Category Archives: Crony capitalism

Who is the customer?

Outsourcing, public-private partnership – this is the Trojan horse of the political entrepreneur that will fool the political class every time into believing salvation from inefficient government lies within. For those familiar with how markets are actually supposed to function, the irony is clear: only harm shall spring forth.

One of the more insidious “partnerships” is that of the outsourced private prison and probation services. The Georgia legislature has recently passed HB 837 which has expanded the authority of private probation companies while simultaneously decreasing public oversight of their operations. In Georgia, if one is convicted of a misdemeanor  (anything from shoplifting to traffic citations) and cannot pay the assessed fine in full, then one is turned over to a private probation company (basically a glorified collection agency) which then collects the fine, along with their monthly fee of course. Under the new law, if fines are unpaid then those convicted may be thrown in jail or electronically monitored all the while accruing greater fines. The original probation period may be “tolled” or extended indefinitely until the fine is paid in full. Inability to pay will land one in prison. Essentially Georgia has reestablished debtor prisons. Herein lies a perverse incentive; inability to pay translates into larger fines. The public courts and the private companies then share in this growing revenue stream. Ironically they make more money off of those with the least ability to pay.

“But criminals must make restitution, surely you’re not suggesting that just because someone is “poor” they should not be compelled to answer for their crime?” No, I’m not suggesting that at all (although I do seriously question whether traffic violations rise to the level of “crime”). To understand why outsourcing leads to distorted incentives, ask yourself, who is the customer? Is it the state, or is it the lawbreaker? In fact, it is the lawbreaker. The state intercedes and poses as the customer, which diverts the stream of responsibility. The probation company is not answerable to the real customer, so they have no incentive to serve them.

Now you may be scratching your head trying to figure out why the lawbreaker should be the customer. Allow me to explain. Assuming that an actual rights violation has occurred (e.g. petty theft), then there is a victim and a perpetrator. The conflict is between those two parties and no one else. It can then be resolved by use of an arbitration (court) proceeding to uncover fault. Assuming the thief is at fault, he has an obligation to make all parties whole (the entity that apprehended him, the court that adjudicated the facts, and of course the victim). To simplify things we’ll assume the insurance carrier of the victim has made all parties whole. Now the insurance carrier has a rightful claim against the thief. It seeks to be made whole. Stated differently, the thief has a debt obligation to that insurance carrier. If the thief cannot pay immediately, then those two parties can come to a mutual agreement as to how that debt will be discharged. They are not constrained by any “laws” – they may agree to whatever they wish. There are many options, but one option could be a voluntary arrangement with a private “prison” (if you can call it that) that would discharge the debt to the insurance carrier in exchange for a certain amount of labor. The thief would have many of these private prisons to choose from and he is under no obligation to choose this path at all – therefore such private prisons would compete for such a labor source, enticing their customers with favorable terms. Indeed, conditions would most assuredly be far more favorable than in any public or private prison system today. After all, if they don’t please their customers (the voluntary “prisoners”) then they won’t be in business for long.

Public-private partnerships will always be corrupted by perverse incentives if the company providing the service is not directly accountable to the customer.

Life, Liberty and Oligopoly for All!

Life, liberty and the pursuit of happiness: the protection of these rights is the bedrock upon which any legitimate government is founded (if such an oxymoron is possible). However, apparently somewhere along the way “oligopoly” was added to the list of inalienable rights. To wit, the latest example of such protectionist behavior was filed in the Georgia House of Representatives on February 5. A bill (HB907) was introduced that would expand the onerous taxicab and limousine regulations in order that they encompass the activities of internet based ridesharing services such as Uber and Lyft. For those unfamiliar with these services, they use a smartphone app based system to connect people that need transportation with those willing to provide it. Like the Internet it is peer-to-peer interaction with the host company merely maintaining the communication backend. It is a lean and efficient system that translates lower operational overhead into lower consumer costs. All drivers undergo a background check and vehicle inspection before they can sign up. To weed out both undesirable drivers as well as passengers these services employ a self-regulating Ebay-style reputation/feedback system.

These services are faster, often cheaper and can quickly respond to increases in demand, so it should come as no surprise that they’ve been having an impact on the bottom line of the traditional taxi services – many of which still don’t even accept credit cards in the cab. Taxi companies don’t like competition. So what do they do? Do they turn to government and ask “Why don’t you remove all your burdensome regulations so we too can operate more efficiently and at lower costs?” No. Instead they demand that if they must drag a 100-lb boulder everywhere they go, then so too must everyone else. In reality they never would ask for regulations to be repealed. Many had a hand in crafting them. These regulations artificially suppress the supply of service (oligopoly) so as to maintain elevated prices. As an industry, taxis operate nationwide under a byzantine set of rules that permit the local government (and often competitors as well) to determine, in their sole discretion, the precise perfect quantity of taxis needed in their jurisdiction. Once that is determined, taxi owners are allowed to purchase from the government that quintessential symbol of their “public necessity” role – the taxi medallion. The medallion is nothing more than a glorified business license, albeit an artificially limited license. To imagine how limiting the quantity of licenses issued for a service might affect prices paid by the consumer, imagine if, say, another occupation that is also bizarrely licensed by the state – barbers – (really? we really need government to ensure we get a good haircut?) were restricted to just one barber per town. Sure that one barber earns more, but everyone else loses. In the same way, the taxis that already have their medallion stand to benefit by using government to artificially limit who can participate in the taxi market.

When discussing this bill in public the taxi companies are not foolish enough to divulge it’s all about protecting their oligopolistic profits; no, they claim, (as do all politicians looking for an excuse to control our lives), it is about “public safety.” Yes, because clearly when someone is paying you for a lift you lose all ability to competently operate an automobile. Cars function completely differently when a paying passenger is in them as opposed to a non-paying passenger. Yes, how stupid of me to not realize this fact.

It’s a good thing we have government, otherwise how else would we be protected from the evils of innovative businesses attempting to compete with ossified fascist oligopolies.

Energy Independence (Autarky) Makes Us All Poor

If you enjoy the soft warm glow of an incandescent light bulb then you might want to head over to your local hardware store and stock up. As of January 1, the manufacture or importation of 40- and 60- watt light bulbs has been outlawed (100-watt bulbs were banned in 2012 and 75-watt in 2013).  This ban was mandated by the Energy Independence and Security Act of 2007 – a monstrosity of a bill passed with bipartisan and industry support and signed into law by a Republican president (so much for the “Republicans are for small government” myth). It is, like all such bills, predicated on irrational fears and willful ignorance of human nature. The very title betrays adherence to an economically self-destructive goal: market independence. Such independence not only makes us poorer (paying more for less) it actually encourages belligerent behavior. Withdrawing ourselves as a country from the global market (becoming “market isolationists”) by striving for independence or erecting trade barriers makes us more, not less, likely to go to war. Equating energy independence with security is 21st century doublespeak that permits the political class to con the country into following their lead. A country that depends on acquiring its goods through a global network of trade is unlikely to foul that network by killing its participants. But a country that is “independent” has free reign to attack its neighbors if it in fact relies on those neighbors for nothing.

If market independence enhanced one’s security then the state should hold the hermit in highest regard. The hermit produces all for himself and thus relies on no one. But such independence has a cost. It is not money that enhances our standard of living; it is other humans interacting freely with one another. Money is merely a ledger entry, simple bookkeeping to measure the balance of subjective value between such voluntary exchanges if we so choose (e.g. friendship is valuable, but we don’t track that valuable exchange in terms of money). If human interactions add value to our lives, then it follows that limiting those interactions will suppress such value. Government intervention in the market arbitrarily limits these potential interactions by limiting choice. Selecting only from the approved options is no choice at all. So, if government intervention always limits choice, it follows that this will always leaves us all with less value in our lives – even those that appear to benefit from such interventions are harmed, for they too exist in a world with fewer goods because of their legally permitted decreased output.

Now one might have imagined that this “bulb ban” was vociferously objected to by the evil bulb manufacturers (who just wanted to keep foisting cheap bulbs on America in order to preserve their profits at the expense of our “energy independence”). The exact opposite was the case. Industry had been trying for years to entice consumers into switching to the higher margin CFL bulbs with promises of bulb longevity (that never materialized in practice) to offset the exorbitantly higher cost (20-fold in some cases). Once industry realized they could get government to do what the free-market would not (compel consumers to buy their product by leaving them no other choice), they quickly formed a coalition with environmental groups and pushed for crony-capitalist legislation under the cloak of eco-friendliness.

What are the results so far? The consumer has less money, the bulb manufactures have more, and the public, having been sold on the idea of greater bulb efficiency, now leave their bulbs on longer, thus entirely negating one of the primary goals of the bill. That greater efficiency would lead to greater usage should have been easily predicted by anyone who has observed the human penchant to double up on a low calorie meal. Try as they might, Congress cannot legislate away human nature.

Obamacare Kills the Family Farm

Obamacare is poised to put the family farm out of business. Although not directly applicable to the food industry, it has spawned sibling legislation whose ends are aligned with the Obamacare mandate of lowering health care costs for the nation – by any means necessary. Toward that end the “Food Safety and Modernization Act” was passed in 2011 which has now spawned a new round of FDA rulemaking known as proposed rule “Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food.” The primary stated goal of this proposed rule (according to the FDA) is to “reduc(e) the public health burden of foodborne illness associated with contaminated produce.”  A worthwhile goal, I’ll grant that. However setting aside for now the question of constitutionality of a federal agency laying down rules to govern activity that is wholly intrastate in nature, there are a number of problems with both the implementation, results and costs associated with this end goal.

Some of the more absurd components of this proposed rule include (a) WEEKLY testing of water “before it touches the surface of any fruit”, (b) where manure has been spread one must wait 9 MONTHS before harvesting, and (c) the maintenance of DAILY clipboards of records of every event that takes places on the farm related to food production. As with any regulation there is a cost involved. Irrespective of the industry it is always the large entity that has the advantage relative to its smaller competitors in terms of bearing the additional costs of new regulation. Therefore it should come as no surprise that this proposed rule would have the effect of putting many small farmers out of business (there are exemptions for “small” farmers, however these merely delay the timeframe of implementation). But don’t take my word for it, you can read the comments of such farmers themselves at the FDA’s comment site.

Now at this point the progressive may be protesting, “But, but, this rule will save lives and if some small farms must be sacrificed to achieve that goal then as long as the greater good is being served this is an unfortunate side-effect.” Although seeing as how most progressive types are proponents of buying locally grown produce (itself not a bad concept) I imagine their heads will explode when they realize this “greater good” will have the net effect of putting so many small farmers out of business it will all but kill the “buy local produce” industry.

Even by FDA’s own best estimates this rule would potentially reduce the incidence of food borne illness by 2-5% (i.e. save no more than 67 lives per year or about $14 million per life). And while I would gladly spend $14 million to save the life of a loved one, I don’t have $14 million nor do I (or anyone) have the right to use government to fleece my neighbors pockets for that $14 million on the off chance it might save a life I care deeply about.

The emotional response of “we can’t put a value on a human life” runs afoul of the economic law of diminishing returns. Whenever a brand new type of regulation was introduced (pollution, car safety, etc) we witnessed massive improvements – because nothing existed before that (not that such regulation was necessary however, seeing as how these types of regulations were merely a response to prior government induced market distortions). As a hypothetical example, seeing that $1 billion in regulatory costs reduces deaths from 1 million to 1 thousand legislators naturally will assume even tighter regulations costing another $1 billion will do the trick – but it doesn’t work like that. Those new regulations reduce deaths to only 900, another billion to 850 and so on. The low hanging fruit was picked with the initial round of regulation; the minuscule amount of fruit at the top takes exponentially more effort to pick.

Ok, fine, you may say, a human life should not have a dollar value attached – we should spend and spend to stop all deaths. Although publicly we may profess such sentiments, our actions speak very differently. If our safety were paramount to the exclusion of all monetary and non-monetary costs then we would either choose to drive at 1 mph at all times or spend hundreds of thousands of dollars to drive a military grade armored tank. But we don’t do that because safety is a luxury and we can only afford luxuries to the extent we have produced above more than the bare essentials. This, by the way, is why human conditions were so much less safe years ago and are so in third world countries today – not due to any lack of government oversight but rather due to lower productivity, which puts luxuries (such as safety) out of reach. So although we are bound by our productive capacity when determining how much we personally want to spend on safety, government knows no such bounds. Whether it might cost $100 billion or $100 trillion to potentially save one life is of no concern to those that bear none of the costs.

Marietta Braves?

Unless you are a baseball fan or local politics wonk you may have missed the big news last week: the Atlanta Braves will be leaving Atlanta for greener fields in Cobb County beginning with the 2017 season (speculation has already begun whether they will change their name to the Marietta Braves). This move has created a teachable moment concerning bureaucrats who credulously believe they can derive a net benefit by subsidizing the profits of private business via the public tax trough.

The particulars of this prospective Braves relocation are rather interesting in light of the epidemic of head-in-the-sand disease that is sweeping through Cobb County government. The Braves have released an infographic that details the massive extent to which Cobb County will be bribing, err, supporting them. The Cliff Notes version is this: Cobb will cover 45% of the overall $672 million cost of the project through a mix of new and increased taxes amounting to $18 million per year over the next 16 years. This tax expense will however be offset by increased local retail spending that will bring in an (estimated) whopping additional $89 thousand per year in sales tax revenue. I don’t know, maybe I’m being unfair: Would you pay $180 a year for the opportunity to possibly earn as much as a cool 89¢? The math for this deal just does not work. Cobb County would have to realize an ADDITIONAL $1.8 billion in retail sales just to break even. Given that the current total amount of retail sales in Cobb County is $2.1 billion that seems a bit of stretch to imagine that a mere baseball team could nearly double the entire retail economic output of the county.

There is nothing wrong with the Braves relocating to wherever they desire. However, they should bear 100% of the cost of their relocation speculation. It’s lose-lose for the taxpayer. If the move goes well for the Braves then the taxpayer has paid for something the Braves could have paid for themselves. If the move goes poorly then the Braves are shielded from the effects of that bad decision via the taxpayer picking up nearly half the tab. Some will invariably argue that the local community should bear some of the costs to lure the Braves to their neck of the woods because the local community will indirectly benefit. To accept such a flawed argument one must also accept the premise that Walmart should likewise demand to be subsidized by other businesses nearby because those businesses will derive increased traffic owing to the “anchor” location of the Walmart. Everything each one of us does will conceivably benefit someone else indirectly. This argument, taken to its logical conclusion, demands that we should all attempt to extort money from our neighbors before we do anything.

But, we can’t really blame those in charge over in Cobb County for making such absurdly wrong-headed decisions; they are simply following precedent. Those who can think, think, those you can’t, follow precedent. Local (and national) governments have been hooked to the same economic voodoo for decades. They wish/hope/believe that if they offer up financial support to a private business looking to relocate within their territorial boundaries that the potential increased economic activity will provide a net benefit to them and their constituents. Unfortunately wishing for something doesn’t make it so. In fact there has never been a situation where such subsidization has bore net economic fruit. So why do governments keep making the same mistake over and over? Because government has no feedback mechanism to correct their mistakes. There is no profit and loss test. If they subsidize some boondoggle and it doesn’t pan out (a loss), oh well, the taxpayers will still have to continue paying for it for years after the private entity they were subsidizing is gone and those elected officials have left office. Government legally can’t go out of business, so they are free to make the same mistakes over and over. The people may “vote the bums out”, but the institution remains. The aphorism “Those who fail to learn from history are doomed to repeat it” is nowhere more true than with government.