minimum wage

Free Trade, Specialization, and Economic Dynamism

Futuristic City - Coruscant

Futuristic City – Coruscant

Why do large companies exist? Some industries like film production used to be vertically integrated — that is, most aspects of production were completed by direct employees of the studio, with even screenwriters and actors under long-term contract. This allowed the studio to put together productions rapidly and under direct control, shooting on their own lots and cranking out enough product to keep costs down and quality up. Vertical integration kept down the costs of negotiating with each supplier / worker and guaranteed availability of unique resources, like the services of major stars and expensive soundstages.

The Hollywood studio system has since been broken up, and many productions are completed by dozens of business entities handling separate parts of the project. Agents and producers package projects and a thriving ecosystem of specialized contractors do much of the work; at the end of every special-effects blockbuster film you’ll see dozens of firms credited.

Big companies stay vertically integrated when a new product or industry takes off and there is limited support from outside contractors, or when legal and regulatory burdens make it difficult to reliably contract out parts of the work. In countries where influence with the government is the only way to operate without harassment, large firms that have apparently unrelated businesses under one ownership — conglomerates — are the most successful form. In South Korea, these firms (called chaebol[2]) were seen as national champions and had the political pull necessary to survive in a corrupt, influence-peddling environment; improvements in transparency and the curbing of corrupt influence after the Asian debt crisis of 1997 resulted in reform of the chaebol system and broke up the ownership of large segments of the Korean economy, which has improved the country’s growth record and competitiveness.

Mature industries with highly-developed contract labor markets tend to outsource many more functions, which lowers the carrying costs for the industry as a whole — an in-house special effects division, for example, will either be over- or under-utilized much of the time, and it’s a natural evolution from seeking outside business for slack periods to being spun off as an independent concern when there are large numbers of independent special effects firms with different areas of expertise. As a contracting market develops, it then becomes practical for even a small team to start their own firm, further atomizing the market.

The classic pamphlet “I, Pencil”[3] explains the story of the simple graphite-leaded wood pencil’s production as a mute symphony of coordination and cooperation by suppliers and producers who have organized spontaneously under the free market system to produce a product not one of them fully understands. All of its component materials and the machines needed to manufacture the pencil come from different suppliers who have developed the constituents independently, specializing in, say, the paint for the exterior, or the rubber eraser. Time and many instances of contracts fulfilled lead to trust between suppliers, and competitive markets hone each supplier’s quality and price to hold down the cost of the completed product.

What happens when trade barriers go up? Say the best producer of rubber pencil erasers is in Malaysia, and a protectionist Congress slaps a high tariff on products from Malaysia….

The price landscape the US-based pencil manufacturer sees changes when Malaysian erasers leap in price because of the new tariffs, and a US-based supplier now appears to offer a better deal on erasers, so the manufacturer orders from them instead. Unfortunately the unfamiliar supplier has a lower quality product at a higher price, and the pencil manufacturer and the new eraser supplier spend days negotiating payments and terms. The resulting pencils have to be priced higher and consumers notice the erasers don’t work very well, and begin to consider other brands of pencil instead….

Relatively free trade allows multinational networks of the best and most-efficient suppliers to capture the benefits of specialization globally. The world’s auto industry, for example, benefitted greatly in the end by combining innovations from Japan, Germany, and the US, and modern autos manufactured anywhere today source parts from multiple countries — which becomes most noticeable when, for example, the dangerous failure of airbag components made in Mexico by major supplier Takata of Japan spreads to include recalls of upwards of fifty million cars from at least twelve different car companies[4]. Atypical disasters aside, the availability of low-cost and reliable components from overseas has brought US-manufactured cars up to increasingly-high global standards and allowed US final assembly plants to remain competitive despite their higher labor costs.

When trade barriers are lowered, there is often short-term pain for less-competitive, formerly-protected industries, as there was for the US auto giants in making the transition to a global market. But high trade barriers and closed markets mean higher prices and a lack of competition to keep the domestic industry honest — and if the protected products are a large component of national consumption and a capital good necessary for other industries as well, like autos and trucks, the entire economy of the protectionist country will grow more slowly and become less competitive in international trade. A return to high trade barriers for the US, like the Smoot-Hawley Tariff Act of 1930,[5] would lower the quality and raise the prices of many US-made goods, making them less competitive in global trade even if no other countries retaliated by raising their tariffs. Just because there are still countries with high tariff and other barriers doesn’t mean the US, as one of the greatest beneficiaries of the global free trade system, should also shoot itself in the foot. In the 1930s countries stumbled into a worsening Depression by such short-sighted actions which harmed everyone, and contributed to the strains resulting in WWII.

Similarly, it is damaging when any government acts to limit or over-regulate trade between its citizens and its companies. The US Constitution addressed the issue of trade barriers between the various States by giving the power to regulate “interstate commerce” to the Federal government, intending to prevent the kind of tariffs and barriers that Britain had used to benefit their own industries at Colonial expense from springing up between the States.

Today France is in the throes of strikes and disorder as its Socialist government tries to reform its labor regulations to allow for a freer market in labor.[6] Current regulations there make it so difficult to fire or lay off employees that companies do everything they can to avoid hiring regular full-time employees, and most young people are forced into the undermarket of contract and temporary labor to gain employment. Youth unemployment rates over 20% in many parts of Europe are crippling their career development, in large part due to overregulation. Entire economies grow more slowly when special-interest regulation favors the few insiders who already have secure positions over the young outsiders.

Trade liberalization and the global spread of freer markets produced the greatest improvement in global living standards the world has ever seen, the Great Enrichment, with higher living standards than ever dreamed of for middle classes in the developed world, and billions of people lifted out of poverty outside it.[7] The increasing prosperity and health of these populations defused the population bomb that was supposed to have produced famine and war by the late 1970s.[8] Technological innovation and capitalist investment fed more people and found more resources and energy at lower prices. Growing wealth created a demand for clean air and water, and a supply of new emissions and cleanup technologies that have improved the local environment of every country that has completed the transition to both democratic governance and capitalism. The countries that tried to maintain their centrally-planned economies were outcompeted, and every one has either given up central planning or collapsed into poverty.

But the temptation to control an organic free-market economy to benefit special interests is always waiting, and those special interests (whether private industries or public employee unions) are good at funding campaigns and lobbying legislators to have laws written in their favor. US courts have been all too willing — since the Supreme Court’s 1937 “Switch in time that saved nine,” which bowed to to FDR’s desires[9] — to allow Congress and state legislatures to regulate private contracts and trade by presuming that any regulation which had a ”rational basis” was constitutional. This great expansion of opportunities for graft resulted in the growth of an overbearing administrative state, a permanent shadow government of tenured bureaucrats and administrators who are so protected by Civil Service and public employee unions that there is no accountability and only limited desire to serve the public who pay all the bills. Meanwhile, the economy grows more and more slowly as some industries like banks are bailed out and protected while others are harassed by regulators. Small businesses and community banks are crippled by costly regulatory requirements and labor rules like the ACA, while costs rise in every sector heavily regulated by governments — those sectors (healthcare, education, banking…) lobby for special loans and subsidies. Young people are told they must go to college, taught that government and nonprofit services are the most moral career choices, then saddled with student loan debt and a slack labor market when they graduate — if they graduate.

Let’s imagine for a moment that a Freedom of Contract Amendment exists — a freedom implied by common law and precedent until 1937, but smothered by Progressives eager to mold the people toward a scientifically-managed, centrally-planned future — which as we have seen does not work. People would be free to sell their labor under any terms they wish. Other than Civil Rights Act protections against discrimination, employers would be free to seek out the best employees for their teams and organize them and pay them however they wish. The impossibly complex jumble of fringe benefits and 401Ks and stock plans and options created by complicated tax incentives goes away when the tax system is simplified. It’s a dream, right? Freedom to achieve without being “helped” by a politician with his or her hand out for a contribution, or sued by a lawyer wanting to retroactively apply antiquated 1930s labor regulations designed for factories to your white-collar employees…

The future doesn’t come with thousands of pages of laws and regulations dating back to the last century and designed to hold a tottering status quo in place. It comes out of individual striving and new technologies, and an American people free to mold themselves as they wish. The access to all of the world’s knowledge we now have via the internet means education can be flexible and nearly free for those who are motivated, and trapping our children in failed urban schools or mediocre and left-wing public universities wastes their time and our tax money.

[Note that the current mechanism for negotiating and implementing “free trade agreements” looks very much like the dysfunctional process now used to write new laws — opaque, lengthy, written by committees and tailored to special interests. That’s certainly not a good thing, and opens the process to corrupt bargaining. I’m defending the general principle of free trade here, and often these deals are mixed, a net positive for the US economy while containing many objectionable parts.]

[1] https://en.wikipedia.org/wiki/Vertical_integration
[2] “The Changing Role of Chaebol,” Charlotte Marguerite Powers, Stanford Journal of East Asian Affairs, Summer 2010, https://web.stanford.edu/group/sjeaa/journal102/10-2_09%20Korea-Powers.pdf
[3] “I, Pencil: My Family Tree as Told to Leonard E. Reed,” courtesy of the Ralph Smeed Private Foundation, 1958. https://fee.org/media/14940/read-i-pencil.pdf
[4] “U.S. Department of Transportation expands and accelerates Takata air bag inflator recall to protect American drivers and passengers,” US NHTSA 13-16, May 4, 2016, http://www.nhtsa.gov/About+NHTSA/Press+Releases/nhtsa-expands-accelerates-takata-inflator-recall-05042016
[5] https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
[6] “France labour dispute: Wave of strike action nationwide,” BBC, 26 May 2016 http://www.bbc.com/news/world-europe-36385778
[7] “How the West (and the Rest) Got Rich — The Great Enrichment of the past two centuries has one primary source: the liberation of ordinary people to pursue their dreams of economic betterment,” Deirdre N. McCloskey, Wall Street Journal, May 20, 2016, http://www.wsj.com/articles/why-the-west-and-the-rest-got-rich-1463754427
[8] “The Unrealized Horrors of Population Explosion,” Clyde Habermann, New York Times, May 31, 2015, http://www.nytimes.com/2015/06/01/us/the-unrealized-horrors-of-population-explosion.html
[9] “‘The switch in time that saved nine’ is the name given to what was perceived as the sudden jurisprudential shift by Associate Justice Owen Roberts of the U.S. Supreme Court in the 1937 case West Coast Hotel Co. v. Parrish. Conventional historical accounts portrayed the Court’s majority opinion as a strategic political move to protect the Court’s integrity and independence from President Franklin Roosevelt’s court-reform bill (also known as the “court-packing plan”), which would have expanded the size of the bench up to 15 justices, though it has been argued that these accounts have misconstrued the historical record.” https://en.wikipedia.org/wiki/The_switch_in_time_that_saved_nine


Death by HR: How Affirmative Action Cripples OrganizationsDeath by HR: How Affirmative Action Cripples Organizations

[From Death by HR: How Affirmative Action Cripples Organizations,  available now in Kindle and trade paperback.]

The first review is in: by Elmer T. Jones, author of The Employment Game. Here’s the condensed version; view the entire review here.

Corporate HR Scrambles to Halt Publication of “Death by HR”

Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.

 


More reading on other topics:

Regulation Strangling Innovation: Planes, Trains, and Hyperloop
Captain America and Progressive Infantilization
FDA Wants More Lung Cancer
Jane Jacobs’ Monstrous Hybrids: Guardians vs Commerce
The Great Progressive Stagnation vs. Dynamism
Death by HR: How Affirmative Action is Crippling America
Death by HR: The End of Merit in Civil Service
Corrupt Feedback Loops: Public Employee Unions
Death by HR: History and Practice of Affirmative Action and the EEOC
Civil Service: Woodrow Wilson’s Progressive Dream
Bootleggers and Baptists
Corrupt Feedback Loops: Justice Dept. Extortion
Corrupt Feedback Loops, Goldman Sachs: More Justice Dept. Extortion
Death by HR: The Birth and Evolution of the HR Department
Death by HR: The Simple Model of Project Labor
Levellers and Redistributionists: The Feudal Underpinnings of Socialism
Sons of Liberty vs. National Front
Trump World: Looking Backward
Minimum Wage: The Parable of the Ladder
Selective Outrage
Culture Wars: Co-Existence Through Limited Government
Social Justice Warriors, Jihadists, and Neo-Nazis: Constructed Identities
Tuitions Inflated, Product Degraded, Student Debts Unsustainable
The Morality of Glamour

On Affirmative Action and Social Policy:

Affirmative Action: Chinese, Indian-Origin Citizens in Malaysia Oppressed
Affirmative Action: Caste Reservation in India
Diversity Hires: Pressure on High Tech<a
Title IX Totalitarianism is Gender-Neutral
Public Schools in Poor Districts: For Control Not Education
Real-Life “Hunger Games”: Soft Oppression Destroys the Poor
The Social Decay of Black Neighborhoods (And Yours!)
Child Welfare Ideas: Every Child Gets a Government Guardian!
“Income Inequality” Propaganda is Just Disguised Materialism

The greatest hits from SubstrateWars.com (Science Fiction topics):

Fear is the Mindkiller
Mirror Neurons and Irene Gallo
YA Dystopias vs Heinlein et al: Social Justice Warriors Strike Again
Selective Outrage
Sons of Liberty vs. National Front
“Tomorrowland”: Tragic Misfire
The Death of “Wired”: Hugo Awards Edition
Hugos, Sad Puppies 3, and Direct Knowledge
Selective Outrage and Angry Tribes
Men of Honor vs Victim Culture
SFF, Hugos, Curating the Best
“Why Aren’t There More Women Futurists?”
Science Fiction Fandom and SJW warfare

More reading on the military:

US Military: From No Standing Armies to Permanent Global Power
US Military: The Desegration Experience
The VA Scandals: Death by Bureaucracy

Bootleggers and Baptists

Prohibition: Sheriff Dumps Bootleg Booze

Prohibition: Sheriff Dumps Bootleg Booze

When a campaign is underway to regulate a business or a product, it’s usually easy to identify two groups promoting increased regulation: “Bootleggers” (people who will benefit because the regulation hobbles a competitor) and “Baptists” (people who sincerely believe the new regulation will help others.) The Baptists naively think goodness will come from outlawing bad things, while the bootleggers are aware of unintended consequences and second- and third-order effects of the proposed regulation that will benefit them personally, but pretend to join the Baptists on a moral crusade. Marching together, they agitate for more laws and less freedom of choice.

“Bootleggers and Baptists” is a catch-phrase invented by regulatory economist Bruce Yandle for the observation that regulations are supported both by groups that want the ostensible purpose of the regulation, and by groups that profit from undermining that purpose.

For much of the 20th century, Baptists and other evangelical Christians have been prominent in political activism for Prohibition and Sunday closing laws restricting the sale of alcohol. Bootleggers sold alcohol illegally, and got more business if legal sales were restricted. “Such a coalition makes it easier for politicians to favor both groups. … [T]he Baptists lower the costs of favor-seeking for the bootleggers, because politicians can pose as being motivated purely by the public interest even while they promote the interests of well-funded businesses. … [Baptists] take the moral high ground, while the bootleggers persuade the politicians quietly, behind closed doors.

Strongly-motivated minority interest groups can move the political process toward satisfying their demands, as Prohibitionists did when they succeeded in getting the Eighteenth Amendment passed outlawing alcoholic beverages in the US, a ban which lasted from 1920 to 1933 before it was repealed by the Twenty-First Amendment. It took a decade of rising organized crime and disrespect for the law to finally rouse the great middle of the electorate to demand repeal.

Similar battles still take place on smaller scales. In a recent example,

Arkansas liquor stores have allied with religious leaders to fight statewide legalization of alcohol sales. The stores in wet counties don’t want to lose customers. The churches don’t want to lose souls. Larry Page, a Southern Baptist pastor and director of the Arkansas Faith and Ethics Council, which traces its roots to the Anti-Saloon League of Arkansas in 1899, [also recalled]. . .when his group joined with feminists to oppose pornography and cooperated with Mississippi casinos to fight gambling in Arkansas.

The selfish motivations of the bootleggers hide behind the naive but high-minded feelings of the Baptists. How can a politician oppose Goodness in the form of legislated morality?

Here are some other examples of the phenomenon:

Universal pre-K: Who can be against the education of young children, especially those growing up in poor environments for early learning? Surely extending public school to even earlier years will help underprivileged children catch up! And parents can use even more public-funded daycare to ease their burden, right?

While it’s common to see articles and editorials accepting the positive benefits of pre-K programs without question, the evidence is thin and suggests that some children can benefit from very high-quality programs, but that such benefits disappear after a few years. The Head Start federal program targeting poor children has been expensive and disappointing, with recent studies demonstrating little permanent improvement in outcomes in the long term.

As often happens, proponents start a few pilot programs, recruit highly-motivated staff and parents, and find significant positive benefits. When expanded and managed via the standard education bureaucracy and with less-motivated, unionized staff, benefits to the children shrink or disappear completely, with some programs actually worse for children than being left in a standard private preschool or home setting.

A well-regarded and funded program in Tennessee was studied by a grant-funded group of social scientists and educators at Vanderbilt who had every reason to bias the study to favor the state’s pre-K program. The result? (Emphasis added):

By the end of kindergarten, the control children had caught up to the TN‐VPK children and there were no longer significant differences between them on any achievement measures. The same result was obtained at the end of first grade using both composite achievement measures. In second grade, however, the groups began to diverge, with the TN‐VPK children scoring lower than the control children on most of the measures. The differences were significant on both achievement composite measures and on the math subtests. … In terms of behavioral effects, in the spring the first grade teachers reversed the fall kindergarten teacher ratings. First grade teachers rated the TN‐VPK children as less well prepared for school, having poorer work skills in the classrooms, and feeling more negative about school. It is notable that these ratings preceded the downward achievement trend we found for VPK children in second and third grades. The second and third grade teachers rated the behaviors and feelings of children in the two groups as the same; there was a marginally significant effect for positive peer relations favoring the TN‐VPK children by third grade teachers.

The constant drumbeat of publicity promoting Universal pre-K is motivated by the desire of teacher and public employee unions to employ more staff who will provide more revenue and political power for them. They are the bootleggers in the coalition pushing for Universal pre-K at local and federal levels, and the disorganized voices of those who would be hurt by such programs — operators of private preschools, parents of children who want to choose which daycare they pay for or handle pre-K nurturing themselves — are rarely heard, while the propaganda from the government PR offices and unions is well-funded by tax dollars and compulsory union dues.

Free College For All: Bernie Sanders is currently promoting a plan for free tuition at public colleges and universities for everyone. “Education” (in the form of conventional regimented schooling) is a sacred cow, and the belief that everyone is better off being sent to college after high school has been promoted by politicians for years. We’ll cover the pernicious results of policies based on that belief later in the chapter on Higher Education, but we’ve already seen what happens when you make subsidized student loans available to everyone: you get millions of deeply-indebted former students, both those who failed out because they should never have been admitted in the first place and those who learned little of value to the job market. You also get a high rate of inflation in college costs, as these loans allowed colleges to expand and compete for students with less concern for costs or outcomes.

The Baptists in this case are all those well-meaning people who believe everyone should go to college and get a professional white-collar job. The bootleggers are all of those college administrators and employees who benefit from increased funding and enrollment, the prospective students who want to have a free ride, and the politicians who rely on the support of academics. The scribes and government workers who are products of academia themselves write all the narratives in our society, and blue-collar workers and nonacademics who would be taxed to pay for this freebie get no taxpayer funding to tell their own stories.

Let well-known philosopher of labor Mike Rowe explain this:

Consider the number of college graduates today, who can’t find work in their chosen field. Hundreds of thousands of highly educated twenty-somethings are either unemployed or getting paid a pittance to do something totally unrelated to the education they borrowed a fortune to acquire. Collectively, they hold 1.3 trillion dollars of debt, and no real training for the jobs that actually exist. Now, consider the country’s widening skills gap – hundreds of thousands of good jobs gone begging because no one wants to learn a useful trade. It’s madness. “College For All” might sound good on the campaign trail, but in real life, it’s a dangerous platitude that reinforces the ridiculous notion that college is for people who use their brains, and trade schools are for people who use their hands. As if the two cannot be combined.

Universal Healthcare: The Baptists here are well-meaning people who think everyone should get good healthcare, and because they have been told by propagandists that everyone in Europe and Canada has free, quality healthcare that costs their government far less, they can’t imagine why the US shouldn’t have it, too. Which ignores the major differences between such programs — only Canada has single-payer without a parallel private-pay healthcare system, and even that is changing, while the Canadian provinces vary in costs and coverages, as well as waiting periods for nonemergency care. Meanwhile, European countries have systems that vary from Britain’s NHS, a completely government-owned and run healthcare system with enough problems that its breakdowns are daily news fodder, to Swiss and French programs that are really public-private insurance plans with cheaper basic options. “Medicare-for-All” as proposed by US universal healthcare proponents would expand the Medicare system, which is already headed for financial disaster as the population ages, to cover everyone. It’s never acknowledged that rising costs will then require rationing and onerous cost controls that would make the US system start to resemble Britain’s NHS — cheaper but lower quality, with worse outcomes for cancer treatments and limited access to more advanced care.

Who are the bootleggers? The ACA co-opted the big health insurance and drug companies to guarantee them a captive market with higher revenues in return for turning the private insurance market into a kind of regulated utility that everyone would be forced to join, which allows regulations to essentially tax younger and healthier people to subsidize the costs of the older and sicker without regard to ability to pay. We now have lower-middle-class working families paying much more than they would in a free market so that wealthy people with pre-existing conditions can get insurance at subsidized rates. While many pre-existing conditions were unfortunate accidents, some were acquired because of poor life choices and self-indulgent health and dietary habits — so now the rich couch potato who drank and ate himself to diabetes and heart problems suffers no penalty, at least financially, since some group of healthy families is paying extra to subsidize his care.

Single-payer, Medicare-for-All is another step toward micromanagement of both citizen lifestyles and medical procedures. The politicians are dreaming of more dependent voters who will always support them, as in Britain, where voters are continually told they can have a “better” NHS by voting in the right people. The problems of the British NHS cannot be solved by a change in administrations because they are due to its structure as a socialized service, with unionized civil service-style employee protections and the accompanying limited accountability for poor service and failure. Once in place, such systems are very difficult to repeal, and their bureaucracies, like today’s federal HHS and Medicare bureaucracies, provide a good place for political supporters to collect a paycheck while serving as the party of government’s permanent supporting class.

Climate Change: The Baptists here are citizens who believe that not only is global warming a man-made phenomenon resulting from increases in greenhouse gases in the atmosphere (that much is probably true), but that its onset will be rapid and severe enough to justify virtually any costly program proposed to limit the threat (which appears untrue, or at least unproven, as the simplistic early climate models have failed to correctly predict the amount of actual warming.) What price would you pay to save the planet? Even questioning the cost of proposed programs is viewed as heresy by true believers.

The bootleggers are the rent-seeking part of the coalition to “do something,” which began when the danger was first popularized and resulted in large increases in research funding for the small number of climate scientists who specialized in climate change research. As momentum built and more governments funded research and activism in the field, whole labs and careers depended on finding the danger to be as large as possible, to justify ever more research funding. Stoking popular fear, politicians could appear to be protecting citizens by promising more and more measures to slow greenhouse gas emissions. It became clear, though, that vested interests would not allow the least-cost, most economically-sound means of reducing emissions: research on solar and nuclear power generation and low, rebated carbon taxes which would allow businesses and citizens to gradually reduce emissions over time without sacrificing current plants and arrangements.

What happened instead: complex emissions credit schemes which allowed politicians to favor some interest groups over others while raking in hidden taxes from consumers; mandates requiring utilities to pay much more to purchase ever-increasing percentages of “green” power, generated at high cost from subsidized windmills and solar power plants which proved to work poorly or have limited service lives; and command-and-control regulations that shut down existing plants and closed down coal mines.

Each of these schemes had bootleggers waiting to profit: politically-connected investors in solar power schemes like Solyndra (bankrupt in 2011, with $535 million in federally-guaranteed loans and $25 million in California tax credits lost) and the Ivanpah steam-solar project ($2.2 billion, obsolete and unable to generate its designed power since the day it opened.) Both Ivanpah and Solyndra were huge bets on the wrong technologies, with standard photovoltaic panels falling in price so much that these huge investments were rendered uncompetitive shortly after they were funded. Ivanpah received $1.6 billion in loan guarantees from federal taxpayer funds, covering investments by its owners, BrightSource Energy, NRG Energy, and Google. The company has delayed payment on its loans and in late 2014 requested an additional $539 million in funding via a federal tax credit program.

Spain’s Abengoa, a multinational alternative energy company, has filed for Chapter 11 protection in the US, and in March of 2016 filed for bankruptcy. The federal loan guarantees for $1.45 billion for the Solano solar plant in Arizona and the $1.2 billion for the Mojave solar project in California now appear to be US taxpayer losses. Again, enormous sums of taxpayer money built scaled-up projects with obsolete technology which could only produce power at many times the cost of natural gas plants.

In parts of Europe and the US, poor and middle-class ratepayers pay much more for electricity because of these state-required green energy programs, while many wealthy consumers avoid paying the inflated rates by installing subsidized solar panels.

Other bootleggers include the large number of government staff now employed to work on climate change issues and propaganda in governments around the world, with the many UN climate meetings in cities like Paris and Copenhagen serving as luxurious junkets for tens of thousands of functionaries.

Even businessmen in the petroleum industry will surreptitiously support green activist organizations they believe will harm competitive fuels more than theirs. Aubrey McClendon, who made and then lost a huge fortune pioneering the fracking production of natural gas in the US, “secretly gave $25 million to the Sierra Club for the Sierra Club’s ‘Beyond Coal’ campaign, for the obvious reason that it would benefit his natural gas company if coal were squeezed by new regulation.”:

But as the Sierra Club and other environmental groups have made clear, once they’re done killing coal they’re going after natural gas next. Did McClendon think they’d spare him? He was a perfect example of Churchill’s description of an appeaser as someone who feeds the crocodile hoping he’ll be eaten last. I lost all respect for McClendon when this news leaked out, and it was a great embarrassment to the Sierra Club as well. He was rent-seeking bootlegger. A lot of them died in high-speed crashes back during Prohibition, usually being chased by the law.

Internet Gambling Prohibitions: This is closer to the coalitions against alcohol, with many religious and social organizations concerned about gambling addiction (the Baptists) joining with casino magnates, Indian tribes, and state lotteries (the bootleggers) to try to outlaw a competitor — easy gambling on the Internet. In 2015, Sheldon Adelson, billionaire head of the Las Vegas Sands and numerous hi-revenue casinos worldwide, promoted a bill in Congress (The Restoration of America’s Wire Act, or RAWA) intended to prohibit Internet gambling at the federal level, superseding state authorizing laws. He hired a lobbying firm, Steptoe and Johnson, which was then also hired by fantasy sports companies — which would be exempt under the proposed Act. By outlawing some forms of online gambling but exempting others, the proposed law would preserve casino monopolies and take control away from states.

Tobacco: Vaping equipment, or e-cigs, provide the appearance of cigarettes and a dose of the nicotine smokers crave in a delivery format (evaporated carrier with nicotine and flavoring) that is much less harmful to smoker’s lungs. Many experts recommended smokers switch to e-cigs immediately, since harm to their health would be much reduced. But e-cigs threaten both the makers of the highly-regulated and taxed legacy cigarettes and the makers of smoking cessation products like nicotine gum and patches — often the same companies! So paid “medical authorities” and lobbyists began to work hard to promote the view that the new and untested e-cigs were just as hazardous — if not more hazardous, since their long-term effects were unknown! — than traditional cigarettes. Cato’s Regulation put out a good paper on the bootleggers-and-Baptists pattern in this new propaganda war:

Now consider the situation with electronic cigarettes (e-cigs) and their incumbent competitors: tobacco companies that produce and sell traditional cigarettes and drug companies that produce nicotine replacement therapies (NRTs). The U.S. cigarette market has been regulated, one way or another, since colonial times. Along the way, federal regulation—coupled most recently with the state attorneys general Master Settlement Agreement (MSA, about which we say more later)—effectively cartelized the industry, bringing increased profits to the industry and higher cigarette prices and reduced cigarette consumption throughout the nation. Falling cigarette consumption gladdened the hearts of health advocates, who fought for the elimination of tobacco products, while higher industry profits brought joy to tobacco company owners.

This happy Bootlegger/Baptist equilibrium is now threatened by the exploding sales of e-cigs, a new technology for delivering nicotine to all who want it without simultaneously bringing the harmful combustion-induced chemicals associated with burned tobacco. Today, there are many e-cig producers and numerous small shops selling e-cigs and customized nicotine-dispensing products. It is a rapidly evolving market that has been relatively open to new entrants and innovation in product design. Given the quick growth in e-cig use (much of which comes at the expense of cigarette sales), previous political deals that stabilized tobacco industry profits are at risk. The major tobacco companies are understandably not sitting idle. They, too, have entered the e-cig marketplace and are responding in other ways to the new competition.

The major pharmaceutical companies have not been idle either. The makers of smoking cessation products, including NRTs such as the nicotine patch and nicotine gum, are major players in the politics of tobacco and nicotine. The producers of traditional nicotine delivery devices and NRTs are at work trying to stop the disruptive e-cig producers. These Bootleggers are joined by health advocates (Baptists) who raise questions about unknown potentially harmful effects that may be associated with e-cig use. Both groups—cigarette and NRT producers on the one hand, and health advocates on the other—would like to stop new e-cig producers or severely crimp their ability to compete.

Lawfare between the tobacco industry and state attorneys general was settled in 1998 with the MSA (Master Settlement Agreement), which set the payments due to the states to compensate them for the additional Medicare and Medicaid costs states would bear because of tobacco products. The agreement was carefully designed to send money to the states while protecting the incumbent manufacturers from competition, allowing them to raise prices more than required to pay the fines.

Again from Cato’s paper:

The heart of the MSA was the promised payment of $206 billion by the four participating cigarette companies to the participating states. Those payments would be tax deductible and the costs would be paid by consumers in the form of higher cigarette prices. (Because cigarette consumption is highly price inelastic, the cost of the price increase was largely borne by consumers rather than producers.) The MSA presented state legislatures with a simple choice: either accept the MSA, in which case they would be able to spend their state’s share of the billions of dollars raised from smokers, or reject the proposed statute and their states’ smokers would still pay the higher prices necessary to fund the deal but they would lose their claim on the money. Not surprisingly, every state legislature took the money.

Responsibility for the payments was allocated among the cigarette companies in proportion to their current market share, thereby reducing the incentive for the participating cigarette companies to engage in price competition to increase their respective market shares. The structure of the MSA thus provided a powerful incentive for each company to be satisfied with the status quo.

The MSA also attempted to protect the major cigarette companies from new competition. At the time of the agreement, the four participating cigarette companies accounted for about 99 percent of domestic cigarette sales. Increasing cigarette prices to pay for the settlement risked a loss of market share to marginal competitors or new entrants. Therefore the MSA provided that for every percent of market share over 2 percent lost by a participating cigarette manufacturer, the manufacturer would be allowed to reduce its payments to the states by 3 percent, unless each participating state enacted a statute to prevent price competition from non-participating manufacturers (which each state did). The statutes require nonparticipating cigarette producers to make payments equal to or greater than what they would owe had they been participants in the agreement, to eliminate any cost advantage.

The MSA also included restrictions on cigarette marketing practices agreed to by the participating producers. The advertising limits were portrayed as a public health measure because they reduced advertising that could influence young adults and teens. The limits also reinforced the anticompetitive nature of the MSA by making it more costly for new brands or entrants to secure market share through promotional efforts.

The MSA’s cartel-reinforcing provisions sufficiently suppressed competition to enable cigarette companies to take advantage of the price inelasticity of cigarette demand and obtain record profits. This made it possible for the major cigarette manufacturers to increase prices by more than was necessary to make the mandated MSA payments.

Having made a deal to get big money for states and attorneys while protecting the companies from competition and raising prices more than enough to make the addicted smokers themselves pay the full cost of the settlement, many of the states decided to grab their money immediately by selling municipal (federal tax-free) bonds backed by the MSA payments expected. California alone issued at least $16.8 billion in such bonds, proceeds being used for both immediate expenses and long-term capital improvements. Legislators appear to have forgotten that the supposed purpose of the payments was to cover smoking-related expenses of future medical care for the state’s population, and instead chose to spend the money immediately on unrelated matters while leaving the burden of those health expenses with future taxpayers.

In some cases, however, the bonds are backed by secondary pledges of state or local revenues, which creates what some see as a perverse incentive to support the tobacco industry, on whom they are now dependent for future payments against this debt.

Tobacco revenue has fallen more quickly than projected when the securities were created, leading to technical defaults in some states. Some analysts predict that many of the bonds will default entirely. Many of the longer-term bonds have been downgraded to junk ratings. More recently, financial analysts began raising concerns that the rapid growth of the electronic cigarette market is accelerating the decline of $97 billion outstanding in tobacco bonds…. Lawmakers in several states proposed measures to tax e-cigarettes like traditional tobacco products to offset the decline in TMSA revenue. They anticipate that taxing or banning e-cigarettes would be beneficial to the sale of combustible cigarettes. — Wikipedia on “Tobacco Master Settlement Agreement”

Vested interests, including tobacco companies and the states, now actively seek to suppress e-cigs or at least tax them enough to make up for any lost revenue as they are adopted. This means they are actively working to keep smokers addicted to the most hazardous form of nicotine consumption, with its resultant cancers and other diseases. The original Baptist goal of helping smokers quit the habit to avoid cancer and early death has long since been forgotten.

Minimum Wage: Baptists: voters who want low-paid workers to have better lives and higher incomes, imagining poor families will benefit while businesses will pay the costs. Bootleggers: Politicians needing an issue to show they want to help “working families” and unions who represent some minimum-wage workers, but more importantly represent many more workers who make more than that, who will get even higher wages as a result of existing contracts and the outlawing of lower-paid laborers who might compete with them.

Economically, it’s very clear: minimum wage laws harm inexperienced and unskilled workers by making it illegal for them to be employed at wage rates that reflect the value they can add with their labor. Those workers won’t be hired, and many will be replaced by automation as they are priced out of the labor market. Politicians and union bosses won’t lose their jobs, even as unemployment among the unskilled increases as a result of the new minimum wage law. Most unionized workers make much more than minimum wage now, so they will keep their jobs while outlawing lower-priced nonunion competition. Economists who study the issue tend to agree there is a small negative effect on employment when minimum wages are increased slightly, but the large increases now proposed may do much greater harm by reducing hours and eliminating jobs for unskilled workers. The economists who find no negative effects tend to be labor economists, who tend to be supported by government and labor union funding and so have some conflict of interest in their researches.

Meanwhile, small business owners are ignored when they explain their response to much higher minimum wages has to be reduced hours, higher prices, and possibly going out of business since many have committed to expensive leases and can’t withstand a huge increase in costs:

[Seattle restaurant owner Grant Chen wrote of] his struggles to stay in business as he faces a 61% increase in his labor costs from Seattle’s $15 minimum wage initiative. As I’ve mentioned before on CD, the $15 an hour minimum wage law isn’t really ultimately “a political problem as much as it’s a simple math problem,” as Anthony Anton of the Washington Restaurant Association explained the situation. And Grant Chen and other Seattle restauranteurs like Brendan McGill (owner of Hitchcock Restaurant and Hitchcock Deli) are finding out that the new restaurant math of Seattle’s $15 minimum wage is breaking the system…. a 61% increase in wages from $9.32 to $15 an hour is like imposing an annual tax on restaurants of $11,360 per full-time employee. If you understand that a $11,360 tax per employee (and $113,600 in higher labor costs for every 10 employees) would drive many restaurants out of business, you’ll understand why the “new restaurant math of a $15 minimum wage” is making Grant Chen’s restaurant unprofitable, and why it is driving him out of business.

The Baptists are told hard-working poor families will enjoy richer lives, but it’s rarely mentioned that young people looking for summer work or just starting out will find it much harder to reach that first rung on the career ladder.

As Glenn Reynolds of Instapundit says:

The Los Angeles Times report somehow fails to list union workers among the winners. They earn quite a bit more than the minimum, but many of them have their pay scales indexed to the minimum wage. Unions also give heavily to Democratic politicians who support union-friendly issues like hiking the minimum wage.

And the losers? Anyone whose labor is worth less than $15 an hour, and who is about to learn the hard way that the real minimum wage is always zero.

They Wrote a Book On It: Economist Bruce Yandle (who coined the term “bootleggers and Baptists” in 1983) has a book out with co-author Adam Smith, Bootleggers and Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics. Recommended for further study and examples, notably TARP, a $700 billion emergency response to the economic crisis of 2008 which ended up as a field day for bootleggers and rent-seekers.


Death by HR: How Affirmative Action Cripples OrganizationsDeath by HR: How Affirmative Action Cripples Organizations

[From Death by HR: How Affirmative Action Cripples Organizations,  available now in Kindle and trade paperback.]

The first review is in: by Elmer T. Jones, author of The Employment Game. Here’s the condensed version; view the entire review here.

Corporate HR Scrambles to Halt Publication of “Death by HR”

Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.

 


More reading on other topics:

Jane Jacobs’ Monstrous Hybrids: Guardians vs Commerce
The Great Progressive Stagnation vs. Dynamism
Death by HR: How Affirmative Action is Crippling America
Death by HR: The End of Merit in Civil Service
Corrupt Feedback Loops: Public Employee Unions
Death by HR: History and Practice of Affirmative Action and the EEOC
Civil Service: Woodrow Wilson’s Progressive Dream
Bootleggers and Baptists
Corrupt Feedback Loops: Justice Dept. Extortion
Corrupt Feedback Loops, Goldman Sachs: More Justice Dept. Extortion
Death by HR: The Birth and Evolution of the HR Department
Death by HR: The Simple Model of Project Labor
Levellers and Redistributionists: The Feudal Underpinnings of Socialism
Sons of Liberty vs. National Front
Trump World: Looking Backward
Minimum Wage: The Parable of the Ladder
Selective Outrage
Culture Wars: Co-Existence Through Limited Government
Social Justice Warriors, Jihadists, and Neo-Nazis: Constructed Identities
Tuitions Inflated, Product Degraded, Student Debts Unsustainable
The Morality of Glamour

On Affirmative Action and Social Policy:

Affirmative Action: Chinese, Indian-Origin Citizens in Malaysia Oppressed
Affirmative Action: Caste Reservation in India
Diversity Hires: Pressure on High Tech<a
Title IX Totalitarianism is Gender-Neutral
Public Schools in Poor Districts: For Control Not Education
Real-Life “Hunger Games”: Soft Oppression Destroys the Poor
The Social Decay of Black Neighborhoods (And Yours!)
Child Welfare Ideas: Every Child Gets a Government Guardian!
“Income Inequality” Propaganda is Just Disguised Materialism

The greatest hits from SubstrateWars.com (Science Fiction topics):

Fear is the Mindkiller
Mirror Neurons and Irene Gallo
YA Dystopias vs Heinlein et al: Social Justice Warriors Strike Again
Selective Outrage
Sons of Liberty vs. National Front
“Tomorrowland”: Tragic Misfire
The Death of “Wired”: Hugo Awards Edition
Hugos, Sad Puppies 3, and Direct Knowledge
Selective Outrage and Angry Tribes
Men of Honor vs Victim Culture
SFF, Hugos, Curating the Best
“Why Aren’t There More Women Futurists?”
Science Fiction Fandom and SJW warfare

More reading on the military:

US Military: From No Standing Armies to Permanent Global Power
US Military: The Desegration Experience
The VA Scandals: Death by Bureaucracy

Minimum Wage: The Parable of the Ladder

Climbing the Ladder

Climbing the Ladder

My standard parable on minimum wage increases: a young person looks at the wall of adulthood in front of him/her. On the other side are organized gardens and abundance, self-esteem and recognition. A ladder stands in front of the wall. The young person is about to start the climb, when an officious person comes along, cuts the first few rungs off the ladder, and says, “There! Now you will get paid more even though you have no experience and no one knows what kind of worker you’ll be.”

The minimum wage started as a tool to keep down competition, to keep poor people from undercutting pay rates. Of a piece with the same era’s unions and guilds that prevented black people from working in many occupations.

The ultimate fix for all the rent-seeking efforts is an amendment adding freedom of contract to the Bill of Rights, which is unlikely to happen soon. The public favor for such micromanagement comes from cartoon views of villainous employers (and landlords and businesses, etc) as the only game in town. Virtually no one lives in one-employer, one-landlord towns — choice is everywhere. Finding new work for the large number of people displaced by automation and competition goes a lot more smoothly in a free and flexible labor market. Maybe the economy has to collapse under the weight of regulation before the cartoon view is overthrown?

This post was motivated by this post at Sarah Hoyt’s site, which is a good read.


Death by HR: How Affirmative Action Cripples OrganizationsDeath by HR: How Affirmative Action Cripples Organizations

[From Death by HR: How Affirmative Action Cripples Organizations,  available now in Kindle and trade paperback.]

The first review is in: by Elmer T. Jones, author of The Employment Game. Here’s the condensed version; view the entire review here.

Corporate HR Scrambles to Halt Publication of “Death by HR”

Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.