Posts Tagged ‘regulation’

The Criminalization of American Business

March 19, 2015

When the future Gibbon chronicles America’s decline and fall, the war on business will feature prominently.

Unknown-2Some readers will gag. That’s precisely the problem. We demonize business, imagining it controls everything; fictional bad guys are invariably doing ill for profit; “corporate” is a four-letter word, with Wall Street blamed for economic troubles, and business misfeasance seemingly confirmed by repeated multi-billion dollar penalties extracted by government watchdogs.

The left harps on the imperfections of markets; about those of government, not so much. And while in many places businesses do suck, mainly this reflects not free markets at all, but the opposite — crony capitalism and cartelization suborned by the state. Denunciations of the “evils of capitalism” often fail to see that it’s really government behavior behind them.

And here’s the bigger picture. Modernity has made us very rich, compared to past millennia, with people able to live far better lives. (Fools romanticize “the good old days.”) In the last century, worldwide average real dollar incomes multiplied five-fold. Where do you think all this wealth came from? Government? Socialism?

It came from businesses seeking profit by supplying us with desired goods and services. That’s what generates all the wealth and income to buy them with. The capitalist, market system. Hate it all you like, but you cannot live without it.*

Yet it seems we’re trying to kill this goose that lays our golden eggs.

images-2A recent issue of The Economist looked critically at the mentioned parade of payments by companies to settle charges of wrongdoing, topped by Bank of America’s $17 billion in August. You might think if BofA agreed to that, it must have done something really naughty. Not necessarily. As The Economist stressed, these settlements typically don’t make public the details of the supposed misdeeds, which remain murky. But in one major example I’ve discussed, where the true story did emerge, the case against the bank clearly made no sense.**

Why then would they settle? Because to fight the government in such cases is suicidal even if you’re guiltless.*** Accounting firm Arthur Andersen did fight, and won vindication in the Supreme Court – a pyrrhic victory since by then the firm had been destroyed. This is why The Economist bluntly called all this an “extortion racket” – “the world’s most lucrative shakedown operation.”

I’ve always said that “unfettered capitalism” is a nonsense straw-man – just as individuals are subject to laws against harmful conduct, businesses should be too. UnknownBut as The Economist pointed out, the market does a very good job of punishing truly errant companies. Competitors will make sure misdeeds are publicized; customers and investors will flee; share prices will plummet. This penalty is far greater than any exacted by government.

Meantime, corporations face extortion not only by government predators, but also lawyers in the class action litigation racket. I’ve written about this epic scandal too.

China has no rule of law because enforcement is totally at government’s arbitrary whim. Lately it’s been on a rampage against foreign-owned businesses and their personnel, with selective prosecutions for various ill-defined “offenses.” But America isn’t far behind, with metastasizing business regulations carrying criminal penalties (estimated at 300,000 in 1991; apparently no one has tried to count them since). Result: no company can fail to be guilty of something. So that prosecution is necessarily selective, which inherently corrupts it. Former Deputy Attorney General Larry Thompson said in 2011, “No matter how gold-plated your corporate compliance efforts, no matter how upstanding your workforce, no matter how hard one tries, large corporations today are walking targets for criminal liability.”

images-3But at least large ones can manage the huge costs of trying to comply with the ever-deepening thicket of regulatory and paperwork requirements, and defending themselves. Small ones cannot – a big reason why their job creation – historically the most vibrant part of our economy – has been faltering. It’s increasingly hard to start and sustain a small business in today’s overbearing regulatory environment. (Click here for an outrageous example of small business screwed over by state government.)

The Economist concluded by saying “the recent flood of actions against companies has . . . done serious harm, to America’s legal system and the rule of law.” And of course it also seriously harms our economy.

* And, much though you may curse “the corporations,” if you actually stop to ponder, you are actually quite pleased about 99% of what you buy from them.

** The Economist noted that the very first federal criminal conviction of a corporation, in 1909, a railroad, was “for the bizarre offense of cutting prices.”

*** And the payments come from the pockets of shareholders – not the executives who agree to them. The Economist also observes that it’s wrong to suppose government enforcers act disinterestedly for the public good. They have their own agendas – puffing up their egos and careers.

 

Poverty and Inequality: The Business Cure

January 7, 2014

imagesPoverty has long been a cause celebre; inequality seems the cause du jour. The oceans of ink spilled on these topics are mostly finger-pointing, short on solutions, and the solutions are too often worse than useless. But three pieces in a recent issue of The Economist stood apart.

The “Schumpeter” business column, headed Not open for business, concerns why U.S. employment lags despite massive government stimulus. What government gives with one hand it smothers with the other. Start-up companies account for all of America’s net job creation,* and government is stifling them.

First, they’re starved for human capital. Our native students don’t acquire enough of the right skills; and when foreigners do, “the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill.” Legions of foreigners who want to work here or start businesses wind up going elsewhere due to our suicidally restrictive immigration policy.

UnknownSecondly, there’s over-regulation. In 2009-11, Schumpeter relates, 106 new regulations were issued with projected annual economic impacts exceeding $100 million each. I’ve written about how legislation like Sarbanes-Oxley and Dodd-Frank imposes vast new bureaucratic requirements. Giant established companies, with armies of lawyers, can cope, but not small and starting firms. The dramatic decline since 2001 in new companies going public is no coincidence.

This is part of government’s war on business. You’d think, given the parlous state of U.S. employment, there’d be a cease-fire. And (notwithstanding all the anti-business rhetoric of “progressives”) neither the public nor the government actually wants this war. images-2Yet it goes on, because too few seem to grasp that for good jobs paying good wages you need good businesses earning good profits. Here in New York politicians like Gov. Cuomo talking “economic development” seem oblivious to the war. Recently the state sued a host of smaller firms because a workers compensation trust into which they’d long faithfully paid can no longer meet employee claims; many face being driven out of business.

If you want to redistribute wealth, first you’ve got to create wealth to redistribute.

Next there’s a book review – The Great Escape: Health, Wealth, and the Origins of Inequality by Angus Deaton. In a nutshell, much of the hand-wringing over supposed rising inequality overlooks non-money factors, most notably health and longevity, where the gap between rich and poor has been narrowing significantly. Deaton does recognize the billion or so in poor countries still excluded from this trend. Should we give money to help them? His answer is basically no; while some targeted health programs are effective, most foreign aid does more harm than good because the key problem is not lack of resources but bad governance. And aid tends to keep bad governments bad.

Unknown-1Which brings us to another book review: of Paul Polak’s and Mal Warwick’s The Business Solution to Poverty. You read that right: capitalism, which so many (so wrongly) blame for poverty is really the solution. Rather than seeing the poor as victims needing handouts, the authors see them as potential workers and customers.

They write mainly about the latter role, and how products and services can be targeted to the needs of poor people, which if done right not only generates profits but also improves life for the purchasers. We see, yet again, the error of viewing business as merely exploitive. What business is instead really all about is profiting by satisfying others’ needs and wants.

Unknown-2And, more broadly, again it is capitalism, business, industry, commerce, enterprise, that is the answer to poverty: not people given money but earning it. Rich countries, and rich people, in the main, are rich because they produce things that better the lives of others. That’s how the whole world gets richer.

* I.e., among other employers, job gains and losses cancel out.

Motown Blues and the Bonfire of Liberal Vanities

August 5, 2013

images-2The biggest city bankruptcy ever, Detroit’s, is a shocker – or not. Inevitable, really. Detroit lost its signature industry (mostly) and with it over 60% of its peak population. It couldn’t downsize fast enough; and city services, rather than merely contracting, went to hell, driving out even more businesses and residents. But even if it could have resized appropriately (and avoided its prodigious mismanagement), Detroit still owed pension and health benefits to an army of retirees from a past workforce sized to a larger city.

Unknown-1While Detroit is in many ways unique, its basic problem of unaffordable retiree obligations is not. It’s a huge nationwide time-bomb.

Political office-holders have always found it expedient to buy off public employee unions in so-called “collective bargaining.” Unlike such negotiations in the private sector, “management” is captive to the unions for political support and even campaign money. (Mainly Democrats, it must be said.) And while voters might balk at public employee wage levels obviously out-of-whack, future pension and healthcare promises sneak through the back door. This is what really destroyed Detroit. (And what 2011’s Wisconsin battle was about.)

So whereas most private sector pensions have long since shifted to “defined contribution” approaches (keying payouts to what employees put in), most public worker pensions are still “defined benefit” plans keyed to final year pay. And many furthermore allow gimmicks (like padding overtime) to inflate that figure.

images-1State and local governments are supposed to put aside money to cover future retiree obligations. But state pension funds are deficient, in the aggregate, to the tune of around 27% or $1 trillion. And even that’s based on their assumption that pension funds will earn market returns of 7.5 to 8%. Maybe so in the go-go ‘90s, but today that’s wildly unrealistic. A 5% return (still probably optimistic) would mean the underfunding is around 50% or $2.7 trillion (just for states, not counting local governments).

And that further assumes retirees will die on schedule. Better not have any more medical breakthroughs.

(Disclosure: I get a very nice pension as a former NY state employee. New York’s pension fund is one of the least deficient; Illinois’ the worst. But New York, and especially its municipalities, face other severe fiscal problems.)

So states and localities are in a very deep hole, that gets deeper every year. The longer drastic reform is put off, the harder it gets. Already there is no politically palatable fiscal adjustment that could close the gap.

This is just one facet of the bigger problem I keep harping on: the gigantic mismatch between government’s “entitlement” promises (pensions, Social Security, Medicare, Medicaid, Obamacare, welfare, unemployment payments, disability, food stamps, etc., etc.) and the means to pay for them, as ever more people collect these benefits while ever fewer are productively employed to generate the wealth and taxes needed. President Obama seems oblivious to this inevitable future smash-up.

Back to Detroit, one bit in The Economist’s coverage caught my eye: “The Mayor is leading a campaign to shut down small businesses that do not comply with regulations – an odd priority for a city with no money.”

Odd? I’d say downright insane. This is the schizophrenia of liberals, always mewing about “good jobs at good wages” as if you could somehow have them without good businesses making good profits. (See my past post about over-regulation harming small business.)

UnknownSo here’s my Detroit revitalization plan. Stop the “campaign to shut down small businesses.” Detroit desperately needs businesses, and the jobs, wealth, and tax revenues they generate. Shut down instead all the regulations these businesses are supposedly violating. images-3Yes, all. Burn the rulebooks. Call it a Bonfire of Liberal Vanities. Leave the regulation of businesses between them and their customers.* Make Detroit the easiest and cheapest place on Earth to do business. Let’s see, once and for all, what free market economics can really do.

In Detroit, the results of such laissez-faire could hardly be any worse than what we’ve seen till now. Nonregulation’s harm to a few would be overwhelmed by economic benefits for the many.

*With the courts to sort out claims of fraud, misfeasance, breach of contract, etc. But businesses that do their customers dirty don’t tend to stay in business. Successful ones are those making customers happy.