Although I play basketball (poorly), I’m not a fan of the NBA. As such, I don’t pretend to have much interest in the Donald Sterling controversy.
Some people have wondered whether his rights to free speech are being infringed, but I disagree. He obviously has the right to say whatever he wants, even if he makes himself look like an idiot.
But the National Basketball Association is an organization that has certain rules, and it presumably has the right – by virtue of the contract among team owners – to impose disciplinary measures.
In other words, Sterling has free speech, but that doesn’t mean he is free from consequences if he says something dumb. Just as I have free speech at the Cato Institute, but also would suffer consequences if I said something offensive about a particular group (or, for that matter, if I started supporting tax hikes, bigger government, and statism).
And that’s a good thing. As a libertarian, I don’t want the government policing speech, but there’s nothing wrong with private sector penalties on racists.
And that’s the topic of today’s column. The free market is a powerful and under-appreciated tool for punishing racism and rewarding color-blind behavior.
Here’s some of what Walter Williams wrote on the topic for the Washington Examiner. He starts by pointing out that Sterling certainly wasn’t racist when making decisions about what basketball players to employ.
Though Sterling might be a racist, there’s an important “so what?” Does he act in ways commonly attributed to racists? Let’s look at his employment policy. This season, Sterling paid his top three players salaries totaling over $46 million. His 20-person roster payroll totaled over $73 million. Here are a couple of questions for you: What race are the players whom racist Sterling paid the highest salaries? What race dominated the 20-man roster? The fact of business is that Sterling’s highest-paid players are black, and 85 percent of Clippers players are black.
Walter draws the obvious conclusions, and he cites the path-breaking research of the late Gary Becker on the economics of discrimination.
How does one explain this? …Let’s use a bit of simple economics… First, professional basketball is featured by considerable market competition. …There’s open competition in joining both high-school and college teams. You just sign up for tryouts in high school and get noticed by college scouts. Then there’s considerable competition among the NBA teams in the acquisition of the best college players. Minorities and less preferred people always do better when there are open markets instead of regulated markets. Recently deceased Nobel Prize-winning economist Gary Becker pointed this phenomenon out some years ago in his path-breaking study “The Economics of Discrimination.” Many people think that it takes government to eliminate racial discrimination, but economic theory predicts the opposite. Market competition imposes inescapable profit penalties on for-profit enterprises when they make employment decisions on any basis other than worker productivity.
In other words, the free market pushes people to make decisions on the basis of ability rather than race.
The takeaway from the Sterling affair is that we should mount not a moral crusade but an economic liberty crusade. In other words, eliminate union restrictions, wage controls, occupational and business licensure, and other anti-free market restrictions. Make opportunity depend on one’s productivity.
And as you can imagine, Walter speaks with authority on these issues. And he’s right that the free market is a weapon against racism.
The bureaucrats apparently like forcing companies to hire people who are more likely to rip off customers, though sometimes they find judges that aren’t nearly so tolerant.
Let’s see what the Wall Street Journalhad to say about the “hilariously caustic rebuke of the Equal Employment Opportunity Commission by the Sixth Circuit Court of Appeals.”
The EEOC had sued Kaplan, the for-profit education company, for using “the same type of background check that the EEOC itself uses,” as Judge Raymond Kethledge cheekily put it in the first sentence of his ruling in EEOC v. Kaplan. Despite its own practices, the Obama EEOC has made a cause of suing private companies because it claims that credit and criminal background checks discriminate against minorities.
But so-called disparate impact doesn’t mean discrimination.
Judge Kethledge eviscerated the EEOC like a first-day law student, writing that Kaplan had good reason to conduct credit checks… As for proving disparate racial impact, Judge Kethledge noted that “the credit-check process is racially blind; the [credit-check] vendor does not report the applicant’s race with her other information.” …The unanimous opinion was joined by Damon Keith, one of the most liberal judges on the entire federal bench. If government officials were accountable, EEOC General Counsel P. David Lopez would be fired for losing in such humiliating fashion.
But that’s just one crazy case.
The Wall Street Journal also opined about another strange example of EEOC quackery. The bureaucrats actually believe that stealing should be a protected disability.
Or, to be more technical, that stealing should be an acceptable behavior because of a supposed disability.
In September 2008, Walgreens employee Josefina Hernandez claims she had a hypoglycemia attack, grabbed a bag of potato chips off a shelf and ate them to boost her blood sugar. The drug-store company has a strict policy against “grazing” (i.e., stealing) and so a supervisor fired Ms. Hernandez, an 18-year veteran of the company. Three years later, the EEOC sued Walgreens for discrimination under Title VII of the 1964 Civil Rights Act and the 1990 Americans With Disabilities Act and asked for punitive damages. …The ADA requires employees to request an accommodation for a medical condition, which Mrs. Hernandez never did. Nor does federal law sanction illegal activity—i.e., theft—under cover of a disability, as the Supreme Court made clear in 2003’s Raytheon v. Hernandez.
A green light for thievery from the EEOC
Seems like this should be an open-and-shut case. Which raises the interesting question of why the EEOC decided that the federal government should intervene on behalf of potato chip thievery.
So why pursue such a case in the first place? The EEOC’s lawyers probably figured they had nothing to lose. If they landed a sympathetic judge, they could set a new legal precedent. If they lost, taxpayers would pay for the case anyway. And sure enough, U.S. District Judge William Orrick, an Obama appointee, ruled against the store’s motion for summary judgment last week. The question now is whether Walgreens will continue to fight for the right to fire employees who steal from company shelves, or simply settle to get the EEOC’s lawyers to go away.
I hope all companies fight meddling and stupidity by the federal government.
I do understand that sometimes it makes sense to acquiesce to extortion, at least in the short run. The long-run costs of surrender, though, are very high.
Which is why companies should fight, but they should get support from Capitol Hill. The EEOC budget should be slashed to show that there are consequences to bureaucratic insanity.
But there’s another government-imposed cost that burdens the financial sector.
Writing for the Wall Street Journal, Paul Kupiec of the American Enterprise Institute reveals some very sobering – and disturbing – data on pay levels for both the financial industry and its regulators.
Most banks in this country are small businesses and pay employees modest salaries. The Bureau of Labor Statistics reports that the average annual salary of a bank employee was $49,540 in 2012, not much higher than the average annual across all occupations, $45,790.
In other words, there are some very well paid people working for big banks, but most employees in the financial sector earn modest incomes.
But notice that I wrote “most employees.” That’s because there is a big group that is very well paid.
But they aren’t in the business of making loans, allocating credit, and helping to finance future growth.
That’s because these highly compensated folks aren’t in the private sector. They are regulatory bureaucrats.
…one group in banking stands out as highly paid—federal bank regulators. Before the Dodd-Frank Act, the average employee of a federal bank regulatory agency received 2.3 times the average compensation of a private banker. By 2013 this ratio increased to more than 2.7—and in some cases considerably more.
Kupiec provides details on how these bureaucrats get paid much more than wealth creators.
The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. The staff at the Federal Reserve is likely even better compensated, but the Fed refuses to release employee salaries. You might think high-paying jobs at these agencies require special skills. Not so. At the OCC, secretaries make on average $79,182 per annum. Motor vehicle operators (the agency’s limo drivers) at the FDIC earn $82,130. Human resources management trainees at the CFPB make $110,759 a year. Averages tell only part of the story. In 2012, 68% of FDIC and CFPB staff—and 66% at the OCC—earned above $100,000 a year. Nearly 19% of the CFPB and OCC staff earn more than $180,000 a year. At the OCC, 10.5% of workers earn above $200,000 a year, at the FDIC 9.3%. Fewer than 7% of employees in any of these regulatory agencies earned less than $50,000. In other words, 93% of the employees in these federal bank regulatory agencies earned more than the average banker’s salary in 2012.
So what’s the rationale for overpaid bureaucrats?
Defenders of the status quo claim that high pay is necessary to attract skilled professionals.
Needless to say, that’s not true.
Instead of raising salaries to attract and retain employees for specialized, hard-to-fill jobs, federal bank regulatory agencies have increased the salaries of all employees. Ironically, the hard-to-fill jobs that require substantial education or professional experience—such as attorneys and economists with banking experience—have the smallest premiums over comparable private positions. Salary premiums are especially large for easy-to-fill jobs that require no specialized, hard-to-hire skills.
But here’s the bottom line. Consumers and taxpayers are paying higher fees and receiving fewer benefits because so much money is being diverted from the industry to finance the bureaucracy.
Who pays for these generous salaries? Bank shareholders pay directly through insurance premiums on deposits and examination fees levied by the bank regulatory agencies. These costs are passed on in higher customer fees and loan rates. The high compensation of CFPB employees is funded by taxpayers through the Federal Reserve. The runaway labor costs of these regulator agencies are not subject to congressional control, and they add up. Employee compensation accounts for about 80% of the operating costs of bank regulatory agencies. If the average regulatory employee’s compensation were equalized between bankers and regulators, the direct cost of bank regulation would fall by more than 50%.
At the risk of adding more bad news, the numbers for the financial sector are just the tip of the iceberg.
This video explains how the people who pay taxes get far less compensation than America’s bureaucrat class.
P.S. Lest I leave people a bit depressed, I want to share some good news.
I wrote back in 2011 about a motorist getting nailed for flashing his headlights to warn other drivers about a speed trap.
Here is an excerpt from a report in the Atlanta Journal Constitution about a Judge throwing out a similar charge.
Chris Hill noticed a sheriff’s deputy behind him and flashed his lights to warn a UPS driver coming the other way. The deputy pulled over Hill on U.S. Highway 140 in White City and handed him a $260 ticket for improperly using his headlights, saying another deputy had seen the flashing lights from behind the UPS truck and alerted him to stop the log truck because of the signaling. Outraged, Hill decided to fight the ticket, and on Wednesday, a Jackson County Justice Court judge dismissed the citation, finding that motorists flashing their headlights amounts to speech protected by the Oregon Constitution.
We even have examples of government stupidity that can be characterized as a combination of wasteful spending and foolish regulation, such as one part of the government squandering money on research about how to encourage condom use by providing prophylactics of different sizes while another part of the government has regulations preventing the private sector from providing prophylactics of different sizes.
Today’s post, however, could win a prize for the most profound and disturbing example of government stupidity. It mixes foolish red tape with over-the-top political correctness.
A set of seating is being torn down outside the Plymouth Wildcats varsity boys’ baseball field, not long before the season begins, because the fields for boys’ and girls’ athletics must be equal. A group of parents raised money for a raised seating deck by the field, as it was hard to see the games through a chain-link fence. The parents even did the installation themselves, and also paid for a new scoreboard. But, after someone complained to the U.S Education Department’s Office for Civil Rights, an investigated by the department determined the new addition was no longer equal to the girls’ softball field next door, which has old bleachers and an old scoreboard.
This is utterly absurd for several reasons, most notably that the federal government shouldn’t have any role in education, much less efforts to micro-manage high school sports facilities.
But even if one accepts that Washington bureaucrats should interfere in such matters, it’s important to understand that it is bureaucratic lunacy to interpret “Title IX requirements to offer equal athletic opportunities to both boys and girls” to somehow mean equal seating.
What happens if there are fewer people who want to watch female sports? Should there be a requirement to build bleachers that are mostly empty?
Or maybe we can blend Obamacare to Title IX and create a mandate that parents and others in the community have to attend female sporting events 50 percent of the time?
Actually, I shouldn’t even joke about such an idea, lest some bureaucrat think it’s a serious proposal.
Two years ago, I shared a video about the Environmental Protection Agency’s brutal and thuggish tactics against an Idaho family.
That story had a very happy ending because the Supreme Court struck a blow for property rights and unanimously ruled against the EPA (too bad that similarly sound analysis was absent when the Justices decided the Kelo case).
Now we have a new example of the EPA running amok
Let’s look at a horrifying report about another family in the cross hairs of a rogue bureaucracy.
All Andy Johnson wanted to do was build a stock pond on his sprawling eight-acre Wyoming farm. He and his wife Katie spent hours constructing it, filling it with crystal-clear water, and bringing in brook and brown trout, ducks and geese. It was a place where his horses could drink and graze, and a private playground for his three children.
Sounds like the American dream, but also responsible stewardship since ponds usually have a positive role in limiting erosion.
Unfortunately, the EPA’s pinhead bureaucrats saw an opportunity for pointless and destructive intervention.
But instead of enjoying the fruits of his labor, the Wyoming welder says he was harangued by the federal government, stuck in what he calls a petty power play by the Environmental Protection Agency. He claims the agency is now threatening him with civil and criminal penalties – including the threat of a $75,000-a-day fine. …The government says he violated the Clean Water Act by building a dam on a creek without a permit from the Army Corps of Engineers. Further, the EPA claims that material from his pond is being discharged into other waterways. Johnson says he built a stock pond — a man-made pond meant to attract wildlife — which is exempt from Clean Water Act regulations. The property owner says he followed the state rules for a stock pond when he built it in 2012 and has an April 4-dated letter from the Wyoming State Engineer’s Office to prove it. …But the EPA isn’t backing down and argues they have final say over the issue. They also say Johnson needs to restore the land or face the fines.
As you can imagine, this was not exactly good news for the property owner.
Johnson says he was “bombarded by hopelessness” when he first received the administrative order from the EPA. …The EPA order on Jan. 30 gave Johnson 30 days to hire a consultant and have him or her assess the impact of the supposed unauthorized discharges. The report was also supposed to include a restoration proposal to be approved by the EPA as well as contain a schedule requiring all work be completed within 60 days of the plan’s approval. If Johnson doesn’t comply — and he hasn’t so far — he’s subject to $37,500 per day in civil penalties as well as another $37,500 per day in fines for statutory violations.
But kudos to Mr. Johnson. Unlike so many others, he’s not going to roll over and acquiesce to EPA brutishness.
Johnson plans to fight. “This goes a lot further than a pond,” he said. “It’s about a person’s rights. I have three little kids. I am not going to roll over and let [the government] tell me what I can do on my land. I followed the rules.” …Johnson says his legal fight with the government agency is a teachable moment for his kids. “This is showing them that they shouldn’t back down,” Johnson said. “If you need to stand up and fight, you do it.”
Needless to say, the EPA is not the only out-of-control bureaucracy in Washington.
Let’s now read about the thuggish actions against blueberry growers by the Department of Labor.
Bureaucrats from that entity decided to launch a legal jihad against some growers and they relied on bad numbers and grotesque strategy.
Another example of big government run amok.
In late July 2012, officials from the Department of Labor’s Wage and Hour Division visited Pan-American Berry Growers, B&G Ditchen and E&S Farms for spot inspections. …the Labor Department’s Wage and Hour division district director, Jeff Genkos, accused the growers of minimum-wage violations and declared the blueberries “hot goods” under the 1938 Fair Labor Standards Act. This charge is usually reserved for, say, T-shirts sewn by child laborers. The effect was to stop the fruit from being shipped to customers. He then ordered the growers to pay back wages and penalties and asked them to sign away any right to appeal the deal.
What was most shocking about the DOL’s actions is that they engaged in Mafia-type tactics and “made an offer they couldn’t refuse.”
This put the growers in an impossible spot. Either they could collectively pay $240,435 or let millions of dollars’ worth of berries rot. And they only had a day or two to make a decision. They did what any prudent employer would do: They paid the money, and the hot goods order was lifted.
And you won’t be surprised that the bureaucracy cooked the numbers in the first place.
It turns out that Labor’s bureaucrats had divined that the average worker could only pick around 60 pounds of blueberries an hour, some 30 pounds below what workers usually pick. They then counted the number of workers employed and concluded the growers must have had workers employed off the books. …In January, Oregon magistrate judge Thomas M. Coffin ruled for the growers. “In essence, to avoid the potential loss of millions of dollars worth of berries, defendants had to agree to the DOL’s allegations without an opportunity to present a defense or confront the DOL’s evidence in an administrative or court hearing,” he wrote.
I’m glad at least one court has ruled against the Department of Labor. Let’s hope that the final result is positive when all the appeals have been exhausted.
Both of these stories belong in my collection of “Government Thuggery in Action.”
The headline of this post might not be completely honest. Indeed, if you asked me to grade the accuracy of my title, I’ll admit right away that it falls into the “if you like your plan, you can keep your plan” category of mendacity.
But this satire is based on a very bizarre reality. Advocates of Keynesian economics such as Paul Krugman have claimed that war is stimulus for the economy and that it would be good if we were threatened by an alien invasion. As such, it doesn’t take too much imagination to think that conversations like this may have taken place inside the Obama White House.
But that doesn’t stop some politicians from practicing free-lunch economics. They tell us, for instance, that government can impose a higher minimum wage with no job losses.
And now the Obama Administration is claiming that it can expand overtime eligibility rules without any adverse impact of base pay, hours, or employment.
In my role as the designated bad guy who has to inform people there’s no magic wand or Santa Claus, here’s what I told the New York Times.
“There’s no such thing as a free lunch,” said Daniel Mitchell, a senior fellow with the Cato Institute, who warned that employers might cut pay or use fewer workers. “If they push through something to make a certain class of workers more expensive, something will happen to adjust.”
I also shared my putative wisdom with the International Business Times, underscoring the principle that government shouldn’t intervene in labor markets.
“Our view is pretty straightforward,” Daniel Mitchell, a fellow at the libertarian CATO Institute in Washington D.C., told International Business Times by phone on Wednesday. “From a philosophical perspective the government shouldn’t get involved with labor contacts between two consenting adults. You can’t impose more labor costs and have them magically disappear.”
I also pontificated on this issue for CBS News radio, but the “highlight” of the day was having to dispel economic myths in a series of TV interviews.
In this debate for Nightly Business Report, I had to explain that faster growth was the only effective way to improve living standards, but my opponent somehow thought we should go back to the glorious 1970s.
And in this interview with Ali Velshi on AJ, I’m stunned that he blames today’s weak job market on free markets.
Last but not least, I made what will probably be my last appearance on Larry Kudlow’s great show on CNBC and used the opportunity to say we shouldn’t copy Europe’s failed welfare states.
Larry is retiring at the end of the month and he will be sorely missed.
P.S. Lots of people are suffering because of Obamacare, especially taxpayers and patients.
But since our main topic today is jobs, let’s not forget that millions of workers are being screwed over by this bad law. They’re losing jobs, losing hours, and/or losing take-home pay thanks to Obama’s ham-fisted intervention.
If you like gallows humor, Reason TV addresses this issue in a new video. Enjoy.
And if you like Obamacare parody videos, here are the other ones that will produce some smiles and laughs.
*The head of the National Socialist Workers Party finds out he can’t keep his health plan.
*A creepy version of Uncle Sam wants to know about your sex life.
Money laundering laws were adopted beginning about 30 years ago based on the theory that we could lower crime rates by making it more difficult for crooks to utilize the financial system. There’s nothing wrong with that approach, at least in theory. But these laws have become very expensive and intrusive, yet they’ve had no measurable impact on crime rates. …politicians and bureaucrats have decided to double down on failure and they’re making anti-money laundering laws more onerous, imposing ever-higher costs in hopes of having some sort of positive impact. This is bad for banks, bad for the poor, and bad for the economy.
You may think that only cranky libertarians are unhappy about this system.
But that’s not the case. Three professors with expertise in criminology, justice, sociology, and public policy wrote a detailed assessment of policies on anti-money laundering (AML) and combating the financing of terrorism (CFT).
Given the establishment pedigree of the authors, the finding of the report are rather shocking. The report’s introduction hints that the whole apparatus should be called into question.
To date there is no substantial effort by any international organization, including the IMF, to assess either the costs or benefits of an AML/CFT regime. The FATF system has proceeded as if it produces only public and private goods, not public or private “bads” or adverse by-products against which the “goods” have to be weighed. The Fund staff itself has raised questions about whether its substantial investment in the 3rd round has yielded adequate returns. It is not known what value that investment produced for the FATF or the Fund’s core objectives. There needs to be more open acknowledgement of actual and potential financial costs of AML/CFT controls, their potential misuse by authoritarian rulers, and possible adverse effects on populations that rely on remittances and the informal economy, as well as potential negative impacts on NGOs and parts of civil society.
And when you dig into the details of the report, you find some surprisingly blunt language.
Basically, there’s no evidence that these policies work, and lots of evidence that they impose real harm.
Benefits of the FATF AML/CFT system have not been demonstrated. Although there may be benefits known to international organizations, governments, regulators, and intelligence agencies, no systematic efforts have been made by the FATF network of IOs or countries or institutions to demonstrate benefits. …Standards and Methodology proceed as if the implementation of an effective AML/CFT regime delivers only public and private goods and imposes no public or private “bads.” This study has learned of no significant effort by any of the standard-setting or assessor bodies to undertake a cost-benefit analysis… Little consideration has been given, they say, to the costs of implementing an AML/CFT regime, and little evidence has been adduced to demonstrate that the costs produce commensurate benefits in their own or indeed in any other jurisdiction. …Costs are substantial whether construed broadly or narrowly. …Moreover, an AML/CFT regime generates substantial costs on the financial sector in terms of money-laundering compliance staff and software procurement. Entire industries have grown around consulting and advising businesses and governments on AML/CFT compliance… Particularly strong views were expressed by bankers about excessive costs of misplaced demands upon the financial industry for surveillance of customers.
The report notes that poor people are among the biggest victims.
AML laws and regulations may adversely affect access of marginal groups whom FATF documents describe as subject to “financial exclusion” from the formal financial system. The more onerous the burdens placed on individuals, companies, and NPOs in countries where there is a substantial informal and cash economy, the more likely they are to opt out of the formal economy for reasons of cost. …Money laundering and counter-terrorism measures can reduce the volume of overseas remittances to the most vulnerable populations in the poorest countries. …Administrative and financial costs imposed on voluntary associations, most of which are very small and poorly funded, can threaten the survival of small associations
By the way, the World Bank also has acknowledged that these counterproductive laws are very bad for poor people, oftentimes disenfranchising them from the banking system
Last but not least, kudos to the authors for making the very relevant point that the destruction of financial privacy is a boon for authoritarian governments.
Numbers of experienced assessors have observed that a fully functioning AML/CFT regime in some countries has provided tools for authoritarian rulers to repress their political opponents by denying them banking or other facilities, increasing surveillance over their accounts, and prosecuting or penally taxing them for non-disclosure, in addition to opening up more opportunities for illegal extortion for private gain. This weapon can be applied against persons/organizations already in the formal financial system.
It’s worth pointing out that this also explains why it’s so dangerous to have governments collecting and sharing tax information.
But let’s stick to the issue of money laundering. Now let’s look at two case studies to get a sense of how these laws impose real-world harm.
We’ll begin with an article in The Economist, which looks at how Western Union’s ability to provide financial services has been hampered by heavy-handed (yet ineffective) laws and regulation.
It seems like this is a company providing a very valuable service, particularly to the less fortunate.
Western Union’s services are essential for people who do not have bank accounts or are working far from home. …Western Union helps to bolster trade and disperse the world’s wealth.
But the statists don’t care.
Someone, somewhere, may want to transfer money for a nefarious purpose. And rather than the government do its job and investigate actual crimes, politicians and bureaucrats have decided that it’s easier to make Western Union spy on all customers.
…these laudable activities conflict with another pressing goal: impeding money laundering. Rules to that end require financial institutions to know who their customers are and how they obtained their money. These requirements transform the virtues of Western Union’s model—the openness and breadth of its network and its willingness to process vast numbers of small transactions—into liabilities.
And the heavy boot of government came down on the company, forcing Western Union to incur heavy expenses that make the system far more expensive for consumers.
Western Union struck a far-reaching compliance agreement with Arizona’s attorney-general in 2010. It agreed to adopt 73 changes to its systems and procedures, to install an external monitor to keep tabs on its conduct and to fund the creation of a new enforcement entity, the Southwest Border Anti-Money Laundering Alliance. Many of the recommendations were highly detailed. Western Union has, for example, set up a system to monitor transactions that takes into account factors such as the seasonality of marijuana harvests and illegal immigration. It is conducting background checks on agents and their families. Such efforts have turned out to be difficult and expensive. …Western Union’s shares have been jolted several times. Earlier this month Western Union said it would be subject to independent monitoring for an extra four years. It faces big fines and criminal prosecutions if it fails to meet the stipulations in the compliance agreement.
Let’s look at another real-world consequence of the AML/CFT regime.
You’ve heard of “driving while black,” which describes the suspicion and hostility that blacks sometimes experience, particularly when driving in ritzy neighborhoods.
Well, DWB has a cousin. It’s BWR, otherwise know as “banking while Russian.” And the stereotype has unpleasant consequences for innocent people.
Here are some passages from a story in the New York Times.
We had sold our apartment in Moscow, jumped through an assortment of Russian tax hoops and transferred the proceeds to the United States, where we now lived. It made me nervous to have all that money sitting in one virtual clump in the bank — but not nearly as nervous as having the card connected to it not work. The experience was also humiliating. In one moment, I had gone from being a Citigold client to a deadbeat immigrant who couldn’t pay for her son’s diapers. I called Citibank as soon as I got home. …”Who closed it?” I was working hard not to sound belligerent. “And where is my money?” …It was Citibank. “I see that because your transactions indicated there may be an attempt to avoid complying with currency regulations, Citibank has closed your account,” the woman informed me. …“Why wasn’t I notified?” “The cashier’s check will serve as your notice.” Citibank had fired me as a client.
Why would a bank not want customers?
Because the government makes some clients too costly and too risky, even though there’s no suggestion of wrongdoing.
Other than ethnicity.
I wasn’t entirely surprised. This had happened to other Russian-Americans I know, including one of my closest friends and my father. My friend had opened her account at a local bank in the United States when she got her first job, at age 13. Her accounts were summarily closed in 2008, while she was working in Russia. The bank, which had been bought by Sovereign in the meantime, would not state a reason for firing a client of 27 years. My father, who immigrated to the United States in 1981, had his accounts closed by BankBoston in 2000, when he was a partner in a Moscow-based business. His lawyers pressed the bank on the issue and were eventually told that because Russians had been known to launder money, the bank applied “heightened scrutiny” to accounts that had a Russia connection. It had closed “many” accounts because of what it considered suspicious activity. Like other kinds of ethnic profiling, these policies of weeding out Russian-Americans who have money are hardly efficient.
But the main thing to understand is that the entire system is inefficient.
Laws were adopted with the promise they would reduce crime. But just like you don’t stop crime by having cops hang out at Dunkin’s Donuts, you also don’t stop crime by creating haystacks of financial data and then expecting to make it easier to find needles.
For more information, here’s my video on the government’s failed money laundering policies.
So when I saw this New York Post story about the feds pissing away a six-figure sum on condom research, I figured this would be a perfect addition to my collection of government waste stories.
The federal government is stretching your tax dollars — in search of the perfect condom. The National Institutes of Health will spend $224,863 to test 95 “custom-fitted” condoms so every American man can choose the one that fits just right.
Do we really need to spend other people’s money to figure out that guys, if they have to wear condoms, would like them to fit?!?
But then I found something in the story that genuinely surprised me. Apparently there are federal regulations that restrict the types of condoms that can be sold in the United States!
The NIH blames US “regulatory guidelines” for American men having to choose from a “narrow range of condom sizes.” The six-figure grant was awarded to TheyFit of Covington, Ga., which offers a wide variety of condoms that vary in length — from a bit more than 3 inches to nearly 9 ¹/₂ — and in width. They’re available in European Union countries, but not in the United States, where they would have to be approved by the Food and Drug Administration.
I’m flabbergasted. I can vaguely understand why the government might regulate some aspects of condom production, such as durability rules to limit breakage. I don’t think such red tape is necessary because companies already plenty of incentive – because of both reputational risk and preemptive legal protection – to maintain good standards.
But at least you can see a rationale for bureaucrats to intervene.
I can’t imagine, though, what excuse regulators came up with when they decided to limit the variety of condom sizes. Maybe this is a literal example of the one-size-fits-all mentality of Washington?
And isn’t it embarrassing that Europeans have a more market-friendly approach on this issue?
Though none of us should be surprised that the Keystone Cops at the United Nations want to create a human right to obtain taxpayer-financed condoms.
P.P.S. Since I started this post with examples of wasteful spending, but then decided that this story might belong in the category of absurd regulation, let’s close by sharing some examples of foolish red tape.
It’s no secret that I have very little faith in the competence and good will of government.
I focus primarily on the fecklessness of Washington, but I also can’t resist highlighting malfeasance and stupidity by local governments, state governments, and foreign governments.
Indeed, I’ve even had to create special categories to keep track of some of the more amazing episodes of bureaucratic blundering. Here are just a few that will leave you shaking your head in disbelief.
Or is it an example of the regulatory state run amok, like when the FDA conducted a raid to stop consenting adults from buying and selling unpasteurized milk, or when the Greek bureaucracy required submission of stool samples in order to set up an online company.
You’ll understand why it’s hard to decide after reading this story. The issue is (gasp!) unregulated topless hair cutting. Here’s some of what was reported by the New York Times.
A woman who allegedly offered topless hairstyling services in northern Colorado faces criminal charges. But police say the problem isn’t cutting hair without a top. …46-year old Suzette Hall was arrested Wednesday night on suspicion of practicing cosmetology without a license.
I don’t know about you, but I’m going to sleep better tonight knowing that the dangerous scourge of unlicensed haircutting in Colorado has been stifled.
Aren’t we lucky that the government is protecting us from such dangers!
Interestingly, the Rebel Barber (who is not the same person as the Rebel Economist) actually tried to comply with the government’s regulatory demands. But there was no license for her particular form of business.
Hall’s ex-husband told police she set up shop in Loveland and offered services as “Rebel Barber.” He told police she applied for “a nude license for hairstylists,” but no such license exists.
Perhaps we can get some federal legislation requiring all states to have new bureaucracies for the purposes of licensing and regulating nude hairstylists?
Actually, I shouldn’t even make that kind of joke. Some politician might take the suggestion seriously.
Better to leave such matters in the hands of local governments. That way, the potential damage is limited by borders.
I also have shown some data suggesting that they don’t work very hard, though I confess to mixed feelings about that factoid since I’d rather have some bureaucrats goofing off all day. After all, the economy would be even more burdened if they were being zealous and harassing additional people in the economy’s productive sector.
As an economist, one of my broad concerns is that taxpayers are picking up the tab for bloated bureaucracy. But I’m also worried for another big reason. We get less prosperity when too many people are being lured into government jobs. Simply stated, those people could be contributing to economic output if they instead were employed in the private sector.
But we need to be careful about how we define “private sector.”
Why? Because not all private jobs are created equal. There are millions of government contractors, for instance, and many of those people should be considered part of a “shadow bureaucracy.” Too often, they’re doing things that are just as wasteful and inefficient as their bureaucrat counterparts, but they don’t show up in the Labor Department data as part of the government workforce.
Another example of the wrong kind of private employment is the so-called compliance sector.
A growing thicket of federal regulations under the Obama administration has contributed to an employment spike in at least one corner of the job market: the increasingly vital compliance industry. ObamaCare, the Dodd-Frank Act and other large federal undertakings have led to an outpouring of new agency rules derided by business groups and defended by advocates. But the regulations have also been a boon for professional compliance officers paid to help companies understand and adapt to the new requirements. …Data kept by the Bureau of Labor Statistics (BLS) shows an 18-percent increase in the number of compliance officers in the United States between 2009 and 2012.
The article continues, including data showing that the compliance sector is getting bigger, costing lots of money, and that the problem began before Obama took office.
At last count, there were an estimated 227,500 compliance officers employed in the United States, according to the BLS. The bureau defines a compliance officer as an employee responsible for evaluating conformity with laws and regulations. …Compliance officers make an average of just under $65,000 annually, a gross national labor cost of roughly $14.7 billion, according to the BLS data. …for small firms without the resources to hire their own full-time compliance staff, adapting to new regulations can be an expensive proposition, said Sam Batkins, director of regulatory policy for AAF. …The expansion of the compliance industry did not begin under President Obama and is not solely linked to the healthcare and Wall Street reform bills. The AAF analysis found a 122-percent increase of compliance officers over the past 10 years.
Gee, maybe we can get to the point where our entire economy is nothing but government bureaucrats and compliance officers. With enough of both categories, we could have full employment!
Of course, there would be one tiny little problem since nothing would get produced. And with nobody generating any income, there wouldn’t be any money to pay for the paper pushers from both government and the private sector.
But as we’ve seen from nations such as Greece, politicians generally don’t grasp this simple point until it’s too late.
Let’s close by issuing a couple of important caveats. Notwithstanding my occasionally overheated rhetoric, not all government jobs are bad jobs. Similarly, I don’t want to imply that all compliance jobs in the private sector are wasteful and inefficient.
To be more specific, I mean those statements in the narrow sense that companies doubtlessly are trying to adapt to all the new regulatory burdens in the least costly manner possible. So the jobs they are creating make sense, given the reality that firms are being buried under a blizzard of red tape.
But I also mean it in the broad sense that there are some regulations that pass a cost-benefit test, and compliance officers resulting from those regulations presumably are part of such calculations. Even a cranky libertarian like me, for instance, won’t lose sleep about compliance officers in a nuclear power plant or at a medical lab doing research on the Ebola virus.*
*But allow me to point out that a genuinely free market would have something akin to compliance officers because of “private regulation.” As I explained last year, “the profit motive creates mutually reinforcing oversight,” and we can be quite confident that market forces would do a better job of protecting us at lower cost.
Beware the sledgehammer used to crack the nut. In this case, the nut is the U.S. government’s laudable goal of catching tax evaders. The sledgehammer is the overreaching effect of legislation that is alienating other countries and resulting in millions of U.S. citizens abroad being forced to either painfully reconsider their nationality, or face a lifetime of onerous bureaucracy, expense and privacy invasion. The legislation is Fatca, the Foreign Account Tax Compliance Act.
Ms. Graffy provides a very powerful example of why FATCA is an absurd extraterritorial application of bad U.S. law.
To appreciate its breathtaking scope along with America’s unique “citizen-based” tax practices, imagine this: You were born in California, moved to New York for education or work, fell in love, married and had children. Even though you have faithfully paid taxes in New York and haven’t lived in California for 25 years, suppose California law required that you also file your taxes there because you were born there. Though you may never have held a bank account in California, you must report all of your financial holdings to the State of California. Are you a signatory on your spouse’s account? Then you must declare his bank accounts too. Your children, now adults, have never been west of the Mississippi but they too must file their taxes in both California and New York and report any bank accounts they or their spouses may have because they are considered Californians by virtue of one parent’s birthplace.
Sounds utterly ridiculous, but FATCA applies these rules to American citizens in other nations – with predictably awful results.
Extrapolate that example to the six million U.S. citizens living around the globe. Many, if not most, don’t know about these requirements. Yet they face fines, penalties and interest for not complying—even if they owe no U.S. taxes, own no U.S. property, have no U.S. bank account and haven’t lived there in years—if ever. …Foreign financial institutions trying to avoid these new requirements have two alternatives: to drop American clients, or don’t invest in the U.S. Neither scenario benefits America. …This infringement on the sovereignty of other nations has not gone down well abroad and has only served to reinforce the most negative stereotypes of America. …It forces honest people with affection for their ties to America to either keep quiet about their heritage, or spend potentially thousands of dollars a year to prove that they owe no U.S. taxes. Or, as is increasingly occurring, it forces them to give up their U.S. citizenship. The result is that the U.S. is turning millions of “good will” ambassadors into “bad will” ambassadors. Can any of this be good for America?
Of course it’s not good for America, but greedy politicians are perfectly happy to impose enormous costs on the private sector in exchange for trivially small amounts of additional revenue. And those projections of additional revenue almost surely won’t materialize because of Laffer-Curve effects on investment in the American economy, so even the politicians won’t come out ahead when the dust settles.
Maybe the crowd in Washington will even learn the right lesson and support Senator Rand Paul’s legislation to undo some of the worst parts of FATCA, but don’t hold your breath.
2. Here’s the second choice. I thought I had learned never to be surprised by examples of foolish government intervention, but even I did a double take when I learned that the federal bureaucracy was regulating rabbits in magic shows.
Not just regulating them, but even requiring disaster plans in case of calamities such as “Fire. Flood. Tornado. Air conditioning going out. Ice storm. Power failures”. I’m not joking. Here are some excerpts from a Washington Post report.
This summer, Marty the Magician got a letter from the U.S. government. It began with six ominous words: “Dear Members of Our Regulated Community . . .” Washington had questions about his rabbit. Again. …Hahne has an official U.S. government license. Not for the magic. For the rabbit. The Agriculture Department requires it, citing a decades-old law that was intended to regulate zoos and circuses. Today, the USDA also uses it to regulate much smaller “animal exhibitors,” even the humble one-bunny magician. That was what the letter was about. The government had a new rule. To keep his rabbit license, Hahne needed to write a rabbit disaster plan. …For Hahne, the saga has provided a lesson in one of Washington’s bad old habits — the tendency to pile new rules on top of old ones, with officials using good intentions and vague laws to expand the reach of the federal bureaucracy. …“Our country’s broke,” Hahne said. “And yet they have money and time to harass somebody about a rabbit.”
What if regulators are committing crimes against common sense?
Just in case you think this is merely a case of bureaucrats concocting silly rules from their comfortable perches in Washington, I’m sure you’ll be delighted to learn that our fearless public servants are venturing outside the beltway.
Hahne…has been doing magic shows full time for 27 years, on cruise ships and on land. That means he has experienced most of the troubles a magician can expect… But he did not expect the U.S. Department of Agriculture. “She said, ‘Show me your license.’ And I said, ‘License for . . .?’ ” Hahne recounted. This was after a 2005 show at a library in Monett, Mo. Among the crowd of parents and kids, there was a woman with a badge. A USDA inspector. “She said, ‘For your rabbit.’ ” Hahne was busted. He had to get a license or lose the rabbit. …Hahne has an official USDA license, No. 43-C-0269, for Casey — a three-pound Netherland dwarf rabbit with a look of near-fatal boredom. The rules require Hahne to pay $40 a year, take Casey to the vet and submit to surprise inspections of his home. Also, if Hahne plans to take the rabbit out of town for an extended period, he must submit an itinerary to the USDA. The 1966 law that started all of this was four pages long. Now, the USDA has 14 pages of regulations just for rabbits. …the law applies only to warmblooded animals. If Hahne were pulling an iguana out of his hat — no license required. Now, he needs both a license and a disaster plan.
The good news – relatively speaking – is that rabbit regulations don’t threaten to drive investment and jobs from the U.S. economy. But for sheer stupidity on the part of government, can you think of a more pointless set of regulations?
3. Now let’s consider our final example, which manages to combine the nanny state with domestic protectionism with an attack on the First Amendment.
This trifecta of red tape insanity comes from Kentucky, where the local state-protected cartel of psychologists wants to stop a newspaper columnist from giving free advice.
John Rosemond has been dispensing parenting advice in his newspaper column since 1976, making him one of the longest-running syndicated columnists in the country. But some Kentucky authorities want to put him in a time out. In May, Kentucky’s attorney general and its Board of Examiners of Psychology told Rosemond his parenting column — which regularly offers old-school advice and shows little tolerance for any kind of parental coddling — amounts to the illegal practice of psychology. They want him to agree to a cease-and-desist order. In particular, they want Rosemond to stop identifying himself as a psychologist, because he is not a licensed psychologist in Kentucky.
To his credit, Mr. Rosemond is fighting back.
Rosemond, an author of 11 parenting books who has a master’s degree in psychology from Western Illinois and is a licensed psychologist in his home state of North Carolina, sees the board’s letter as an effort at censorship and is filing a lawsuit Tuesday in federal court seeking to bar the state from taking any action against him. …He is represented by the Arlington, Va.-based Institute for Justice, which has filed multiple lawsuits challenging what they see as overreach by government licensing boards. Institute for Justice lawyer Paul Sherman says that under Kentucky’s logic, columnists like Dear Abby and television personalities like Dr. Phil and Dr. Oz are breaking the law any time they offer advice, because the content is aired in Kentucky and meets the state’s broad definition of psychological advice.
And the newspaper that publishes his column also is standing up for the First Amendment.
Peter Baniak, editor of the Lexington Herald-Leader, which ran the column that prompted the psychology board’s cease-and-desist letter, said Monday that his paper has not been contacted by the board or the Kentucky attorney general, and that the paper intends to continue publishing the column. “I would find it troubling for a state board to suggest or think it has the ability to say what should or shouldn’t run in an advice column,” Baniak said.
By the way, if you watch this video, you’ll see that Rosemond’s home state of North Carolina also is guilty of trying to undermine the First Amendment as part of efforts to protect certain professions from competition.
Now it’s your turn to pick the most foolish example of regulation from this list.
By the way, just in case there are skeptics who think I’ve shared isolated examples and that regulation is generally beneficial, check out these staggering numbers.
The growth of federal regulations over the past six decades has cut U.S. economic growth by an average of 2 percentage points per year, according to a new study in the Journal of Economic Growth. As a result, the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now. The researchers, economists John Dawson of Appalachian State University and John Seater of North Carolina State, constructed an index of federal regulations by tracking the growth in the number of pages in the Code of Federal Regulations since 1949. …They devise a pretty standard endogenous growth theory model and then insert their regulatory burden index to calculate how federal regulations have affected economic growth. …Annual output in 2005, they conclude, “is 28 percent of what it would have been had regulation remained at its 1949 level.” The proliferation of federal regulations especially affects the rate of improvement in total factor productivity, a measure of technological dynamism and increasing efficiency. …Overall, they calculate, if regulation had remained at the same level as in 1949, current GDP would have been $53.9 trillion instead of $15.1 in 2011. In other words, current U.S. GDP in 2011 was $38.8 trillion less than it might have been.
And the author of the column also is a bit skeptical. But even when he plays with the numbers a bit, he still finds that the cost of regulation is enormous.
…let’s say that the two economists have grossly overestimated how fast the economy could have grown in the absence of proliferating regulations. So instead let’s take the real average GDP growth rate between 1870 and 1900, before the Progressives jumpstarted the regulatory state. Economic growth in the last decades of the 19th century averaged 4.5 percent per year. Compounding that growth rate from the real 1949 GDP of $1.8 trillion to now would have yielded a total GDP in 2013 of around $31 trillion. Considerably lower than the $54 trillion estimated by Dawson and Seater, but nevertheless about double the size of our current GDP. All this means that the opportunity costs of regulation—that is, the benefits that could have been gained if an alternative course of action had been pursued—are much higher than the costs of compliance.
The key thing to understand is that faster economic growth, if maintained for a long period, can yield huge increases in living standards thank to compounding.
The accompanying chart, for instance, shows that it takes 70 years for a country to double economic output if it suffers with Italian-style 1 percent annual growth.
But if a nation enjoys rapid annual growth, it’s possible to double GDP in 10-20 years.
2. I’m even more worried about global regulations that force all nations to adopt the same policy. The one-size-fits-all approach of regulatory harmonization is akin to an investment strategy of putting all your retirement money into one stock.
I talked about this issue in Slovakia, as a conference that was part of the Free Market Road Show. The first part of my presentation was a brief description of cost-benefit analysis. I think that’s an important issue, and you can click here is you want more info about that topic.
But today I want to focus on the second part of my presentation, which begins at about the 3:40 mark. Simply stated, there are big downsides to putting all your eggs in one regulatory basket.
Financial regulations like the Basel capital accords, designed to make banks act more prudentially, did the opposite – incentivising banks to load up on government-backed mortgage debt and, particularly in Europe, government bonds. Unlike mistakes made by individual firms, these were compounded across the entire global financial system.
The final sentence of that excerpt is key. Regulatory harmonization can result in mistakes that are “compounded across the entire global financial system.”
P.S. For a more learned and first-hand explanation of how regulatory harmonization can create systemic risk, check out this column by a former member of the Securities and Exchange Commission.
P.P.S. Politicians seem incapable of learning from their mistakes. The Obama Administration is trying to reinflate the housing bubble, which was a major reason for the last financial crisis. This Chuck Asay cartoon neatly shows why this is misguided.
Team Obama is now the red tape record holder. …pages in the Code of Federal Regulations hit an all-time high of 174,545 in 2012, an increase of more than 21% during the last decade. …the cost of federal rules exceeded $1.8 trillion, roughly equal to the GDP of Canada. These costs are embedded in nearly everything Americans buy…at $14,768 per household, meaning that red tape is now the second largest item in the typical family budget after housing. Last year 4,062 regulations were at various stages of implementation inside the Beltway. The government completed work on 1,172, an increase of 16% over the 1,010 that the feds imposed in 2011, which was a 40% increase over 722 in 2010. …the Obama Administration did not break the all-time record of 81,405 pages it set in 2010. But the 78,961 pages it churned out in 2012 mean that the President has posted three of the four greatest paperwork years on record. And to be fair, if Mr. Obama were ever to acknowledge that this is a problem, he could reasonably blame George W. Bush for setting a lousy example. Despite the Obama myth that the Bush years were an era of deregulation, the Bush Administration routinely generated more than 70,000 pages a year in the Federal Register.
If those numbers don’t make you sit up and take notice, how about these ones?
Today’s Byzantine system is good for tax lawyers, accountants, and bureaucrats, but it’s bad news for America. We need to wipe the slate clean and get rid of this corrupt mess. And you know how to make that happen.
But sometimes it helps to have a real-world example of how a specific industry responds when it is freed from onerous taxation and pointless regulation.
Tom Acitelli explains in the Wall Street Journal how the American beer industry was rejuvenated by deregulation and tax cuts. Here are some excerpts from his column.
As recently as 35 years ago, there were fewer than 50 breweries in the whole country… The story of the U.S. ascent to the top tier of world beer began in the late 1970s, when brewing was liberated from government taxation and regulation that had held it back since Prohibition. …The brewing industry had been trying unsuccessfully for years to get Washington to lower excise taxes on beer produced by smaller brewers. …H.R. 3605 cut the federal excise tax on beer to $7 from $9 per barrel on the first 60,000 barrels produced, so long as a brewery produced no more than two million barrels annually. …The tax cut unleashed a revolution in American brewing. Hundreds of smaller breweries began to open across the country selling what came to be called craft beer.
But the industry wasn’t held back just by taxation.
Some of the stars of American craft beer, such as Ken Grossman of Sierra Nevada and Sam Calagione at Dogfish Head, got their start with home brewing—an activity that until the late 1970s was illegal in the U.S. …the government did little to enforce the anti-home-brewing law. Still, the air of illegality discouraged many who might have taken up home-brewing… Enthusiasts in the U.S. kept their interests underground, usually sharing information only with a small circle of other home brewers. Who knew when the government might start enforcing the home-brewing prohibition? Gradually, though, the secretive home brewers grew bolder. …They lobbied…to introduce legislation legalizing home-brewing at the federal level. …legislation…was reconciled with a House bill in August 1978. President Carter signed the law that October, and it took effect the following February. Home-brewing of up to 200 gallons a year per household was suddenly permitted.
So what happened when economic liberty was legalized?
The result: Home-brewing took off, helping to spur the movement toward craft beer that had been touched off by the beer tax reduction. The beer industry swelled in the 1980s and 1990s, producing thousands of jobs and tens of millions of dollars in annual tax revenue. The rise of American beer wasn’t an accident. It was spurred by efforts to cut taxes and regulation that unleashed entrepreneurship. Too bad Washington doesn’t raise a toast to that idea more often.
The part about “millions of dollars in annual tax revenue” rubs me the wrong way, as I explained in a recent post about marijuana legalization in Colorado, but even an anti-taxer like myself recognizes that ending a form of prohibition is a net plus for freedom.
And I definitely like what Acitelli writes about applying more broadly the lessons of lower taxes and deregulation. Heck, if we’re good students and study hard, maybe some day we can be Hong Kong instead of France.
Barry was specifically making fun of OSHA bureaucrats for fining a company for the horrible transgression of saving a worker when a trench collapsed. But there are many other examples of law enforcement run amok.
Anthony Brasfield saw romance when he released a dozen heart-shaped balloons into the sky over Dania Beach with his sweetie. A Florida Highway Patrol trooper saw a felony. Brasfield, 40, and his girlfriend, Shaquina Baxter, were in the parking lot of the Motel 6 on Dania Beach Boulevard when he released the shiny red and silver mylar balloons and watched them float away Sunday morning. …Brasfield was charged with polluting to harm humans, animals, plants, etc. under the Florida Air and Water Pollution Control Act. …Between 2008 and 2012, the Florida Department of Law Enforcement said there were 21 arrests statewide under the rarely used environmental crime statute. The third-degree felony is punishable by up to five years in prison.
Let’s now think about what this means.
We have a guy who almost certainly had no idea he was committing a crime. He presumably isn’t rolling in money since he was staying at a Motel 6. Yet now he faces a harder life because he has a felony arrest on his record.
I’m assuming, by the way, that the government surely won’t send him to prison. I’m also guessing – or at least hoping – that the state won’t even impose a heavy fine. And perhaps the prosecutor’s office will drop or reduce the charges so he won’t have a felony conviction on his record. Though maybe I’m being too generous in those assumptions.
Anyway, my main point is to question why the unfortunate Mr. Brasfield was arrested in the first place. What was the cop thinking, that a felony arrest would help fill his quota?
By the way, I’m not claiming that there shouldn’t be a rule against releasing balloons near a nature preserve. It may be that imposing some sort of sanction is the right way, from a cost-benefit perspective, to preserve and protect the environment.
But Mr. Brasfield wasn’t a big corporation dumping chemicals into the water with full knowledge of lawbreaking and potentially doing millions of dollars of damage. That’s the situation where felony arrests and prosecutions are completely appropriate.
Releasing a few balloons, by contrast, should be treated more like jaywalking or littering. Though I realize that would require common sense from lawmakers, law enforcement, and the justice system. So good luck with that.
As an economist with a boring personality (sorry to be redundant), I sometimes focus on numbers. And when contemplating the cost of regulation and red tape, there are some numbers that should frighten all of us.
Should it be a federal crime for businesses to refuse to hire ex-convicts? Yes, according to the Equal Employment Opportunity Commission, which recently released 20,000 convoluted words of regulatory “guidance” to direct businesses to hire more felons and other ex-offenders.
I’m sure employment lawyers are delighted at the thought of all the billable hours that will be required to peruse 20,000 words of bureaucratese, but what on earth is the EEOC thinking?
Well, it seems the bureaucrats have a long track record of seeking to “protect” the criminals amongst us.
…the EEOC began stretching Title VII of the 1964 Civil Rights Act to sue businesses for practically any hiring practice that adversely affected minorities. In 1989, the agency sued Carolina Freight Carrier Corp. of Hollywood, Fla., for refusing to hire as a truck driver a Hispanic man who had multiple arrests and had served 18 months in prison for larceny. The EEOC argued that the only legitimate qualification for the job was the ability to operate a tractor trailer. U.S. District Judge Jose Alejandro Gonzalez Jr., in ruling against the agency, said: “EEOC’s position that minorities should be held to lower standards is an insult to millions of honest Hispanics. Obviously a rule refusing honest employment to convicted applicants is going to have a disparate impact upon thieves.”
But even though the bureaucrats were slapped down by the courts, the EEOC continues to harass companies that seek to hire honest workers who aren’t a threat to the general public.
…the EEOC guidance frowns on such checks and creates new legal tripwires that could spark federal lawsuits. …If a background check discloses a criminal offense, the EEOC expects a company to do an intricate “individualized assessment” that will somehow prove that it has a “business necessity” not to hire the ex-offender (or that his offense disqualifies him for a specific job). …It is difficult to overstate the EEOC’s zealotry on this issue. The agency is demanding that one of Mr. Livingston’s clients—the Freeman Companies, a convention and corporate events planner—pay compensation to rejected job applicants who lied about their criminal records.
To understand the stupidity and venality of government, re-read the last sentence of that excerpt. The EEOC actually wants a business to give money to applicants who were rejected because they lied about their criminal records.
I’m at a loss for words.
Actually, just joking. I have a lot more words to write, particularly when I see that the bureaucrats at the EEOC also launched a legal attack against a firm that understandably didn’t want to hire crooks for sensitive jobs such as guarding nuclear power plants.
…businesses complying with state or local laws that require employee background checks can still be targeted for EEOC lawsuits. This is a key issue in a case the EEOC commenced in 2010 against G4S Secure Solutions after the company refused to hire a twice-convicted Pennsylvania thief as a security guard. G4S provides guards for nuclear power plants, chemical plants, government buildings and other sensitive sites, and it is prohibited by state law from hiring people with felony convictions as security officers. …The EEOC’s new regime leaves businesses in a Catch-22. As Todd McCracken of the National Small Business Association recently warned: “State and federal courts will allow potentially devastating tort lawsuits against businesses that hire felons who commit crimes at the workplace or in customers’ homes. Yet the EEOC is threatening to launch lawsuits if they do not hire those same felons.”
Oh, by the way, you probably won’t be surprised to learn that the EEOC refuses to say whether it conducts background checks on its own employees. Remember, the ruling class shouldn’t have to worry about all the laws imposed on you and me and the rest of the peasants.
…the EEOC is practically rewriting the law to add “criminal offender” to the list of protected groups under civil-rights statutes, [but] the agency refuses to disclose whether it uses criminal background checks for its own hiring. When EEOC Assistant Legal Counsel Carol Miaskoff was challenged on this point in a recent federal case in Maryland, the agency insisted that revealing its hiring policies would violate the “governmental deliberative process privilege.”
What’s particularly tragic about this farce is that it will almost certainly hurt the minorities that the EEOC supposedly is trying to help.
…studies published in the University of Chicago Legal Forum and the Journal of Law and Economics have found that businesses are much less likely to hire minority applicants when background checks are banned. As the majority of black and Hispanic job applicants have clean legal records, the new EEOC mandate may harm the very groups it purports to help.
And if you want a few more examples of government stupidity:
The Obama administration issued $236 billion worth of new regulations last year… The analysis from the American Action Forum, led by former Congressional Budget Office Director Douglas Holtz-Eakin, found that the administration added $216 billion in rules and more than $20 billion in regulatory proposals in 2012. Complying with those rules will require an additional 87 million hours of paperwork, the report said. The group put the total price tag from regulations during Obama’s first term at more than $518 billion. …The Environmental Protection Agency racked up the most in regulatory costs last year, according to the report, issuing $172 billion worth of rules. Regulations from the healthcare reform law tacked an additional $20.1 billion in costs onto the economy.
This isn’t pocket change. Indeed, $236 billion is almost four times as much money – measured annually – as Obama’s tax hike. And the vast majority of that burden will be borne by ordinary citizens, not just the so-called rich.
But the article includes a very important caveat.
Though the study lists the costs of regulations, it does not calculate any benefits that might have resulted from them.
That’s an important point, which is why it would be nice if the government engaged in some honest cost-benefit analysis. Some regulations impose modest costs and generate meaningful benefits. Mandating that cars include seat belts would be a good example.
But other regulations impose costs far in excess of potential benefits, such as all the red tape accompanying Obamacare, the regulatory tsunami of Dodd-Frank, and the never-ending plethora of EPA rules.
Many people complain about the high cost of regulation. Heck, I’m one of them. I’ve shared some very disturbing numbers about the burden of red tape.
But maybe it’s time to step back and look at the bigger picture. More specifically, we should ask whether there is an alternative to government regulation. John Stossel says yes, arguing that private markets are remarkably effective in protecting consumers without the involvement of government.
He starts his column by noting that the regulatory nightmare is getting worse.
The bureaucrats never stop. There are now more than 170,000 pages of federal regulations.
But then he explains that private rules are just like regulation, but without a role for clumsy and ineffective government.
It is scary to think about a world without regulation. Intuition leads us to think that without government we’d be victims of fraud… But our intuition is wrong. Consider this: An entire sector of the economy operates almost entirely without government controls. Complete strangers exchange big money there every day. It’s the Internet. It does have regulation, just not government regulation.
He mentions the innovative private regulation of companies such as PayPal and eBay.
PayPal invented a new form of regulation. “They developed a private fraud detection system, where they used computers to say, ‘This might be fraudulent,’ and then it would send it to a human to investigate that.” That dramatically reduced fraud, and PayPal thrived. EBay’s business model is also threatened by fraud. How can a buyer trust that, say, a seller will actually deliver a $25 pack of baseball cards and that the cards will be what he claims they are? In theory, you could sue; but in practice, our legal system is too slow and costly for that. So eBay came up with self-regulation: The buyers rate the sellers.
And he also explains how stock markets originally relied on private forms of regulation.
Did you know that stock markets began without government regulation? …the first stock exchanges developed in London in the 1700s: “Government refused to enforce all but the most simple contracts. Nevertheless, brokers figured out how to do short sales, futures contracts, options contracts — even though none was enforceable by law.” They came up with private enforcement. “They traded in coffeehouses. And after a while, they decided: ‘Let’s enforce rules within this coffeehouse. If you default, you’re going to get kicked out of the coffeehouse, and we’re going to call you a lame duck.'”
Unfortunately, the trend is for more government, even though much of red tape produced by Washington doesn’t pass the cost-benefit test.
Years of consumer reporting have taught me that such private regulation is better for consumers than the piles of rules produced by our bloated government. Worse, government’s micromanagement stifles innovation. Companies now invest in lawyers and “compliance officers,” rather than engineers and creators.
John’s column is music to my ears. I wrote an entire article for Townhall based on the premise that “the profit motive creates mutually reinforcing oversight” to protect the interests of consumers.
In other words, private companies don’t maximize profits by poisoning, killing, mistreating, and abusing their customers. And even if they thought that was a means of getting rich, other private companies such as banks and insurance companies would have a profit-maximizing incentive to stop bad behavior.
That doesn’t mean there’s no role for government. Even a libertarian system, for instance, would have a legal system enabling people to get compensation when they suffer losses because of negligence.
The question before us, though, is whether the pendulum has swung too far in favor of command-and-control regulation from Washington.
To answer, let’s close this post with some examples of regulatory idiocy from government bureaucracies.
In the town that launched the War on Poverty 48 years ago, the poor are getting poorer despite the government’s help. And the rich are getting richer because of it. The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 – a ratio of 54 to 1. That gap is up from 39 to 1 two decades ago. It’s wider than in any of the 50 states and all but two major cities.
One small but important correction in the previous excerpt. As I have noted many times, the “poor are getting poorer” because of “the government’s help.”
The article then explains that a lot of the redistribution in Washington is from taxpayers to a pampered elite.
…in the years since President Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too – especially in the nation’s capital. …Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. …Direct spending by the federal government accounts for 40 percent of the area’s $425 billion-a-year economy. …Roughly 15 cents of every dollar from the entire federal procurement budget stays in or around the government’s hometown, said Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University. Last year, that was about $80 billion out of $536 billion in procurement spending, he said. The 15 percent share is far greater than the region’s 2 percent portion of the U.S. population. “We’re seeing an enormous transfer of wealth from taxpayers to the Washington economy,” said Fuller.
And all this spending leads to an elitist class of cronyists, politicians, contractors, bureaucrats, and lobbyists. No wonder the DC area is home to some of the richest counties in America.
But unlike other well-to-do areas, the wealth in DC is rarely accumulated by honest means.
Instead, it’s the result of perverse form of redistribution to big-government insiders. Check out these horrifying details.
Washington-area workers with incomes above $100,000 rose to 22 percent of the workforce, up from 14 percent in 1990, adjusted for inflation, a Reuters analysis of Census data found. …there are 320,000 federal jobs in the Washington area. Within the District of Columbia, 55 percent pay $100,000 or more. …Nearly 13,000 lobbyists registered with the government last year and reported $3.3 billion in fees, or about $260,000 per lobbyist. That’s 22 percent more lobbyists and 37 percent more inflation-adjusted revenue per lobbyist than in 1998… Times are flush for Washington lawyers as well. The number of attorneys in the area has risen 44 percent, twice the national rate, to 41,000 since 1999. Their average income, adjusted for inflation, rose 35 percent to $156,000.
…the D.C. region already has a reputation as one of the most affluent in the country. But the area is fast emerging as a home to the truly rich as well. High-end luxury retailers are responding. Brands such as Aston Martin are expanding their operations into the area — betting, for instance, that there will be plenty of customers who can afford the $280,000 sports car James Bond drives in the movies. …Already there are 500 Aston Martin owners in the area with the potential for more.
The region’s top one percent of households make more than a half million dollars yearly — far more than the national average for the one percent, according to a study of Census data by Sentier Research, an Annapolis-based data analysis firm. And these top earners — many of whom are from dual-income households and benefit from federal contracting — weathered the recession better than their counterparts in some other metropolitan areas and the nation. More are moving beyond comfortable affluence to a much higher standard of living. “What is unique to D.C. is that there has been a change in the complexion of wealth here. There didn’t used to be much of this ultra-high-net-worth business here and now there is,” said Susan Traver, the regional president of BNY Mellon Wealth Management.
But everyone in the rest of America at least can go to sleep tonight with a warm and fuzzy feeling of joy, knowing that our money has created such comfortable lives for the political elite.
Milton Pedraza, the CEO of the Luxury Institute, a research and consulting firm, said that purveyors of luxury goods are drawn to the area because it has…a stable economy bolstered by the federal government. Government contracting, where some local entrepreneurs and business owners amassed their fortunes, has been a key driver of the region’s economy for three decades. A third of the region’s gross regional product still comes from federal spending… “Let’s face it . . . the only place with money during the recession was Washington, D.C.,” Pedraza said.
Perhaps we should make a slight correction in the previous excerpt. After all, shouldn’t it read “America suffered a recession because the only place with money was Washington, DC.”
…government should not interfere with certain personal decisions, including the freedom of employers and employees to contract freely, unfettered by labor regulations. …My position is one of strict neutrality. The government should not take side in employer-employee issues. …this is a question of property rights. If another person owns a business, I do not have a right to interfere with his choices as to what he does with his property – so long as he does not interfere with my rights of life, liberty, and property.
That’s all fine and well. Standard libertarian boilerplate, one might even say, and I’ve certainly expressed these views on television (see here, here, and here).
But then I explore some implications. If you believe in a system based on property rights and private contracts, then right-to-work laws are an unjust form of intervention.
…a property rights perspective also would reject so-called right-to-work laws which infringe upon the employers’ freedom of contract to hire only union members which is something employers may wish to do since it can lower transactions costs. …Some would argue that nobody should be forced to join a union as a condition of employment. The relevant issue in this instance, however, is not whether one can be forced to join a union, because a person cannot; if he does not like the union, he can refuse the job. The real issue is whether a business and its employees should have the freedom to choose to sign contracts which have union membership as a condition of employment.
All that being said, I’m glad Michigan just enacted a right-to-work law. I know it’s not ideal policy, but my rationale is that most government labor laws (such as the National Labor Relations Act and the Norris–La Guardia Act) tilt the playing field in favor of unions.
So until that glorious day when we get government out of labor markets, I view right-to-work laws as a second-best alternative. They’re a form of intervention that partially compensates for other forms of intervention.
P.S. Since I’ve written something that might appeal to union bosses, I feel the need to compensate. So feel free to enjoy some good cartoons mocking unionized bureaucrats by clicking here, here, here, and here.
The United Nations may be useful as a forum for world leaders, but it is not a productive place to develop policy. The international bureaucracy compulsively supports statist initiatives that would reduce individual liberty and expand the burden of government.
Writing for the Wall Street Journal, Gordon Crovitz explains this new threat. He starts by describing the laissez-faire system that currently exists and identifies the governments pushing for bad policy.
Who runs the Internet? For now, the answer remains no one, or at least no government, which explains the Web’s success as a new technology. But as of next week, unless the U.S. gets serious, the answer could be the United Nations. Many of the U.N.’s 193 member states oppose the open, uncontrolled nature of the Internet. Its interconnected global networks ignore national boundaries, making it hard for governments to censor or tax. And so, to send the freewheeling digital world back to the state control of the analog era, China, Russia, Iran and Arab countries are trying to hijack a U.N. agency that has nothing to do with the Internet. For more than a year, these countries have lobbied an agency called the International Telecommunications Union to take over the rules and workings of the Internet.
He then warns about the risk of government control.
Having the Internet rewired by bureaucrats would be like handing a Stradivarius to a gorilla. The Internet is made up of 40,000 networks that interconnect among 425,000 global routes, cheaply and efficiently delivering messages and other digital content among more than two billion people around the world, with some 500,000 new users a day. …The self-regulating Internet means no one has to ask for permission to launch a website, and no government can tell network operators how to do their jobs. The arrangement has made the Internet a rare place of permissionless innovation.
Crovitz identifies some of the specific tax and regulatory threats.
Proposals for the new ITU treaty run to more than 200 pages. One idea is to apply the ITU’s long-distance telephone rules to the Internet by creating a “sender-party-pays” rule. International phone calls include a fee from the originating country to the local phone company at the receiving end. Under a sender-pays approach, U.S.-based websites would pay a local network for each visitor from overseas, effectively taxing firms such as Google and Facebook. …Regimes such as Russia and Iran also want an ITU rule letting them monitor Internet traffic routed through or to their countries, allowing them to eavesdrop or block access.
And he warns that the Obama Administration’s representative seems inadequately committed to advancing and protecting American interests.
The State Department’s top delegate to the Dubai conference, Terry Kramer, has pledged that the U.S. won’t let the ITU expand its authority to the Internet. But he hedged his warning in a recent presentation in Washington: “We don’t want to come across like we’re preaching to others.” To the contrary, the top job for the U.S. delegation at the ITU conference is to preach the virtues of the open Internet as forcefully as possible. Billions of online users are counting on America to make sure that their Internet is never handed over to authoritarian governments or to the U.N.
With all the support Obama got from Silicon Valley and the high-tech crowd, one would think this is an issue where the Administration would do the right thing. And it sounds like the U.S. is on the right side, but the real issue is whether the American representative is prepared to tell the dictators and kleptocrats to jump in a lake.
The moral of the story is that the United Nations should not be a policy forum. The bureaucrats seem to have no appreciation or understanding of how the economy works, perhaps because they live in a bubble and get tax-free salaries.
But just because someone’s nice, that doesn’t mean that they should have any power over my life or your life. And many of the nations pushing to control and regulate the Internet are governed by people who are neither nice nor pleasant.
I have a love-hate attitude toward international bureaucracies.
I’m mostly negative about organizations such as the IMF, World Bank, UN, and OECD. In part this is because they are a very expensive burden on taxpayers, but also because they generally push for bad policy.
One very good source of data from an international bureaucracy is the Doing Business Index, published each year by the World Bank. As you can see from the image (click to enlarge), the United States does relatively well in this ranking.
The one area where the U.S. gets a very poor score, though, is in the “paying taxes” category. This is yet another reason why we should junk the corrupt internal revenue code and replace it with a simple and fair flat tax.
But a lot of people don’t focus on the cost of regulation. They are motivated instead by a desire to protect themselves against unknown risks, which they assume are exacerbated by companies that are greedy for short-run profits.
…it is difficult—or even impossible—for the average consumer to gauge safety. Are we flying on a well-maintained plane? Are we eating food that is free of salmonella and botulism? Is our workplace protected against dangerous machinery? Are our children vulnerable to chemical exposure? Since the vast majority of people have no way of answering these questions, we shouldn’t be surprised that many of them want some sort of independent oversight—especially since they suspect that businesses will be tempted to cut corners. After all, less money spent on health and safety means more profit for shareholders.
But I also explained how the free market produces very effective forms of private regulation.
…the desire for profits creates a big incentive for businesses to use good practices while producing safe and effective products. Imagine you’re the CEO of a major airline, and one day all the regulatory agencies disappear. Are you going to stop maintaining your planes? At the risk of stating the obvious, the answer is no. One disaster could be the death knell for an airline, particularly if there were the slightest hint that the company was skimping on upkeep. Moreover, it’s highly unlikely that investors would plow money into an airline when share value could disappear overnight because of an accident. And banks presumably would be leery about lending to an airline that faced the risk of quick bankruptcy. Moreover, insurance companies would have a very strong incentive to monitor the safety practices of the airline— and keep in mind no bank would lend money to an airline that lacked insurance. In other words, the competitive marketplace can be viewed as a very effective form of regulation. Instead of rules and red tape from Washington, the profit motive creates mutually reinforcing oversight.
This “mutually reinforcing oversight” does not guarantee that business won’t cut corners and/or make mistakes. But, then again, regulation from politicians and bureaucrats don’t stop that from happening either.
The key question to ask is which approach achieves the best results at the lowest cost.
The answer is the free market, though augmented by government regulations that pass a cost-benefit test, the tort system to discourage bad business behavior such as negligence, and the criminal justice system to fight behaviors such as fraud.
There will be a debate, of course, on where to draw the line. But one thing I can say for sure is that an intelligent system will never produce these examples of bureaucratic idiocy.
Even though I’m a fiscal policy economist, I often get hit with questions on other topics. This frequently happens when I’m overseas and I’m put in the position of defending every nuance of free market policy.
I don’t mind pontificating on other issues, but I get frustrated with myself for sometimes not having the specific knowledge to make the best possible case. I was recently asked, for instance, whether the private sector was capable of protecting the health and safety of workers.
Moreover, I made the generic argument about how employers have a profit-maximizing incentive to protect the health and safety of their workforce.
But when the person asserted to me that the creation of the Occupational Safety and Health Administration (OSHA) was followed by safer workplaces, all I could do was mumble something about the sun doesn’t rise because roosters crow and that we would need hypotheticals and counterfactuals.
This then led me to the National Safety Council, where I discovered that the person who was asking me about regulation was correct. As seen in this chart, workplace deaths have fallen significantly since OSHA was created.
There is a discontinuity in the data in 1992 because of a change in methodology, but I’ll stipulate that this doesn’t weaken in any way the argument that the creation of OSHA was followed by lower death rates in the workplace.
But it also turns out that my cop-out response about roosters and sunrises was right on the mark.
Let’s now look at the same chart, but this time we will include data going all the way back to 1933. What we find is that the workplace deaths were falling before OSHA and they continued to fall after OSHA.
Now for some caveats. This chart doesn’t prove OSHA is completely ineffective. Moreover, I”m sure there were state-based workplace regulations in effect in the pre-OSHA era, and I assume the federal government also had some health and safety regulations as well, perhaps through the Labor Department.
My argument is simply the more limited hypothesis that regulations impose considerable costs, which should be taken into account, and that businesses have a profit-maximizing incentive to promote health and safety in the workplace, which is increasingly important as society becomes richer.
So let me put the onus back on the pro-regulation crowd. Given the charts above, shouldn’t there be some sort of obligation to show that regulation has had a positive impact, particularly when costs are added to the equation.
This past Monday, I took part in a panel discussion about the financial crisis at the European Resource Bank in Brussels.
One of my main points was that people in private markets always make mistakes, but that this is a healthy and necessary process so long as there is a profit and loss feedback mechanism that encourages people to quickly learn when things go wrong (and also to reward them when they make wise decisions).
In the financial crisis, though, we saw the government interfere with this process. First, bad policies such as easy money from the Fed and corrupt Fannie Mae/Freddie Mac subsidies distorted market signals and caused a needlessly high level of mistakes. Second, bailouts interfered with the feedback mechanism, teaching people that large levels of imprudent risk are okay.
The politicians, unsurprisingly, didn’t learn the right lessons. Instead of reducing the level of government intervention, they imposed the Dodd-Frank bailout bill (named after two lawmakers who were pimps for Fannie and Freddie and thus disproportionately responsible for the crisis).
…the speech of the year was delivered at the Federal Reserve’s annual policy conference in Jackson Hole, Wyoming on August 31. And not by Fed Chairman Ben Bernanke. …BoE Director of Financial Stability Andrew Haldane and colleague Vasileios Madouros point the way toward the real financial reform that Washington has never enacted. The authors marshal compelling evidence that as regulation has become more complex, it has also become less effective. They point out that much of the reason large banks are so difficult for regulators to comprehend is because regulators themselves have created complicated metrics that can’t provide accurate measurements of a bank’s health. …Basel II relied far too much on the judgments of government-anointed credit-rating agencies, plus a catastrophic bias in favor of mortgages as “safe.” Instead of learning from that mistake, the gnomes have written into the new Basel III rules a dangerous bias in favor of sovereign debt. The growing complexity of the rules leaves more room for banks to pursue regulatory arbitrage, identifying assets that can be classified as safe, at least for compliance purposes. …in both the U.K. and U.S. the number of regulators has for decades risen faster than the number of people employed in finance. Complexity grows still faster. The authors report that in the 12 months after the passage of Dodd-Frank, rule-making that represents a mere 10% of the expected total will impose more than 2.2 million hours of annual compliance work on private business. Recent history suggests that if anything this will make another crisis more likely. Here’s a better idea: Raise genuine capital standards at banks and slash regulatory budgets in Washington. Abandon the Basel rules on “risk-weighting” and other fantasies of regulatory omniscience.
The references to the Basel regulations are particularly noteworthy. These are the rules, cobbled together by regulators from different nations, and they’re supposed to steer financial institutions away from excessive risk.
You won’t be surprised to learn, though, that these rules caused imprudent behavior. Indeed, one of the slides from my presentation in Brussels specifically highlighted the perverse impact of the Basel regulations.
Some American regulators also understand the inverse relationship between regulation and well-functioning markets. The Wall Street Journal opines on the words of Thomas Hoenig.
The same “fundamentally flawed” system of financial rules that failed in 2008 lives on, “but with more complexity” in the latest proposals from regulators. That was the blunt message on Friday from Federal Deposit Insurance Corporation Director Thomas Hoenig. He was talking about the pending implementation of international bank capital standards known as Basel III. …Mr. Hoenig did a public service at an American Banker symposium by reviewing the relevant history from 2008: “It turns out that the Basel capital rules protected no one: not the banks, not the public, and certainly not the FDIC that bore the cost of the failures or the taxpayers who funded the bailouts. The complex Basel rules hurt, rather than helped the process of measurement and clarity of information.” Observing a Basel system that only grows more complicated as U.S. regulators prepare to implement the latest version, the former president of the Federal Reserve Bank of Kansas City also pointed out that the biggest winners from such regulatory regimes are never the little guys. Mr. Hoenig explained that “the most brazen and connected banks with the smartest experts will game the system…”
I closed my remarks in Brussels by saying that government does have a role in financial markets, but I said that it should focus on identifying and punishing fraud. The free market, by contrast, is the best way to promote safety and soundness.
More specifically, there is nothing quite like the possibility of failure and losses to encourage prudent behavior. As I stated in this interview, capitalism without bankruptcy is like religion without hell.
Hell, by contrast, occurs when government intervenes and sets up a system of private profits and socialized losses.
Every year, I look forward to the annual releases of both Economic Freedom of the World and the Index of Economic Freedom. With their comprehensive rankings, these two publications enable interested parties to compare nations and see which countries are moving in the right direction.
As an American, I’m ashamed to say that these publications also show which nations are moving in the wrong direction. And the United States ranks poorly by this metric, having dropped from 3rd place to 10th place since 2000 according to Economic Freedom of the World.
Some people dismiss these pieces of data because the two rankings are considered to reflect a pro-free market bias.
But the folks at the World Economic Forum surely can’t be pigeonholed as a bunch of small-government libertarians, and the WEF’s Global Competitiveness Report shows the same trend.
The United States took the top spot in the WEF’s Global Competitiveness Index as recently as 2007 and 2008, but then dropped to 2nd place in 2009.
I think Bush bears the full blame for that unfortunate development. But the decline has continued in recent years, and Obama deserves a good part of the blame for the drop to 4th place in 2010.
The U.S. then fell to 5th place last year, in part because of horrible scores for “Wastefulness of Government Spending” (68th place) and “Burden of Government Regulation” (49th place).
Given this dismal trend, I opened the just-released 2012 Report with considerable trepidation. And my fears were justified. The United States has now dropped to 7th place.
Here is some of what was said about America.
The United States continues the decline that began a few years ago, falling two more positions to take 7th place this year. Although many structural features continue to make its economy extremely productive, a number of escalating and unaddressed weaknesses have lowered the US ranking in recent years. …some weaknesses in particular areas have deepened since past assessments. The business community continues to be critical toward public and private institutions (41st). In particular, its trust in politicians is not strong (54th), perhaps not surprising in light of recent political disputes that threaten to push the country back into recession through automatic spending cuts. Business leaders also remain concerned about the government’s ability to maintain arms-length relationships with the private sector (59th), and consider that the government spends its resources relatively wastefully (76th). A lack of macroeconomic stability continues to be the country’s greatest area of weakness (111th, down from 90th last year).
For people who like to look at the glass as being 1/10th full, the U.S. does beat Portugal (116ht place) in the score for macroeconomic stability.
Here are a few additional highlights. Or lowlights might be a better word.
The U.S. scores 42nd in property rights, behind Namibia and Uruguay.
The U.S. ranks 59th in government favoritism, behind Guinea and Bolivia.
The U.S. scores 76th in wastefulness in government spending, behind Mali and Nicaragua.
The U.S. also is 76th in the burden of government regulation, behind Kenya and Thailand.
The U.S. scores 69th in extent of taxation, behind Gambia and Ethiopia.
The U.S. ranks 103rd for total tax rate, behind Greece (!) and Philippines.
Now time for some caveats. The WEF report is based on survey results, for better or worse, and it also probably is best characterized as a measure of the attitudes of the business community rather than an estimate of economic freedom.
Regardless of limitations, though, it is a good publication. As such, it is downright embarrassing to see the U.S. fare so poorly in key indices – particularly when third-world nations score better.
It’s important to understand, however, that the Fed’s powers – and its ability to cause mischief – are not limited to monetary policy.
Let’s look at some excerpts from a Wall Street Journal column by John Cochrane, a Cato adjunct scholar and professor at the University of Chicago. We’ll start with a look at the expanded powers of the Federal Reserve.
We are used to thinking that central banks’ main task is to guide the economy by setting interest rates. …Since the 2008 financial crisis, however, the Federal Reserve has intervened in a wide variety of markets, including commercial paper, mortgages and long-term Treasury debt. At the height of the crisis, the Fed lent directly to teetering nonbank institutions, such as insurance giant AIG, and participated in several shotgun marriages, most notably between Bank of America and Merrill Lynch. …Many Fed officials, including Fed Chairman Ben Bernanke, see “credit constraints” and “segmented markets” throughout the economy, which the Fed’s standard tools don’t address. …In his speech Friday in Jackson Hole, Wyo., Mr. Bernanke made it clear that “we should not rule out the further use of such [nontraditional] policies if economic conditions warrant.”
But are these developments good or bad? Professor Cochrane is worried.
…the Fed has crossed a bright line. …an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials. In addition, the Fed is now a gargantuan financial regulator. Its inspectors examine too-big-to-fail banks, come up with creative “stress tests” for them to pass, and haggle over thousands of pages of regulation.
And he provides an example of what happens when the Fed no longer is bound by the rule of law.
A revealing example of where we are going emerged last spring, admirably documented on the Fed’s website. Using its bank-regulation authority, the Fed declared that the banks that had robo-signed foreclosure documents were guilty of “unsafe and unsound processes and practices”—though robo-signing has nothing to do with the banks taking too much risk. The Fed then commanded that the banks provide $25 billion in “mortgage relief,” a simple transfer from bank shareholders to mortgage borrowers—though none of these borrowers was a victim of robo-signing. The Fed even commanded that the banks give money to “nonprofit housing counseling organizations, approved by the U.S. Department of Housing and Urban Development.” …you can see where we are going: Hey, nice bank you’ve got there. It would be a shame if the Consumer Financial Protection Bureau decided your credit cards were “abusive,” or if tomorrow’s “stress test” didn’t look so good for you. You know, we’ve really hoped you would lend more to support construction in the depressed parts of your home state.
This is both outrageous and worrisome. It’s outrageous because there is no legal authority for this form of coerced redistribution. But it’s worrisome because the Fed is seeking to things that should be well outside its mandate, such as dictating the actions of the financial sector and engaging in cronyism.
We’re already making similar mistakes in other areas, as evidenced by the green energy scam. Now it’s happening with the Fed. Next thing you know, you’ll wake up one day speaking Greek, Italian, or Spanish.
So why am I smiling? Well, France wasn’t doing so well under the de facto socialist Nicolas Sarkozy, and it seems that things are looking even worse now that the de jure socialist Francois Hollande is in charge.
The French are bleaker about their country’s future than at any time since 2005, a new poll showed on Saturday, with 68 percent saying they are “rather” or “very” pessimistic… Hollande’s government has been reeling from unemployment at a 13-year high and a rash of job cuts in recent weeks at top employers like carmaker Peugeot and retailer Carrefour. The government launched a plan this week to create 150,000 state-sponsored jobs for youth. Only 34 percent of those surveyed were confident in the government’s ability to battle unemployment, and just 20 percent expect the government to be able to improve their buying power. …The poll found that the pessimism extended even to 58 percent of Socialist party supporters.
I’m wondering when the pessimism will spread to investors. France recently lost its triple-A credit rating, but the rating agencies don’t do a good job, so I think it’s much more important to look at the prices of credit default swaps.
In other words, how much does it cost for an investor to insure debt from the French government? According to this CNBC site, France isn’t viewed as being as creditworthy as nations such as Switzerland, Germany, and the United States, but it is closer to those countries than it is to Spain, Italy, or Portugal.
This is just a guess on my part, but I think France is reaching the point where investors are suddenly going to get concerned about the government’s ability to fulfill its promises.
If Hollande follows through on his threat to impose a “patriotic” 75-percent tax rate, for example, that could be the trigger that makes the bond market a lot more skittish. Particularly since it will result in fewer rich people in France.
Actor Johnny Depp has moved out of France and returned to America because he didn’t want to become a permanent French resident and pay income tax there. …Depp has now moved his family out of France after government officials asked him to become a permanent resident, as he feared he would end up paying tax in both countries. He tells Britain’s The Guardian newspaper, “…France wanted a piece of me. They wanted me to become a permanent resident. Permanent residency status – which changes everything. They just want… Dough. Money… ” Depp goes on to explain that if he spends more than 183 days a year in France he will have to pay income tax in both Europe and America, adding, “So you essentially work for free.”
Wow, complaining that he doesn’t want to “work for free.” What is he, some sort of radical libertarian from the Tea Party?
President Obama recently got himself in a bit of hot water with his “you didn’t build that” remark, which trivialized the hard work of entrepreneurs.
But he is right – in a perverse way – about government playing a big role in the life of small businesses. Thanks to a maze of regulations, the government is an unwelcome silent partner for every entrepreneur. And we’re not talking small numbers.
But sometimes an image helps to make things easy to understand. Here’s a chart from the Joint Economic Committee, which maps out the web of regulation imposed by Washington.
This chart does more than just show sources of red tape coming from Washington. It shows that “Washington” is really several entities, such as Congress, the executive branch, the courts, and so-called regulatory agencies.
These varies entities then impose regulatory burdens in various fields, such as labor, finance, tax, and environment.
Keep in mind, by the way, that each small pink circle actually represents an entire field of regulation. So when you see, for instance, the “Obamacare” circle, what you’re really seeing is this nightmarish image of regulatory complexity.
And don’t forget the role of state and local government.
Last but not least, remember that each regulatory bureaucracy is then capable of making individual decisions that…well, you judge for yourself.