Tag Archives: Regulation

Why Politicians Are Like Copper Thieves

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Washington is a criminal enterprise, which is not news. Politicians regularly dole favors to their donors in the form of grants and loan guarantees (Solyndra), theft of private assets for bailouts (Chrysler), and mandates for the use of worthless commodities (corn ethanol). The corruption is endless and goes back to Byzantium; governments are always corrupt because men are corruptible. Due to its size, however, Washington is the greatest criminal enterprise ever assembled. Still, what manner of thief has Washington become? The worst kind.

Popular culture lionizes certain classes of criminals, such as jewel thieves and bank heist masterminds, while it demonizes dirty crimes like armed robberies. Why the difference? Isn’t a thief a thief? Not entirely, and for good reasons. A jewel thief takes from the rich, who by popular belief can afford a loss. He sneaks into a mansion, barely breaking a single window, removes the jewels, and disappears. Nobody is injured, nothing much is damaged, and the jewels go on to flatter another wealthy owner; at least in the movies. Economically, this theft is highly efficient. Wealth is transferred from one person to another with little collateral impact. It is as if the rich victim just handed a stack of cash to the thief.

Dirty crimes involve a high degree of collateral damage as a part of the transfer of wealth. When an armed robber steals a few hundred dollars from a convenience store, the collateral damage is tremendous. People are often murdered, and customers lose faith in the store’s safety, so they shop elsewhere. The damage caused by dirty and unpopular crimes greatly exceeds the value to the thief; people instinctively say “what a waste” when they hear of these crimes.

A particularly wasteful crime trend is copper thieves. Copper thieves steal from construction sites by cutting down installed copper wires and pipes in order to sell the valuable metal as scrap. In doing so, they destroy the value of the labor that installed the copper as well as the finished value of the wire and pipe. Stealing copper whose scrap value may be a few hundred dollars can cause hundreds of thousands of dollars in collateral damage. Economically, copper thieves are among the worst criminals because they cause so much harm for a relatively small personal gain.

So, is Washington’s culture of corruption more like a jewel thief or a copper thief? Washington causes incalculable collateral damage while directing wealth to its friends. As Peter Schweizer’s Throw Them All Out documented, a few hundred thousand dollars thrown at a politician results in tens of millions in graft in return. From the investor’s (i.e. donor’s) point of view, political gamesmanship is the best investment of all. From the taxpayer’s perspective, Washington corruption is nearly a crime against humanity.

Consider corn ethanol. Because each State is equal in the Senate, a swath of low population states that grow corn wield extreme power over Congress’s appropriations. These corn states have forced politicians to mandate ever more corn ethanol in gasoline because it drives up prices and demand for corn. Congress has outlawed the importation of Brazilian sugar and ethanol because it is too competitive. If the goal were to reduce CO2 emissions, Brazilian sugar and ethanol would be the choice, but the goal is to benefit comparatively rich plain state farmers. The result is world hyperinflation in food prices. Corn prices rose from under $2.50 per bushel to $6 thanks to Washington mandates. Since cattle feed on corn, steak prices are rising at 10 times the rate of general inflation. Worldwide prices of substitute staples like rice also rose, causing a food crisis where most people spend most of their income on food. Just like copper thieves, Washington politicians, largely Republican in this case, do not care how many people they hurt to get a few thousand campaign dollars.

On the Democrat side, consider Pres. Obama’s harassment of Chrysler bondholders. In order to bail out his UAW base, Obama stole from the bondholders whose rights were senior to those of the labor union. Obama called on the bondholders to “sacrifice” to benefit the greater good, but his version of the greater good was the UAW, which represents a tiny wealthy sliver of the US’s workforce. The greater cost for Obama’s theft is hidden in the revelation that politics trumps property rights. The Chrysler bondholders were prepared to sue the Government, but they were convinced by Obama’s operatives that they would be beaten down long before prevailing in court. Until this moment, an investor felt he knew his rights, but now any investment can be taken without cause or compensation if the President so wishes. In order to transfer a few million dollars to his cronies, Obama permanently damaged an $8 trillion engine for capital formation and economic growth.

If only Washington acted as the gentlemanly jewel thief, simply giving its stolen cash to its friends. Instead, Washington is like the copper thief, callous to the incidental damage its thievery causes. The next time someone exposes the latest episode of Washington corruption, remember to scale-up the reported graft to include the collateral damage.

Worker Participation Is The Writing On The Wall

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We’ve been a little bit lazy, I think, over the last couple of decades. – Pres. Obama

Pres. Obama was talking about his government’s laziness in attracting foreign investment (hint Mr. President: less government efforts actually attract investment, not more), but he may as well have been talking about the US in general since he took office. Of course Americans are far from lazy, they just respond to market signals like taxes and regulations, and the percent of adults who now work or wish to work portends doomsday.


Worker Participation Rate (%) By Year (1976-present)
Source: Bureau of Labor Statistics

Worker participation is the percent of adults (16 and over) who are either working or are seeking work. As the chart shows, workforce participation drops off during recessions because some people give up on seeking work and either retire or join a shadow unmeasured economy. Significant drops in participation can be seen during the 1980-82 recession, the 1990 recession, and the 2001 recession, but they all pale to the collapse of worker participation over the past three years. In all the years measuring this metric, there has never been such a dramatic collapse in the percent of people who contribute to the measured economy.

The difference between an adult who works and who does not is the story of the US’s recent troubles. Workers pay taxes and consume fewer public resources like Food Stamps, Medicaid, Section 8, and Unemployment Insurance. Workers support the retired through Social Security and Medicare taxes. The arc of worker participation over the past 35 years mirrors the rise and fall of US prosperity and global standing.

The dramatic rise throughout the ’60s and ’70s reflects women joining the workforce, and followed the Regan revolution of unprecedented prosperity, basically paying for an ever growing government budget and runaway entitlement programs. However, worker participation fell off a cliff almost immediately after Obama took office. Possibly a coincidence, but his brutal FDR-like rhetorical assault on private enterprise, his hyper-regulatory legislation, and his partisan pro-union policies sent a message to employers to stop hiring.

This is not to say that people outside of the workforce do not contribute. For example, a dual income family that once used daycare or a nanny for their children might decide that the mother’s after-tax income would barely cover the cost of these services. When the mother decides to leave the workforce, she takes the worthwhile job of daycare or the nanny, but now all of these parties are not reporting income and paying taxes. By burdening businesses with regulation, taxes, and now the mandate to provide health care, many people find a way to get by outside of the workforce system.

The baby-boom generation that brought the US such fiscal gems as Medicare is retiring, creating a powerful drain on worker participation. The boomers are about a quarter of the US’s population, and without their employment, the US simply cannot pay its bills. Either boomers need to work longer or the US needs qualified immigrants in huge numbers over the next decade; without a workforce to support the retirement of the boomers, the US cannot survive as is.

The US’s worker participation rate is falling to that of socialized Europe. What the world generally sees as European laziness may actually be a rational response to socialism that discourages workforce participation. The US federal debt is likewise approaching that of Europe’s failed economies such as Greece and Italy. US debt is as much caused by overspending as it is anemic economic growth, much like Europe. Rather than a warning that anti-capitalism and over regulation lead to ruin, Europe’s example is a role model for Washington and the Obama administration. If the US’s economy ever rights itself, look to worker participation as the key measure of the turnaround.

Steve Jobs – A Life In Failure

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This week Apple co-founder Steve Jobs passed away after a lengthy battle with cancer. As a household name, people naturally mourned the man most had never met. Like his historical comparison, Thomas Edison, Jobs was a brash provocateur, did little of the hands-on inventing in his shop, enjoyed a non-conventional libation, and he oversaw monumental failures. Jobs’s sometimes nemesis, Bill Gates, has many of the same type-A traits, but Microsoft was essentially forbidden to fail, and that is the reason Apple is worth 25% more than Microsoft today.

Failure is the common thread among all great innovators. Edison’s monumental failure was his DC power grid. Westinghouse won the battle to electrify the nation with AC power – a vastly superior technology, yet Edison remains the greatest inventor of his time. Jobs’s failures were epic – the Lisa, Next Computer, the first portable Mac. Under different leadership, Apple also produced the Newton and other disasters. Unlike anything else, failure focuses the mind, redirects resources, and redoubles creative efforts. Most triumphs rise from the rubble of colossal failure. In Apple’s case, it teetered on the brink of insolvency at the end of 2000, only to become the most valuable publicly traded company today.

Microsoft also had its share of failures – Windows Me, Clippy, a host of failed applications. Microsoft’s early history was that of producing a poor first effort, but constantly improving until it dominated the market. The paths of Jobs and Gates diverged when the Government decided Microsoft was too successful. In 1998, a group of AGs and the DOJ responded by shackling Microsoft’s creativity; Microsoft essentially had to clear each new idea or product with government bureaucrats. Anything that might leverage Microsoft’s strengths in the market was forbidden. Microsoft had become akin to a public utility – profitable, but low growth and no innovation. Without the prospect of success, the risks of failure seem too great, and innovation at Microsoft tailed off.

To be sure, Microsoft employees continued to invent new technologies. Microsoft pioneered the tablet PC, touch screen smart phones, speech recognition built into Windows, and a wealth of patents. But Microsoft never bet the farm on any of these innovations, and they never dominated their markets. Most notably, Apple now dominates the tablet market that Microsoft launched a decade ago. Without the incentive and freedom to risk failure, Microsoft lost its way. Now that government oversight has been lifted, Microsoft is aggressively pursuing the markets it pioneered – smart phones and tablet PCs. The freedom to fail is the power to innovate and make the world better.

Shout Bits has argued against government interference in the creative process before, but the story of Steve Jobs is the promise of US exceptionalism, while the story of Microsoft is the decline of innovation when the government disallows failure. Jobs lead the true American life. He failed over and over; his life took as many turns as his short years allowed. He founded a Fortune 500 company, lost it, and eventually rebuilt it. Along the way, he revolutionized computers, movies, music, and telephony. Whenever Jobs took on an industry, those working for the established norm packed their bags.

On the other hand, while Microsoft started out disrupting industries with aggressive risk taking, later it was ensnared by government dictates on what was ‘fair.’ The careers of Jobs and Gates are a cautionary tale to anyone who might believe the government should allocate investments or somehow decide which ideas are to succeed. Even if Pres. Obama had picked a winner in Solyndra, the heavy hand of government would have foreclosed on someone else with an even better idea. Steve Jobs’s career was a celebration of the US’s unique capacity to tolerate the failures that eventually lead to the innovations that build the modern world.

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