Coyote Blog

I have a confession -- at Harvard Business School (HBS), I loved business strategy cases.   This is a confession because most ex-HBS students have at best a love-hate relationship with cases in the same way that the Band of Brothers, or the 506th PIR, had with Curahee Mountain.  The first 8, 10, 12 cases were fine and you could handle them. But the problem is that they kept coming and coming, two or three a day, like a North Korean human wave attack.

There is a pretty well defined template for B-school cases, at least in my day (I love being old enough to say that).  A typical example begins with the CEO-on-the-Gulfstream-jet trope, e.g.

Jessica Stevens, CEO of Acme Enterprises, leaned back in her seat on Acme's brand new Gulfstream VI corporate jet, thinking about the meeting that lay ahead of her.  She was flying back to her Pittsburgh headquarters for the quarterly board of directors meeting, and the board was expecting real answers and a specific plan for how she intended to deal with Acme's mounting problems.

Over the last 3 years Acme's growth had plateaued at the same time a slew of new companies had entered its industry, putting pressure on Acme's traditionally strong margins.  In addition, Acme had just lost the bidding on two critical government contracts, its largest plant had just burned down, its CFO was under SEC investigation, a strong unionization drive was in the works supported by Antifa protests outside her house, and she had damaged her favorite Chanel purse when she launched it into the face of her lying mancy VP of manufacturing who she had just caught in bed with her husband.

OK, that last sentence is probably an exaggeration (cases were not quite THAT interesting).  But for me, strategy cases were like who-done-its or locked-room Agatha Christie mysteries.  Would the CEO extricate herself, and if so, how?  What would I do?  If someone were to write business strategy mysteries I would eat them up (the closest I can think of is Clavell's Nobel House -- how would the Nobel House extricate itself -- and even despite the absolutely unrealistic Dallas and Dynasty-like portrayals of business, I love that book).  It is telling that the only novel I have written (OK, more accurately, the only novel I have finished) has heavy doses of business strategy in the plot.

A lot of people write me and say, "Coyote, why the fixation on your blog and Twitter with Tesla?"  Unlike what Tesla fanboys guess about me, I actually like electric cars (though I am not thrilled with my having to subsidize them, but that is not a narrow Tesla problem).  I am riveted to the Tesla story because it totally feels like a great HBS case study of the future.

Long-time readers know I think that there is fraud here -- the SolarCity buyout, to my eye, was totally corrupt.  But if I found fraud fascinating, I would write constantly about Enron and Theranos (heck, I worked for Jeff Skilling at McKinsey on the Enron study so I could even be quasi-insider).  But fraud is only fleetingly interesting.  I can think of 5 companies that I am shorting today that I think are engaged in fraud, and I can't remember mentioning one of them on Twitter or this blog.   I find Theranos mildly interesting, but only because my wife is borderline diabetic and really was enthusiastic for Elizabeth Holmes's vision.

But here is the situation a couple of years ago at Tesla.  Think of this as the case study introduction:

• Tesla has introduced a real, desirable EV in an industry where EV's were basically crap cars no one wanted produced for PR and some regulatory reasons.
• For the first time ever, Tesla has demonstrated there was a large market for luxury EV's
• With the model S, Tesla had what has proved to be at least a 7 year lead over competitors (introduced in 2012 and similar products from several companies coming out in 2019)
• Tesla had the Model 3 ready to be introduced, with projections of topping 10,000 per week shortly, which could be one of the largest selling sedans in the world, EV or no.  Tesla had as many as 400,000 reservations already in hand for this car.
• Tesla had a founder (sort of, Musk is credited as founder but really isn't) with the Midas touch, sometimes called the real world Tony Stark, with a huge legion of followers who believe that he is the smartest and most ethical (given his green vision) engineer in the world and can do no wrong.
• Tesla had shareholders almost literally throwing money at the company, giving it a higher total market value than GM or Ford and with valuation metrics orders of magnitude higher than traditional car companies, based in part on visions of world-leading self-driving capabilities and comparisons to Apple.  The closest thing I have ever seen to the Simpson's take my money meme.

I can imagine the case study now -- should Tesla focus on the high-end of the market now and seek an immediate profit and a potentially sustainable long-term niche?  Or should it go all-out to do nothing less than become the major player in the entire worldwide automotive market, taking advantage of its high valuation to raise billions of capital to fund years of cash burn?  These are super interesting questions that I will not address today.  Tesla's apparent choice in this question is ... neither.  It has clearly gone all in, at least in rhetoric, on dominating the automotive market and Elon Musk has announced (at least on Twitter) future new products in nearly every automotive niche.  But at the same time Tesla has refused to leverage its high stock price to raise capital and actually has been cutting back on capital spending and slow-rolling expansion plans. I frankly cannot explain it, and won' try here.

What I want to discuss is the frequent comparison to Apple.   Elon Musk likes to compare himself to Steve Jobs and Tesla to Apple, but I don't think the comparison is very apt.  A big part of this is the differences in their in-source and out-source decisions.

As background, my thinking is shaped by several aspects of my HBS education.  The first is a business strategy curriculum crafted from the very first class to make one skeptical of flashy, sexy businesses.  Our first two cases in first year business strategy were an incredibly sexy electronics company, followed by a dull-as-dirt water meter company.  But it turned out that the water meter company minted money, with little technology change and huge moats against competition, while the electronics company was having to invest billions every few years just to stay in the game and never really earned a return on capital.

Another factor that shapes a lot of my thinking was that in-source / out-source decisions were very much in the spotlight at HBS at the time.  It was a time when the very nature of the industrial conglomerate was in question, and we were constantly made to ask whether a company really had to own function X to be profitable and successful.  Over and over and over, in company after company, we were asked to think about what were the critical success factor for a business, as well as what the most profitable elements of the vertical value-delivery chain were, and to think about structuring companies solely around these key elements, and outsource everything else.

To a large extent, this has been a key to Apple's success.  As I observed in comparing Tesla to Apple:

But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not [sell] through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-intensive tasks.

Yes, we have Apple stores now, but this was NOT part of the initial strategy and success.  The initial Apple iPod and iPhone strategy basically had Apple outsourcing everything from manufacturing to sales as non-strategic, and keeping in-house the design and software functions.   As it turned out, they were right, because they certainly made much better margins than anyone else in the vertical value chain.

But for all Tesla compares itself to Apple, it has take a totally different approach.  Like most manufacturers, it designs its products (which it is pretty good at).  It also manufactures them (which it is not so good at).  But unlike other auto makers it also owns its own sales and service network (instead of third party dealers) and it is not very good at this and this activity consumes a lot of capital.  Also unlike other auto makers, it also is building out its own fueling network, something GM and Ford can rely on Exxon for. AND, Elon Musk at various times has said we would in-source building of car carrier trailers, car transportation trucking firms, and body shops.  I have argued for years that one of the things that Tesla fanboys love about Tesla -- that it is so integrated vertically -- is an Achilles heel because it greatly increases the capital it needs to grow, takes it into low-margin business segments, and forces it to do highly-technical functions like auto manufacturing it does not have the skills for.  If Tesla really were like Apple, it would have developed a 3rd party dealer network, it would have partnered with someone else to do the charging stations (as VW has) and it would have farmed out the actual manufacturing to an auto-equivalent of Apple's Foxcon (maybe Kia?)

I wish I had the guys name but the person in this blog said it far better than I have been able to say it to date.  From "Credit Bubble Stocks"

The test of whether you are an electric vehicle “disrupter” is: how many manufacturers are licensing your battery? If you’d actually invented a better electric battery or other EV technology (battery is the only technology that matters though), you could license them and have a 10x book business. Tesla not only did not do a battery licensing model, but they effectively did the opposite. Consider the parts of the vehicle industry that they have decided to in-source versus the ones they have decided to outsource. As we know, they decided to in-source and compete head-to-head on manufacturing. The results have shown that they are worse than their more experienced competition. They decided to in-source the automotive retail, which had not been done before and was not legal in most states. (And still is not legal in eight states). This had been a huge distraction from the manufacturing side and has resulted in abysmal customer service. But of all things to outsource, they outsourced the battery production to a joint venture with Panasonic. What should be the entire premise of an electric vehicle company is not even enough of a competitive advantage to do in house.

I am not totally sure I agree -- I think Tesla would argue the key is in design and software, just like Apple.  But even if that is true, why are they doing all this other stuff that they don't do very well and is a total distraction and sucks up needed capital?

Name the field:  Housing, education, health care.  In most any industry you can name, the sum of the government's interventions tend to subsidize demand and restrict supply.  In health care for example, programs like Medicaid, Obamacare, Medicare, and others subsidize demand while physician licensing, long drug approvals and prescription requirements, certificates of need, etc restrict supply.

If you are wondering why, it turns out that most government regulatory processes are captured by current incumbents, who work to get the government to subsidize customers to buy their product or service while simultaneously having the government block upstart competitors, either foreign or domestic.  For example in housing, existing homeowners form a powerful lobby that limits housing supply through restrictive zoning while demanding that the government subsidize mortgage interest (as well as low-cost mortgage programs) and give special tax treatment to capital gains from homes.   The result in every industry is supply shortages and rising prices.

Yesterday, we saw another classic example.  Federal, state and local governments have spent billions of dollars over the last decades subsidizing solar panel installations in homes and businesses.  But now, they are also simultaneously restricting the supply of solar panels:

President Donald Trump is once again burnishing his protectionist bona fides by slapping imported solar cells and washing machines with 30% tariffs - his most significant action taking aim at the world's second-largest economy since he ordered an investigation into Chinese IP practices that could result in tariffs.

Acting on recommendations from US Trade Representative Robert Lighthizer, Trump imposed the sliding tariffs. Solar imports will face a 30% tarifffor the first year, then the tariff will decline to 15% by the fourth year.It also exempts the first 2.5 gigawatts of imported cells and modules, according to Bloomberg.

And... who would have guessed that Elon Musk would be on the receiving end of another government crony handout?  The patron saint of subsidy consumption will get yet another, as Tesla's solar city is currently building a large domestic panel manufacturing plant, an investment decision that makes little sense without tariff protection.

A key thrust of Nancy MacLean's book on the great Koch / Buchanan / libertarian conspiracy to destroy democracy is that public choice theory is all about protecting and cementing elite privilege under the law.  This is actually exactly opposite of how I have always viewed public choice theory -- public choice theory tends to show how well-intentioned "public service" programs tend to get co-opted by a few powerful people for their own benefit.  See "ethanol mandates" or "steel tariffs" or "beautician licensing" or any number of other programs.  But I am not conversant enough to really make this case well.  Fortunately, Steven Horwitz (pdf) has done it in his powerful critique of MacLean's book.

The intellectual error that is most frustrating, however, is her understanding of the relationship between public choice theory and questions of power and privilege. As Munger (2018) points out in his review, MacLean is an unreconstructed majoritarian. She genuinely believes, at least in this book, that the majority should always be able to enact its preferences and that constitutional constraints on majority rule are ways of protecting the power and privilege of wealthy white males. That’s the source of Democracy in Chains as her title and her argument that public choice theory is a tool of the powerful elite. As Munger also observes, normally such a view would be seen as a strawman as no serious political scientist believes it, not to mention that no democracy in the world lacks constitutional constraints on majorities. In addition, one must presume that a progressive like MacLean thinks Loving v. Virginia, Roe v. Wade, and  Obergefell v. Hodges, not to mention Brown, were all decided correctly, even though all of them put local democracies in chains, and in some cases, thwarted the expressed preferences of a majority of Americans.

For public choice theory, constitutions protect the citizens from two forms of tyranny: tyrannies of the majority when they wish to violate rights and tyrannies of coalitions of minorities who wish to use the state to redirect resources to themselves by taking advantage of the logic of concentrated benefits and diffuse costs. Buchanan’s political vision is, in Peter Boettke’s words, a world without discrimination and domination. Constitutional constraints, for Buchanan, are a central way of ensuring that democracy actually protects rights by preventing the powerful from exploiting the powerless and that political decisions involve the consent of all. Constitutional constraints make democracy work for all citizens – they do not put it in chains.

When MacLean argues that public choice is a tool to protect privilege, she gets it exactly backward. Public choice shows us how those with the power to influence the political process can use that power to create and protect privilege for themselves at the expense of the rest of the citizenry. Public choice’s analysis of rent-seeking and politics as exchange enables us to strip off the mask of bogus “public interest” explanations and see a great deal of political activity as socially destructive exploitation of the least well-off. To borrow a bit from the left’s rhetoric: public choice is better seen as a tool of resistance to oligarchy than a defense thereof. It helps us understand why corporate welfare remains so common even as so many see it as a problem. Public choice also helps to understand the growth of the military-industrial complex and challenges public interest explanations of that growth. One can tell similar stories about immigration policy and a number of other issues of that concern modern progressives. Public choice theory sees the battles over Uber and Lyft as the powerful government-licensed taxi companies fighting to protect their monopoly privileges and profits against upstart entrepreneurs better meeting the wants of the public. This provides an excellent illustration of how public choice theory can explain political outcomes, and why the theory is useful in understanding how the powerful can victimize the less powerful. Public choice theory, properly understood, is a tool of critical thinking that enables us to deconstruct political rhetoric to see the underlying forces at work that are allowing those with wealth and access to power to use politics to acquire and protect their privileges and profits

As Arnold Kling might say, and Horowitz himself posits in different words, libertarians spend so much time obsessing over the freedom-coercion political axis that they miss out on ways to engage those on the Oppressor-Oppressed axis.  Public choice theory has a lot to offer Progressives, as it explains a lot about how well-meaning legislation with progressive intent is often co-opted by powerful groups to enrich themselves.  Sure a lot of public choice theory is used by libertarians to say, essentially, burn the whole government to the ground; but there is a lot from my experience in public choice literature that should speak to good government progressives, academic work using public choice to think about better designing programs to more closely achieve their objectives.

As most of you know, my company operates public recreation facilities for a variety of public agencies under concession contracts.  These contracts are mostly similar to each other in their structure, but one key difference among them is the contract length -- we have both short-term contracts of say 5 years and long-term contracts up to 30 years.  When we have longer-term contracts, we are expected to do all the maintenance, even capital maintenance such as repaving roads and replacing roofs (more on that approach here).  The US Forest Service tends to prefer much shorter contracts where they retain responsibility for capital maintenance -- this tends to work out as we pay a higher concession fee on these (since we have fewer expenses) and the Forest Service has a process to use the concession fee to perform capital maintenance.  In fact, generally the FS asks us to do the maintenance because it is way easier for us to get it started (avoids the government contracting processes) and then we get credit for our costs against the fees we owe.

Anyway, I have a fair amount of experience with performing small to medium-sized infrastructure projects on public lands.  Here are a few examples, starting from the sublime and proceeding to the ridiculous, of projects we have not been able to proceed with and why.  In all these examples, my company was going to fund the project so availability of funds was not an issue.

• In TN, we had already begun an expansion to add more campsites to an existing campground, a project already approved by our government landlord.  A disgruntled ex-employee, on his way out, claimed we had disturbed a rock pile and he thought the rock pile was some sort of Native American artifact.  Despite the fact there was no evidence for this, and that the construction was no where near the rock pile, construction was halted and my contractor had to go home while an investigation was begun.  As we speak, scores of acres surrounding the campground have been put off-limits to development until the rock pile is thoroughly studied, but of course no funding currently exists to study the rock pile so it is not clear how long this will take.  I am proceeding internally on the assumption that we will never be given permission and am cutting losses on materials bought for the project.
• In AZ, we operated a snow play area in what was essentially a gravel pit.  The slopes we used were what was left from years of mining gravel, and essentially the whole area had been disturbed.  We wanted to add a real bathroom to replace scores of portable toilets and to bring power to the area rather than use generators.  All the work would be performed on already disturbed land in the gravel pit.  We were told we could not proceed without a NEPA (National Environmental Policy Act) study to assess environmental impacts of the work, which could easily take years or longer if its results got tied up in the courts, as they often do.  Since the government had no money or manpower to do the NEPA study, it was pointless to even try to proceed.  This year, without the ability to construct necessary facilities for visitors, we exited the concession contract and the Forest Service has not be successful yet in finding anyone else to reopen it.
• In CA, just this week, I was discussing two maintenance projects with the government in a series of campgrounds we run near the Owens Valley.  In one, we wanted to dig up a water line that runs under a dirt road to repair a leak.  In the second, we desperately needed to replace some leaky roofs on bathrooms.  Both projects are now delayed.  In the case of the water line, digging up the road was going to require an archaeological study - yes, any digging basically requires such a study, and there is no exception for utterly absurd situations like this.  We eventually decided to open the campground without water this year, to the detriment of campers.  In the other case, the replacement of roofs on some old 1950's campground pit toilet buildings (think bathrooms at a highway rest area but not as nice) have to first be evaluated to make sure they are not historic buildings that should be protected.  Since this is a safety issue, I used up my favors on this one to try to get it to proceed.  In my experience, once a building in a park or campground has been labelled historic, that is pretty much its death sentence.  It becomes impossible to do any work on them and they simply fall apart.  For example, years ago there were some really neat old travel cabins in Slide Rock State Park in AZ.  I tried to get permission to fix them up and reopen them, but was told they were historic and they had to wait for special permissions and procedures and materials.  Today, the cabins are basically kindling, having fallen apart completely.

Recognize that these are projects entirely without NIMBY, funding, permitting, licensing, or procurement issues.  But they still face barriers from government rules.

One of the irritating tasks I am required by law to perform for the government is fill in a bunch of detailed information about my business for the US Census Bureau.  This is one of a number of reports the government sends me each year to fill in.  The first thing I look at on these forms is whether they are required by law.  If they are not, they immediately go in the trash can.  In particular, I could spend 110% of my free time filling in Department of Labor surveys that seem to come for each state we operate in.  The only entertainment value I get associated with these many surveys is the calls I sometimes get from government workers asking me if I would please fill in the survey.  Generally I explain to them that 1.  My time is too valuable to waste on this stuff and 2.  There is no way in hell I am going to give them a bunch of data they will likely only use to justify new regulations that make my business life even harder.

The two reports that are required (this does not include of course the dozens of required tax forms, licensing forms, and corporate registration forms we fill out every year) are the annual Census report and the EEO-1 report.  I already discussed a while back the 15-20x increase in size and complexity of the EEO-1 report, where about 3600 new cells have been added that have to be filled in.  This year the Census Accommodations Industry Report had a huge increase in complexity -- last year's report had one cell for last years' total expenses (though the Census bureau's definition of total expenses was so arcane that it took an hour or so to calculate the number).  This year, instead of a single number for expenses there are 48 different cells to be filled in with detailed categories of expenses.  Here are just two of the many categories they demand:

d.  Purchased repairs and maintenance to machinery and equipment - Expensed repair and maintenance services to machinery, vehicles, equipment, and computer hardware. Exclude materials, parts, and supplies used for repairs and maintenance performed by this firm's employees

e.  Purchased repairs and maintenance to buildings, structures, and offices - Include repair and maintenance to integral parts of buildings (e.g., elevators, heating systems). Exclude materials, parts, and supplies used for repairs and maintenance performed by this firm's employees. Report janitorial and grounds maintenance services in line 4c

Perhaps I am a failure as a business person, but my company does not track expenses in this detail, or at least in these specific categories.   The exercise was not only absurdly time-consuming, it was impossible.  Depending on my mood, I might have just filled it all in with random guesses.   However, even though it is not supposed to be used this way, I couldn't shake the sense that someone someday might try to use it to compare against my tax returns (which are prepared quite carefully and accurately) and try to raise red flags.  So I left it all blank.  I will be interested to see how they respond.

Kevin Drum laments that people are "Americans Flee America For Overseas Health Care Just Like Canadians."  My response in his comments:

I am confused by your using the word "flee". If I buy a Toyota, no one says I am "fleeing" the US manufacturing system. It is a global economy, and I don't know why the globalization of health care services is anything but a good thing. We have put so many barriers in the way of expanding capacity (licensing, certificates of need, FDA approvals, etc) and legislated so many artificial monopolies in health care, it seems perfectly reasonable, even good news, that competition for medical services is emerging from other countries.

For years I have argued that immigration controls in this country are effectively a form of occupational licensing.  While US immigration controls are a terrible policy IMO, Germany's approach seems even worse.  They welcome people into their country but don't let them work, and then wonder why newly immigrated refugees can't find jobs.

In 2015, Germany waited the longest of any country in Europe to restrict the flow of asylum seekers from the Middle East. Yet once they arrived, the asylees who immediately sought work in Europe’s largest economy were greeted by bureaucracy. The law initially forbade asylees from seeking work for 9 months after their arrival, but was reduced to 3 months in November 2014. Then, inexplicably, at the height of the inflows, the German governmentbanned working if the asylee was forced to stay a reception center, which could be up to 6 months.

After the initial waiting period, asylees did not receive unrestricted employment authorization. Instead, they would have to find a “concrete” job offer—i.e. a firm must promise to hire them if the permit is granted—then apply for authorization. Even then, companies can only hire them during the first 15 months if the jobs are offered first to EU residents, and the federal labor department agrees that no one was willing to take. They also set asylee wages, which can price out low-skilled workers.

The hoops don’t end there. Asylees still have to get the approval of the immigration office at the municipal level. Under the law, it would take four years before they could compete equally with EU citizens.

On top of all these refugee-specific regulations, skilled workers are then tasked with proving that they can work in certain occupations. In order to obtain an occupational license, documentary proof of training—proof that’s often buried under bombed-out homes in Syria—is required. Some states in Germany allow asylees to demonstrate their skills in order to receive licensing, but others do not. “I am a dentist and could work, but what am I supposed to do? I am not allowed to work here!” one asylee told DW News.

Low-skilled immigrants haven’t avoided being targeted either. Germany introduced its first ever minimum wage in 2015—which disproportionately hits lower skilled migrants—and a study by the German government in August 2016 found that it had already cost 60,000 jobs.

James Bessen has a terrific article in the Harvard Business Review on the estimated contribution to corporate profits of rent-seeking, or the acquisition of special favors, subsidies, and protections from the government that shelter a company from the normal competition of a free market.  Bessen argues that such rent-seeking is major explanatory factor for recent rises in corporate profits.

This topic will be a familiar one to Coyoteblog readers.   Show me a regulation and I will show you the large corporation that is able to use it to throttle competition.  I remember when everyone claimed the retail minimum wage was going to hurt Wal-Mart, but in fact Wal-Mart actually supported it because it was paying a higher wage than its smaller upstart competitors and thus the minimum wage would tend to hurt Wal-Mart's competition worse than it would be hurt.  Taxi service is one of the most regulated businesses in the country (at least in relation to the complexity of the business) and we are seeing just how much these regulations have supported taxi profits as we watch the taxi companies use the regulations to try to hammer Uber and Lyft.

According to Bessen, the effect is both large and on the rise:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase....

The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. Without further research, we cannot say for sure whether this activity is making the economy less dynamic and more unequal, but the magnitude of this effect certainly heightens those concerns.

Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

I would add two other industries to this list -- medicine and legal.  The reason it likely does not show up in his study is that the returns in these businesses show up to individuals or small private firms.  But heavy regulation, and in particular a licensing process wherein one must get permission from the incumbents in order to compete with them, has always kept prices and returns in these businesses artificially high.

Note by the way that the breakpoint year of 2000 makes this a bipartisan issue, occurring in equal measure in Republican and Democratic Congresses and Presidencies.

And I don't think I need to remind folks, but both of our Presidential candidates are absolutely steeped in and committed to this cronyist, corporatist system

Kevin Drum observes that the top 25 hedge fund managers earned $13 billion in total, including one hapless dude who made $250 million despite losing money and shutting down the fund.

I will say that I have always scratched my head over asset manager compensation.  The tradition is that they get paid as a percentage of assets managed, sometimes with a percentage of the profits as well but never taking a percentage of the losses.   Perhaps this made some sense with smaller pools of money, but today with huge pools of money, the same old percentages yield ludicrous compensation results.  I certainly understand why the managers would defend this compensation scheme, but why do customers accept it?

This reminds me of real estate broker compensation.  The tradition when I grew up is that the seller paid 6%, about half of which went to the seller's broker and half to the buyer's broker.  For years that 6% was etched in stone and no one broke ranks -- the agents were pretty good at maintaining the cartel, and the government helped by putting the force of law behind broker licensing that helped keep the agent supply down.  But as home prices kept increasing, people started noticing that while 6% of $100,000 may have made some sense as reasonable compensation, 6% of $2 million was absurd, especially since a $2 million home was not even close to 20x harder to sell.   So people, initially savvy high net worth folks, and later everyone, began negotiating the 6%.  I have negotiated this number on every home I have sold since the mid-1990s.

I am not really knowledgeable about the asset management business -- in some sense I have negotiated my commission by choosing to put all my money in low-fee Vanguard funds.  How does the asset management business hold the line on fees, particularly when they are in a business where it is so easy to measure their relative performance, and presumably pay them based on this performance?

Which got me to thinking about the customers of hedge funds.  Aren't many of these customers progressive or controlled by progressives?  Hedge funds have been very successful marketing to university endowments, non-profit foundations, and public pension funds -- aren't these institutions often controlled by progressives, or at least left-liberals?  Aren't a disproportionate share of the very high net worth Hollywood and billionaire types who invest in hedge funds also progressive or liberal?  Heck, Hillary Clinton's son-in-law ran a hedge fund until recently.  So why don't these folks get together and instead of worrying about whether their portfolios are invested in Israel or Exxon or some other progressive bette noir, why don't they agree to a set of principles as to how they are going to pay for their asset management services in the future, and stick to these?  I say that progressives should get together, because they are politically passionate about this, but I can't think of any good reason why good libertarians or conservatives wouldn't happily join in to reduce their fees.

I understand that to the extent that there are black swan hedge funds that beat the market year in and year out, these folks will be hard to challenge as they can probably write their own terms.  But for the other 99% of hedge funds, why not use the power progressives already have as customers before we start talking about various government hammers.

PS-  I will put my two cents in.  I think the new Mother Jones site design is awful.

I am not sure that many politicians are good on this score, but Hillary Clinton and Donald Trump are likely as bad as it gets on crony capitalism.  Forget their policy positions, which are steeped in government interventionism in the economy, but just look at their personal careers.  Each have a long history of taking advantage of political power to enrich themselves and their business associates.  I am not sure what Cruz meant when he said "New York values", but both Trump and Clinton are steeped in the New York political economy, where one builds a fortune through political connections rather than entrepreneurial vigor.   Want to build a new parking lot next to your casino or start up a new energy firm -- you don't bother with private investors or arms length transactions, you go to the government.

With that in mind, I particularly liked Don Buudreaux's quote of the day:

First, we labor under a ubiquitous threat of being shackled by crony capitalists.  [Adam] Smith wondered how internally stable a free market could be in the face of a tendency for its political infrastructure to decay into crony capitalism.  (The phrase “crony capitalism” is not Smith’s.  I use it to refer to various of Smith’s targets: mercantilists who lobby for tariffs and other trade barriers, monopolists who pay kings for a license to be free from competition altogether, and so on.)  Partnerships between big business and big government lead to big subsidies, monopolistic licensing practices, and tariffs.  These ways of compromising freedom have been and always will be touted as protecting the middle class, but their true purpose is (and almost always will be) to transfer wealth and power from ordinary citizens to well-connected elites

I was doing a radio interview and was reminded of this article I wrote in response to the famous Obama "Life of Julia" piece extolling the virtues of government in our lives.  Since I spend so much of my time in the last few years finding ways to comply with ever more onerous regulations (rather than actually improving my business or customer service) I thought I would offer a different view.  When I argue that free market proponents need to talk about taxes less and regulation more, this is what I am thinking about.

Since it has been several years since this went up at Forbes, I want to reprint it here in full:

Last week, the Obama Administration released a campaign piece about the life of Julia, showing how Julia benefited from taxpayer largess and oversight by the state at many points in her life. But the campaign piece was incomplete, and missed the part where Julia attempted to start her own business. Long before she started a web business out of her home, she tried to start a retail business.

Julia always liked the outdoors — remember that taxpayers helped her retire from productive work so she could work in a community garden. Well, as she was growing up, Julia loved to camp outdoors. For years she camped at a lovely lakefront public campground until it was forced to close — unfortunately, the government agency that ran the campground had operating costs that were so much higher than the fees charged to visitors that they couldn’t afford to keep it open any longer.

But Julia had an idea. After forming a corporation (a surprisingly easy task with lots of private companies competing to help one complete the proper legal steps), Julia approached the public parks agency about the possibility of her leasing the campground and reopening it under private management. She was surprised, though, at the tremendous opposition she encountered in the agency. Despite the fact that she was willing to adhere to operating standards and restrictions set by the public agency, she initially encountered tremendous resistance. She had assumed a parks and recreation agency would welcome the opportunity to reopen a park to the public, be she had underestimated the near universal opposition to private enterprise she found among the agency’s employees.

Eventually, though, with a lot of hard work and some help from a local TV station that rallied park users to her cause, the public agency agreed to a one-year pilot of her idea.

So the hard part was behind her, right? Probably not. In fact, Julia expected entrepreneurship to be tough. She was worried about the challenges of hiring good employees, getting financing for new equipment, and marketing her new campground. As it turned out, though, she would have little time for any of these concerns.

Before she could even think about hiring employees, she had to get a federal tax ID number, or FEIN, for her company. This identification number allows her to collect and pay her employee’s Social Security and Medicare taxes, as well as withhold and submit the Federal income tax obligations of her employees. In addition to these reports, she also learned that she had to file a separate report each quarter on her employee’s earnings in order to file and pay Federal unemployment taxes.

But her state has its own income tax, so she had to register for a separate ID number to report and pay employee state tax withholding, and then had to fill out yet another registration for another ID number to file another regular report to pay state unemployment taxes. Her state also has a public rather than private workers compensation system, so she registered for another number so she could fill out another monthly report to pay state workers compensation premiums.

And of course, since Julia intends to make retail sales, she needed to register with the state (yet another number and report) to collect and pay sales tax — though her state calls it a “privilege” tax rather than a sales tax because, as the state’s web site explains, conducting commerce is a privilege that can only be exercised with the state’s permission. She is momentarily encouraged when she finds out her state sales tax does not apply to camping, only to eventually find out this is because the state has a completely separate system (yes, another registration number and monthly report) for collecting and paying lodging taxes. So sales in her campground store will be at one tax rate on one report while campsite rentals in the same park will pay a different tax rate on a different report. Which seems overly complicated until she finds out her county also has a separate sales and lodging tax that are added to the state’s, and must be reported separately under a different registration number to the County. Thank goodness she is not in a city, or she could easily have had to file and pay three separate sales taxes and three separate lodging taxes (city, county, state). If she ever decides to rent boats on the lake, she will have to get another state registration to pay a special state boat rental tax, the percentage of which varies based on whether a boat is motorized or human-powered.

Whew. Julia thought she had finally tracked down all her tax registrations, but she was wrong. Her corporation is an S-corporation, so she files and pays her corporate income taxes on her individual return. But it turns out her state also has a franchise tax on corporations she must pay separately, based on her total revenues. In addition, it turns out that each year she must produce a complete list of all her businesses personal property, from lawn mowers to computers to radios to chairs, and submit this list to the County so she can pay property taxes on all these items. Unfortunately, in her state the property tax bill does not end there. When the public agency was running the campground, the county was not allowed to charge another government agency property taxes on the assets. The agency still owns the property — it is just leasing it to Julia so she can operate it — but the county has a mechanism called the Leasehold Excise Tax to make Julia pay the property taxes the agency doesn’t have to pay.

So twelve registration numbers and 12 monthly/quarterly/yearly reports later, surely Julia has fulfilled all her obligations to the government. Unfortunately, no, because she has not even begun to address licensing issues. To begin, the County will require that she get an occupancy permit for her campground, which must be renewed annually. This seemed surprisingly easy, until someone from the County noticed she had removed an old rotting wooden deck from the back of her store that had been a safety issue and an eyesore. It turns out she was in violation of County law because she did not get a removal permit first. She was required to get a permit retroactively, which eventually required payments to seven different County agencies and at one point required, for a reason she never understood, the collection and testing of a soil sample.

Because she will be selling packaged foods in her store (e.g. chips and pop-tarts), she also has to get a health department license and inspection. She had originally intended to keep some fresh-brewed coffee for customers in the store, but it turned out that required a higher-level health license and eight hours training in food handling. She might have been willing to pursue it, but the inspector told her that to make coffee, she would need to install a three-basin stainless steel wash-up sink plus a separate mop sink in her store, and she decided that coffee would have to wait.

Once through the general health licensing process, she then needed to obtain licenses for individual products. She wanted to sell aspirin, so she had to get a state over-the counter drug sale license. She knew that customers would want cigarettes, so she had to obtain a tobacco sales license. One day as she was setting up, a state inspector noticed she had a carton of eggs in her cooler, and notified her she needed a state license to sell eggs (as Dave Barry would say, I am not making this up). And then there was the problem of beer.

She knew that selling beer would require an alcohol license. In addition to requiring a long, tedious application, getting such a license required that she be finger-printed at the local Sheriff’s office, that she measure the distance in feet to the nearest three stores that sold alcohol and the nearest school and church, and that she attend eight hours of special alcohol sales training. The whole application process took many months — at one point her application was kicked back to her because she included a computer CAD drawing of the store when the instructions require the drawing be made by hand (I repeat, I am not making this up). She finally thought she was home-free, when she found her state requires a public hearing as a final step to determine if the market really needs another liquor retailer. At that hearing, several large, powerful local liquor businesses testified that the market was already saturated and that they already had plenty of competition, thank you very much, and her application was denied.

By the time Julia called it quits, she still had multiple applications pending. She hadn’t yet figured out how to create the stormwater runnoff management plan needed for her stormwater permit. She hadn’t been able to satisfy the state air resources board in permitting her small above-ground fuel tank. And she was still going back and forth with the state department of water resources for her drinking water sampling and testing plan.

Julia gave up her dream of working outdoors, and spent the rest of her life closeted in a room staring at a computer screen. It wasn’t what she really wanted to do, but web design does not require a license (yet) and she could avoid the hassles involved with having employees. The public never got its park back, and the campground still sits closed, the facilities falling apart from neglect. But a few months after Julia gave up, a park agency employee wrote a scathing editorial in the local paper, citing Julia’s failure as a great example of how private enterprise has failed and the need for public agencies to do more.

Julia’s experience is a composite, but is based entirely on my personal, real experiences. Every tax, registration, report, inspection, and license mentioned is a real one my company has had to obtain at some point in our expansion to new states. The only difference is in the story of the liquor license, where after my local competitors initially blocked the license I had the wherewithal to fight and eventually get it issued.

A few days ago, there was an article in our daily fishwrap that said something I found hard to believe.  It said that the state had initiated a crackdown on unlicensed shipments of wine from out of state at the behest of a letter from the Goldwater Institute.  It even had a picture (at least in the online edition) of Clint Bolick, Goldwater's chief of litigation.

Essentially, most states do not allow or severely restrict direct purchase by consumers of liquor products from out of state.  As usual for such protectionist stupidity, it is claimed to be for the children, but in fact mainly is meant to protect a small, very powerful group of liquor distributors who make a fortune from their state-granted monopoly on liquor wholesaling.  Basically, by some outdated post-prohibition laws, every drop of alcohol in the state must pass through the hands of a couple of companies, who of course extract their toll like Baron's of old with castles on the Rhine.

I simply found it unfathomable that Clint Bolick, a founder of the Institute for Justice (IC) for god sakes, would be pestering the state to more vigorously enforce stupid, outdated, and protectionist licensing laws.  And it turns out I was right.  

Clint Bolick, the Goldwater Institute’s director of litigation, said he sent the state a letter in November 2012 asking it to get rid of a rule that required customers to show up at certain wineries annually in order to get direct shipments to their homes.

Bolick’s letter, which he provided to The Republic and azcentral, said that rule made no sense and would stop Arizonans from joining wine clubs, where wineries send a designated amount of wine to customers each year, sometimes including wines not available to the general public.

“A requirement of annual presence also does not serve any obvious public purpose, given that the purchaser has established age and identity at the time of the order,” he wrote.

Bolick said he met with the director of the department at the time, Alan Everett, who told him the department would start a regulatory review.

So it turns out that Goldwater was trying to ease regulation and make it easier for consumers to have some choice and access to more suppliers.  All good.

But it turns out "regulatory review" means something different to a state regulator.  I suppose it was too much to think that they might have a review to see if their regulations went too far.  In fact, the "regulatory review" seems to have focused on how they could tighten regulations even further.  The result was not the one Goldwater hoped for ... instead of making things easier on consumers, the state went all-in trying to make things even worse for consumers.

Hill said Bolick's 2012 letter made the department question whether the wineries sending club shipments into Arizona were all licensed.

“It was the basis for us starting to ask questions about who is shipping liquor into the state of Arizona that does not hold an Arizona liquor license,” Hill said....

So far, the department has investigated 223 violations at a total of 199 wineries, according to records obtained through the Liquor Department’s website.

Additionally, somewhere between 250 and 300 wineries were found to have not filed their production reports. Once the department receives those, it could cause some or all of those to be found in violation. Some of those wineries, in order to comply with state liquor laws and have their cases closed, might also agree to not ship wine to Arizona.

Customers frustrated that they cannot get their wine shipped anymore are funding a renewed effort to change the state’s shipping laws. Two California-based groups, The Wine Institute and Free The Grapes, said they are work

It is clear that Goldwater, representing consumers, has very little influence on the state agency.  So who does?  Well, you have probably guessed:

Hill said last Thursday the crackdown came at the request of a member of the Arizona wine industry, saying it was an example of government and industry working together.

Ugh, what a happy thought -- government and industry working together to protect incumbents from competition and restrict consumer choice.

Business licensing and awarding of government contracts is supposed to be entirely viewpoint neutral and related only to factors explicitly listed in the licensing legislation (e.g. training attained, cleanliness, whatever).  Of course, I believe that licensing is generally total BS and is basically a way for incumbent businesses to restrict potential competitors and throttle supply.

Of course, defenders of licensing laws piously intone that they are only there to protect consumers and are enforced in a totally neutral way that has nothing to do with viewpoints or political pull (lol).

Trump is a complete loss as a candidate but he is at least proving once and for all what total BS this is.  Both of the following are via the definitely indispensable Overlawyered.

Boston mayor says Trump will never get any city permits because of his political views.

If Donald Trump ever wants to build a hotel in Boston, he’ll need to apologize for his comments about Mexican immigrants first, the Hub’s mayor said.

“I just don’t agree with him at all,” Boston Mayor Martin J. Walsh told the Herald yesterday. “I think his comments are inappropriate. And if he wanted to build a hotel here, he’d have to make some apologies to people in this country.”

New York mayor says Trump will never get any city business because of his political views.

New York City Mayor Bill de Blasio said Monday that his city may not be able to break its business contracts with Donald Trump but will avoid future deals with the 2016 GOP contender.

"My impression is that unless there has been some breaking of a contract or something that gives us a legal opportunity to act, I'm not sure we have a specific course of action," the Democratic mayor told reporters Monday, according to CNN and Capital New York.

"But we're certainly not looking to do any business with him going forward," de Blasio added.

De Blasio indicated Monday that he has yet to receive a final analysis on whether the city could get out of several contracts with Trump, a celebrity real estate developer turned presidential candidate.

New York City officials began reviewing the contracts, including a Central Park carousel, two rinks and a Bronx golf course, several weeks ago in light of Trump's controversial remarks on immigrants.

It turns out that small government libertarians like myself and large-government progressives actually have something in common -- we both fear accumulations of unaccountable power.  We just find such power in different places.  Progressives fear the accumulation of power in large corporations and moneyed individuals.  Libertarians fear government power.

I won't try to take Caplan's ideological Turing test today, but will just speak from my own perspective.  I wonder how Progressives can ignore that government has guns and prisons while corporations just have the ability to sell you something or hire you (though perhaps not on the terms you prefer).  When pressed to explain why the Left is more comfortable with government power, their explanations (to my taste) depend too much on assumptions that competent versions of "their guy" pull the levers of power, and that power itself and the vagaries of government incentives will not corrupt this guy.

On the other hand, progressives ask me all the time, "how can you trust corporations so much" and then list off a justifiably long list of examples of them acting poorly.  This, I think, is where the real difference comes in, and where the confusion often comes int he public discourse.  I will answer that I don't trust anyone, government or corporations.  What I trust are the incentives and the accountability enforced in a market where a) consumers can take their money elsewhere if they get bad products or services; b) employees can take their labor elsewhere if they are treated poorly; and c) entrepreneurs can make a fortune identifying shortcomings in incumbent businesses and offering consumers and/or employees a better deal.

Unfortunately, when a person or organization finds itself very successful in this game, there is a natural tendency to want to protect their winning position.  But nothing in the market can stop a challenge from a better product or service, so successful entities tend to turn to the government (which has a monopoly on guns and prisons and asset seizures and the like) for protection against upstart challengers.  If successful, these restrictions tend to hobble growth and innovation -- imagine if IBM had successfully used government influence to halt the PC revolution or if AT&T had blocked the growth of cell phones.

This dynamic is at the heart of Brink Lindsey's new white paper at Cato (pdf).   As has been his wont in several past works, Lindsey is looking for proposals that bridge the gap between Left and Right.  So, rather than stake out the 98th salvo in an area where there seems to be a hopeless ideological divide (e.g. minimum wage or low-skill immigration), he focuses on four areas one could imagine building a broad coalition.  Lindsey focuses on attempts by successful incumbents to use government to cement their position and calls them "regressive regulation" because they tend to benefit the already-successful at the expense of everyone else.

In the following sections, I examine four major examples of regressive regulation: (a) excessive monopoly privileges granted under copyright and patent law; (b) protection of incumbent service providers under occupational licensing; (c) restrictions on high-skilled immigration; and (d) artificial scarcity created by land-use regulation. In all four examples, current government policy works to create explicit barriers to entry. In the first two cases, the restriction is on entry into a product market: businesses are not allowed to sell products that are deemed to infringe on a copyright or patent, and individuals are not allowed to sell their services without a license. In the other two cases, actual physical entry into a geographic area is being limited: on the one hand, immigration into the country; on the other, the development and purchase or rental of real estate.

One can immediately see how this might appeal across ideologies.  Libertarians and market Conservatives will like the reduction in regulation and government scope.  Progressives should like the elimination of government actions that primarily help the wealthy and powerful.**

I said "cross ideologies" above rather than bi-partisan because things get messy when actual politics intrude.  All of these protected constituencies wield a lot of political influence across both parties -- that is why the regressive regulation exists in the first place.  And they all have finally honed stories about how these restrictions that prevent new competition and business models are really there to protect the little people (just watch the battles between Uber and the taxi cartels and you will see what I mean).

Never-the-less, this strikes me as a pretty good list.  For whatever barriers there may be, it is a hell of a lot easier to picture a bipartisan agreement on any of these issues than on, say, low-skill immigration.  I haven't finished reading to the end -- I have to get on now with my day job -- so I have yet to see if there are any concrete proposals that look promising.

**The ideological problem here, of course, is that libertarians think that these restrictions are the primary way in which the wealthy unfairly benefit while most Progressives would (I suppose) see it as a side issue given that they believe that even the free-est of market capitalism is inherently unfair.

Conservatives say they are for free markets and free enterprise, but then I read stuff like this (have have added the bold):

Lynch supports Obama’s unconstitutional amnesty, believes illegal immigrants should have the same rights to employment as American citizens, opposes voter ID laws, advocates federal intrusion in local law enforcement under the guise of civil rights, supports the government taking private property on flimsy grounds, and offers no opposition to using drones against American citizens.

I agree with some of these concerns, but the one in bold is a real head scratcher.   What theory of free markets do Conservatives hold that accepts as valid the government licensing of labor?  On what possible grounds should a government bar me from hiring, say, a Russian immigrant to do my programming?  Or crazier still, why can I hire a Mexican in my Mexico office but can't have the same person working for me in my Phoenix office?

I have a theory about the Romans that is probably shared by nobody.  The Romans were strong and powerful and vital when they were creating a variety of citizenship types to accommodate multiple peoples who entered the empire in multiple ways.  In particular I think of civitas sine suffragio or citizenship without the vote.  But this was just one of many variations.   By the first century AD  (or CE per the modern academic trend), a lot of people of a lot of cultures and races and over a wide geography called themselves Romans.

By the end of the empire, the "reforms" of Diocletian and Constatine purged all flexibility from both governance and the economy (in sum, their laws amounted to the Directive 10-289 of the ancient world).  By the time the Empire started falling apart, they had lost all ability to integrate new peoples or innovate with citizenship models.  What was eventually called the Barbarian invasions began decades earlier as the attempted barbarian migrations.   The barbarians wanted to just settle peacefully.  And Rome desperately needed them -- their system was falling apart as their farms and countryside was depopulated from a combination of government policy and demographic collapses (e.g. plagues).  Rome desperately needed new people to settle their farms and form the new backbone of the army and the barbarians desperately wanted to settle and had a lot of military skill, but they couldn't make it work.

Bob Murphy on occupational licensing, via Cafe Hayek

It is a paradox of our age that the interventionists think the public is too stupid to consult Angie’s List before hiring a lawyer, and so they need politicians to weed out the really bad ones by requiring law licenses. Yet, who determines whether a person (often a lawyer!) is qualified to become a politician? Why, the same group of citizens who were too stupid to pick their own lawyers.

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 Information, Part 2 Incentives, Part 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

I often criticize others for attributing 100% of any bad trend to their personal pet peeve.  To some extent I am guilty of that in my last post, where I blamed declining business formation on increasingly complex regulation and licensing.  I think there are good reasons for doing so -- I have spent the last 6 months passing up on business growth opportunities because I was too consumed with catching up on regulatory compliance minutia, particularly in California.  And I have watched as many of my smaller competitors who have fewer resources to dedicate to such compliance issues have left the business, telling me they could no longer keep up with all the requirements.

But there is seldom just one single cause for any trend in a complex, chaotic system (e.g. climate, but economics as well).  One other reason business formation may have dropped is the crash of the housing market and specifically in the equity many have in their homes.

Home equity has historically been an important source of capital for small business formation.  My first large investment in my company was funded with a loan that was secured by the equity in my home.  What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics.  In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.

In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter.  My company is no longer what many would call "small" -- we will do millions in revenue this year.  But there is no way in the world that my banker of over 10 years will lend to my business unsecured -- they will demand some asset they can put a lien on.  So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory.  But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck -- unless the owner has a personal asset, typically a house, on which the banker can place a lien.

So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).

Postscript:  Banks will make cash flow loans if guaranteed by the SBA.  This is another whole can of worms, which I will not discuss today.  SBA loans are expensive and difficult to get, and the SBA has a tendency to turn the money spigot on and off at random times.  I have often wondered if the SBA helped to kill cash flow lending by banks.  First, why make risky small unsecured loans when you can get a government guarantee?  And second, with more formulaic lending criteria, SBA lending eliminated the need for loan officers who were good at evaluating business risks.  I can say from personal experience that the folks who can intelligently discuss a business plan and its risks are all gone from banks now (at least in the small business market).

Don Boudreax has a good editorial up on occupational licensing

The first hint that the real goal of occupational licensing isn't to protect consumers' health and welfare is that far too many of the professions that are licensed pose practically zero risks to ordinary people. Among the professions that are licensed in various U.S. states are florists, hair braiders and casket sellers. What are the chances that consumers will be wounded by poorly arranged bouquets of flowers or that corpses will be made more dead by defective caskets?

The real goal of occupational licensing is to protect not consumers, but incumbent suppliers. Most occupational-licensing schemes require entrants into a trade to pass exams — exams designed and graded by representatives of incumbent suppliers....

But what about more “significant” professions, such as doctors and lawyers?

The case for licensing these professions is no stronger than is the case for licensing florists and hair braiders. The reasons are many. Here are just two.

First, precisely because medical care and legal counsel are especially important services, it's especially important that competition to supply these services be as intense as possible. If the price of flowers is unnecessarily high or the quality poor, that's unfortunate but hardly tragic. Not so for the prices and quality of the services of doctors and lawyers.

Too high a price for medical visits will cause too many people to resort to self-diagnosis and self-medication. Too high a price for legal services will cause too many people to write their own wills or negotiate their own divorce settlements. Getting matters wrong on these fronts can be quite serious.

Won't, though, the absence of licensing allow large numbers of unqualified doctors and lawyers to practice? No.

People are not generally stupid when spending their own money on themselves and their loved ones. Without government licensing, people will demand — and other people will supply — information on different physicians and attorneys. Websites and smartphone apps will be created that, for a small fee, collect and distribute unbiased information on doctors and lawyers. People in need of medical care or legal advice will be free to consult this information and to use it as they, rather than some distant bureaucrat, choose

One thing I think sometimes gets lost -- the critique of licensing often focuses on where licensing is too restrictive - e.g. hair braiding or taxis or simple medical procedures.

But it is just as likely to fail because it is insufficiently restrictive. People will always say to me that they certainly want their brain surgeon to be a licensed physician, implying that licensing is appropriate for certain extreme skills. But would you really choose a brain surgeon merely because he or she was licensed? I would do a ton of research in choosing a brain surgeon, research that would go well beyond their having managed to pass some tests 20 years ago.

The same applies for restaurants - my standards go way beyond whether they have a 3 basin cleanup sink and have sufficiently high temperatures in their dishwasher.

The criteria for licensing is never "just right". Either it is too restrictive and eliminates competition that would provide me value; or else it is insufficiently stringent such that I have to perform the same due diligence I would have in the absence of any licensing regime (though perhaps with less robust tools since licensing likely stunts development of such consumer tools). And even if it happened to be well-calibrated for me, it will not be well-calibrated for my neighbor who will have a different set of criteria and preferences.

This is an update of a post I wrote here.

One question that keeps coming up, both from libertarians as well as others, is why should government define marriage at all?  Can't anyone get married in any kind of private ceremony?

My response is that yes, in some sort of libertarian small-government world, the state would be irrelevant -- what I used to call separation of marriage and state.

But it turns out that the state is already deeply involved in marriage.  The explicit state licensing of marriage already exists, and our laws in Arizona for this licensing are unequal -- some couples get access to this state license, and some cannot.

What makes this important is that marriage is embedded in hundreds, even thousands, of laws.   I searched the Arizona Revised Statutes for mentions of the words "spouse" or "spouses".  These words are used 1133 times in 373 different statutes!  The Our America team told me they counted over a thousand references in Federal code.  In other words, our law codes give -- in thousands of instances -- specific rights, responsibilities, and privileges to married couples who have access to a state-granted marriage license.  Those left out of the current unequal definition of marriage face any number of challenges imposed on them by these specifics of spousal rights and privileges embedded in our law code.  I call this the non-marriage penalty.

There is no way to rip all these references to marriage out of the law and tax code.  Likewise, there is no way to create an equable marriage alternative such as a civil union -- to do so, we would have to go through and rewrite 373 statutes to incorporate this terminology.   The fairest solution -- the one that most respects individual freedoms -- is to accept that such government licensing of marriage exists and then make it as open and as equal and as fair and as accessible as we possibly can.

Despite the title, I should make it clear that I oppose the proposed legislation in Arizona to allow warrant-less searches of  abortion clinics.  The stated justification for the law is to ensure safety and healthy conditions at clinics, but the law is transparently about harassing a particular type of business.

However,  I must admit I get some schadenfreude from this.  Supporters of the bill say that they are only extending the current standards applied to many other businesses, such as restaurants and bars, to abortion clinics.

Regulators from OSHA to the health department have tremendous powers to barge into private businesses and conduct searches without a warrant, whatever the text of the Fourth Amendment might say.  They justify this with licensing regimes that require these businesses to have state licenses, and then require businesses accept these extra-Constitutional searches as a prerequisite for the license.

I have opposed these licensing regimes for years, in part because the consumer protection justification is often a sham -- what they really want is to be able to exercise control of private businesses.  In some cases, these laws are used to protect incumbents.  In some cases (e.g. here) they are used to try to shut down the entire (legal) industry.

Statists on the Left have generally poo-pooed these concerns.  Their typical response is that businesses are just whining, and that only those in violation of the law have something to fear.  Now, they suddenly are recognizing that an unannounced search per se is threatening.

Update:  I find abortion proponents on the Left to be among the worst examples of faux libertarians.  They claim their issue is about choice regarding one's body, but then tend to simultaneously support all kinds of government interventions in personal medical decision-making.  They are all for the sanctity of private property when there is an abortion clinic on the site;  not so much otherwise.

Please check out my Forbes post today.  Here is how it begins:

Last night, the accumulated years of being called an evil-Koch-funded-anti-science-tobacco-lawyer-Holocaust-Denier finally caught up with me.  I wrote something like 3000 words of indignation about climate alarmists corrupting the very definition of science by declaring their work “settled”, answering difficult scientific questions with the equivalent of voting, and telling everyone the way to be pro-science is to listen to self-designated authorities and shut up.  I looked at the draft this morning and while I agreed with everything written, I decided not to publish a whiny ode of victimization.  There are plenty of those floating around already.

And then, out of the blue, I received an email from a stranger.  Last year I had helped to sponsor a proposal to legalize gay marriage in Arizona.  I was doing some outreach to folks in the libertarian community who had no problem with gay marriage (after all, they are libertarians) but were concerned that marriage licensing should not be a government activity at all and were therefore lukewarm about our proposition.  I suppose I could have called them bigots, or homophobic, or in the pay of Big Hetero — but instead I gathered and presented data on the number of different laws, such as inheritance, where rights and privileges were tied to marriage.  I argued that the government was already deeply involved with marriage, and fairness therefore demanded that more people have access to these rights and privileges.  Just yesterday I had a reader send me an email that said, simply, “you changed my mind on gay marriage.”  It made my day.  If only climate discussion could work this way.

So I decided the right way to drive change in the climate debate is not to rant about it but instead to continue to model what I consider good behavior — fact-based discussion and a recognition that reasonable people can disagree without that disagreement implying one or the other has evil intentions or is mean-spirited.

This analysis was originally published about 8 years ago, and there is no longer an online version.  So for fun, I thought I would reproduce my original thought experiment on climate models that led me to the climate dark side.

I have been flattered over time that folks like Matt Ridley have picked up on bits and pieces of this analysis.  See it all here.

Looking at this map of state licensing regimes (darker is more onerous, with AZ being the worst), it is hard to correlate with states being Republican or Democrat.  That doesn't surprise me, because I have always thought the urge to restrict competition and protect incumbents has always been a bipartisan enterprise.

So I sat and thought for a minute about my home state of AZ.  Why is it the worst?  We have a pretty good libertarian history here, from Goldwater onwards.  We have at least one fairly libertarian Senator (Jeff Flake).  So what is the deal?

My hypothesis is that it is related to immigration.  The same majority Republican legislators who are generally open to free markets simultaneously have an incredible fear and loathing of immigration.  Perhaps our onerous business licensing regime is driven by nativists wanting to protect themselves from competition by new immigrants, immigrants who would struggle to compete onerous licensing requirements?

So what does this map look like vs. immigrant population density?  Via Wikipedia, here are the states on density of Hispanics

Hmm, we might be getting somewhere, but its not a perfect fit.  So instead, let's hypothesize that business licensing is aimed at non-white, non-hispanic groups in general (similar to early justifications for the minimum wage as a way to keep black workers migrating from the south out of traditionally "white" jobs).  I cannot get it by state, but the map below by county looks pretty dang similar to the licensing map.  Areas in blue have above average percent of non-whites, red is below average.

Not a perfect fit certainly (one would expect Texas to be more onerous), but perhaps close enough to treat the hypothesis seriously.  I had always thought that I would be the last one to play the race card in a policy analysis, but business licensing tends to have an inherently base motive (protect one group from competition from another group) that is pretty easy to square with racial and ethnic fear.

The creeping regulatory / corporate state gets a setback

Faulting the IRS for attempting to “unilaterally expand its authority,” the D.C. Circuit today affirmed a district court decision tossing out the agency’s tax-preparer licensing program. Under the program, all paid tax-return preparers, hitherto unregulated, were required to pass a certification exam, pay annual fees to the agency, and complete 15 hours of continuing education each year.

The program, of course, had been backed by the major national tax-return preparers, chiefly as a way of driving up compliance costs for smaller rivals and pushing home-based “kitchen table” preparers out of business. Dan Alban of the Institute for Justice, lead counsel to the tax preparers challenging the program,called the decision “a major victory for tax preparers—and taxpayers—nationwide.”

The licensing program was not only a classic example of corporate cronyism, but also of agency overreach. IRS relied on an 1884 statute empowering it to “regulate the practice of representatives or persons before [it].” Prior to 2011, IRS had never claimed that the statute gave it authority to regulate preparers. Indeed, in 2005, an IRS official testified that preparers fell outside of the law’s reach.

Perhaps a first indication that the Obama Administration strategy to pack the DC Circuit with Obama appointees may not necessarily protect his executive overreach.

PS - you gotta love the IJ.

PPS - The IRS justified its actions under "an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses"

The other day, Kevin Drum wrote a post wondering why we had so few doctors per capital in the United States and observing, reasonably, that this might be one reason to explain why physician compensation rates were higher here than in other countries.

He and Matt Yglesisus argued that this smaller number of doctors and higher compensation rates were due to a physician-operated cartel.  This is a proposition I and most libertarians would agree with.  In fact I, and many others apparently, wrote to him saying yes there is a cartel, but ironically it owed its existence to government interventionism in the economy and health care.  In a true free market, such a cartel would only have value so long as it added value to consumers.

Drum seems to have missed the point.  In this post, he reacts to themany commenters who said that government power was at the heart of the cartel by saying no, it's not the government because doctors control the nuts and bolts decisions of the cartel.  Look!  Doctors are in all the key positions in the key organizations that control the cartel!

Well, no sh*t.  Of course they are.   Just as lawyers occupy all the key slots in the ABA.  But neither the ABA nor these doctors cartels would have nearly the power that they have if it were not for government laws that give them that power (e.g. giving the ABA and AMA monopoly power over licensing and school credentialing).  I had never heard of the RUC before, which apparently controls internship slots, but its ability to exercise this control seems pretty tied to the billions in government money of which it controls the distribution.

Let's get out of medicine for a second.  I am sure Best Buy wishes it had some mechanism to control new entrants into its business.  Theoretically (and it may have even done this) it could form the Association of Bricks and Mortar Electronics Retailers (ABMER).  It could even stake a position that it did not think consumers should shop at upstarts who are not ABMER members.  Take that Amazon!  Of course, without any particular value proposition to do so, consumers are likely to ignore the ABMER and go buy at Amazon.com anyway.

Such cartel schemes are tried all the time, and generally fail (the one exception I wonder about is the Visa/Mastercard consortium, but that is for another post).  Anyway, the only way the ABMER would really work is if some sort of government licensing law were passed that required anyone selling consumer electronics to be ABMER members.  And my guess is that the ABMER might not invite Amazon.com to join.  All of a sudden, Amazon is out of the electronics business.  Or maybe it just gets forced to deliver all its product through Best Buy stores, for a fee of course.

Crazy stupid, huh?  The government would never write licensing laws to protect a small group of incumbent retailers, right?  Well, tell that to Elon Musk.  Tesla has been trying for years to bring its cars to consumers in innovative ways, but have time and again run up against state auto dealership laws that effectively force all cars to be sold through the state dealer cartel.  Or you can talk to California wine growers, who have tried for years to sell directly to consumers in other states but get forced into selling through the state liquor wholesaler cartels.

All these cartels are controlled and manned by the industry, but they are enforced -- they are given their teeth -- by the government.

Here are a few off-the-top-of-my-head examples of cartel actions in the medical field admittedly initiated and supported and administered by doctors, that are enforced by state and federal law:

• Certificate of need laws prevent hospitals from expanding or adding new equipment without government permission.  The boards in this process are usually stacked with the most powerful local hospitals, who use the law to prevent competition and keep prices high.  This is a great example where Drum could say that the decisions are essentially being made by hospitals.  Yes they are, but they only have the power to do so because the government that grants them this licensing power over competitive capacity.  Without this government backing, new hospitals would just laugh at them.
• Government licensing laws let the AMA effectively write the criteria for licencing doctors, which are kept really stringent to keep the supply low.  Even if I wanted to only put in stitches all day to busted up kids, I would still have to go through 8 years of medical school and residency. Drum and Yglesias focus on the the number of medical schools and residencies.  I do not know if these are an issue or not.  But what clearly is an issue is the fact that one has to endure 8 expensive years or more just to be able to hand out birth control or stitch up a skinned knee.
• Government licensing laws help doctors fight a constant rearguard action against nurse practitioners and other less expensively trained folks who could easily do half or more of what doctors do today.
• The FDA and prescription drug law not only helps pharma companies keep profits up, but also increases business to doctors as people have to have a prescription for certain drugs they could easily buy on their own (e.g birth control pills, antibiotics).
• The government limits immigration and thus labor mobility, reducing the ability of doctors from other countries to move here.

I am sure there are more.

There is no denying that in the middle of every industry cartel are insiders who are maneuvering to increase the rents of the incumbent players.  In fact, I am sure that every industry has participants who dream about getting off the competitive treadmill and creating a nice industry cartel, and would be the first to sign up.  But none of these dreams are ever going to happen unless they are enabled by the coercive power of government.

Of course, the consistent answer is, well, we just have the wrong guys running things.  If we had the right guys, it would work great.  But this kind of co-option always happens.   Look at taxis and liquor license holders and the entire banking sector.  Five years ago I would bet that progressives thought they finally had that right guy in the administration.  And look what has happened.  Banking cronyism is as strong as ever.  Obama's signature health legislation is full of crony giveaways.  In 6 months the health insurers are going to be running the entire PPACA infrastructure to their own benefit.

update:  This post is verging on the "is cronyism capitalism's fault" argument.  Rather than go into that again, it is here.

Update #2:  Related

Arkansas orthodontist Ben Burris was hauled in front of the state dental board in September after dentists in northeast Arkansas complained that he was offering dental cleanings to the general public in his Braces by Burris orthodontics clinics. The price for dental cleanings was $98 for an adult and $68 for a child, which Burris has said is about half of what dentists in northeast Arkansas typically charge.

Burris said most of the patients who need cleanings don’t have a dentist, but are checked by one of the three orthodontists in his clinic. Also, Burris said he offered the service because it was good for his business and good for the public. Some of his competitors “have gone absolutely ballistic” over the price and complained to the board, Burris said.

MP: Of course, the Arkansas dental cartel has no basis to complain directly about the low prices for dental cleaning at Braces by Burris clinics, so they are instead complaining that the clinic’s low-cost teeth cleaning services violate the states Dental Practice Act, which prohibits orthodontists and other specialists from practicing “outside their specialty.”