Free Markets, Free People

capitalism

The Economy In An Anecdote

I think this entire article entitled “Why I’m Not Hiring” could qualify as the QOTD. It neatly explains why businesses are so reluctant to hire anyone right now.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She’s been with us for over 15 years. She’s a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

[...]

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay … When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

There is no grand revelation in Mr. Fleischer’s explanatory essay. Just hard cold reality: make the costs of hiring more expensive, and less hiring will happen.

Some may argue that just because Mr. Fleischer’s company isn’t hiring for these reasons, that doesn’t mean that other companies are refraining on the same basis. True, but what are the other possible reasons then? Logan Penza summarizes some of the arguments:

It’s those Evil, Greedy Corporations.

That’s the simple explanation most of the talking heads have for the continuing high unemployment numbers. Those Evil, Greedy Corporations horde their money and refuse to hire anyone. When they do hire someone, they don’t pay them enough, don’t offer them enough benefits, don’t pay enough taxes, pollute the planet, steal candy from babies, kick puppies, and make obscene gestures at your auntie. Evil, Greedy Corporations are offered up as cartoon villains, detestable and vile and without any redeeming value.

The trouble with cartoon villains is that they are fictional.

Well, yeah, but it’s so much easier to blame fictional bogeymen then to address what the real businesses say.

Another argument I’ve seen advanced is that the marketplace is inherently uncertain, and that businesses who can’t cope with changes in the law are simply unfit to survive. There is a certain laissez-faire appeal to this argument, but ultimately it doesn’t make sense.

The fact of the matter is that the types of market risk that businesses can and do adjust to, aside from increased competition, are changes in demand and supply, natural disasters and war. The more savvy, efficient and customer-sensitive businesses do survive these sorts of uncertainties and ultimately enhance the economy when they do.

In contrast, when the government continually raises the costs of doing business in the first place (or threatens to do so), the only ones who really survive are either the politically connected or the very wealthy (yes, they are often the same thing). That doesn’t have anything to do with building a better mousetrap, as it were, or growing the economy. And it certainly doesn’t do anything to raise everyone’s standard of living. Instead, all it does is reward those closest to the rule-makers, thus creating more competition to be closest to the King rather than satisfying the marketplace. It is exactly the sort of crony-capitalism we claim to detest.

As Mr. Fleischer summarizes:

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

Perhaps instead of punishing business, the government could get out of the way. Maybe then we could get some of that job growth we’ve all been looking for. Unfortunately, it seems that few in Washington are listening, or worse, that they don’t really care.

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Deficits: Are Spending Increases The Same As Tax Cuts?

This weekend on on Fox News Sunday, Jon Kyl (rather inartfully) set up a classic struggle between political views of how government economics work:

Ezra Klein (and others) pounced on Kyl’s poorly expressed assertion (my emphasis):

What’s remarkable about Kyl’s position here is that it appears to be philosophical. “You should never have to offset cost of a deliberate decision to reduce tax rates on Americans,” he said. Never! This is much crazier than anything you hear from Democrats. Imagine if some Democrat — and a member of the Senate Democratic leadership, no less — said that as a matter of principle, spending should never be offset. He’d be laughed out of the room.

Back in the real world, tax cuts and spending increases have the exact same affect on the budget deficit. This sort of comment is how you tell people who care about the deficit apart from people who are interested in exploiting fears of the deficit to shrink the size of government.

While Kyl’s phrasing lends to this sort of demagogic mockery, it’s hard to blame Klein, et al., after the spending binge that followed the Bush tax cuts of 2001. Kyl’s immediate point — that paying for some tax cuts by raising other taxes — is spot on. Shuffling around the types of taxes that one pays makes no sense if the idea is to let Americans hold onto more of their money. Indeed, he made exactly that point after his Fox News Sunday appearance (via Daniel Foster):

“Who does the money belong to?” Kyl asked rhetorically. “The money belongs to the taxpayer, to the people. The money does not belong to the government, and yet that’s what this kind of a rigid paygo rule would assume: that the money belongs to the government, and therefore if you’re going to deny the government some of that revenue through a tax cut, you have to make the government whole, because the government can never lose any money. That would mean that you could never reduce the size of government. Each year, when it gets bigger, it stays at that level or it gets bigger yet, but you can never reduce it.”

As Foster notes, “Kyl is openly advocating some ‘starve the beast’ unfunded tax cuts.” Klein counters this with a reasonable budgetary point: deficits are deficits, whether from reduced income or increased spending. Yet, this misses the real issue:

He who has the money expands; he who does not shrinks.

According to the “starve the beast” strategy, if government takes in less revenue than it spends, eventually it will have to cut spending in order to match revenues, and thus the government will shrink. At the same time, if the private sector has more money in its pocket, the economy will expand. While the efficacy of this strategy leaves much to be desired in practice, at least one part of the equation can’t be denied, i.e. the more money that the government takes in, the more it expands.

The same holds true for the private sector. The fewer taxes it is forced to pay (that is, the more money it is allowed to keep), the greater it expands.

So, the real question is, which do we want to expand: the private sector or the government?

Kyl is dead-on in his describing the pervasive attitude of statists of all stripes. They really think the money belongs to the government and should be dispersed as it sees fit (provided, of course, that government is run by officials suitably attuned to the “common good”). That is where the struggle lies. Statists believe that government is the best source of economic expansion while history individualists commend the opposite.

If the statists are correct, then we should want the government to expand, and deficits should be run up without commensurate spending cuts or, alternatively, with tax increases. If, instead, the private sector holds the key to economic expansion, then deficits (if any) should be met by spending cuts. Period.

To be sure, in order to live under a rule of law, some minimal level of government spending is required. Ideally, taxes, user fees, etc. pay for that minimal level, but there will always come a time when unfortunate events necessitate dipping into the red. It is in those times when raising taxes may be the best solution on a temporary basis (which hasn’t always worked out very well). Once those events subside, however, continuing to expand government spending can only be done to the detriment of the private sector, which will then shrink.

In the end, whether the electorate chooses an expansion of the state or the private sector will be the real deciding factor in whether the economy expands or not. All deficit spending may be equal in budgetary terms, but only one course will actually serve to expand the economy. On that score, Kyl has the better of the argument.

~MJW

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Chavez tightens grip on Venezuela

In all the hype about the McChrystal story and the focus on the Gulf spill, you may have missed this story about Hugo Chavez’s continued destruction of the Venezuelan economy:

Venezuelan army soldiers swept through the working class, pro-Chavez neighborhood of Catia in Caracas last week, seizing 120 tons of rice along with coffee and powdered milk that officials said was to be sold above regulated prices. “The battle for food is a matter of national security,” said a red-shirted official from the Food Ministry, resting his arm on a pallet laden with bags of coffee.

How dare they not heed price controls? Meanwhile, in the ultra-efficient state machine bureaucracy, things are going swimmingly:

Critics accuse him of steering the country toward a communist dictatorship and say he is destroying the private sector. They point to 80,000 tons of rotting food found in warehouses belonging to the government as evidence the state is a poor and corrupt administrator.

120 tons confiscated. 80,000 tons allowed to rot. You can do the math.

“We are bringing order to prices,” Trade Minister Richard Canan told Reuters during the Catia raid. “There are traders who are taking these products to the black market … That is a crime and our government will continue to target these stores.”

Food prices are up 41% this past year. Price controls. If you don’t think you’re paying enough now, try them.

~McQ

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The market speaks: doctors increasingly turning down new Medicare patients

USA Today brings us a story that should surprise no one. Medicare, the supposed model of a government run health care system, is finding that fewer and fewer doctors are willing to take on new patients under that system. They cite the low payments Medicare offers (or perhaps forces) for patient treatment. Baby boomers just now entering the system are going to find their choice of a doctor restricted.

The numbers break down like this:

• The American Academy of Family Physicians says 13% of respondents didn’t participate in Medicare last year, up from 8% in 2008 and 6% in 2004.

• The American Osteopathic Association says 15% of its members don’t participate in Medicare and 19% don’t accept new Medicare patients. If the cut is not reversed, it says, the numbers will double.

• The American Medical Association says 17% of more than 9,000 doctors surveyed restrict the number of Medicare patients in their practice. Among primary care physicians, the rate is 31%.

Note especially that final group. Primary care physicians are the group of physicians that the newly passed health care reform law depends on to implement its “preventive care” regime.

The reason is rather simple and straight forward – Medicare offers 78% of what private insurance pays in compensation for a doctor’s services. Why doctors are leaving or restricting new Medicare patients is rather easy to understand as well:

“Physicians are saying, ‘I can’t afford to keep losing money,’ ” says Lori Heim, president of the family doctors’ group.

Consequently they cut or drastically restrict the source of the loss. While most doctors are not going to turn away existing Medicare patients, they may not accept new ones and finally, through attrition, close their practice to Medicare patients.

It isn’t rocket science – no good businessman is going to continue to do things in which the net result is a loss of money. And a doctor’s private practice is a business – one which employs a number of people. He or she, like any business person running a small business, cannot afford the losses. So they identify the problem and eliminate it.

As this continues it will put them in a direct confrontation with the federal government. It is anyone’s guess, given the current administration’s choices for wielding power, how that will turn out. But what this rejection of the compensation offered by government is doing is bringing to the fore is one of the underlying conflicts of the new health care law – the premise of the law is that government can control costs (and payments) and thereby make medical care less costly. The doctors are saying, go for it, but I’m not playing.

At some point, government is going to have too address those who make that declaration. We’ll then see how free of a country we really are, won’t we?

~McQ

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Just words

Not that I’m particularly upset by this (liberal certainly are), however, it again makes the case that this president should never be judged just by what he says (see below). He should always be judged by what he does and how it all turns out. For instance:

The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.

A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC’s authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources — congressional aides as well as outside advocates — requested anonymity for fear of White House reprisal.

Tough talk, populist rhetoric (CEO’s get paid too much and we need to rein them in) and when it comes to actually doing so? Yeah, not so tough at all. Like I said, the outcome doesn’t bother me and, after publicly taking corporate CEOs to task, attempting to shame them and cut their pay, someone must have alerted Obama to the fact that they mostly paid the campaign freight during his run for the presidency.

Why do I say that? Well the “Business Roundtable”, which so vociferiously opposed this is a lobby of corporate CEOs. And the White House liason to that lobby is Valerie Jarrett.

The White House is now saying that the provision allowing investors proxy access which would allow them to have a say in CEO salaries was never something they explicitly backed.

“It was not part of our original financial reform proposals, and we have not taken a position explicitly. We have heard from and understand the various concerns on this critical corporate governance issue from multiple stakeholders including business, investors, labor and others. We are confident that the House and Senate conferees will come to a resolution and deliver a consensus view,” said the spokesperson.

Of course that, along with much of what they say, is not true. Huffington Post reminds us of two administration officials who took very explicit positions in support of the provison:

Deputy Secretary of the Treasury Neal Wolin addressed the provision. “The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC’s rulemaking process will define the precise parameters of proxy access,” he said. “But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard.”

Valerie Jarrett followed Wolin. “The Senate bill will make it clear that the SEC has unambiguous authority to issue rules permitting shareholders access to the proxy — essential, as I know you guys know,” she said. “We agree that corporate governance means more transparency, more responsibility, more accountability, and once again — I can’t say it too often — we stand firmly with you on that point.”

Any questions? Does this leave you with the impression that the administration never explicitly took a position on that provision? Are you still convinced Obama means what he says, or are you beginning to understand that he’s mostly show and not much “go”?

Oh, and yes, this would be called “crony capitalism” if you were wondering.

~McQ

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Misunderstanding Freedom

Rand Paul managed to raise quite a ruckus by honestly stating his views in response to a loaded (and irrelevant) question. In the process, the left and those who pose an intellectual moderates have seized the opportunity to tee off on libertarianism and the Tea Party movement. Dale capably dismantled one such effort by the New York Times editorial board. Today, a more subtle, concern-trollish effort graces the NYT in a piece from Sam Tanenhaus:

On the surface Mr. Paul’s contradictory statements [i.e. that he dislikes the federal government intrusion into private business affairs, abhors racism, and would have voted for the 1964 Civil Rights Act -- ed. - which aren't necessarily contradictory] might seem another instance of the trouble candidates get into when ideological consistency meets the demands of practical politics. This was the point Senator Jon Kyl, Republican of Arizona, made when he said, in mild rebuke of Mr. Paul, “I hope he can separate the theoretical and the interesting and the hypothetical questions that college students debate until 2 a.m. from the actual votes we have to cast based on real legislation here.”

But Mr. Paul’s position is complicated. He has emerged as the politician most closely identified with the Tea Party movement. Its adherents are drawn to him because he has come forward as a kind of libertarian originalist, unbending in his anti-government stance. The farther he retreats from ideological purity, the more he resembles other, less attractive politicians.

In this sense, Mr. Paul’s quandary reflects the position of the Tea Partiers, whose antipathy to government, rooted in populist impatience with the major parties, implies a repudiation of politics and its capacity to effect meaningful change.

Although Tanenhaus provides a fairly non-judgmental opinion here, he is also quite clearly trying to imply a racist undertone to the Tea Party movement. At best, he is suggesting that Rand, and thus Tea Partiers, are smugly indifferent to the vagaries of racial prejudice, and all too ready to sacrifice the well-being of those who suffer most from such discrimination on the altar of libertarian purism. While it’s true that libertarians can be just as prone to fits of utopianism as any good Marxist, Tanenhaus’ conjecture relies on at least two fundamental misunderstandings: (1) that adherence to principles of liberty can only be maintained from a standpoint of ideological purity; and (2) that distrust of government intrusion equals “anti-government.”

Taking the second point first, there has been a concerted effort by the left to portray libertarians in general, and Tea Partiers specifically, as some sort of “anti-government” force. Tanenhaus attempts to support this myopic view by equating Rand’s skepticism regarding certain portions of the ’64 Act with an unbending aversion to government in toto. In turn, all those in favor of limited government, and especially those opposed to the unnecessary and unwanted expansion of federal powers witnessed in the past couple of years, are labeled as anti-government ideologues, who mistake the theoretical for the practical. Yet, in truth, the views of libertarians and the Tea Party crowd are not terribly different from those of this nation’s founders in that regard. Distrust of government, after all, was what led to the formation of a constitution that limited its powers and explicitly placed the source of all such power in the hands of the people. That is not an anti-government stance, but a pro-limited-government and pro-liberty view. Tanenhaus’ misapprehension of that fact leads to a portrayal of Rand et al. as some sort of anarchist radicals bent on destroying government. Nothing could be further from the truth.

Turning to Rand’s comments on the ’64 Act, we should all have a problem with government intrusion into our private affairs. A good argument can be made that without such intrusion the invidious racist practices targeted by the ’64 Act would have continued for quite a while, but that is simply an end-justifies-the-means argument that misses the most important reason to be skeptical of such intrusions: once government has such power it rarely, if ever, gives it up, but instead extends its reach into other areas as well. Yes, that is a “slippery slope” argument, but one that in this case is well founded in fact. Indeed, the ’64 Act itself, based on Congress’ Commerce Clause powers, serves as the perfect illustration of why the slippery slope should be minded. Since the end of the Lochner era, and the concurrent expansion of Commerce Clause power, the federal government has arrogated to itself the ability to control almost every level of your business and personal activity, right down to what you may or may not ingest, and how you can can receive health care when you get sick. Again, whether some of these results are “good” is beside the point that the means of obtaining them requires a suppression of liberty and an expansion of centralize government power. For that reason, and that reason alone, Rand is right to question the necessity of certain provisions of the ’64 Act, even if eventually he would have voted in favor of it (and leaving aside the cogent, and certainly correct, arguments that federal government had the requisite power to enact those provisions through the 13th Amendment). And, again, none of that stance make he or anyone who supports him some sort of “anti-government” radical.

In the same way, questioning invasive government powers in defense of liberty does not make one an impractical ideologue. For starters, freedom isn’t just an idea or some sort of construct; government is. Like pure oxygen, it’s rare to find in the natural order of things, but that doesn’t mean it doesn’t exist. In contrast, government had to be invented from the ideas of man. Accordingly, it is not ideological to take the view that, as Justice Scalia once noted, individual liberty is the default position and government control over it must be constitutionally and specifically justified, not the other way around. Our very country was founded on this basic principle. Yet, the critics of Rand Paul, libertarians and Tea Partiers get this exactly backwards.

Moreover, just because something is practical, doesn’t warrant an eradication of individual liberty. Perhaps it is true that de facto Jim Crow would have lingered in the absence of those ’64 Act provisions preventing private discrimination. If so, then the practical application of those laws would seem to trump the individual liberty of the racists who tried to perpetuate that era. Yet, can it truly be said that the ’64 Act was responsible for bringing an end to discrimination, or since we know it still exists, its retardation? Isn’t there a much better argument to be made that Martin Luther King, Jr., Rosa Parks, Medgar Evers, and all those civil rights activists of the 50′s and 60′s who lent their blood, sweat and tears — and sometimes their very lives — to the cause had a much greater impact than the 88th Congress? In this sense, while the ’64 Act may have been practical in regards to expediency, was it really necessary especially in consideration of the cost to personal freedom? Even if the answer to that last question is a fully justified “Yes” (and maybe it is), raising it does not make one an ideologue impervious to the realities of life. It simply makes one a principled defender of liberty, which one can be without being a mindless utopian.

Looking at this whole issue from a broader perspective, the real problem here is a basic misunderstanding of freedom. One can love liberty and still support government. From a libertarian point of view, government is simply an ordered, less brutal means of securing to ourselves the ability to pursue freedom by donating limited powers to the governing organization. Instead of defending all property with the barrel of a gun, we look to the judicial system. Rather than depend on the will and wherewithal of individuals to defend our society from its enemies, we support a national defense. As opposed to having each and every transaction among people be subject to individual contract, we recognize the ability of legislatures to set certain standards for the conduct of society. We may disagree as to where the limits should be set on each of these governmental powers, but libertarians are fully cognizant of the fact that having some sort of governmental structure is more desirable than having none. And yet, we also unapologetically and jealously guard our freedom, ever mindful that liberty lost is rarely regained without serious strife and deadly consequences.

In short, although we may question authority, we do not seek to abolish it. While we may defend the liberty of even the most odious of individuals, that does not mean we support their anti-social behaviors. Libertarians, and all lovers of freedom, have firm, historical reasons for challenging intrusions into their lives. We do not need to be ideologues to do so, and the practical effects of that suspicion of power has led directly to the greatest expansion of wealth and prosperity for the largest number of people in history. Freedom, at times, may be ugly up close, but it is still the most beautiful thing that has ever existed, bar none. Defense thereof requires an adherence to reality, not flights of fancy.

Ed Morrissey nails it

Take a look at this little blurb from President Obama’s speech in Quincy IL:

We’re not, we’re not trying to push financial reform because we begrudge success that’s fairly earned. I mean, I do think at a certain point you’ve made enough money. But, you know, part of the American way is, you know, you can just keep on making it if you’re providing a good product or providing good service. We don’t want people to stop, ah, fulfilling the core responsibilities of the financial system to help grow our economy.

Ed latches on to those two highlighted lines to deliver a great rebuttal:

He should have stuck with the TelePrompter. The President doesn’t get to decide when people have “made enough money.” In fact, as the radio host notes, that’s a statist point of view. Furthermore, the responsibility of an entrepreneur isn’t to “grow our economy,” core or otherwise. It’s to grow his own economy. In a properly regulated capitalist system, the natural tension of self-interests create economic growth through innovation and efficient use of capital and resources.

Bingo – well said, old friend.

~McQ

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Welfare State In Crisis

The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.

In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.

No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.

Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930′s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.

Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.

Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.

Quote of the day – Crony Capitalism edition

I think this captures my feelings about the situation:

“[C]rony capitalism” has as much to do with real capitalism as praying mantises have to do with real prayer.” – Donald J. Boudreaux, Cafe Hayek

Boudreaux is responding to an article by Gerald O’Driscoll a few days ago in which O’Driscoll took on the notion that “crony capitalism” is simply an natural evolution of capitalism.  Boudreaux had a slight nit to pick with the author but his characterization of crony capitalism was dead on.

O’Driscoll covers many of the myths that those who want to characterize crony capitalism as a problem only to be found under a capitalist system.  In fact it has little to do with capitalism at all.  It’s simply cronyism and, once you understand what is being described, it can exist under any system that has a government.

You see, that’s the one ingredient that is necessary for it to exist.

Under a free enterprise system – capitalism – the government’s job is to play referee, that is, enforce legal contracts and prevent/punish fraud.   And, there’s a certain amount of regulation necessary to exercise those functions.

But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or a free market.  When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism.  Obviously, a capitalist system, then, isn’t the only place it can happen.

And how does this cronyism develop?

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Government also tends to favor those who favor it.  And this is one of the many things which came to light in this recent financial bailout:

Crony capitalism ensures the special access of protected firms and industries to capital.

Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

Consider the revolving door at Goldman Sacs.  Consider the preponderance of union workers at GM and Chrysler.  Go ahead and try to argue there’s no money connection between those who control the government’s purse strings and regulations and those who have benefited.

Donald Beoudreaux gives a great summary that dispels the myth that “crony capitalism” is a version of capitalism or, in fact, has anything whatsoever to do with it:

To the modern American ear, “anarchy” no longer means simply “no ruler”; instead it now means “no law” – true, free-for-all chaos.  In vivid contrast, capitalism – real capitalism – is infused with law, most of which is self-enforcing.  The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.

The chief problem with crony capitalism is precisely that it injects significant amounts of lawlessness into the economy, transforming capitalism into something entirely different and dysfunctional.  Under crony capitalism, government excuses the politically influential from capitalism’s laws.  Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals who lie, rape, pillage, and plunder.  And that’s true lawlessness and chaos.

So don’t let the enemies of capitalism get away with calling it crony capitalism.  It’s cronyism, pure and simple, and it can and does exist with any form of government.  And increased regulation isn’t going to change that dynamic or curtail the developed system of cronyism that we now suffer under.

~McQ

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When Girl Scouts Attack

Some of you would no doubt love to be accosted by a bunch of girl scouts plying their wares (you know who you are), but you won’t be subject to such a harrowing experience in Seattle:

Tim Burgess’s move to outlaw “aggressive panhandling” may be an unconstitutional, attention-seeking bully tactic, but at least the Councilmember appears willing to apply the law equally to anyone asking for money on the streets. Even if they just want to sell you a box of thin mints.

The issue, such as it is, arose from a (possibly facetious) email exchange between a Seattle Councilmember and an alleged citizen complaining about what can only described as a channeling of a Mike Myers mock-horror scene:

Councilmember Burgess:

I was strongly opposed to your panhandling proposal until my experience on the streets of downtown West Seattle yesterday. Now I totally understand where you’re coming from.

Here’s what happened: on the way to the West Seattle Farmer’s Market, I encountered a band of Girl Scouts aggressively promoting cookie sales within spitting distance of a KeyBank ATM where I was withdrawing money. The situation was so extreme that I could actually hear their aggressive, repeated, high-pitched solicitations at the very moment I was entering my PIN. Then as my cash was dispensed and I nervously removed my receipt — trying to stay calm despite this invasion of my constitutional right to not be confronted by my relative class status — I saw two adult women. They were the ringleaders, I assume. They didn’t seem to be doing anything but watching over the whole scene and talking discreetly to each other about god knows what. All in all, a nerve-racking experience.

So there they were, asking for money, repeatedly, despite my lack of interest in what was on offer, all happening well within 15 feet of an ATM. Would this be banned by the your ordinance? I certainly hope so, because there’s a long history of applying laws like this inequitably, almost as an excuse to push poor people out of desirable areas instead of addressing the actual problem.

Thanks for any information you can offer.

My best guess is that this email comes from a rather disgruntled, yet somewhat clever, panhandler. The Councilmember’s response is both appropriate and obviously skeptical, but it does raise an interesting question: if the state is going to exercise it’s police powers judiciously, doesn’t that ensure that we miss out on opportunities that are neither a threat nor an offer of something we don’t really want? After all, what sort of hair-shirted aesthete do you have to be to not want girl scout cookies?

When it comes to local rules and regulations, I’m not one to quibble too much unless such restrictions impinge on fundamental rights. Setting up shop in a public way certainly deserves some treatment of police power since the sidewalks belong to the public. At the same time, if you are just standing around hawking your legal goods, I really don’t understand what it is we need to be protected from. Can it be annoying to walk through a gauntlet of capitalism? Sure. Maybe worse for some than others. But we don’t have any right to be free from annoyance, do we?

I mean, if that were the case, then why should I be bothered by ACORN morons marching up and down the street where I work? Nothing has ever been done about that. Once, I nearly came to blows with some idiot preaching about how we needed a new New Deal while I was trying to enjoy a leisurely stroll in downtown Alexandria, VA. Do I have the right to be free from that annoyance? Not bloody likely.

And the fact of the matter is that I shouldn’t be “free” from those annoyances, anymore than I should expect to be “free” from girl scouts selling cookies on a street corner, or a hippie selling dew rags in a city square. If one of them genuinely threatens my peace, then the appropriate authorities should be able to step in, but how often is that truly the case? That some panhandler was able to point out this hypocrisy in the enforcement of Seattle’s anti-public-space-economy laws (to coin a terrible phrase) only underscores how ridiculous the application of police power (local or otherwise) has become.

The bottom line is that, whether one is selling girl scout cookies or dew rags, why do I need the state’s protection? Keep the public ways clear for the public sure, but let’s not forget that commerce is what truly makes the world go ’round. Without it, that police protection doesn’t get paid for.

[HT: Tom Scott]