then dumb people at most or all tasks? Simple, require a college degree. You can be pretty sure that the people who graduated from Stanford, Yale or Harvard have a higher IQ than the high school grad submitting an application. Middling college grads are probably smarter than non-grads. People with a few years of college are probably smarter than people who never went. Imperfect but better than nothing.

So the poor kids have to spend $70,000 a year for four years of borrowed money to be able to legally show prospective employers that they have brains. It is the only legal way for them to show their IQ.

Second on the walk of shame is the federal money loaned freely to college students and the bankruptcy exception for student loans. Non Dischargeable loans mean more loans can be made to questionable credits, unleashing a flood of [borrowed] money.  And federal subsidies and policies make even more lending to students possible.

What a golden age for students. Wait, if the USG subsidized car loans, would it mostly benefit drivers or car manufacturers? Drivers still have to pay off the inflated price of the cars sold. Car manufacturers would have more customers with money in their pocket that could only be used to purchase cars. Car manufacturers get the money, subsidised customers get the loan. Sudent loan largess has mostly benefited institutions of higher education to the detriment of student borrowers. The local university often has the nicest buildings, the best jobs, the finest grounds, the most events and parties, in the whole town.

The last thing I have time to write about is the ability to price discriminate. Imagine if before you purchased an airline ticket, the airline could demand to see your tax returns, income statement, expenses and net worth? Then imagine the airline could legally set a different price for you based on the information it learned. Student financial aid is a thinly disguised price discrimination scheme. The price is set so high that they expect nearly no domestic student to pay list price. Then they offer a discount designed to extract the highest portion of your disposable income that you can part with and your graduate’s disposable income over the next ten years. All for the coffers of the institution. Arn’t they nice benevolent institutions?

These are college material students and college educated parents they are fooling. Wow a $10,000 grant and $50,000 loan. Lucky me.

Government is also Unaccountable

Not only do governmental organizations favor the rich and connected over the middle class and the insignificant, but they are also unaccountable.

In Flint, MI apparently the entire city was poisoned by lead in the water supply. City officials were allegedly aware of the situation for a considerable period of time while their citizens were being damaged. Yet no one can identify a person who is responsible for keeping the water safe, or even revealing the problem to the public.

In today’s (3/20/16) Sunday New York Times there is an editorial titled “Poisoned Water in Newark Schools”. The school system acknowledged it was aware of high levels of lead in the schools for years. Is the Times calling for criminal charges against administrators and employees? Lets let the Times speak for itself:

This is shocking but, sadly, not surprising given the neglect of public schools, especially those in poor communities, by Congress and state governments.

This morning I was watching “Due Process,” a Rutgers law school produced TV program. The show reminded me of the $100 million dollar gift Mark Zukerberg made to the Newark Schools about five years ago. With the matching funds the Newark Public Schools received a nearly $200 million windfall. Use of the money was determined by the local politicians: the NJ Commissioner of Education, the Legislature and the teacher’s union. If only the Newark Schools haven’t been neglected these last five years.

Over the last four years capital expenditures for the schools averaged about $12 million, so the $200 million gift could certainly have made a difference to the school infastructure.

I’m sure Mr. Zukerberg preferred that his money go to innovative changes in the organization of the Newark schools, and a significant amount was spent on charter schools. However, politicians determined the final spending, and $89 million went to contract and labor costs and $21 million went to consultants (each amount more than the entire capital budget for a year).

To the Left, Western Civilization is Irredeemably Evil

If you want to unseat the elite who have power now and replace them with you,  you need a reason why you are preferable to them.

One could pledge to reform and improve sclerotic institutions, but where is the percentage in that? Running fair institutions that give no favor to you and your supporters is pretty weak beer for all the effort.

No, a much better rationale for replacing the current power elite with you is to convince people that the current institutions are irredeemably unfair. Then you get to take over the institutions and run it according to your lights. Universities are not overpriced, over administered, and failing in their missions to educate. No, they are full of rapists, racists and privilege. Only by throwing out the current administrators and professors can they be made fair.  You get to keep the overpriced, over administered, and failing features.  Once you start running the place you can get some of that swag, reward your supporters with useless administrative positions and keep goofing off in the work (educating) department.

Marx and the Bolsheviks claimed that capitalists were exploiting the workers.  Power must be moved from whomever had it now to the Bolsheviks to right the injustice and make life better.  Strong medicine had to be applied by the new leaders least society slip back into injustice.  I don’t think the condition of the  proletariat were improved much by the Russian Revolution.   In the USA the working class got richer, more secure and freer with no radical change of leadership or institutions. Soon all revolutionaries seeking power for themselves needed a new grievance to justify the revolution.

Our government is very corrupt but it is not a system that is irredeemably evil.  One could change the tax code so it did not blatantly favor one person or business over another.  One could stop bailing out banks ran into insolvency by their management. One could prevent the government from taking an ownership stake in a business, like General Motors, and then regulate the safety of the product of General Motors. One could stop politicians from getting millions in ex post facto bribes for favors by having politicians forfeit their pensions and secret service protection if they engage in remunerated work after office (or accept gifts). One could dry up the student loan money that is funneled into rich failing institutions. One could make the Justice Department independent of the Executive Branch.  One could end the Federal Reserve.

Those are all possible things – there would be reduction in the discretionary power of our elite if they were instituted.  Naturally it would be hard to accomplish such things, since the elite would resist them and the reformers would not get a large amount of personal gain. Not to say it would be impossible for determined people of good will.

Uber is Revealing

Uber is revealing how government is generally a supporter of entrenched interests.  Upstarts and competitors are always hated by existing businesses. Under real capitalism there is little an existing business can do other than produce a better good or service at a lower price.  When the government has unlimited powers to regulate business however the more powerful existing business can wield the police power of the State to throttle competitors.

Here’s an example from the news: Counsel meeting could limit the number of Uber cars.  The stated public purpose is to fight congestion. That reasoning ignores the benefit to people. Of course adding Uber cars to the surface streets of Manhattan increases congestion. It also makes it possible for people to get around conveniently without bringing their own car.  Huge parts of Manhattan have no cabs cruising most hours because there is not enough demand. Calling a radio dispatched limo can involve an hour wait. Competition for yellow cabs will make service better. Just the entry of Uber often makes the local cabs cleaner, the local drivers more pleasant and the cars upkeep better.

The taxi industry proposed similar legislation before. Where are the people who commute to Manhattan by car and bus? Are they calling for this type of legislation?  How about pedestrians and businesses? Are there concerned committees with broad support?

Thousands of people want to work by providing a service to Manhattan. More thousands want to voluntary exchange their money for an Uber ride. Yet the city counsel wants to prevent this voluntary exchange.

Uber reveals this about regulation

Government almost always forwards the interests of established business over the upstart business and the customer.

Ostensibly, regulation of taxi services is for the safety of the public and to insure minimum levels of service.  In actuality it is to prevent competition in service, price and innovation, all to the benefit of entrenched taxi service providers.

I remember the cabs in NYC years ago.  The vehicles were poorly maintained and dirty.  The driver often spent his time on the cell phone talking loudly in a language I could not understand, as if he was on his own time instead of in my paid service..

In Miami the trip from the airport to Miami Beach was fixed fare.  Once the shocks on the cab were bad and it bounced up and down so severely I thought we would drive into the bay. Another time I could smell exhaust in the car. I thought the driver might pass out at any moment. Because the fare was fixed the drivers drove as fast as they could. At night they would turn off the dashboard lights so the passengers could not guess how fast they were flying. Nothing like speeding on a causeway over water in an under-maintained car while the driver is in deep conversation with someone miles away.

Then I tried an Uber car in Miami. The car was a very new Toyota small SUV. The driver had provided water and candy for passengers.  He asked about the temperature to set, whether there should be music or not and at what volume.  The trip cost slightly less than an equal taxi trip. I was hooked.

Why is Uber so much better?  Every major metropolitan area regulates taxis. They limit who can offer the service; hence it is a government enforced monopoly.  They act as monopolies always act  Either they raise prices (or not if prohibited by regulation) or cut on service and capital investment, or both.  The cabs are crappy  The drivers are rude and unconcerned about your experience,

The politicians gain the fees and support of taxi fleet owners. The fleet owners gain freedom from competition and the need to manage and provide a good customer experience.  The drivers gain almost nothing. Hired hands who take their little share out of the arrangement by freedom from providing customer service. After all, there will be fares no matter how surly or preoccupied the drivers are. The customer pays for the politician’s and the fleet owner’s benefits. He pays in crappy cabs, higher prices, lousy customer service.

It’s repeated everywhere. The most regulated enterprises provide the poorest customer service. Think of what your experience at the doctor’s office or hospital is like today