Coyote Blog

Update:  Finem Respice had a great photo in the same vein back during Occupy Wall Street.

During the period that  Occupy Wall Street was making the news, I often said that I agreed with many of their problem diagnoses but absolutely disagreed with their proposed solutions.  They, like I, decried the abuse of government power via Cronyism by private parties, e.g. protection and bailout of Wall Street bankers.  Their solution, though, to increase government power never made any sense to me.

Here is Michael Huemer via Don Boudreaux:

Predatory behavior does not occur merely because human beings are selfish.  It occurs because human beings are selfish and some human beings are much more powerful than others.  Powerful, selfish people use their positions to exploit and abuse those much weaker than themselves.  The standard solutions to the problem of human predation all start by cementing the very condition most likely to cause predatory behavior – the concentration of power – and only then do they try to steer away from its natural consequences.  The alternative is to begin with an extreme decentralization of coercive power.

Michael Munger has one of the most useful articles I have read in a very long time.  As illustrated by the Venn diagram I posted a while back showing the heavy overlap between the Tea Party and Occupy Wall Street, we have much more concurrence in the diagnosis of problems than in the prescriptions for solutions.   Munger gets at the heart of why many people go wrong in these prescriptions

When I am discussing the state with my colleagues at Duke, it's not long before I realize that, for them, almost without exception, the State is a unicorn. I come from the Public Choice tradition, which tends to emphasize consequentialist arguments more than natural rights, and so the distinction is particularly important for me. My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA. 

But their solution is, without exception, to expand the power of "the State." That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least three hundred years....

He follows with this useful test

But they may not immediately see why "the State" that they can imagine is a unicorn. So, to help them, I propose what I (immodestly) call "the Munger test."  

1. Go ahead, make your argument for what you want the State to do, and what you want the State to be in charge of.
2. Then, go back and look at your statement. Everywhere you said "the State" delete that phrase and replace it with "politicians I actually know, running in electoral systems with voters and interest groups that actually exist."
3. If you still believe your statement, then we have something to talk about.

This leads to loads of fun, believe me. When someone says, "The State should be in charge of hundreds of thousands of heavily armed troops, with the authority to use that coercive power," ask them to take out the unicorn ("The State") and replace it with George W. Bush. How do you like it now?

If someone says, "The State should be able to choose subsidies and taxes to change the incentives people face in deciding what energy sources to use," ask them to remove "The State" and replace it with "senators from states that rely on coal, oil, or corn ethanol for income." Still sound like a good idea?

How about, "The State should make rules for regulating sales of high performance electric cars." Now, the switch: "Representatives from Michigan and other states that produce parts for internal combustion engines should be in charge of regulating Tesla Motors."  Gosh, maybe not …

Hat tip:  Don Boudreaux

I spent most of the Bush years asking Conservatives a similar question -- you may be fine when "your guy" has this power, but would you be happy if Al Gore or Nancy Pelosi had it.  And of course I have spent most of the Obama years asking Liberals whether they would be comfortable if George Bush or Rick Perry had similar powers to what Obama has claimed for himself.  Because they will.

I said something similar here, though less elegantly.  I concluded in part:

Technocratic idealists ALWAYS lose control of the game.  It may feel good at first when the trains start running on time, but the technocrats are soon swept away by the thugs, and the patina of idealism is swept away, and only fascism is left.  Interestingly, the technocrats always cry "our only mistake was letting those other guys take control".  No, the mistake was accepting the right to use force on another man.  Everything after that was inevitable.

Successful businesses often seek to cement their position and block new competition by running to government for legislation that blocks new entrants and/or makes it harder to compete for smaller upstarts.  One only need to look at the taxi cartel trying to kill Uber and Lyft to see exactly how this operates.  It is working:

This is a strategy that works with both Republican and Democrat politicians, which may explain why both Occupy Wall Street and the Tea Party shared opposition to cronyism among their complaints.

Of course there are other factors than just powerful incumbents blocking new competitors.  In California, regulations that make it just debilitating to try to run a business are also driven by the tort bar, which has created a thriving business in extracting settlements from companies over miniscule rules violations.  And the California government obliges by shifting the rules constantly, so companies are both constantly vulnerable and have to pay other attorneys to strengthen their immune systems against these assaults.

I warned you that Cliven Bundy's ranch was the wrong hill to fight on over property rights and the role of government ownership on western lands.  And I was right.

This kind of thing should not come as a surprise.  This is a guy who simply did not want to pay his rent, and used the catch phrases of liberty to try to get sympathy.  I could find about a thousand far more sympathetic examples of folks screwed over by government land use regulations -- e.g. people whose puddle in the backyard is suddenly a wetlands that they can't build on.  But for some reason Conservatives all rushed to pile on this one example.  Stupid.  The media can probably be counted on to hide the unsavory back stories of Occupy Wall Street supporters, but there is no way they are going to do so for a "hero" of the right.   The BLM almost bailed Conservatives out of their stupid support for Bundy by their execrable on-site management of the raid, but Conservatives are now getting what they deserve for jumping in bed with this guy.

I can think of two groups with whom I have some sympathy -- the Tea Party and climate skeptics -- who share one problem in common:  the media does not come to them to ask them what their positions are.  The media instead goes to their opposition to ask what their positions are.  In other words, the media asks global warming strong believers what the skeptic position is, without ever even talking to skeptics.  It should be no surprise then that these groups get painted with straw men positions that frequently bear no resemblance to their actual beliefs.

Paul Krugman provides an excellent example.  He writes:  (shame on the blog author for not linking Krugman's article, here is the link)

Or we’re told that conservatives, the Tea Party in particular, oppose handouts because they believe in personal responsibility, in a society in which people must bear the consequences of their actions. Yet it’s hard to find angry Tea Party denunciations of huge Wall Street bailouts, of huge bonuses paid to executives who were saved from disaster by government backing and guarantees.

This is really outrageous.  I am not a Tea Partier because they hold a number of positions (e.g. on immigration and gay marriage) opposite of mine.  But to say they somehow have ignored cronyism and bailouts is just absurd.  TARP was one of the instigations, if not the key instigation, for the Tea Party.  As I have written any number of times, the Tea Party and Occupy Wall Street actually shared a number of common complaints about bank bailouts and cronyism.

David Harsanyi has more here.

By the way, it is Hilarious to see Krugman trying to claim the moral high ground on Cronyism, as he has been such a vociferous proponent of the Fed balance sheet expansion, which will likely go down in history as one of the greatest crony giveaways to the rich in history.

Scratch "consumer" protection laws and you will almost always find the laws are really aimed a protecting incumbent businesses and traditional business models.  This time from France:

To the surprise of virtually everyone in France, the government has just passed a law requiring car services like Uber to wait 15 minutes before picking up passengers. The bill is designed to help regular taxi drivers, who feel threatened by recently-introduced companies like Uber, SnapCar and LeCab. Cabbies in the Gallic nation require formidable time and expense to get their permits and see the new services -- which lack such onerous requirements -- as direct competitors.

This is the interesting political ground where the Occupy Wall Street movement and the Tea Party have a lot of overlap.  That is why the Chamber of Commerce, which represents all these incumbent businesses, is working with both parties to keep the cozy corporatists in power against challenges from the Left and Right.  If you are a business owner, eschew the Chamber and join the NFIB and support the IJ.

1.  Eliminate all deductions in the individual income tax code

2.  Eliminate the corporate income tax.

3.  Tax capital gains and dividends as regular income.

4.  Eliminate the death tax as well as the write-up of asset values at death

I don't have any idea if this revenue positive or negative (I suspect it would be short-term positive, and long-term very positive), but I don't care.  This would:

1. Substantially reduce the government's ability to play preference games and give crony special help in the tax code.
2. Completely eliminate the huge unproductive drag of corporate tax law expenses and substantially reduce the cost of individual tax preparation.
3. Eliminate the enormous unproductive drag of estate tax planning
4. Eliminate forced sales of family farms and businesses at death in order to pay the taxes (taxes are paid instead on capital gains when sold).
5. Substantially reduce government-induced distortions on flows of capital  (e.g. current promotion of home ownership over renting, of corporate debt over equity financing, of capital gains over income, etc).
6. Eliminate most double taxations in the code, since there is now only the individual income tax.

I would be happy to make this revenue neutral (even if it required an individual income tax rate hike) and sell this to the Tea Party and Occupy Wall Street alike as a plan to reduce waste, corporatism, and crony meddling.  The OWS might be upset about 2 & 4, but corporate profits eventually show up as either capital gains or dividends, so they will eventually get taxed on the individual income tax return.  Ditto death taxes - currently they are largely offset by the ability to write-up asset basis at death and aggressive tax planning.  And anyway, the death tax is a trivial sources of government revenues.

Postscript:  I know there is all sorts of literature that supposedly promotes a lower capital gains tax as an economic positive.  Frankly, I don't trust it any more than any other literature genned up to promote special tax breaks to any group because that group is supposedly economically more important.  In my mind, a lower capital gains tax rate (which means a higher regular income tax rate) is just another way of government expressing an artificial preference for one economic activity over another.  Specifically, a lower capital gains rate creates a preference for real estate and stock investors over business owners.   Currently, I invest in a second home and flip it for a profit and I get a tax break on the capital gains.  But if I invest in a business instead that pays off with regular income, I get no tax break.  Why?  Why is one type of investing better than another?  The answer is that it is not, but the people who buy and sell equities and real estate in large quantities have more political clout than small business owners.

Postscript #2:  And Medicare taxes have to go up, at least until the program is restructured. 

Postscript #3:  This is a great example of what I want to make go away.  I consider it far more destructive in the long run than a percentage point rate change.  In case it is behind a paywall, here is a bit of it (these giveaways to the rich were in the very same bill that was supposed to be to soak the rich):

Thus Michigan Democrat Debbie Stabenow was able to retain an accelerated tax write-off for owners of Nascar tracks (cost: $78 million) to benefit the paupers who control the Michigan International Speedway. New Mexico's Jeff Bingaman saved a tax credit for companies operating in American Samoa ($62 million), including a StarKist factory.

Distillers are able to drink to a $222 million rum tax rebate. Perhaps this will help to finance more of those fabulous Bacardi TV ads with all those beautiful rich people. Businesses located on Indian reservations will receive $222 million in accelerated depreciation. And there are breaks for railroads, "New York Liberty Zone" bonds and so much more.

But a special award goes to Chris Dodd, the former Senator who now roams Gucci Gulch lobbying for Hollywood's movie studios. The Senate summary of his tax victory is worth quoting in full: "The bill extends for two years, through 2013, the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States)."

You gotta love that "depressed areas" bit. The impoverished impresarios of Brentwood get an extra writeoff if they take their film crews into, say, deepest Flatbush. Is that because they have to pay extra to the caterers from Dean & DeLuca to make the trip? It sure can't be because they hire the jobless locals for the production crew. Those are union jobs, mate, and don't you forget it.

The Joint Tax Committee says this Hollywood special will cost the Treasury a mere $248 million over 10 years, but over fiscal years 2013 and 2014 the cost is really $430 million because it is supposed to expire at the end of this year. In reality Mr. Dodd will wrangle another extension next year, and the year after that, and . . . . Investing a couple million in Mr. Dodd in return for $430 million in tax breaks sure beats trying to make better movies.

Then there are the green-energy giveaways that are also quickly becoming entitlements. The wind production tax credit got another one-year reprieve, thanks to Mr. Obama and GOP Senators John Thune (South Dakota) and Chuck Grassley (Iowa). This freebie for the likes of the neediest at General Electric GE -0.82% andSiemens SIE.XE +0.20% â€”which benefit indirectly by making wind turbine gear—is now 20 years old. Cost to taxpayers: $12 billion.

Cellulosic biofuels—the great white whale of renewable energy—also had their tax credit continued, and the definition of what qualifies was expanded to include producers of "algae-based fuel" ($59 million.) Speaking of sludge, biodiesel and "renewable diesel" will continue receiving their $1 per gallon tax credit ($2.2 billion). The U.S. is experiencing a natural gas and oil drilling boom, but Congress still thinks algae and wind will power the future.

Meanwhile, consumers will get tax credits for buying plug-in motorcycles ($7 million), while the manufacturers of energy-efficient appliances ($650 million) and builders of energy-efficient homes ($154 million) also retain tax credits. Manufacturers like Whirlpool love these subsidies, and they are one reason that company paid no net taxes in recent years.

I continue to be fascinated by the frequent intersection of classical liberals / libertarians and Occupy Wall Street, at least in the diagnosis of what ails us.  This post by Russ Roberts I linked previously is a great example.   Both groups get energized by criticisms of the corporate state and crony government.

Where they diverge, of course, is in solution-making.  The OWS folks see the root cause in the behavior and incentives of private corporations which corrupt government actors with their money, and thus advocate solutions which increase state power over these private entities.  In contrast, libertarians like myself see the problem as too much state power to create winners and losers in the market and shift wealth from one group to another.  Given this power, the financial incentives to harness it in ones favor are overwhelming and will never go away, so the only way to tackle it is to reduce the power to play favorites.

That is the purposely inflammatory title of my article this week at Forbes.com, finding the roots of crony capitalism not in capitalism itself, but in progressive legislation.  An excerpt:

The core of capitalism has nothing to do with, and is in fact inherently corrupted by, the exercise of state power.  At its heart, capitalism is one simple proposition -- free exchange between individuals based on mutual self-interest.  There is no room in this definition for subsidies or special government preferences or bailouts.  The meat and potatoes activities of crony capitalism are corruptions rather than features of free markets.  Where state power to intervene in economic activity does not exist, neither does cronyism.

Believe it or not, the Occupy movement reminds me of nothing so much as 1832.  Flash back to that year, and you will find Federal officials with almost no power to help or hinder commerce... with one exception: the Second Bank of the United States, a powerful quasi-public institution that used its monopoly on government deposits as a source of funds for private lending.  The bank was accused of using its immense reserves of government cash to influence elections, enrich the favored, and lend based on political rather than economic formulae (any of this sound familiar?).  Andrew Jackson and his supporters, the raucous occupiers of their day, came into office campaigning against the fraud and cronyism at the Bank.

Jackson, much like the current OWS folks, was a strange blend of sometimes frontier anarchist and sometimes tyrannical authoritarian.  But in the case of the Second Bank, the OWS movement could well learn from Jackson.  He didn't propose new and greater powers for government officials to help check abuses of the existing powers -- he proposed to kill the Bank entirely.  Eliminate the source of power, and men can no longer tap it for their own enrichment.

Unfortunately, the progressive Left which makes up most of the OWS movement has taken exactly the opposite approach over the last century or so, expanding government powers and economic institutions (such that today the scope of the second bank seems quaintly limited) and thus the opportunity for cronyism.   In fact, most of the interventions that make crony capitalism possible are facilitated and enabled by the very progressive legislation that the progressive Left and the OWS protesters tend to favor.  Consider some examples...

David Henderson has a wonderful 4-part series of a talk he had with an Occupy-type crowd in Monterrey.  He does a good job of showing how the roots of many of the problems the Occupy folks fret about lie with government power rather than free markets.

part 1

part 2

part 3

part 4

Here is a point he makes in part 3 that I have made before

"Or consider this," I said, "Who was the wealthiest man in America early in the 20th century?" "John D. Rockefeller," said someone. "Right," I said, "and at its peak, John D. Rockefeller's net worth was, in today's $, about $200 billion, which would make him richer than Bill Gates and Warren Buffett combined."

"But think what you have that he didn't. He couldn't watch TV, play video games, surf the Internet, or send e-mail. During the summer, he didn't have air conditioning. For most of his life, he couldn't travel by airplane. He didn't even have [and here I picked up my cell phone] a 1G. And here's the big one: If he got sick, he couldn't use many medicines, including penicillin. Calvin Coolidge's son, after playing tennis on the White House lawn and getting a blister, died. He didn't have antibiotics."

"So you could say that you're richer than Rockefeller. Isn't there a song about that?Here's the test. Who here would trade places with Rockefeller?" I asked. About 5 people stuck up their hands. "Then you're not," I said. "Who wouldn't trade places with Rockefeller?" I asked. About 15 people stuck up their hands. "You are," I said.

I wrote something similar of San Francisco 19th-century millionaire Mark Hopkins

Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week.  And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted.  Hopkins likely never read after dark by any light other than a flame.

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die.  All the rage today is to moan about people’s access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis.  Hopkins died at 64, an old man in an era where the average life span was in the early forties.  He saw at least one of his children die young, as most others of his age did.  In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin’s business partner and neighbor.  The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

The only mistake in this I would correct was to say Mark Hopkins was old at 64.  The average lifespan was in the forties, but this was mainly because of childhood death.  Once someone made it into their thirties, they had a pretty good chance of living into their sixties.

This is a fascinating tale, from Occupy Wall Street, demonstrating how a group with assumptions including

1. Its OK for one group to exercise power over another group
2. Its OK to redistribute money on some basis other than earning it through voluntary commerce

This is a pretty interesting interview with Eric Schmidt of Google.  I am running out the door and don't have time to excerpt it, but in short, Schmidt is quite critical of the ability of government to intelligently regulate technology.

His solution is telling.  There is nothing here about reducing the power and scope of government, despite his clear and concise description of its consistent structural failures.  His solution:  more power for my guys.  That way, when Washington plays its game of sacrificing the less connected in favor of the well connected, we will do OK.

I am working on this concept for my next Forbes column vis a vis the Occupy Wall Street movement.  The OWS folks seem incoherent to us, because, in short, they complain about people having unfair power over them and then their solution is ... to give other people more power.   I have reconciled this in my mind with a cold war analogy.  Everyone accepts the arms race as a fact, and so the only way to survive is to have more nukes than the other guy.  The only way to deal with power, is to get more power for my side.

Frankly, its time for disarmament.  As a retailer, I get irritated with credit card processors, but I understood when Congress was considering regulation of interchange fees that giving the Feds the power to set credit card terms, rather than the banks, was not going to make things any easier, just shift the costs from more to less favored constituencies (and consumers are always the least favored constituency).

More later as I sort this out in my head.