Coyote Blog

"F.D.A. Cracks Down on Juul and E-Cigarette Retailers" today, via the NYT.

As of this moment, cigarette-maker Phillip Morris stock is up nearly 4.5% on the news.  This happens so many times in sloppy policy making that I can't even count them.  Do-gooders assume that when they ban things, like e-cigarettes, that individuals will turn to the regulators' preferred alternative, in this case abstinence from any type of vaping or smoking.  But in fact, many are much more likely to switch to tobacco smoking, which is orders of magnitude more dangerous than vaping.  Adults who think these things through, like investors on Wall Street, understand this so that is why Phillip Morris has gained over $5 billion in value today.  The FDA is working to create a whole new generation of tobacco smokers.

When I hear that "that teenage use of electronic cigarettes has reached 'an epidemic proportion,'" unlike the regulators I do not immediately assume this is unalloyed bad news.  Another way of putting this is an "epidemic of teenagers who are turning to safer alternatives to really damaging tobacco products."

And when it turns out the regulators just make things worse so they can win this news cycle of virtue signalling, there is no way they will take responsibility for it,

And if you want to be really, really cynical about this, you might remember that with the huge government tobacco settlement, the government essentially made itself business partners with the large tobacco companies.  Any competitors threatening the top companies in the settlement seriously threaten tax income to many state governments.

UPDATE:  I had the wrong link.  The call is Wednesday but at 2:30 Pacific after the market closes, which makes more sense.  Like many companies, Tesla likes to dump the quarterly financials, dozens of pages in 8 point font, just seconds before the conference call.

If you are sitting in your office this week and need to be entertained in a way that looks like you are working, consider the Tesla investor conference call Wednesday at 2:30 PDT.  I can't guarantee anything but past conference calls have been a circus.  Normally I would expect the Tesla Board or the corporate counsel (who is Musk's divorce lawyer, lol) to bring adult supervision to the party, but so far that has not happened in any Tesla communications to date.  Expect potential discussion around:

• Tesla's immediate external capital needs, given that they are burning cash faster than you could actually physically burn it (Musk claims zero is needed but everyone else in the free world thinks its >$2 billion, with a huge part of Tesla's existing debt also expiring and needing to be rolled over soon)
• Model 3 order blacklog (this was the question in the last call that caused Musk to tell the experienced Wall Street analyst to shut up and then he switched to taking questions from a Youtube fanboy
• Model 3 production rates and quality issues
• Gross margins.  They HAVE to get higher for survival.  Particularly since Telsa has chosen to eschew traditional dealer networks so corporate bears all the cost of service and support.  This demands Tesla not only get its gross margins as high as other auto makers, they need to be higher.
• Expiration of tax subsidies -- the $6500 government tax credit for Tesla customers slowly disappears once their 200,000th EV has been sold in the US, which has happened.
• The disappearance of the $35,000 Model 3 from the web site (this is the promised car that generated a lot of the Telsa hype in the first place)
• Disappearance of all those other teased products (coupe, semi) that were released to great fanfare and have not ever been mentioned again
• ZEV credits (these are credits it gets from states like CA that other car makers have to buy to do business in those states with gasoline vehicles).  These are odd ducks as they have a lot of value but for some reasons do not show up anywhere on the balance sheet, so one doesn't know they even exist until Tesla chooses to sell them for a LOT of money.   They can flip a single quarter positive by saving these and exercising them at the same time.  Most folks see this happening in a bid to make Q3 profitable.  (By the way, anyone out there that understands by what accounting rules these valuable assets don't get put on the balance sheet are encouraged to email me the answer).
• Introduction of competitive products (Jaguar, Volvo, and pretty much everyone else soon)
• Pending lawsuits from both shareholders and whistle-blowing employees
• Implosion of SolarCity (now part of Telsa) such that new installations are on a trend line towards zero
• (unlikely but someone should really ask) Musk's silencing of critics
• (unlikely but someone should really ask) Musk's social media demeanor, including calling the Thai rescue hero a pedophile because he did not use Musk's goofy submarine

Tesla is a train wreck I cannot take my eyes off.  Unlike Theranos, which combined a product that didn't work with a screwed up management, and which operated in the dark, Tesla combines what has been a really good product with a screwed-up management, and operates in an absolute blaze of publicity.  I have never seen any stock where sentiment was so polarized between bears and fan-boy bulls (Herbalife, maybe?)

I have a personal metric of sentiment and volatility I invented but I am pretty sure has been used since before I was born.  Anyway, I look at the sum of the price of an at-the-market put and at-the-market call for the stock about 6 months out.  I then divide this combined price by the share price.  For Tesla January options, this comes to 31%.    This is really a huge number.  Take ExxonMobil, which has a lot of split sentiment right now (a historically fabulous company that keeps screwing up its quarters recently) this metric sits at 9%.

Disclosure:  I am in and out of short positions on TSLA, typically selling around 350+ (usually after Musk has honeytrapped the fan boys) and covering in the 290-300 range (usually after real news or a Musk meltdown).  This strategy has been profitable for 2 years but I think that is coming to an end.  TSLA is either going to fall more or stay high based on what it does in the 3rd quarter.

From the WSJ, the dying business of picking stocks.

Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins.

Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.

Advocates of passive funds have long cited their superior performance over time, lower fees and simplicity. Today, that credo has been effectively institutionalized, with government regulators, plaintiffs' lawyers and performance data pushing investors away from active stock picking.

Steve Chapman's article in Reason on police accountability is good throughout, but these stats are amazing:

Consider Cleveland. The ClevelandPlain Dealer reported that the police department looked into 4,427 uses of force by cops over four years and gave its blessing to each one. In Houston, every shooting over six years was found by the internal affairs department to be absolutely necessary. ...

The feds also assume that law enforcement officers are less fallible than the pope. From January 2010 to October 2013, the Los Angeles Times reported, Border Patrol agents shot 67 people, killing 19. Three of the agents are still being investigated. Of the remaining 64, 62 were absolved. The other two got a stern lecture.

It's all part of a national pattern. Bowling Green State University criminologist Philip Stinson has done extensive research on killings by cops. His conclusion? "It's very rare that an officer gets charged with a homicide offense resulting from their on-duty conduct even though people are killed on a fairly regular basis," he told The Wall Street Journal.

I have already given my cynical take on why this problem exists and why it is likely to persist.  Specifically, Conservatives fetishize the police and refuse to believe any shooting was unjustified and Liberals are suspicious of the police but refuse to challenge the powerful public employees unions that protect police from accountability.

Kevin Drum simply does not understand why Wall Street might be piling into broadband stocks despite proposed "tough new regulations."  He posits a number of hypotheses -- that Wall Street expected the rules to be worse than they turned out to be.  But this can't be it because the hundreds of pages of rules are still a secret.  He also hypothesizes there might be some nefarious secret loophole buried in the rules Wall Street knows about but we don't.

This is crazy!  How can a reasonably bright person like Drum who writes about the political economy not understand the issue of regulatory capture?  Seriously, I have always figured that the Left, which has a seemingly infinite appetite for regulation, must favor regulation because they find the benefits to out-weight the crony-ist downsides.  Is it really possible Drum is unfamiliar with the downsides altogether, or is he just being coy?

Here is what regulation, particularly utility-style regulation, tends to do -- it locks in current business models and competitors.  It makes it really hard for new entrants to challenge incumbents with innovative new business models or approaches, because regulations have been written based on the old business model and did not take the new one in account.  So a new entrant must begin business by getting regulators to allow their new model, which never happens because by this time incumbents have buildings full of lobbyists aimed at the regulatory process.  Go ask Tesla and Uber and Lyft about how easy it is to enter a heavily regulated business even with a superior new business model.

This is particularly true in the technology world.  The biggest threat to incumbency is someone with a new technology or approach to the technology.  Don't believe me?  I suggest you go to the offices of Netscape or AOL or Lycos or Borders or Circuit City or Radio Shack and interview them about the security of their multi-billion dollar businesses in the face of new online technologies.  At best, regulators put a huge speed bump in the way of competitors, costing them time and money to get their alternative business model approved.  At worst, regulators block new competitors altogether.

I will give you a thought experiment.  Let's say these exact same rules were adopted in the year 2000, when AOL and Earthlink dial-up ruled the internet access world.  Would cable and satellite and DSL have grown as quickly?  I can see the regulators now -- "hey, all the rules specify phone dial up.  There's nothing here about cable TV.  Sorry [Cox, Comcast, whoever] you are going to have to wait until we can write new rules.

The other thing that happens with utility-style regulation is that companies in the business tend to get their returns guaranteed.  Made a bad investment in a competitive market?  Well good luck getting customers to pay extra to bail you out from your bad decision when they have other options.  But what happens when your local power company wastes $10 billion on a nuclear plant that never opens -- it gets built into your rate base!

In the cast of broadband, they are locked in what business school students would see as a classic supply chain battle.  Upstream companies like Netflix supply content via downstream broadband companies.  Consumers are only willing to pay a certain amount for this content, so the upstream and downstream fight a lot over who gets what share of that consumer $.    This happens everywhere in the business world, from Cable TV to oil refining to selling TV's at Wal-Mart.  There is a real danger that broadband will lose this fight in the future -- but not now.  Regulated industries never die, they appeal to their regulators for help.

As of yesterday, Wall Street is looking at broadband companies and realizing that they are now largely immune from competition and some level of minimum returns are likely now gauranteed forever.  Consumers should hate this, but what's not to love for Wall Street?

Postscript:  Kevin Drum describes the new regulation this way:  "Basically, under Wheeler's proposal, cable companies would no longer be able to sign special deals to provide certain companies with faster service in return for higher payments."  This is a bit like describing the Patriot Act as a law to force people to take their shoes off at the airport.  Yes, it does that narrow thing, but it does a LOT else.  The proposal is hundreds of freaking pages long.  It does not take hundreds of pages to do the narrow little niche thing Drum (like most neutrality supporters) wants.

This Administration has cleverly taken this one tiny concern people have and have used it as an excuse to do a major regulatory takeover of the Internet.  This is a huge Trojan Horse. But I have already ranted about the details of that and you can read that here.

I am just amazed at how many otherwise smart people are rooting for the government to regulate the Internet:

According to a pair of new reports from the Wall Street Journal and the New York Times, the FCC chairman Tom Wheeler will soon do what some net neutrality advocates have been clamoring for for ages: Try to officially reclassify internet service as a telecommunications service under Title II of the Telecommunications Act. That'd effectively put internet access in the same bucket as landline telephone service, which is treated as a public utility in the United States, and would basically ban the paid prioritization of certain web sites and services over others....

We -- along with many of you -- will be watching the outcome of that vote with bated breath. For that matter, so will representatives and head honchoes of the country's internet service providers. A vote in favor of reclassification means that all of those companies will eventually have to deal with way more intense regulatory scrutiny, and do away with plans to treat some web-centric companies with deep pockets as first-class citizens of the internet while the rest of us wait longer for other stuff to load.

So, out of the fear in the last sentence, that some people will get better service than others -- something that, oh by the way, has never really happened so is entirely hypothetical -- you are urging on a regulatory regime originally designed for land-line phone companies, a technology that basically went unchanged for decades at a time.  The phones that were in my home at my birth in 1962 were identical to the one in my dorm room when AT&T was broken up in 1982.  Jesus, we are turning the Internet into a public utility -- name three innovations from an American public utility in the last 40 years.  Name one.

And all you free-speech advocates, do you really think the Feds won't use this as a back-door to online censorship?  We are talking about the same agency that went into a tizzy when Janet Jackson may have accidentally on purpose shown a nipple on TV.  All that is good with TV today-- The Sopranos, Game of Thrones, Arrested Development, etc. etc. etc. results mainly from the fact that cable is able to avoid exactly the kind of freaking regulation you want to impose on the Internet.

Here is my official notice -- you have been warned, time and again.  There will be no allowing future statements of "I didn't mean that" or "I didn't expect that" or "that's not what I intended."   There is no saying that you only wanted this one little change, that you didn't buy into all the other mess that is coming.   You let the regulatory camel's nose in the tent and the entire camel is coming inside.  I guarantee it.

Update:   Apparently the 1934 Telecommunications Act imposes a legal obligation on phone carriers to complete calls no matter who they are from.  Sounds familiar, huh?  Just like net neutrality.  It turns out this law is one of the major barriers preventing phone companies from offering innovative services to block spam calls.

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.

Apparently there is yet another executive order with far reaching consequences for government contractors, Executive Order 13673  (does it bother anyone else that we are up in the 13 thousands on these?  Did they start numbering at 1?)  Hans Bader has the details:

A July 31 executive order by President Obama will make it very costly for employers to challenge dubious allegations of wrongdoing against them, if they are government contractors (which employ a quarter of the American workforce). Executive Order 13,673 will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal. That’s the conclusion of The Wall Street Journal and prominent labor lawyer Eugene Scalia.

This “Fair Pay and Safe Workplaces” order allows government officials to cut off the contracts of contractors and subcontractors that do not “consistently adhere” to a wide array of complex labor, antidiscrimination, harassment, workplace-safety and disabilities-rights laws. Never mind that every large national business, no matter how conscientious, has at least one successful lawsuit against it under federal labor and employment laws, which is inevitable when a company has thousands of employees who can sue it in hundreds of different courts that often have differing interpretations of the law. The order also bans using perfectly legal arbitration agreements, overstepping the President’s legal authority.

I can say as someone who absolutely bends over backwards to be in compliance, it just is not possible to be totally clean.  We have won most all of the lawsuits and actions against us over the years vis a vis labor laws and related charges.  A lot of these are pro forma discrimination charges that some employees in protected groups file automatically when terminated, usually without any evidence of specific discrimination.  We have, to date, won all of these "was he a Hispanic that was terminated rather than he was terminated because he was Hispanic" suits.  We have only lost one case.  To give you an idea of how hard it can be to be 100% in compliance, let me describe it:

We had a government contract governed by the Service Contract Act, which sets out minimum wages to be paid for different types of jobs.  These wages typically are in two parts - a base wage and, if the company does not have benefits, a fringe payment in lieu of such benefits.  For example, it might say that a day laborer must be paid (I will use round numbers for simplicity) $12 an hour base wages plus $4 an hour for fringes.  So we paid the worker $16 and hour and felt ourselves in compliance.  

Then we had a Department of Labor audit.  The investigator insisted that the law required that we break these two payments into two lines on the paycheck.  So instead of having  a paycheck that said 40 hours times $16, it needed to say 40 hours times $12 and 40 hours times $4.  Thus we were found to be in violation and issued a huge fine.  I protested that the law said no such thing -- the law said I had to have a clear paper trail of what I paid people.  It did not say the labor and fringes had to be shown separately on the paycheck, nor did any DOL published regulation require this  (and of course I also pointed out that the intent of the law that someone get paid a minimum amount had been fulfilled).  

Apparently, the DOL had an internal handbook that suggested this as a correct practice, but this had never been tested in court nor embodied in a published regulation.  To impose the fine, my attorney said they had to take me to court.  I said go for it.  The DOL chose not to press the case, and we adjusted our paycheck practices to avoid the issue in the future.  I was happy to comply with this, as stupid as it was, but it was impossible to know it was an actual requirement until I got busted for violating this double-secret practice.  But there it is on my record - VIOLATION!

I will leave it to Bader's article to explore some of the implications of this order, but I want to add some unintended(?) consequences of my own:

• Government contractors would be insane to operate in California (and perhaps other regulatory hell-holes, but I am familiar with California).  California has a myriad of arcane labor laws (like break laws and heat stress laws) that are difficult to comply with, combined with a legislature that shifts the laws every year to make it hard to keep up, combined with a regulatory and judicial culture that assumes businesses are guilty until proven innocent.  If state labor violations or suits lead to loss of business at the national level, why the hell would a contractor ever want to have employees in California?
• I have a couple of smaller competitors who have sent employees into the parks we operate who then filed extensive, manufactured complaints to the government about our service, timed to make it difficult on us when we bid against them for the contract renewal.  How tempting will it be for companies to place employees in their rival who then file serial labor complaints to undermine that rival in future contract awards?
• Companies that do government contracting as a sideline are going to be driven out of the business, reducing the choice and competition among contractors.   Earlier I discussed how 41 CFR 60-2.1  and 41 CFR 60-4.1, also the result of an Obama executive order, drove our company out of our last incidental contracting business (though we deal with the government all the time, it is generally through concession contracts where we get paid by the public, not by the government, so a lot of government contracting law does not apply to these contracts).

Sorry, I don't have a source for this.

Making common cause with people with whom one disagrees about many other issues is a natural state of affairs for most libertarians.  Since we are such a minority, we can only make progress seeking out allies on the Left and Right on particular issues.  It was so natural to me that I was caught short when I ran Equal Marriage Arizona to find that many other people have no desire to do this.  They will not make common cause with you on an issue with which they agree with you 100% if they disagree with you on an array of unrelated issues.  I have now come to the conclusion that the latter attitude is more common than the former.  The problem with politics is, IMO, not the lack of compromise, but this lack of ability to make common cause across political lines on narrow issues.  Thus, for example, Elizabeth Warren is unable to make common cause with Republicans on the Ex-Im Bank, despite the fact it hits on two of her hot buttons (corporate subsidies and crony insider benefits for Wall Street bankers).

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.

The Senate Majority Leader has decided to try to shame and silence a private citizen for daring to engage in political discourse.  Here is Harry Reid:

I believe in an America where economic opportunity is open to all. And based on their actions and policies they promote, the Koch brothers seem to believe in an America where the system is rigged to benefit the very wealthy.

Remember that this is coming from the man who has somehow become a multi-multi-millionaire over a lifetime of only holding government jobs.

Contrast this with Charles Koch's actual words, parts of which could have come out of the mouth of an occupy Wall Street protester:

I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash-and-grab, short-term profits, saying how do I get a regulation, or we don’t want to export natural gas because it’s one of our raw materials … Well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism.

And that’s true even at the local level. I mean, how does somebody get started if you have to pay $100,000 or $300,000 to get a medallion to drive a taxi cab? You have to go to school for two years to be a hairdresser. You name it, in every industry we have this. The successful companies try to keep the new entrants down. Now that’s great for a company like ours. We make more money that way because we have less competition and less innovation. But for the country as a whole, it’s horrible.

And for disadvantaged people trying to get started, it’s unconscionable in my view. I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make people’s lives better while using fewer resources to do it, and making more resources available to satisfy other needs.

When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — getting regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most.We end up with a two-tier system. Those that have, have welfare for the rich. The poor, OK, you have welfare, but you’ve condemned them to a lifetime of dependency and hopelessness.

Yeah, we want “hope and change,” but we want people to have the hope that they can advance on their own merits, rather than the hope that somebody gives them something. That’s better than starving to death, but that, I think, is going to wreck the country. Is it in our business interest? I think it’s in all our long-term interests. It’s not in our short-term interest. And it’s about making money honorably.

People should only profit to the extent they make other people’s lives better. You should profit because you created a better restaurant and people enjoyed going to it. You didn’t force them to go, you don’t have a mandate that you have to go to my restaurant on Tuesdays and Wednesdays or you go to prison. I mean, come on. You feel good about that?

Harry Reid's entire job is built on a foundation of cronyism.  Most of his re-election money comes from outside his home state of Nevada, from companies hoping to score political favors from him and from the power he weilds in the Senate.  If laws were proposed to thwart Congressional cronyism, say through reducing the power of Congress to pick winners and losers, who would fight such a law, Reid or Koch?

Apparently the Feds are using banking regulation to strangle businesses, even legal ones, that they don't like by cutting off their access to the banking system (via Overlawyered).

Wall Street Journal reporter Robin Sidel, along with Andrew Johnson, reported on the success that the federal government is having in barring access to the banking system for a number of businesses. As we've discussed previously, "Operation Choke Point" and related arm-twisting efforts by the Feds are aimed at making life difficult for a variety of targeted businesses. Among those disfavored businesses are online lenders, payday lenders, check cashers, virtual currency dealers, gaming businesses, and marijuana-related businesses (although our beloved US Attorney General has been making noises that he simply will look the other way when it comes to enforcing federal drug laws against marijuana businesses that are operating legally under state law)....

In the article and a companion audio interview, Sidel states that the primary concern appears to be with the difficulty of complying with BSA and money laundering risk. While that's certainly true with many of the businesses, it's also true that some of the businesses have been targeted by the regulators for extra scrutiny because they're in a line of business, like payday lending, where the regulators simply don't like the business model on social policy grounds. If we see the Feds back off of weed but still keep the heat on payday lenders, then the argument that it's all about money laundering risk becomes a bit tenuous.

I have not updated this story in a while, but we continue to litigate against the Federal Government over the closure of privately-operated and privately-funded parks on public lands.  The closure is over, obviously, but it is a situation that is very likely to recur and we are attempting to fight this battle now to set a precedent.   The Wall Street Journal's law blog is running an update on the story here.

You can find all my posts from the shutdown here.

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.

Local blogger Greg Patterson writes:

The Wall Street Journal is reporting that Gannett will soon be adding USA Today to it's local papers.

With this change, the Republic and USA Today are essentially a hybrid.  As print revenue continues to slide the USA Today side will grow and the Republic side will shrink.  Eventually, your morning Republic will consist of a copy of USA Today with enhanced local coverage.

This is a change I have expected for a long time.  The wire services have always existed as an attempt by local papers to share costs in national and international news gathering, but I would have expected this next step of national consolidation some time ago.  The internet allows not just the text, but the entire layout of newspapers to be transmitted instantly across the country.

The whole situation reminds me of television broadcasting, where local affiliates exist mainly as a byproduct of past technological limitations in signal transmission.  Satellite and cable have eliminated these restrictions, but still local affiliates exist, in part because there is some demand for local content but in part because of the fact that the government protects their existence (by law, cable and satellite operators must give you the local affiliate, they cannot give you the national feed).

This is what I wrote back in 2009

I actually think the problem with newspapers like the Washington Post is the "Washington" part.  Local business models dominated for decades in fields where technology made national distribution difficult or where technology did not allow for anything but a very local economy of scale.  Newspapers, delivery of television programming, auto sales, beverage bottling and distribution, book selling, etc. were all mainly local businesses.  But you can see with this list that technology is changing everything.  TV can now be delivered via sattelite and does not require local re-distribution via line of sight broadcast towers or cable systems.  Amazon dominated book selling via the Internet.  Many of these businesses (e.g. liquor, auto dealers, TV broadcasting) would have de-localized faster if it had not been for politicians in the pocket of a few powerful companies passing laws to lock in outdated business or technological models.

Newspapers are ripe for a restructuring.  How can one support a great Science page or Book Review section or International Bureau on local circulation?  How much effort do the NY Times, Washington Post, LA Times, SF Chronicle, etc. duplicate every day?  People tell me, "that's what the wire services are for."  Bah.  The AP is 160 years old!  It is a pre-Civil War solution to this problem.  Can it really be that technology and changing markets have not facilitated a better solution?

The future is almost certainly a number of national papers (ala the WSJ and USA Today) printed locally with perhaps local offices to provide some local customization or special local section.  Paradoxically, such a massive consolidation from hundreds of local papers to a few national papers would actually increase competition.  While we might get a few less stories about cats being saved from trees in the local paper, we could well end up not with one paper selection (as we have today in most cities) but five or six different papers to choose from  (just look at Britain).  Some of these papers might choose to sell political neutrality while some might compete on political affiliation.

It is always hard to tell if the media is really offering a balanced sample of customer experiences when they pile on some company, but the Huffpo makes a pretty good case that large Wall Street home rental companies are doing a terrible job at customer service.

If so, I am unsurprised for three reasons:

• I run what is essentially a property management company.  One thing I have learned is that everyone outside of the business systematically underestimates basic maintenance and operating costs, and few if any ever factor in the costs of longer-term capital maintenance.  Further, and perhaps more critically, outsiders frequently underestimate the detailed, even minute focus on process and organization that is necessary to make sure everything is getting maintained satisfactorily  particularly when the portfolio gets larger than the executive group can personally oversee.
• I have rented out a second home for a few years.  It is difficult and expensive to stay on top of basic maintenance, and this is with one property that one is intimately familiar with.  I challenge you to find many people who will say they made money renting their second homes, particularly given the high cost of property management.  They may have made money on the appreciation of the real estate value, or reduced the net costs of owning a vacation home, but I seldom run into anyone making money on a annual basis (as long as the real cost of capital is being considered in the equation).
• Wall Street has a long history of treating operational assets as financial assets.  There is a huge mindset difference between the two.  The book Barbarians at the Gate included some early history of LBO firms like KKR, and it is interesting the culture clashes they faced as they tried to explain the need to be operationally involved in their investments to the financial guys who wanted to treat them as Deals.

Since I have posted positively about Teach for America, it is only fair I post this article from the Atlantic of a Teach for America alum who felt she was unprepared for what she faced in the classroom.

Over the years, I have met many TFA teachers and have been in their classrooms, and have never gotten this vibe from them, but perhaps one of our samples (mine or the author's) are flawed**.

I guess my reaction to the article is this:  TFA is the best program I have encountered to try to improve education within the framework of our deeply flawed public education system***.  However, understanding the flaws of public education, and being someone who would much rather see competition introduced into the k-12 education system, I suppose I am not surprised that putting really talented people in a bad system can only do so much.

The education establishment, which is implicitly backed by most of the media, really wants to kill TFA, which just goes to show, perhaps, the impossibility of making change happen within the system.  Think of it this way:  TFA is everything liberals have wanted in teaching reform.  It brings the brightest of the bright from America's colleges and diverts them from Wall Street and Harvard Law to teaching schoolkids.  It is modeled roughly on the Peace Corps.  It is the most establishment-friendly way I can think of to try to make public schools better and still the public school system immune system rejects it.  If TFA cannot work, then we should take that as proof that it is time for a radically new system that eliminates the government monopoly on education.

** I confess it may be my sample.  When we pay to sponsor a teacher, we specify that we will only sponsor one in a charter school.  Consistent with my comments in the rest of the article, I despair of throwing even really good people into typical public schools, and want to send them where they might have a chance.  The school where we have sponsored a teacher the last couple of years is doing great, with a population of kids nearly 100% eligible for the Federal school lunch program and most of whose parents do not speak English as a first language (or at all) significantly outperforming their peers.

*** I also think it is a great program for the young adults in it.  I have seen many of the not-for-profit and NGO jobs smart kids go into out of college, and they are awful.  They teach bad organizational lessons that will make these folks less employable in the future by productive enterprises and they at best do nothing (at worst spend their time lobbying to make my life harder and more expensive).  Against this backdrop, it is a much better experience for folks who want a service type of job out of college - the life skills taught are more relevant and the work has a higher impact.

A Wall Street Journal article today looks at problems at Sears in their critical appliance business.  I have no problem believing that Sears is in trouble, and at various times over the past decade (full disclosure here) have held small short positions in Sears.  The author argues that the Sears appliance business has had a number of missteps, and is contributing to Sears growing losses, propositions with which I cannot argue, in part because there is no data provided to confirm or deny the connection between problems in the appliance business and Sears' profitability woes.

The other theme of the article is that recent missteps in the appliance business, particularly the 2009 switch from Whirlpool to Samsung and LG to manufacture its in-house Kenmore brand, is hurting its market share in the retail appliance business, and leading the the growth in market share at Home Depot and Loews.   But the author's own data belie this conclusion.  Here is the market share chart she includes:

While Sears may have lost a couple of points of market share since 2008, and 2013 does not look like a particularly good year so far, the vast majority of its market share loss occurred from 2002-2008, long before most of the recent problems profiled in the article.  In fact, its more likely that the loss coincided with Sears reorganization with Kmart a decade ago, events referred to only briefly in the article.

Look, I have no insider knowledge here, just a pet peeve that trends referenced in an article should match trends in the data.  But Sears is a tired old retailer.  Many of its peers from the same era are dying or dead.  People are shifting their shopping away from the malls where Sears is located.  Lowes and Home Depot were both juggernauts during this period.  I would have said that a story could equally well have been written that despite all the confusion in their business, they have done a pretty descent job arresting the decline in their market share over the last five years.  Of course they are likely dead in the long run.

Postscript:  Oddly, I witnessed a similar Sears private label fracas when I worked for Emerson Electric over a decade ago.  For years and years, Emerson (not the folks who make the cheap radios and TVs) manufactured many of the Sears Craftsman hand tools and power tools.  Sears got tough one year, and negotiated a better deal of some sort with someone else, and an entire division of Emerson saw its sales basically going to zero.  So Emerson bought a bunch of orange paint and plastic, went to Home Depot, and cut a deal for a private label tool line at Home Depot (Emerson separately owns the Rigid tool company, so a lot of the items were branded Rigid).  Emerson ended up in potentially better shape (I did not stay long enough to see how it turned out), partnered with a growing rather than a declining franchise.

There is some chance this may be apocryphal (I don't see any evidence the reporters confirmed this with the FDA), but as someone who has had government inspectors show up on our property demanding to see our license to sell eggs, it wouldn't surprise me if true.  I am bombarded with government insanity of this genre every day.

Apparently, a children's magician who was forced to obtain a government license for his stage rabbit is claiming

My USDA rabbit license requirement has taken another ridiculous twist. I just received an 8 page letter from the USDA, telling me that by July 29 I need to have in place a written disaster plan, detailing all the steps I would take to help get my rabbit through a disaster, such as a tornado, fire, flood, etc. They not only want to know how I will protect my rabbit during a disaster, but also what I will do after the disaster, to make sure my rabbit gets cared for properly.  I am not kidding–before the end of July I need to have this written rabbit disaster plan in place, or I am breaking the law.

The bizarre government requests like this one at least give us a laugh around here.  Less funny are the zillions of other pieces of waste paper that must be supplied to various agencies every month -- for example the 9 different permits which took 3 years to accumulate from Ventura County just to remove a dangerous and rotting deck  (not coincidentally, we are closing all our business in Ventura County at the end of this year).  Just in the last several days the Department of Labor asked for new, more onerous monthly reporting of headcounts and payroll by state (I declined) and the census bureau asked for quarterly rather than annual detailed reports of our lodging business (I declined).

One piece of advice I would give to harried small business people is to say "no" as often as possible to these data requests.  Obviously, you will need to turn in your monthly sales tax reports or you will be going to jail, but do you really need to feed the census?  The department of Commerce?  The Department of Agriculture?  The Labor Department?  Much of this data they gather is used either 1) to craft regulations that will just make your life as a business owner harder in the future or 2) to subsidize academics and economists in the form of free data.  As I told the Labor Department the other day, I am happy to fill out their survey if they want to pay me, say, $100 a month to compensate me for my time.  Otherwise they are just stealing free labor and proprietary data from me to help some grad student write her PHD or help some Wall Street hedge fund manager better call the market.

There won't be any direct order found telling the IRS to go hassle Conservative groups.  That's not the way it works.  Obama's style is to "other" groups he does not like, to impugn their motives, and to cast them as pariahs beyond the bounds of civil society.  Such and such group, he will say, opposes me not because they have reasonable differences of opinion but because they have nefarious motives.  Once a group is labelled and accepted (at least by your political followers) as such, you don't have to order people to harass them. They just do it, because they see it as the right thing to do to harass evil people.  When Joe Nocera writes this in support of Obama in no less a platform as the NY Times, orders are superfluous

You know what they say: Never negotiate with terrorists. It only encourages them.

These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people. Their intransigent demands for deep spending cuts, coupled with their almost gleeful willingness to destroy one of America’s most invaluable assets, its full faith and credit, were incredibly irresponsible. But they didn’t care. Their goal, they believed, was worth blowing up the country for, if that’s what it took...

He concludes by saying

For now, the Tea Party Republicans can put aside their suicide vests. But rest assured: They’ll have them on again soon enough. After all, they’ve gotten so much encouragement.

There are probably some deeply confused people in the IRS right now -- after all they were denying tax exempt status to terrorists, to enemies of America.  They should be treated like heroes, and now they are getting all this criticism.  So unfair.

Postscript:  And they are racists.  Racist terrorists.

But Obama, in his most candid moments, acknowledged that race was still a problem. In May 2010, he told guests at a private White House dinner that race was probably a key component in the rising opposition to his presidency from conservatives, especially right-wing activists in the anti-incumbent "Tea Party" movement that was then surging across the country.

This is totally the Obama way of fighting a political battle.  He is saying, "forget their stated reasons for opposing me, such as opposition to the health care law, to Wall Street bailouts, and to rising government debt.  They really oppose me because they are racists and I am black."  Obama's opposition are absolutely never, ever people of good will who simply disagree.

PS#2:  It's pretty hilarious the NY Times published Nocera's "Tea Partiers are Terrorists" editorial just 6 months after they editorialized against incivility in the context of the Giffords shooting, which by the way had as much to do with civility in public discourse as the Benghazi attacks had to do with a YouTube video.  In fact, it sure seems like this administration has a history of falsely blaming tragedies on their political opposition's speech.

The story the other day that AIG was considering suing the taxpayers because the taxpayers did not give them a nice enough bailout was so vomit-inducing that I did not even look much further into it.

A couple of readers whom I trust both wrote me to say that the issues here are a bit more complex than I made them out to be.  The Wall Street Journal sounds a similar note today:

Every taxpayer and shareholder should be rooting for this case to go to trial. It addresses an important Constitutional question: When does the federal government have the authority to take over a private business? The question looms larger since the 2010 passage of the Dodd-Frank law, which gave the feds new powers to seize companies they believe pose risks to the financial system.

That vague concept of "systemic risk" was the justification for the AIG intervention in September 2008. In the midst of the financial crisis, the federal government seized the faltering insurance giant and poured taxpayer money into it. The government then used AIG as a vehicle to bail out other financial institutions.

But the government never received the approval of AIG's owners. The government first delayed a shareholder vote, then held one and lost it in 2009, and then ignored the results and allowed itself to vote as if the common shareholders had approved the deal.

In 2011 Mr. Greenberg's Starr International, a major AIG shareholder, filed a class-action suit in the U.S. Court of Federal Claims in Washington alleging a violation of its Constitutional rights. Specifically, Starr cites the Fifth Amendment, which holds that private property shall not "be taken for public use, without just compensation." The original rescue loans from the government required AIG to pay a 14.5% interest rate and were fully secured by AIG assets. So when the government also demanded control of 79.9% of AIG's equity, where was the compensation?

Greenberg is apparently arguing that he would have preferred chapter 11 and that the company and its original shareholders likely would have gotten a better deal.  Perhaps.   So I will tone down my outrage against Greenberg, I suppose.  But nothing about this makes me any happier about bailouts and corporate cronyism that are endemic in this administration.

From Megan McArdle:

When I was reporting on Wall Street, I used to be told with some regularity that government was needed to counteract the short-term thinking of the business sector, who never thought much beyond the next quarterly earnings report.  This now seems as quaintly adorable as picture hats and daily milk deliveries.  An ADHD day trader with a cocaine habit and six months to live has considerably more long-term planning skills than our current congress.

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.