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In 2008 the United States suffered a severe recession. Many have called it the “Great Recession” because it was worse than any of the recessions we have had since World War II. It wasn’t as bad as the Great Depression that occurred in the 1930’s but it was extremely serious. The stock market declined by 50 percent. The labor market lost 8.4 million jobs – 6.1 percent of all employment. The unemployment rate hit 10 percent in October of 2009. In the fourth quarter of 2008 the economy shrank at an annualized rate of 6.2 percent. In the first quarter of 2009 it fell by another 6.1 percent. American business slashed capital investment at an annual rate of 38 percent. Investment in software and computer equipment declined by an annualized 33.8 percent, and investment in new buildings was down 44.2 percent.
There have been many recessions since World War II. The one thing they all had in common was that the country experienced higher levels of economic growth immediately after each one. The deeper the recession, the higher the rate of growth that would follow it. So the good news was that after the severe recession of 2008 we could certainly expect a very high level of growth.
But this time, it didn’t happen. 5 years later, 5 million of the 8.4 million jobs lost had not returned. This is in spite of an increase in population of 10 million people over that time. By 2012 the unemployment rate was still above 8 percent. The average annual growth rate of the economy since 2008 has been less than 2 percent. The unemployment rate today is down to around 5 percent, but huge numbers of people have just stopped looking for work and aren’t counted in the official statistics. 64 percent of people over the age of 16 in this country are not working. Large numbers of people have part time jobs when they would prefer to work full time. Many others are employed at far lower levels than their skills would allow.
So what happened? What has changed in the world today that prevents robust economic growth? That’s what this book is about.
We will begin by taking an in depth look at how the economy works and how businesses grow. We will discuss what the benefits of that growth are to everyone and we will look at the infrastructure and system of laws that must be in place for businesses to be successful. Then we will look more closely at all of the things that are happening today that are putting the brakes on business success and economic growth.
People need to understand what makes the economy work efficiently and how we – often unknowingly – do things to slow it down. If we don’t understand how it works we’re more likely to be in favor of policies that will cause it to slow down. If more people understood these things, maybe they would think twice before promoting policies that are preventing economic growth and hurting everyone in society because of it.
Take a look around your home. Nearly everything you see (except the other people) was created by a business. The chair you’re sitting on and the computer you are reading from were made by businesses. All the furniture, appliances and electronics were manufactured by businesses. All the food in your refrigerator and in your pantry was grown by farmer businessmen, and probably processed by other businesses. All the clothes in your closet were sewn by businesses (unless you made them yourself – in which case the fabric and thread was made by a business. The heating and air conditioning systems, the plumbing and electrical systems – all created by businesses. The paint on the walls, the carpet on the floor, and of course the house itself was built by the employees of various businesses.
Look at your car. It was assembled by the business that bears its name. But there are thousands of individual components and subassemblies inside that car. Each was manufactured by a different business. And those businesses all got their raw materials like steel, plastic and rubber from other businesses.
Now think about what it took to manufacture all those things in your house. Every one of those thousands of businesses that created the things you use every day had to have equipment to manufacture things. This equipment is typically large, complex and highly specialized for the individual business. Other businesses assembled that equipment from components they purchased from still other businesses.
And how did all this stuff get to you? It was shipped by trucks, trains and ships from all over the world. Who manufactured those things? Businesses.
Think about the services you use. Who cuts your hair, washes your car, and gives you a pedicure? Unless you do these things yourself, there are businesses that provide those services to you.
What do all these businesses need in order to provide products to you? What allows them to create these things and sell them to you? And what gets in the way of their success? What slows them down or makes their costs increase? Those are the questions that this book will answer.
Free market capitalism is mankind’s greatest invention ever. That’s right, greater than fire, greater than the wheel, even greater than the fork. It has lifted more people out of poverty and allowed them to find fulfilling and challenging lives than any other system ever invented. It has allowed ordinary people to have more things and services than the richest of kings could have dreamed of even 200 years ago. It has prevented countless wars because countries who effectively trade with each other rarely confront each other on battlefields. There is too much to lose and too little to gain with war.
If we want to fight poverty there are many things that we can do. Today private charities and government both work to help the poor in our nation. We can argue about the effectiveness of government programs, but it is clear that some of these are necessary. But all of these programs together aren’t even a drop in the bucket of anti-poverty results compared to free-market capitalism. Capitalism has brought billions of people out of poverty over the last century.
And it continues to do so today – around the world. The problem is that we can and do measure how many people receive food stamps, or disability payments or other forms of government assistance. But no one accurately measures how many more poor people there would be if we abolished our free market system. No one really considers the number of poor people who will never be able to lift themselves up because of over-regulation, excessive taxation and crony capitalism. We can choose to tweak existing government assistance programs and maybe help hundreds or thousands of people. Or we can work to get the roadblocks out of the way of our free market system and help many millions of people.
A growing economy allows people to find or create interesting lives for themselves. It provides opportunities and jobs for people so they can support themselves and their families instead of relying on government handouts. A growing economy gives people choices. If they are confident that jobs are out there, they are more willing to take risks, move to new locations if they want, change careers if they so desire, get out of the work force for a while to have children or continue their education. If the economy is growing, people are more willing to start businesses of their own and eventually hire even more people. In short, there is no better situation for a nation than to be at peace and have a growing economy.
But how does it all work? What is this magical thing called an economy? What makes it grow, and what limits its growth? Sometimes the best way to get a basic understanding of a complex process is through the use of an analogy. Economics is no different.
Let’s start by thinking of the national economy as a vast cruise ship. It is filled with passengers who are busy living their lives and never even pay any attention to what is powering the ship. But the interesting thing is that every one of these passengers contributes to the function of the ship. Every time these people go to work, or buy something or sell something, they are helping to maintain the ship. Just by going about their lives they are helping to keep the ship afloat and in good working order.
But there is something else they can do too. And that is the most amazing part. Every one of these people can create the fuel that drives the engines of the ship and propels it forward. How do they do that?
Every time one of these passengers has an idea and acts on it, he or she creates a little magical fuel. And that fuel finds its way down to the engine room and powers the giant engine, turning the propeller, and moving the ship forward. What kinds of ideas?
Every time one of these passengers goes to work and comes up with an idea about improving her job, she creates some magical fuel. Every time she finds a less expensive or more efficient way to make her company’s product or service she creates a little more fuel. Every time she does some research and development and improves her company’s product she creates some more fuel. And when some people actually develop and begin to sell new things or new services they create the most fuel of all.
Left on its own this ship will plow through the ocean very rapidly. The people on board are constantly coming up with new ideas. They are like idea machines.
And this is true in the real world too. Everyday people are coming up with ideas, literally millions of ideas. We come up with big and small ideas all the time. We are constantly coming up with small ideas to make some task that we do easier or more efficient. Often we don’t even know it. It might be as small as finding a little more efficient way to get ready for work in the morning. It might be a way to streamline a process that you do every day at work. Or it might be a big idea that leads to the creation of a new business.
We are happiest when we are coming up with and implementing new ideas. People who are bored in their jobs usually feel that way because they either aren’t allowed to implement new ideas, can’t think of any ideas, or just don’t care enough to try to improve things. Most ideas happen because we just love to be creative. It’s a part of human nature to constantly improve things. We are always looking for ways to make things better and easier.
And businesses spend billions of dollars each year on research and development. This is nothing more than a systematic way to harness ideas and figure out how to make new products or improve existing ones.
Back to our magical cruise ship. The biggest problem this ship has is that it is actually being forced to tow some boats behind it. And these boats are loaded with rocks. What are those boats and rocks? They are the high taxes, over-regulation, and crony capitalism that we are forced to deal with every day. Those are the primary things that slow our ship down.
And that’s what this book is about. I will first explain how the economy moves forward with new ideas. Then I’ll discuss what is required to allow a modern economy to move forward – the infrastructure, laws, and culture that are needed in a modern society for its economy to function and grow. The rest of the book is a detailed discussion about the things that slow down, and will ultimately stop our economy – our cruise ship. These are the things that are stopping our world.
Ideas are exhilarating. When I came up with the idea for this book, I was excited. I couldn’t wait to get to a computer and write down my ideas. That’s the way it is for entrepreneurs. They develop something new, and can’t wait to start making it happen.
Competition drives new ideas too. Businesses in competitive industries are forced to innovate and improve or one of their competitors will improve more quickly and drive them out of business. But the most successful businesses are those that take their employee’s ideas seriously and encourage them to improve what they do.
Every good businesses is constantly coming up with new ideas to improve what it does. Each business is constantly asking questions like, how can we make our product more quickly? How can we sell more of it? How can we improve the product or service? Can we make it for less money? At its core, the economy is driven forward by nothing more than ideas.
Usually those ideas come from people who work within the business already. Those people are the experts and every day they are faced with challenges and problems. And if they are properly motivated and given the freedom to improve their jobs, they will always find ways to make things better.
But why do new ideas cause growth. Don’t these businesses just compete with each other and take the same customers away from each other, so that the end result is just the same size? Whoever has the best ideas wins, but someone else loses, right? Wrong.
It’s true that every one of these businesses has to compete with the other businesses who make the same or similar things. All those businesses are asking the same questions. How can they make their product or service for less money, more quickly, efficiently, better. How can they sell more of it? That competition encourages people to work harder and try to come up with better ideas than the other guy.
There’s a saying that necessity is the mother of invention. Well, the competition of other businesses causes there to be a necessity to come up with new ideas. It is also competition that drives the giant cruise ship of the country forward. Without this constant competition the ship would slowly come to a halt.
But how does that competition work and how do all these new ideas lead to growth in the economy?
Maybe the best way to understand this is to look at an industry that we are all familiar with – the fast food industry. Bear with me while I take you through a little history.
The hamburger was invented sometime between 1885 and 1904, but it wasn’t until the end of World War I that the sale of hamburgers really took off. Americans were very productive and very busy and often didn’t have time to sit down for a meal at a restaurant and no longer had time to go home for a meal at lunchtime. Sure, people could make their lunch at home and bring it with them to work, but after a while that gets boring.
When there is a need, creative enterprising people will always step in and find ways to answer that need. Some of them began to realize that they could make hamburgers quickly and easily and sell them to other workers at lunch time. If you opened up a little shop on a busy street, people could walk or drive up and buy one. You could sell lots of them and make a little profit on every one. The people who bought them were happy because they got a tasty lunch that they could hold in their hands, and eat quickly, and inexpensively. It’s was a win-win.
So it’s no surprise that a lot of people decided that they could open up a little hamburger stand and make some easy money. Before long there were lots of these places and they started to compete with each other. If I was an office worker in a city in the 1920’s and had an hour lunch break, I could walk to three or four different little hamburger stands. So I’d decide which one had the best burger. Which one had the fastest service, or lowest price or nicest picnic benches? And the hamburger joints each had to improve to compete with the guy down the block.
It also became clear that some places made sure that every time you bought a hamburger at their place it would taste the same. Some other places had great burgers one day, but only mediocre burgers the next day because they lost their great fry chef. People got tired of going to places where they never knew if they would get a great burger or a mediocre one.
Once some of the owners understood this problem they started working hard to standardize all their processes so they could assure that they delivered top quality products every time. This was fairly easy to do if they just owned one little hamburger stand. The owner could train the workers himself and watch over them until he was certain they were always doing it right.
Now when some of the joints were really successful, the owners started to think they could open up new hamburger stands in different parts of town so they could sell to other people who lived or worked too far from their original place. Of course this caused a whole new set of problems they didn’t have when they only had one location. They couldn’t possibly be standing in the kitchen of each one of their locations all the time. So they had to hire managers for each store. And then train the managers to do things the same way they did it at their first stand.
Those who were the most successful at this were the most likely to grow and continue to add new hamburger stands. The person who was by far the most successful at this was Ray Kroc. He wasn’t the original founder of McDonald’s. The founders were two brothers – Richard and Maurice McDonald. But Ray Kroc was able to take a successful little hamburger business and grow it into the largest chain of fast food restaurants the world has ever seen.
By 1948 the McDonald brothers had a stand called McDonalds Bar-B-Q in San Bernardino California that had a menu with 25 items on it. They realized that most of their profit came from hamburgers, so they streamlined to just selling hamburgers, cheeseburgers, french fries, shakes and soft drinks. They set up their kitchen like an assembly line for maximum efficiency. In this way they had learned from other people’s ideas and made them their own.
In 1952 they created a restaurant design with gleaming red and white ceramic surfaces and the now famous 25 foot yellow sheet metal arches trimmed in neon – the “golden arches”. All new ideas.
Then they started selling franchises. They were hugely successful in the San Bernardino area. But didn’t really have any desire to take the operation national. This is where Ray Kroc came in. He bought the rights to set up franchises all over the country. One by one he opened new restaurants so that by 1959 there were 102 locations, and by 1962 they had sold over 1 Billion hamburgers.
In 1965 McDonalds went public. Common shares were offered at $22.50 per share. By the end of the first day’s trading, the price had risen to $30. A block of 100 shares purchased for $2,250 in 1965 was worth, after 12 stock splits (increasing the number of shares to 74,360), over $5.7 million as of year-end market close on December 31, 2010.
Today McDonald’s revenue is over $38B per year, there are over 35,000 restaurants worldwide, and over 440,000 total employees.
It’s a truly remarkable success story – built on constant improvements and the flexibility to always adjust to customer’s desires. But of course McDonalds wasn’t the only company in the fast food business that was able to standardize and make sure that customers got exactly the same food and experience no matter where they went. Burger King’s hamburgers were a little different because they were flame broiled instead of fried. A lot of people liked their taste better, and so they were able to successfully compete with McDonald’s. Today they have annual revenue of $2 Billion and over 34,000 employees.
Those two businesses dominated the industry for many years, but the rest of the world never stands still. People continue to have ideas. The founder of Wendy’s, Dave Thomas developed a better tasting burger (in many people’s opinion) than either McDonalds or Burger King. They called it Dave’s Hot ‘N Juicy Burger. And they followed the same formula to make sure every restaurant provided burgers that were exactly the same as the others. So they were able to take away some of McDonalds customers.
These big three of the fast food world continued to compete with each other for customers. They added new items to the menu. Fish sandwiches, chicken sandwiches, salads. They decided that they could even serve breakfast and attract customers at a different time of the day. They each continued to improve and expand.
Most economists thought that fast food growth would slow or stop in the 1980’s or 90’s. But they didn’t take into account the impact of new ideas. People continued to innovate. Today, in addition to two McDonald’s, a Burger King, and two Wendy’s within two miles of my house in Arizona, there are also the following fast food businesses.
•Five Guys Burgers
•Eegees (a local sandwich chain)
•Jack in the Box
•El Polo Loco
•+ 7 fast food restaurants inside the local mall
And what happened with all this? These businesses grew astronomically.
Every decade people think that the fast food industry can’t possibly grow any more. The business is mature. There won’t be no more new ideas. Everything had been thought of and people were getting tired of fast food.
But this never seems to happen. In 1970 Americans spent about $6 billion on fast food. By 2010 that number had skyrocketed to $110 billion. And of course they had to hire more workers. In 1990 there were 6 million employees in the Food Services and Drinking Places industry. Today there are over 10 million. These business are more efficient than ever. They use more computers and more automated cooking equipment, but because the size of these businesses continues to grow, they’ve been forced to continually hire more workers. And this drives the engine of the economy forward. If no one had ever invented the hamburger, none of this would have ever happened. And those 10 million employees would never have had those jobs and the economy would be much slower and smaller because of it.
But the invention of the hamburger was just the first idea. Along the way there have been dozens of big ideas and countless thousands of small ones that pushed the fast food engine forward. Let’s make a list of just a few of the big ideas in the fast food industry.
•The invention of the hamburger
•The idea to sell them to people
•The idea to create a little restaurant where people could buy a hamburger and walk away with it instead of taking the time to sit down in a restaurant to eat it.
•Standardization – so that every hamburger was as close to identical as possible.
•Franchising. This is where there is one owner of the entire business, but individual owners can buy individual hamburger stands and they all use the same name and all use the same processes. Each owner keeps most of his profits and only gives a small amount back to the original owner.
•Even more standardization – so that every business anywhere in the country looked almost the same and served identical food.
•The Drive Thru
•Burger King’s flame broiled burger
•Wendy’s hot ‘n juicy burger
•Branching out beyond just the hamburger, fries and a coke idea. Starting to sell chicken or fish sandwiches.
•Branching out even further – fried chicken, tacos, submarine sandwiches, pizzas, premium coffee.
•Adding salads and healthier alternatives to the menu.
•Starting to sell breakfast foods
More recently – other chains have sprung up. 5-Guys gives customers a wide array of toppings to load on top of their burgers. In and Out goes back to basics and only offers hamburgers and fries, but the taste is (arguably) better and the potatoes are sliced right in the store and immediately deep fried – creating a better taste than the frozen french fries that most chains offer.
These are just a few of the big ideas. They have been extremely important, but what we never hear about are the thousands of ideas from individual franchise owners and managers and employees to make things a little better or a little faster. Standardization makes it harder for individual ideas to take hold, but there are mechanisms in any well-run company that allows these ideas to percolate up and get looked at. And that is the continuing genius of the fast food industry. The people in the business continue to have new ideas. The ideas are tried out, the poor ones are discarded, and the good ones are adopted. If one business is successful with something, the other businesses consider whether are not to adopt the idea themselves
Let’s take a quick look at another part of the fast food world and how ideas saved one company and are creating growth in a part of the business that has long been mature – pizza.
When Patrick Doyle became CEO of Domino’s Pizza (now just Domino’s) he inherited a company that was in free fall. Sales were dropping dramatically. He took a look at what was happening and realized that people hated their pizza. They didn’t like the flavor, the texture of the crust and the quality of the ingredients as much as most other pizzas that were available. So he ran ads that showed people complaining about their pizza. Then he appeared on the screen and apologized. And asked America for another chance. And he followed it up by completely changing their product, and America loved him for it. After those ads Domino’s had the best 3 months of sales growth in their history.
And he continues to adapt. Recently they rolled out their Domino’s app making it much easier for their customers to order pizza. They are working with Ford Motor Company to create a voice activated app that will let customers order a pizza while they are driving home from work.
This is how the engine of the economy grows. Someone has an idea. Others come along and build on that idea. They have ideas of their own, and they take the original idea and improve upon it. If the person with the original idea is smart he will take the new ideas and come up with more new ideas of his own. And the entire economy grows because of it.
Sure, all of these fast food businesses steal customers from each other. But the amazing result has been that each of them has continued to grow. The ideas that each one had, caused more people to want to eat fast food, because the fast food itself has continued to improve, the prices have stayed low, and there are more and more alternatives out there all the time.
But an interesting point here. None of these idea people or business owners wake up each day and think, “I’m going to grow the economy today.” That is the furthest thing from their minds. They are focused on their businesses and making them successful. In doing so, they are attempting to win more customers. This may have the effect of taking customers from the other businesses in their industry, or maybe all the businesses may grow at the same time. Either way, each business is trying to be as efficient as possible. They are trying to make and sell as much of their product as possible with the least number of employees as possible. Most business owner don’t think about growing the economy. They just want to make their business the best it can be.
Of course if they are successful and they are able to sell more of their product, then they will probably be forced to hire more workers. But the truth is that each owner would rather have less employees than more. Employees are expensive. You have to pay their salaries, and benefits, and provide a space for them to work, and heating and cooling for the buildings they work in, and electricity for their computers and so on. The less employees they can make due with, the better.
There’s an old joke that you can always tell a politician is lying because his lips are moving. One of the popular lies these days is when a politician brags about creating jobs. If you stop to think about it, it’s obvious that politicians don’t create jobs. All they can do is provide the infrastructure that businesses need, and then get out of the way so that business people can create jobs. But mostly what politicians like to do is create new rules and regulations and taxes that slow businesses down and slow down the rate at which new jobs are created.
I chose to discuss the fast food industry because it is lightly regulated. In addition to normal employment regulations that every company must follow, they also have food safety regulations that must be followed. But these have all been in place for many years and there haven’t been significant changes. Because of the limited number of regulations, this industry continues to grow and expand. Unfortunately most industries in our country are facing dramatically increasing regulations.
Remember our magical cruise ship of the economy. When politicians and bureaucrats add new regulations they are adding new rocks onto the boats that our cruise ship is towing. Bit by bit, almost imperceptibly, these rocks are slowing the ship down. And the worst thing is that it’s been happening for so long that most of us have forgotten just how fast our ship could go. We’ve accepted slow, or even no forward motion for so long that we think it’s normal.
The normal state of the economy is smooth sailing, and solid economic growth. But this is only the case in countries that have the basic infrastructure, legal requirements and culture already in place. If these requirements are not met, or only some of them are met, growth will be reduced or will stall altogether. Before we can begin talking about how regulations, taxes and crony capitalism are stopping our economic growth, we have to discuss what structures need to be in place for growth to happen at all.
The list is rather extensive, but luckily for us, the United States, through the hard work of our parents and grandparents, and the continuing hard work of many people today, has very good infrastructure, good laws, and a great culture in place. The most important thing we need to do is maintain it and improve it as necessary.
Below is the basic list. These are the essential building blocks for economic growth. It is possible to still have growth when one of more of these are deficient, but it will be substandard and probably inconsistent. In this chapter I will discuss each item on the list, give an overview of our current situation and discuss how well we are maintaining and improving it.
B. Rule of Law
•Uniform Commercial Code (UCC)
•Business License Processes
E. Entrepreneurial Culture
Now, let’s go through each of these one at a time. We will look at the current situation in the US and explain how growth has benefitted by its presence, or been harmed by its absence. We will also take a look at the current state of each item. Is it improving or are we allowing it to atrophy?
Its official name is the Dwight D Eisenhower National System of Interstate and Defense Highways. But we usually just refer to it as the Interstate System. It is over 47,000 miles of controlled access highways. About one quarter of all vehicle miles driven in the country use the Interstate system and it is estimated to have cost $425 billion to build.
We are all familiar with it, and most of us use it regularly – even daily. But from an economic point of view, was its construction worth it? The huge cost, the disruption of people and property. The noise of construction and traffic. Without a doubt, the answer is a resounding yes!
According to the non-profit organization – Publicpurpose, “The interstate highway system has had a profound effect upon the American economy and contributed significantly to improved economic efficiency and productivity.
By increasing speed and expanding access, freight costs have been reduced substantially. Tractor-trailer operating costs have been estimated at 17 percent lower on interstate highways than other highways.
•The interstate highway system made less expensive land more accessible to the nation’s transportation system and encouraged development.
•The travel time and reliability of shipment by interstate highway has made “just in time” delivery more feasible, reducing warehousing costs and adding to manufacturing efficiency.
•By broadening the geographical range and options of shoppers, the interstate highway system has increased retail competition, resulting in larger selections and lower consumer prices.
•By improving inter-regional access, the interstate highway system has helped to create a genuinely national domestic market with companies able to supply their products to much larger geographical areas, and less expensively.
Each of these cost reducing impacts have made both labor and capital more efficient and this has encouraged business expansion, new investment, and job creation.
Through the years, various estimates have been made of the contribution of the interstate highway system to the economy, generally finding that the interstate highway system has far more than paid for itself in improved commercial productivity.
A recent study indicated that with respect to non-local roads (which includes the interstate highway system), each dollar of investment in highways produces an annual reduction in product costs of 23.4 cents, with larger cost reductions in the early years and smaller reductions in more recent years.
The annual economic benefit is estimated to have peaked in 1970 at approximately $38 billion. Over the 45 year period since then, it is estimated that gross producer cost reductions have exceeded $1 trillion --- more than three times the gross original investment in the interstate highway system. This represents a substantial economic benefit, which is likely to have created employment and reduced consumer prices --- permitting the financial resources of consumers to be stretched to purchase more than would be otherwise possible.”
The original portion of the Interstate Highway System was completed in 1991, and today most people just take it for granted. But of course anything this large requires a great deal of maintenance. And it’s easy for local politicians to ignore the big picture and disapprove the projects that are necessary to maintain this great system of ours.
The bridge that crosses the Columbia River on Interstate 5 was built 98 years ago and was designed for Model T’s and horse carts. It ties together Oregon and Washington, but today is one of the country’s most dangerous crossings. Based on structural conditions it is currently rated to handle 50,000 vehicles per day, but is carrying 130,000. It has a section that lifts up to allow boat traffic on the river to pass – thus tying up traffic for miles in each direction. It has 3 narrow lanes in each direction but traffic engineers say 5 are required. Clearly it needs to be replaced. And yet the agency that that was attempting to finalize the plans for a $3.2 billion project to replace the bridge shut down the entire project last year. The governors of both states were in favor of the project, but left wing environmentalists and right wing tea party members both opposed it. The left wing doesn’t want any new road construction and claims that it might endanger salmon in the river, while the right wing opposed a light rail extension that lawmakers added to the bill.
This is completely ridiculous. Vancouver and some of the suburbs of Portland are on the Washington side of the river. Many of the drivers who cross the bridge, do so everyday just to get to their jobs. I-5 is the busiest trucking corridor in the western US. It is just a matter of time before something terrible happens. If one side of the bridge fails or becomes unusable, the traffic gridlock that will result (due to political gridlock) will be unbelievable. Already the daily delays that this bridge causes is costing an estimated $230 million reduction in annual wages in the area. Everyone but the most radical politicians on both sides of the issue agree that a replacement bridge is needed, but no one can seem to make it happen.
This sort of issue is being repeated across the country. Local concerns get in the way of the national good. The interstate system was designed and paid for by the entire country. It is unconscionable that local politicians who are currying favor with their most radical constituencies are able to stop the repairs and improvements that the entire country depends upon.
Our Interstate System is the envy of the world, and only one country has more miles of limited access roadways than the US – China. That’s right, the country that just a few years ago was one of the poorest in the third world now has more miles of limited access roadways than the US. It is absolutely necessary to the economic health and well-being of the US that we maintain, modernize and where necessary expand the system in order to allow our economy to continue to function smoothly.
The largest railroads in the U.S. are Union Pacific, Burlington Northern & Santa Fe (BNSF), CSX, and Norfolk Southern. There are also a number of smaller freight carriers as well. They operate a highly competitive marketplace. They are forced to offer high-quality service at competitive rates. According to Wikipedia, “railroads carried 39.9 percent of freight by ton-mile, followed by trucks (33.4%), oil pipelines (14.3%), barges (12%) and air (0.3%). However, railroads’ revenue share has been slowly falling for decades, a reflection of the intensity of the competition they face and of the large rate reductions railroads have passed through to their customers over the years.” This is the way the marketplace is supposed to work. Companies compete, quality increases, prices fall, and the customers benefit.
North American railroads operate nearly 1.5 million freight cars, over 30 thousand locomotives, and have over 200,000 employees. The largest commodities they carry are coal, chemicals, farm products, nonmetallic minerals and something called intermodal transport.
The fastest growing rail traffic segment is called intermodal. This is just a term for the use of railroads along with another mode of transportation, such as trucks or ships. The large boxes you may see on ships are just lifted up and placed directly onto trucks or railroads to be shipped to their final destination. According to Wikipedia, “Intermodal combines the door-to-door convenience of trucks with the long-haul economy of railroads. Rail intermodal has tripled in the last 25 years. It plays a critical role in making logistics far more efficient for retailers and others. The efficiency of intermodal provides the U.S. with a huge competitive advantage in the global economy.”
America’s railroads account for 40 percent of intercity freight volume — more than any other mode of transportation — and provide the most efficient and affordable freight service in the world. Because rail transportation is so efficient, it saves consumers billions of dollars every year, and reduces energy consumption, pollution and reduces greenhouse gases.
The Association of American Railroads states that, “By linking businesses to each other here and abroad, freight railroads have played a crucial role in America’s economic development for more than 180 years. Today, freight railroads serve nearly every industrial, wholesale, retail, and resource-based sector of our economy. They remain critical to our economy today.”
According to the U.S. Department of Commerce freight railroads sustain more than 1 million additional jobs at firms that provide goods and services to railroads or that are recipients of spending by the employees of railroads and their suppliers. Every job in day-to-day freight rail operations sustains another 4.5 jobs elsewhere in the economy.
Railroads help their customers control their prices, saving them billions of dollars each year, enhancing the global competitiveness of U.S. goods, and improving our standard of living.
Average U.S. freight rail rates were 42 percent lower in 2013 than in 1981. This means that the average rail customer today can ship close to twice as much freight for about the same price as it paid more than 30 years ago.
The American Association of State Highway and Transportation Officials (AASHTO) estimated that if all freight rail traffic were shifted to trucks, the companies that ship by rail today would have to pay an additional $69 billion per year.
In addition to their role as an economic engine, railroads offer substantial public benefits. On average, railroads are four times more fuel efficient than trucks. In 2013, railroads moved a ton of freight an average of 473 miles per gallon of fuel. Because greenhouse gas emissions are directly related to fuel consumption, moving freight by rail instead of truck reduces greenhouse gas emissions by 75 percent.
It has been estimated that highway gridlock costs the U.S. economy $121 billion per year just in wasted fuel and time. Lost productivity, cargo delays, and other costs add tens of billions of dollars to this tab. But a train can carry the freight of several hundred trucks. That means railroads reduce highway gridlock, the costs of maintaining existing highways, and the pressure to build costly new highways. That’s especially important now when government funding for highway spending and other purposes is under such severe pressure.
It’s obvious that our system of freight railroads are a huge benefit to our economy. And one of the best things about it is that it is owned and maintained by the railroads, not taxpayers. Every country that wishes to have a successful growing economy must have a successful railroad system. It is simply the most efficient method that man has ever devised for moving heavy loads around a country.
95 percent of our international trade comes through our seaports. In fact without our vast network of seaports, it is very clear that our national economy would quickly grind to a halt. And I’m not just talking about our magical cruise ship moving forward. I’m talking about the entire ship rusting, rotting and sinking. That’s how important our ports are.
Let’s look at the economic impact of just one port – the Port of Los Angeles.
The Port of Los Angeles is one of the world’s largest trade gateways and the scope of its economic contributions to the regional economy is far-reaching. The Port is connected directly and indirectly with tens of billions of dollars in industry sales each year in the Southern California region. Those sales translate into hundreds of thousands of local jobs and billions of dollars in wages, salaries, and state and local taxes.
According to the Port of Los Angeles its benefits include:
•1.1 million jobs in California
•3.3 million jobs in the United States
•$89.2 billion in California trade value
•$223 billion in U.S. trade value
•$5.1 billion in state tax revenue
•$21.5 billion in federal tax revenue
But these figures don’t begin to consider the real impact of successful, efficient ports. These ports literally make it possible for international trade to happen. International trade makes all our prosperity and even our very lives possible. Without it, the world economy would collapse and it is no exaggeration to say that many millions of people whose lives depend on imported goods would perish.
Of course it’s obvious that modern sophisticated airports are crucial to international trade. Air Cargo transports goods worth in excess of $6.8 trillion! This is approximately 35 percent of all world trade by value.
And the U.S. is lucky to have some of the greatest airports in the world.
In terms of the number of aircraft that took off or landed at an airport so far this year – 8 of the top 10 airports in the world were in the U.S.
In terms of tons of freight shipped from airports and number of passengers 4 of the top 10 airports were in the U.S. But airports are expanding around the world. Here are some of the major expansions projects going on today.
In China there were 175 airports in 2010, but they expect to have 230 by the end of 2015. In Beijing they are beginning work on a $14 billion international airport in the city’s southern district. It should be able to handle 72 million passenger annually by 2025.
In Japan Tokyo’s Narita International Airport is building a new terminal dedicated to low cost airlines. It will open this year and will be able to handle 50 million passengers a year.
In Singapore work begins in earnest this year on Jewel Changi Airport, an impressive-looking palace of glass that will shroud retail, entertainment and leisure outlets as well as a multi-level garden and walking trails. The centerpiece will be the Rain Vortex, a 40-meter-tall waterfall cascading from the roof of the glass dome.
In Mexico City work is beginning on another eagerly anticipated international airport. It is designed to be the world’s most sustainable when it opens in 2018.
And the list goes on. Major expansions are happening in Brazil, Germany, The Netherlands, and Saudi Arabia. These are all great things and all work to improve and increase global trade.
And the U.S. continues to expand its airports as well. A $4.1 billion improvement project is underway at LAX. In New York there have been major upgrades in terminal 4 at Kennedy International, and a $3.6 billion replacement of LaGuardia’s Central Terminal building. DFW is in the middle of a 7-year terminal renewal and replacement program. Denver International has a $544 million project that includes a major hotel and a rail line connecting the airport to Denver’s Union Station.
The only real downside to all this growth is that the airlines in the U.S. have continued to consolidate. As there continue to be less airlines competition is declining. This means that service will tend to be worse and costs will continue to increase. Competition is the only thing that can change this, but today most consumers have only one or two choices of airlines to fly from their hometown.
But in general, around the world, air travel is a healthy industry in an important part of the economy. No country can successfully grow and modernize its economy without up to date international airports.
Reliable electricity is absolutely essential to all aspects of modern life. Luckily in this country and nearly all of the developed world, access to uninterrupted electricity is pretty much a given. We take it for granted, because most people alive today have never lived in a time or place where it wasn’t available. Blackouts and brownouts are quite rare and make national news when they do occur. That is great, and the growth of our modern economy would slow, and even stop or reverse if it were to somehow change.
Of course, like any modern complex man-made thing, there are threats to our electrical infrastructure – aka, the grid. Extreme weather, sunspot activity and even cyber or terrorist attacks can happen. But these are unlikely, and quite well defended against.
The bigger threat is from decisions by our own bureaucrats. Currently the Environmental Protection Agency is probably the biggest single threat to the long term reliability of our electrical grid.
The Institute for Energy Research states, “The EPA is in the process of promulgating regulations that will reduce the reliability of the power grid with little thought to the consequences. In fact, these policies threaten to take offline 130 gigawatts of reliable electricity generation sources – enough to meet the electricity needs of 105 million Americans.”
Why would they do such a thing? Largely it is a misguided attempt to reduce global warming. They are finalizing a wide ranging carbon dioxide regulation under section 111 (d) of the Clean Air Act. It threatens to shut down many dozens of the most reliable and dependable power plants. The problem is that electricity reliability and dependability is not one of the EPA’s statutory obligations. So they actually don’t care if this happens.
One recurring theme of science fiction is that man creates some technology to solve a problem, and it develops a life of its own and turns on mankind. It may have a mission to create peace in the world and it decides the best way to do that is to kill all human beings. Then there will be peace.
The EPA is following this pattern. In blind pursuit of clean air and water it is going far beyond its creators original intentions and is destroying the very things that modern man needs to live and thrive. They are attempting to shut down all coal fired power plants in the country. They hope to replace them with solar and wind generation. The problem is that solar and wind are not reliable. The sun doesn’t shine at night and the wind doesn’t always blow. Whereas coal fired plants can run non-stop day and night.
It’s OK to add solar and wind for helping with peak demand, but they cannot be the primary sources we rely upon for our day to day base needs.
Other agencies of the Federal Government are actively attempting to shut down existing nuclear power plants. Nuclear power is one of the most reliable forms of electrical generation. And it generates about 1/5 of our total power needs today. There is no way that solar and wind can replace that amount of power. One study said that to generate all the power needed by the U.S. by solar alone, we would need to cover an area the size of California with solar panels!
Energy expert Robert Bryce states, “If you are anti-carbon dioxide and anti-nuclear, you are pro-blackout.”
Due to the diligence of our parents and grandparents in this country we are blessed today to have an amazing water infrastructure. Everyone in our country has access to clean safe drinking water. Think about that amazing fact. In a country of over 300 million people, absolutely everyone has access to safe drinking water. In many countries around the world the availability of safe drinking water is the most critical problem. We haven’t needed to worry about that for decades.
But like any infrastructure, it needs to be maintained, updated and grown as our population and needs increase. Unfortunately, because we tend to take safe water for granted, in many places we are not maintaining and growing this system as much as necessary. California is the prime example.
Today California is facing a water crisis that was completely avoidable. Yes, they are facing an extended drought. But this should not come as a surprise. Most of the state is desert. Yet, because of extremely powerful environmental groups, California has not built any major water infrastructure project since the 1960’s. If more surface storage space had been available during the last 15 years before the current drought, regulators would have been able to store dramatically more water.
And during normal years the state should be filling its reservoirs as much as possible. But regulations require that 4.4 million acre feet of water (approximately enough for 8.8 million families) be diverted for ecological uses.
California’s Department of Water Resources estimates that a planned reservoir called the Sites Reservoir could hold enough water for 7 million Californians. But environmentalists have filed multiple lawsuits and prevented it from ever being built. The plans have been sitting on the shelf since the 1980’s.
But even if all of these projects had been built, they would only be part of the long term solution. Conservation must also be part of the solution. But the conservation measures that the green lobby force on people are only partly successful. The Greens, like most liberals feel that the government must be heavy handed and force people to use less. What they forget is that the best way to change behavior is to let the law of supply and demand work.
The largest users of water should pay the most for it – right? This is just common sense. But it doesn’t work that way in California. Effectively, the largest single user of the state’s water is the environmentalists. That is because they have convinced lawmakers to allow the vast majority of the state’s water to just run through rivers and streams back down to the ocean. But they don’t pay anything for all that water.
Farmers use 80 percent of what is left over. But they don’t pay anywhere near close to market prices because many of them have inherited their water rights from their ancestors based on California’s first come, first served rules.
In addition many farmers pay nothing to suck water out of the aquifers under their land. All they need to do is pay for the well. The water is free.
And other farmers that do pay for water pay far less than city users. Farmers in the Imperial Valley pay $20 per acre foot, while city dwellers in San Diego pay $200 per acre foot. People in Sacramento pay a flat rate for their water no matter how much they use.
“The best — and most sustainable — solution to California’s water woes would be full-bore markets in which prices can rise and fall with supply and demand. Under such a system, depleting water reserves would have led to price increases long ago, producing an automatic incentive to conserve. More importantly, this would have clearly signaled growing scarcity, spurring new technologies for affordable water generation. All of this would have allowed consumers and businesses to make small adjustments over time without letting the shortage reach a crisis point.”(The Week – April 17, 2015).
Water is a natural resource. And like any natural resource, it is limited. When natural resources are developed by private companies, and those resources run low or become more expensive to develop, those companies pass the extra cost onto their customers. But governments have a hard time doing that. Politicians like to get re-elected, and allowing water rates to increase tends to make people unhappy. Unhappy people vote current office holders out of office. So they will tend to keep the rates low as long as possible.
We need to find ways to take the water infrastructure out of government hands and put it into private hands again. When companies own something and sell it, they will have every incentive to maintain it properly and produce as much of it as possible. If private enterprises had owned the rights to California’s water this crisis never would have happened. They would have built multiple reservoirs over the years. And as the drought grew, they would have raised their rates. And they would have raised them on everyone, not just those with political clout. People would have seen their water bills increase and would have found ways to conserve.
Farmers would have switched to crops that require less water. They would have stopped growing things like watermelon, and begun switching to drip irrigation instead of sprinkling or flooding.
There would still need to be some regulations of course. Water is life itself. We need to assure ourselves that it is safe, and not in the hands of some unscrupulous organization that might shut it off on a whim. But mostly, the marketplace is self-regulating. We just need to let it work.
Today over half the people on the planet are connected to one another via the internet. Over $8 trillion exchange hands each year through e-commerce. If the internet was considered an industrial sector it would be larger than agriculture or communication. Its contribution to global gross domestic product is greater than Spain or Canada. It has accounted for over 10 percent of GDP growth over the last ten years.
According to a McKinsey Global Institute study, “There is a clear connection between the maturity of the internet ecosystem in a country and rising living standards. We found that an increase in internet maturity similar to the one experienced in advanced countries over the past 15 years correlates with an increase in real per capita GDP of $500 on average over this period. It took over 50 years for the industrial revolution of the 19th century to achieve the same result.”
Again, according to the McKinsey study, “Rejuvenating traditional activities has been the internet’s main impact. The internet has enabled fundamental business transformations that span the entire value chain in virtually all sectors and types of companies – not just online ones. These shifts include wholesale changes not only in how products are bought and sold but also in how products and services are designed, produced and distributed. Even a tiny business today can operate with a dynamically managed supply chain that spans geographies and operates with a global work force.”
It is also a huge job creator. Although many traditional jobs have been eliminated there has been a massive net gain in job creation. “A detailed analysis of the French economy, for example, found that while the internet is reported to have destroyed 500,000 jobs, it created 1.2 million new ones.”
The biggest beneficiary has been ordinary people. It allows people to compare prices, find instant sales, and locate specific makes of automobiles or attractive rental properties without the use of brokers and dealers. It can offer road directions and health information. It saves the consumer time, boosts price transparency, and gives customers access to hard-to-find products. The more consumers visit price comparison web sites the lower prices fall.
The internet encourages competition, innovation and helps people to develop to their maximum potential. This allows countries to maximum benefits that it offers.
As discussed in Chapter 1, industries that are lightly regulated like fast food, can continue to experience growth long after most experts believe them to be mature. The growth of an industry only stops for one of two reasons. Either the technology has changed and that industry is no longer needed as much (things like analog wristwatches or passenger railroads in the US), or the government gets involved and begins to heavily regulate it.
Until now the internet has been quite free from government regulation and it has been a huge and dynamic engine of growth. But now the government has decided that there is a need to solve a problem that doesn’t really exist. Under the guise of “net neutrality” the Federal Communications Commission has decided to regulate the internet much like it did the telephone companies in the 1930’s. The internet is so vast and so dynamic that it will be quite some time before this series of new regulations has a noticeable impact, but it will. I’ll discuss this more in the chapter on Regulations.
Now let’s take a look at the system of laws that any nation needs to have in place if they hope to have a highly successful economy.
This code was first written in 1952 and it exists to harmonize the laws of commercial sales among all 50 states. It contains sections on such things as the formation and breach of contracts, the rights of owners of securities (stocks), banking and check collection procedures, promissory notes, letters of credit, and auctions and the liquidation of assets. Its overriding philosophy is to allow people to make contracts easily and to fill in any missing provisions where the agreements are silent. It seeks to impose uniformity and the streamlining of routine transactions.
It was written in the United States but has been very influential around the world. The United Nations has adopted many of its provisions regarding contract law.
It’s easy to see why these kinds of laws are necessary for the growth and success of an economy. The fact that it was written by private organizations but then adopted by all 50 states shows that there is nearly unanimous agreement that it is necessary and essential to conduct commerce efficiently and effectively. Every country that wishes to conduct business in the international community must have signed on to the United Nations equivalent of the UCC or have similar laws itself, or it will fall hopelessly behind.
The Department of Labor administers more than 180 federal laws that cover over 125 million employees. Here are some of the most important ones.
•Wages and hours. These laws cover minimum wage and overtime laws. They restrict the hours that children under 16 can work and forbid children to work in jobs that are too dangerous. Currently the minimum wage nationally is $7.25 per hour.
•Workplace Safety. Safety and health conditions in most private employers are covered by the Occupational Safety and Health Act (OSHA).
•Employee Benefit Security. These laws regulate employers who offer pension benefits helping to ensure that those pensions are still available when needed by the employees.
•Unions and their members. It protects union funds, requires unions to file financial reports, and establishes standards for the election of union officers.
•Family and Medical Leave. This law requires most employers to offer up to 12 weeks of unpaid leave for the birth or adoption of a child or the serious illness of the employee or a spouse or child of the employee.
Taken together these laws protect the basic rights of workers. These laws are the results of many battles over the last 150 years – dating back to the early days of the industrial revolution.
Economically, nations can still thrive without many of these labor protections in place – at least for a while. The US had incredible economic growth in the last half of the 19th century even though none of these laws existed at the time. Many poor countries around the world allow their workers to be exploited and yet their economies are growing.
But sooner or later the people will rise up and demand these basic rights. How a nation responds will determine whether or not the economic growth will continue.
The bigger question is whether or not we should continue to expand these laws. There is a huge push today to increase the minimum wage. The cities of Seattle and Los Angeles have increased their rates to $15.00 per hour. Besides the obvious benefit of putting more money in minimum wage workers pockets, what other impacts are there. Let take a look.
Some of the largest minimum wage employers are restaurants and fast food outlets. Most of their employees tend to be young people. So what will likely happen as the minimum wage increases? If looked at from the owner’s point of view it’s really pretty obvious. He can do any of the following things.
•He can attempt to increase their prices. But if the minimum wage increases by 50 percent and labor is the owners biggest cost he will need to increases prices a lot! A $4.00 hamburger may now need to cost $6.00. It’s pretty clear that he will sell a lot less hamburgers at that price. The price increase may just drive him out of business.
•He can try to automate. Most fast food chains are aggressively doing this today. They are letting people place their orders on computer screens. They are automating the cooking process. This way they can hire less people. So who will suffer the most from this? Young people. For many young people, their first job experience may be in a fast food restaurant. As there is more automation there is less need to hire inexperienced employees. So many more young people will find it difficult or impossible to get jobs. Inevitably this leads to higher youth unemployment and higher crime rates.
•If he owns a sit-down restaurant he may be able to change his pricing and tell his customers that there is no longer any expectation that they tip their servers. This way their out of pocket costs may not increase as much. Of course, since most servers depend on tip income their net take home may not change very much even with the increase minimum wage.
•He can call it quits, lay off all his workers and shut the doors. Many may be forced into this situation as sales dry up.
Politicians (especially Democratic ones) love to promise voters that they will increase the minimum wage. But of course they never explain that there are dramatic costs to doing so. If they really wanted to provide a benefit to workers they would favor policies that caused the economy to grow. With a growing economy there is more demand for workers. As demand grows but the number of workers stays about the same, wages will naturally increase. It’s called supply and demand.
Where I live, there is a one page (or online) form to complete. The application fee is $25 and the annual license fee is $50. There is another application if the business will be collecting sales taxes. It’s really quite simple and inexpensive. Of course there are additional costs and procedures if the business is related to food or alcohol, but it’s largely quite painless.
This is the way it should be. In many countries the process can require dozens of different forms, months or even years of delays and even bribes to officials. As countries streamline the process they will see the number of businesses increasing, and with it the overall health of their economies.
Good credit reporting agencies must be in place and everyone must have credit reports about them available.
The US has three credit reporting agencies. Equifax, Transunion, and Experian. They are all regulated private businesses whose purpose is to gather credit information on everyone and sell the results to organizations that need it – such as insurance companies, employers and anyone else that has a “permissible purpose” for that information.
Any advanced economy must have accurate credit reporting about people so that loans can be given to people who are credit worthy and withheld from people who are not. In reality most people can get loans, but those with poor credit scores must pay higher rates of interest than those with excellent scores.
This is one of those requirements for a successful economy that is like greasing the wheels of a train. It allows it to move forward more easily.
The system has worked quite well until now, but unfortunately now the government is going to get involved and regulate it far more than it has in the past. Through a new law called Dodd-Frank, the government regulators are writing thousands of pages of new regulations to try to fix a system that was never really broken. I’ll discuss this much more later.
For now just think of it as a few more tons of rocks that our cruise ship must drag behind it.
These laws need to make it possible to escape your debt if your business fails.
Bankruptcy allows individuals, couples, and businesses that cannot meet their financial obligations to be excused from repaying some or all of their debt. Bankruptcy has been in existence since ancient times. In the United States, the rules and procedures for filing bankruptcy are governed by federal law. States are prohibited from legislating in this area of the law.
It is vitally important for every successful nation to have good bankruptcy laws. There must be a way for a business person to get out from under a huge amount of debt that he will never be able to pay. Many new businesses are not successful, and many entrepreneurs start two or three businesses before they can make one succeed. Bankruptcy allows that to happen. Without it, people would be far less likely to take the risks of starting up something new, and the economy would grow much more slowly.
This is an area where the US excels!
If you could get most business people to truthfully tell you what they think about the topic, they would say that they hate competition. Sure, in theory they all know that it is necessary for a healthy capitalistic economy to function properly. But they hate it. Without it they could make a lot more money, they wouldn’t have to constantly innovate, and they wouldn’t have to work so darn hard. They could work an eight hour day and then go home and forget about the business until the morning. They could spend more time with their families and live more balanced lives. Life would be much easier.
Most business owners don’t like competition, but they are keenly aware that it is out there, constantly changing and improving and they had better do the same or sooner or later their businesses will fail. So they accept it as a fact of life and deal with it. That’s how it should be.
But there are some who would do whatever they could to stamp out the competition. There are many techniques that have been tried over the years, and the smart governments around the world are wise to them and have outlawed them.
“United States antitrust law is a collection of federal and state government laws, which regulates the conduct and organization of business corporations, generally to promote fair competition for the benefit of consumers. The main statutes are the Sherman Act 1890, the Clayton Act 1914 and the Federal Trade Commission Act 1914. These Acts, first, restrict the formation of cartels and prohibit other collusive practices regarded as being in restraint of trade. Second, they restrict the mergers and acquisitions of organizations which could substantially lessen competition. Third, they prohibit the creation of a monopoly and the abuse of monopoly power.” (Wikipedia)
Here are a few examples.
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The intent of price fixing may be to push the price of a product as high as possible, generally leading to profits for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
One of the biggest recent examples is the Apple Corporation. In 2013 Apple was found guilty of conspiring with major book publishers to raise the price of e-books. They were found to have conducted secret negotiations with some of the largest book publishers and attempting to conceal their communications. The purpose of these meetings was to ensure that its e-book business would be free from retail price competition, causing consumers to pay higher prices for many e-books. Apple continues to claim that it did nothing wrong. Apple claims its actions introduced innovation and competition into the e-book industry in an attempt to break Amazon’s monopolistic grip on the publishing industry.
In international trade, the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.
So some countries may be tempted to “dump” a particular product at a low price in another country for an extended period of time. Then, once they drive that countries producers of the product out of business, can raise prices as much as they want. China has been accused of dumping many different products into the US over the years. Products such as tires and steel.
In order to protect themselves, the World Trade Organization allows countries to impose anti-dumping tariffs on these products. But first they must prove that the other country sells the same product for significantly more in their home country.
It is absolutely crucial that every country has anti-trust laws that are vigorously enforced to prevent these anti-competitive behaviors. Without them, true competition will not exist, or will not remain for long.
I’m not going to devote much time to this section. Even though there are opportunities for business even in a time of war, the optimal situation is one of peace with a low crime rate. Far less people are going to take the chance of creating or growing a business if they don’t feel protected by the police or are in fear that their city will be attacked by an enemy.
For the world today in which there is such a huge amount of international trade, there must be free and safe movement across the world’s oceans. This is an area where the US plays a vital role. The US Navy patrols the world’s seas and enforces the world’s laws by making sure that ships are able to safely travel around the globe. Unfortunately the U.S. is downsizing the navy. Today the U.S. has less ships than at any time since before World War I. So far we have been able to control the threats that are out there.
Pirates from the coast of Africa have threatened commercial ships, kidnapped their crews and caused havoc. But through international cooperation this threat has been greatly reduced.
Iran often threatens to shut off the Persian Gulf through which most of the world’s oil flows. The U.S. has permanently stationed an aircraft carrier in the area to prevent this. However the downsizing of the Navy has caused them to withdraw for a period of two months for repairs. Hopefully the Iranians won’t try anything during this time.
The Chinese are building some small atolls in the South China Sea into major islands and putting in runways and military equipment. If they choose to shut off access to this vital waterway the U.S. would have an extremely difficult time stopping them.
These are just a few of the current threats around the world. The U.S. is the only nation capable of keeping the commercial shipping routes open. The prosperity of the entire world depends on the ability to ship goods around the world without disruption. Even a short disruption could send the economies of the world into a deep recession.
For any nation to compete effectively in today’s complex world, it must have a well-educated population. Businesses need knowledgeable and skilled workers at every level of their organizations. Companies that are able to, will move to locations where they can find the most and best qualified employees. How does the U.S. fare in this important criteria? Let’s take a high level look at our education system – beginning with our University system.
I think most people around the world would agree that today the United States has the best university system in the world. Let’s start with a few statistics.
•There are 4,495 colleges and universities in the U.S.
•Over 55% of people in the U.S. over the age of 25 have gone to at least some college
•Nearly 40% have at least an associates or bachelor’s degree
•According to the Times Higher Education World University Rankings 27 of the top 50 and 72 of the top 200 universities in the world are in the United States. The U.S. has more than twice as many universities in the top 200 as does the next country (the U.K.).
•Each state maintains its own public universities – which are always non-profit.
•Although costs have increased dramatically, there are still college level course opportunities available for nearly every income level – with Community Colleges still offering extremely reasonable rates.
But there are many concerns with our system. The biggest is cost. According to Bloomberg, college tuition and fees have increased 1,120 percent since 1978 – 4 times faster than the consumer price index. With such a large number of universities you’d think there would be robust price competition among them. But many of them seem to compete to have the best fitness centers or sports teams instead of the best professors or lowest costs.
We may not like to admit it, but the health of our economy is more dependent on the efforts of the brightest and most talented top 1 percent of our population than anyone else. These are our top scientists, our researchers, and the people who start the most new technology companies. This is where the U.S. still outshines the rest of the world. Our top universities like Harvard, MIT, Stanford, etc. continue to churn out brilliant highly educated individuals who end up being responsible for much of the growth and success of the American economy. Stanford had more to do with the creation and development of Silicon Valley than any place else. It was and continues to be an incredible American success story that the rest of the world envies and would love to emulate. We should be very proud of this and continue to do everything possible to support it.
According to a 2005 report from the OECD, the United States is tied for first place with Switzerland when it comes to annual spending per student on its public schools, with each of those two countries spending more than $11,000. The country has a reading literacy rate of 99 percent of the population over age 15. In 2008, there was a 77 percent graduation rate from high school, below that of most developed countries. In spite of this a Michigan State study concluded that that, “A slightly higher proportion of American adults qualify as scientifically literate as European or Japanese adults.” This is likely because the rate of participation of the labor force in continuing education is high.
Overall the U.S. is in pretty good shape regarding the education of its work force. Unfortunately, there is a dramatic disparity between the education levels achieved by the poorest vs. the most affluent member of our population. The quality of public schools in poor and affluent areas are light years different from each other. However one of the positive things we are seeing today is the rise of the Charter School movement.
Charter schools are unique public schools that are allowed the freedom to be more innovative while being held accountable for advancing student achievement. Because they are public schools, they are:
•Open to all children;
•Do not charge tuition; and
•Do not have special entrance requirements.
Charter schools were created to help improve our nation’s public school system and offer parents another public school option to better meet their child’s specific needs. The core of the charter school model is the belief that public schools should be held accountable for student learning. In exchange for this accountability, school leaders should be given freedom to do whatever it takes to help students achieve and should share what works with the broader public school system so that all students benefit.
Every child deserves a chance to succeed in college, careers, and life, which starts with a great education. All children should have the opportunity to achieve at a high level, and public charter schools are meeting that need:
•Charter schools are some of the top-performing schools in the country.
•Charter schools are closing the achievement gap. They are raising the bar of what’s possible—and what should be expected—in public education.
•A higher percentage of charter students are accepted into a college or university.
America is a world leader in entrepreneurialism. This culture of risk taking is crucial to the growth and development of any country. The U.S. is blessed with this culture partly because of our immigrant history. Most immigrants who came to the U.S. over the last two centuries did so because they were willing to strike out on their own, take risks and leave the familiar behind in the hopes of creating better lives for themselves and their children. These are precisely the kinds of attitudes that are required to be a successful entrepreneur.
The U.S. also has a bankruptcy system that doesn’t punish people as severely as most other countries. This tends to skew the system toward risk taking. The upside potential of a new business is huge, but the downside risk is relatively small. In places like Silicon Valley there is a certain attitude that failure is a badge of honor. It’s the feeling that if you haven’t gone bankrupt at least once, you must not be a real entrepreneur.
We are also blessed with a very hard working society. In Europe there are laws that require everyone to receive 4 weeks of vacation per year. In the US there are no laws specifying vacation length and many people don’t take vacations at all for many years.
Americans have historically believed that their future is in their own hands. We have believed that the opportunities are out there, we just have to put in the hard work and we will be successful.
In Europe and Japan, higher tax rates and more punishments from bankruptcy make it more difficult to become an entrepreneur. The culture of Europe tends to work against entrepreneurs as well. In a recent poll 42 percent believed that entrepreneurs exploit the work of other people, but in the US only 26 percent thought that. European Universities tend to have negative views of business in general – and receive nearly all of their funding from the government. In the US most large universities partner with business.
American universities have been some of the greatest contributors to economic growth because they are innovators. They encourage their brightest professors to work directly with business, they have opened business parks, and they invest venture funds. About half of the start-ups in Silicon Valley have their roots in Stanford University.
But there are threats to this system as well and many fear that Americans are decreasing their overall entrepreneurship. After the terrorist attacks on September 11th, the US clamped down on foreign immigration. Today over 1 million people are waiting in line to immigrate into this country. But only 85,000 visas per year are given out to skilled workers, and only 10,000 from any single country. These are the very people the country needs to come in and innovate and create those new products that will help our economy to grow.
There’s also the huge problem of “patent trolls.” According to Investopedia a patent troll is, “A derogatory term used to describe people or companies that misuse patents as a business strategy. A patent troll obtains the patents being sold at auctions by bankrupt companies attempting to liquidate their assets, or by doing just enough research to prove they had the idea first. They can then launch lawsuits against infringing companies, or simply hold the patent without planning to practice the idea in an attempt to keep other companies productivity at a standstill.”
These people – almost always lawyers – are doing terrible harm to the economy by stopping businesses from innovating and creating new products. All for their own personal gain.
I live in Arizona. One of the amazing things about this state is that we receive an average of 350 days of sunshine every year. It’s not at all unusual for weeks to go by with absolutely no clouds in the sky at any time. You could say that the normal state of weather here is clear blue sunny skies. The only time we see any significant cloud cover is if some major storm forms in the Pacific or the Gulf of Mexico and makes its way over mountains and long distances to bring some clouds here. Often when that happens all we get is a day or two of clouds and no rain. Sometimes we do get rain, but most of it falls in July-August or January-February. And even in those months, it’s usually sunny.
You can think of the American economy the same way. Its normal state is growth. Sunny skies and gentle breezes; growth and prosperity. The rest of this book is about how people get in the way and often unknowingly create ways to slow or stop that prosperity.
Some of the things they create are necessary –like a minimum level of taxes and a few regulations to protect our health and safety. These are the necessary anchors on our cruise ship. They cause the economy to slow, but not much. But politicians and bureaucrats (sometimes with the best of intentions) have gone far beyond what is required and have thrown up thousands of hurdles and road blocks that have caused our economy to grind slower and slower. Whether they mean to or not, they have found ways to stop the world.
The Obama administration is the most regulatory in history. So far it has issued 157 new regulations that cost Americans $73 billion annually. And very few of these undergo any sort of rigorous cost-benefit analysis.
The basic problem is that our regulatory agencies have incredibly broad powers and they are run by unelected bureaucrats. The Dodd-Frank banking law has allowed these bureaucrats to implement 400 new rules. It isn’t Congress that writes these individual rules – it’s the regulators. We can vote our representatives out of office, but these regulators stay.
The Consumer Financial Protection Bureau has written four major rules that each cost over $100 million per year. These rules restrict access to mortgages, eligibility standards, and the schedule of payments. So these regulators are having an enormous new impact on the lives of all Americans.
The vast majority of these regulations don’t even have an estimate of their costs developed. The Department of Labor has created a rule that live-in helpers for the elderly and disabled must now be compensated for their overtime. These helpers have always been exempted from overtime rules so they could spend more time with the people they help. The new rules will cause them to be able to do far less for people, and the patients will suffer.
Hundreds more regulations are in the works. There are over 125 economically significant regulations in the works. Every new regulation makes a small dent in the economic growth rate of the country. Together, they dramatically slow growth. Individually most regulations are implemented for good reasons – although many are clearly just to add power to the regulatory agencies. But when hundreds of significant new regulations get issued each year, the impact to the economy is dramatic.
No one knows how fast the economy could grow if most of these regulations didn’t exist. But every one of them adds another pile of rocks to the boats that our cruise ship must tow.
Let’s look at a few categories of regulations. Let’s consider how they began as very good, and even necessary ideas, but how the agencies that control them continue to grow and issue new regulations – without end. These agencies are destroying our economy and eventually with it – the country.
The Cuyahoga River, at times during the 20th century, was one of the most polluted rivers in the United States. The reach from Akron to Cleveland was devoid of fish. A 1968 Kent State University symposium described one section of the river:
“From 1,000 feet below Lower Harvard Bridge to Newburgh and South Shore Railroad Bridge, the channel becomes wider and deeper and the level is controlled by Lake Erie. Downstream of the railroad bridge to the harbor, the depth is held constant by dredging, and the width is maintained by pilings along both banks. The surface is covered with the brown oily film observed upstream as far as the Southerly Plant effluent. In addition, large quantities of black heavy oil floating in slicks, sometimes several inches thick, are observed frequently. Debris and trash are commonly caught up in these slicks forming an unsightly floating mess. Anaerobic action is common as the dissolved oxygen is seldom above a fraction of a part per million. The discharge of cooling water increases the temperature by 10 °F (5.6 °C) to 15 °F (8.3 °C). The velocity is negligible, and sludge accumulates on the bottom. Animal life does not exist. Only the algae Oscillatoria grows along the piers above the water line. The color changes from gray-brown to rusty brown as the river proceeds downstream. Transparency is less than 0.5 feet in this reach. This entire reach is grossly polluted.
At least 13 fires have been reported on the Cuyahoga River, the first occurring in 1868. The largest river fire in 1952 caused over $1 million in damage to boats, a bridge, and a riverfront office building. On June 22, 1969, a river fire captured the attention of Time magazine, which described the Cuyahoga as the river that “oozes rather than flows” and in which a person “does not drown but decays.” (Wikipedia)
This fire added to the growing outrage around the country that our environmental policies were disjointed, and were not working. Our air was foul and our rivers and waterways in many parts of the country were so polluted that fish were dying and people couldn’t swim in them. The situation had developed for many years because the regulations that prevented industries from dumping their untreated waste into the air and water were mostly ineffective.
Businesses in competitive environments didn’t feel like they could individually spend the money to clean up their waste before discharging it. If one business chose to spend the millions necessary to make that happen and their competitors didn’t, then their costs would be higher and they might be driven out of business.
But something needed to be done. After years of discussion and deliberation a law establishing the Environmental Protection Agency was signed into law by Richard Nixon in 1970.
“The EPA was initially charged with the administration of the Clean Air Act (1970), enacted to abate air pollution primarily from industries and motor vehicles; the Federal Environmental Pesticide Control Act (1972); and the Clean Water Act (1972), regulating municipal and industrial wastewater discharges and offering grants for building sewage-treatment facilities. By the mid-1990s the EPA was enforcing 12 major statutes, including laws designed to control uranium mill tailings; ocean dumping; safe drinking water; insecticides, fungicides, and rodenticides; and asbestos hazards in schools.
One of the EPA’s early successes was an agreement with automobile manufacturers to install catalytic converters in cars, thereby reducing emissions of unburned hydrocarbons by 85 percent. The EPA’s enforcement was in large part responsible for a decline of one-third to one-half in most air-pollution emissions in the United States from 1970 to 1990, and during the 1980s the pollution standards index improved by half in major cities; significant improvements in water quality and waste disposal also occurred. The Comprehensive Environmental Response, Compensation, and Liability Act (also called Superfund), providing billions of dollars for cleaning up abandoned waste dumps, was first established in 1980, but the number of those waste sites and the difficulties of the cleanups remained formidable for years thereafter.
Throughout the 1980s and ‘90s the EPA continued to strengthen laws governing air and water quality and toxic substances. However, it also introduced new rules. The EPA’s accomplishments during this period included the requirement that all primary and secondary schools be tested for asbestos starting in 1982, the reauthorization of the Clean Water Act in 1987, the reauthorization of the Clean Air Act in 1990 with amendments that called for reductions in sulfur dioxide generation and the phasing out of chemicals that deplete the ozone layer, and a rule requiring the removal of all remaining lead in gasoline starting in 1996. Other regulations introduced during this time included the Nuclear Waste Policy Act (1982) and the Energy Star program (1992); the latter was implemented to rate the usage costs and energy efficiency of household appliances and other electronic devices. This period also saw the development of the Emergency Planning and Community Right-to-Know Act (EPCRA), which allowed local communities to know the nature of the toxic chemicals produced by industries in their areas and assisted communities in developing emergency plans to deal with hazardous substance releases and exposures.
In the early 21st century the EPA’s role expanded to address climate change. In 2007 the U.S. Supreme Court ruled in a case brought by the state of Massachusetts against the EPA that failure to regulate greenhouse gas emissions from motor vehicles was contrary to the requirements of the Clean Air Act. As a result, the EPA was given the responsibility to develop strategies to manage emissions of carbon dioxide and five other greenhouse gases. Stemming from this mandate, the EPA worked with the U.S. Department of Transportation to develop standards that would substantially increase vehicle fuel efficiency, and in 2011 it initiated a permitting program that placed the first limits on greenhouse gas emissions from power plants, refineries, and other large, stationary sources.” Encyclopedia Britannica
The EPA has done an enormous amount of good for our environment. And no matter what economic benefit there might be, very few people would want to return to the days of unrestricted dumping of polluted air and water. The real question is – how good is good enough, and when does the economic cost begin to outweigh the environmental benefits.
A few years ago, in my neighborhood one of the county maintained roads was overwhelmed with traffic. On a short 1 ½ mile stretch of road, there were constant traffic jams. Rush hour on this road was a nightmare. Emergency vehicles often could not get through. It was just a single lane road surrounded by homes, apartments and retail business. Clearly it needed to be widened.
Of course the county has many competing needs for its funds, and it took years for the situation to become severe enough that the county decided to spend the money and widen it. So they sent in their engineers, and developed some initial plans for the widening. They began having community meetings to inform the residents about the specifics of the plan and get their feedback. This whole process took a couple more years, while the traffic continued to be horrific and even worsen as more homebuilding was happening in the area.
But finally all the funds were in place, the engineering was done and they were ready to begin construction.
Now one of the EPA’s most important missions is to protect endangered species. Recently, a tiny owl, called the Pygmy Owl was added to the endangered species list.
Unfortunately for the county that was trying to widen a short stretch of road, there was about ¼ mile of that road that passed through a roughly 10 acre parcel of desert that had never been developed. Even though this desert was completely surrounded by homes, apartments, and retail businesses, the EPA became concerned that there could be a danger to some protected species of plant or animal in the area. So the entire project was put on hold while biologists were brought in to exam this patch of undeveloped desert, as well as the wider area around it to determine if there would be any impacts. Another year went by while this process was undertaken.
A few years earlier, one of the biologists had seen one of the pygmy owls, not on this particular stretch of land, but in some open desert a few miles away. It was felt that this piece of desert could be a place that this particular owl might land at some time. No owl was ever seen on this land, but one might use it someday. Because of this possibility, the entire project was stopped and sent back to be re-designed to see if some way could be developed to mitigate the impact that it might have on the owl.
More time went by, and the traffic snarls continued. Finally new plans were developed. They called for a raised median in this ¼ mile stretch that went through undeveloped desert. Some larger desert trees and shrubs would be planted in the median. And the speed limit for the entire 1 ½ miles would be reduced from 45 down to 40 MPH.
To this day we find amusement in the thought that some poor, lost, little pygmy owl one day might be trying to fly across this roadway, and become so exhausted that he just had to have a rest half way across in one of those specially planted trees. And those cars going by 5 MPH faster would have just spun him around and blown him off course.
The entire episode was pretty ridiculous. Years of delay and millions of extra dollars were spent to potentially save a rare little bird that no one had ever seen in the area, but might someday decide to visit. And even if one of them did happen to fly by, it’s very hard to imagine that these changes to this little stretch of road would make the slightest bit of difference to it.
These are the sorts of things that taxpayer money is spent on to satisfy the demands of the EPA. Although the EPA continues to do excellent work by monitoring to assure that it’s important regulations are followed, in many cases it is now causing money to be spent that has little or no chance of actually making a difference in any aspect of the environment.
So how do we reign it in, while preserving the good work that it does? Well, just as an environmental impact statement is required for every significant project, an economic impact statement should be required as well. This statement should be required for every new regulation and every significant expansion or usage of existing regulations. Just as biologists are hired to create the environmental impact statements, economists should be hired to create the economic impact statements.
Today, we only seriously look at one side of the equation. What is the environmental impact of any development? We end up with terabytes of data showing the impact to every potential plant or animal, or people exposed to the side effects of the project.
There is a small agency inside the government that most people have never heard of. It’s called the Office of Information and Regulatory Affairs – OIRA. The reason most people haven’t heard of them if because their work is strictly advisory in nature. The look at things like whether proposed regulations are inconsistent or duplicative. They attempt to reduce the paperwork burden of regulations.
They have a total of 42 employees and occasionally will do some economic impact analysis when the proposed regulation is deemed to be significant. But this is quite far down the list of priorities for the agency. Only a handful of these employees are actually economists. Far less than what would be needed to conduct a thorough economic analysis of the hundreds of regulations that are passed each year. And on the rare occasions when they do look at the economic impact they just use that to advise the president. They have absolutely no power. The regulating agency has all the power.
So we never look seriously at the economic impacts. We have little to no data that considers how many jobs might be created, or not created if the project is killed. We don’t look at the downstream impacts. We don’t consider all those people who might not get good jobs because of a new regulation. How they won’t be able to purchase homes and everything that goes inside them. How they won’t be able to purchases cars and drive them on vacations. How they will have trouble raising families because they were never able to find that high paying job. We don’t consider the need for extra social welfare spending due to the fact that there is less income in the community. We don’t consider that there might have been more demand for these skilled employees and that demand would push up wages for them and other employees with similar skills.
There are so many positive aspects of development. But these are never analyzed by the EPA, because their mission is simply to protect the environment. We have a general feeling that maybe they are going too far, but we don’t have the hard facts and figures that show us what really happens to real people because of their regulations. Since one side of the argument can present facts and figures, and the other side is reduced to broad generalities, we’ve tended to side with the EPA.
But can’t Congress block some burdensome regulations if they choose to. Technically yes, they can. But since 1996 they have only blocked one single regulation. Effectively they are nothing more than a rubber stamp. If the agency wants a regulation, and the president wants the regulation it will happen.
Congress has given up one of its most important constitutional requirements. Effectively we are governed by the president and all the unelected regulators.
The current director of the EPA is Gina McCarthy. She was nominated by President Obama on March 4, 2014, and assumed office on July 18th of that year. She presides over an agency with over 15,000 employees, and contracts out work to many more. More than half of EPA’s employees are very well paid scientists, engineer, and environmental specialist. Their annual budget is approximately $8 billion.
In some ways Ms. McCarthy’s goals resemble those of a corporate CEO.
•She must manage a large organization with thousands of employees.
•She needs to maintain their core strengths – continue to do well what they have always done.
•She wants to grow the agency.
Every good CEO attempts to accomplish these same things. The first two are not a problem. President Obama and the American people have the expectation that she will effectively administer the organization and continue to thoroughly enforce current regulations.
The problems arise when she attempts to grow her agency. It’s pretty unlikely that Congress will significantly increase their budget just to do what they have always done. The best way to grow any federal bureaucracy is to expand its reach. For the EPA that means continually finding new areas that should be regulated. They have proven to be excellent at finding ways to make this happen.
The real question is, and always has been, what is the true cost of these additional regulations? The problem is, we just don’t know.
The EPA doesn’t employ economists. Their goal is to protect the environment. The employees of the EPA, through their lifetimes of training see the protection of the environment as paramount. They believe that they should do whatever it takes to protect the environment for present and future generations. This is their mission in life. The only time they think about the cost of a proposed regulation is when they are preparing their arguments against those who are concerned that it might be too expensive.
Like all regulatory agencies, they are focused one side of the argument. Unfortunately there is no other agency within the federal government with anywhere near the power or leverage of the EPA that has as its primary mission to protect American industry from expensive regulations. As long as that is the case, the government will continue to be on only one side of the discussion. American business will be on the left to defend itself as best it can, but it is largely fighting a losing battle.
The EPA, with the help of many non-profit environmental organizations, fights to enact new regulations. It does so by publicizing the impact of the current situation. It demonizes the businesses that it accuses of harming the environment in some way. Those businesses have neither the resources, nor the organization to effectively fight back.
But what about the economic impact of these changes? And when does the cost become greater than the benefit? And where does it end? How much environmental protection is enough? Where does it end? As long as we have an entrenched agency with an $8 billion budget, and no organized entity on the other side, we will never really know. The EPA will continue to expand its reach and influence. That’s what it does and that’s what is employees believe in. For them, it’s never enough.
So how do we fix this situation before it bankrupts the country? Three suggestions.
1. The director of the EPA and every major regulatory agency should be an elected position.
Today, the people who are chosen to head major agencies within the government are specialists who strongly believe in the mission of the agency. This may have made perfect sense in the days when there were no standard environmental regulations and it was clear to everyone that we needed some. Today though, it is equally clear that we have reached a point of diminishing returns. Every new regulation is costing more and more, but benefits us less and less.
Maybe we should be hiring regulators who recognize this. The best way to do this, is through democracy. Let the people decide who the best regulators will be. This way the people can speak about what their priorities are.
2. We need to create an Economic Protection Agency.
Economists are very good at some things and very bad at others. If you ask 10 economists to predict what will happen to the economy during the next year, you’ll likely receive 10 different answers. No one can accurately and consistently predict the future of the American economy. There are simply too many variables.
What economists can do extremely well is to look at one specific change and forecast the impact of that change on the overall economy. With a question like this, they can focus on just one variable. And they can plug that change into their models and spit out the result.
For instance, the EPA is now proposing that approximately 1400 power plants in the US must emit 75 percent less mercury by 2016. Economists can take this proposed requirement and estimate how much it will cost each plant. (Currently the EPA says it will cost about $10 billion annually). Based on that, they can estimate how much electricity rates will rise. From there, they can look at all of the downstream impacts of higher rates. How much more will the average consumer have to spend on electricity each year? How many jobs will be lost because those consumers have less money to spend on everything else? How many businesses will relocate operations overseas because electricity rates went up?
This is the sort of economic analysis that economists can do extremely well. If they are given the chance.
As much as I hate to see any growth of the government, I believe that we need one more agency. In fact, we need another EPA. The Economic Protection Agency.
3. Congress should be required to approve any new regulations with an economic impact greater than $1 billion.
As I explained above, Congress can vote to stop a regulation from becoming law. But in the last 20 years they have only done so once. Clearly, they are not doing what we elected them to do.
We need to reverse this process. Instead of the regulation becoming law unless they vote against it, we need to change things so it can only become law if they vote in favor of it.
The reality is that we already have plenty of regulations. And more are coming at us every day. The regulatory agencies should draft the proposed rules, then present them to Congress along with their arguments as to why they are necessary. Then Congress should look at the study that was prepared by the Economic Protection Agency and make the cost benefit analysis.
This is the only way to get both sides of the argument heard, and the best decision made.
Before we talk about America’s employment regulations I’d like to explain how bad these regulations can become if we aren’t careful. Let’s take a look at how things work in Spain.
Geraldo owns a small olive oil exporting business in Spain. He exports his product to other countries in the European Union and even a little to the U.S. He complies with all the import restrictions of each country, has a great source of olives, and has plenty of excess capacity in his business. He currently employs 10 full time workers.
His cousin lives in the U.S. and is trying to help Geraldo. He has a contact at Whole Foods that he has been working with. He has convinced them that Geraldo’s product is excellent and would be a great addition to their product line. Whole Foods is just asking Geraldo to prove that he can deliver enough product when it is needed.
So Geraldo is thinking about what he would need to do to make that happen. He figures that all he would need is about 5 more employees. He has everything else he needs already.
So he begins to consider what it would take to hire 5 full time workers. He knows what salary he would offer and he is sure that he could attract plenty of applicants with it. But then he begins to think about the other costs. First is Social Security. The law requires that in addition to the salary a total of 28.3 percent be contributed to Social Security. Of that he would have to pay 23.6 percent. The employee would only contribute 4.7 percent. So that is his first extra cost.
Then there are the other employee “rights” that he must consider. The first is that he will have to pay 14 months of salary, even though there are only 12 months in the year. These extra payments are to cover the Christmas holidays and the long summer holiday period and are a long-standing tradition. They’re also entitled to one month’s paid holiday and 14 public holidays. So all that is a huge extra cost as well.
Now the jobs are rather complex and it takes quite some time for people to get fully trained, so he needs to hire permanent employees. And the Spanish government encourages this. The problem is dismissal. He has two employees today who are terrible at their jobs. One shows up to work hung over 2 or 3 days a week. The other is negative and disruptive to overall morale. He would love to let them go, but finds that he can’t.
Dismissal is strictly controlled by the government and employees can’t be fired unless they are guilty of the most heinous crimes. If there is a dispute (and employees always will dispute if you fire them), the courts almost always rule in favor of the employee.
Geraldo knows that there are only two ways to get rid of unproductive employees.
1. The first is economic. An employer can claim that dismissing an employee, or several employees, is the only way to save the business from bankruptcy. This requires the intervention of the labor authorities and, if they decide that dismissal is justified, the contract is terminated and the employee receives 20 days’ pay for each year of service up to a maximum of 12 months’ salary. Both of his poor employees have been with him for about 8 years. That means he would need to pay them each about 160 days of salary. If the labor authorities decide against Geraldo but he dismisses the staff anyway, he would need to compensate them with 45 days’ pay for each year of service, up to a maximum of 42 months’ salary. He knows that he can’t claim economic hardship because his business is doing well.
2.The second reason is called “Objective Reasons” – These cover, for example, ineptitude on the part of an employee, an inability to adapt to technological changes after a reasonable period of retraining, and ‘continuous and unjustified absences’. To dismiss an employee for any of these reasons, you must give him 30 days’ written notice and pay an indemnity of 20 days’ salary for each year of service up to a maximum of 12 months’ salary. Geraldo’s employees may be lazy, but they aren’t stupid. They know just how much they can get away with so that Geraldo can’t fire them and win the dispute.
So Geraldo ponders all the implications of hiring 5 more people. All the extra taxes and paperwork, the long list of holidays and one month of vacation. The inability to fire them unless they commit some crime or are unbelievably incompetent. He calls his cousin in the U.S. and tells him to forget it. He’d rather keep his business small and not add to his costs and headaches. And with all those extra costs, he finds that he wouldn’t be able to make a profit on his extra sales anyway.
The government of Spain can’t seem to understand why their economy hasn’t grown at all in six years, and the unemployment rate is about 20 percent. They have good infrastructure and a fairly well educated population. But businesses just don’t seem to be hiring and growing. I wonder why.
Luckily U.S. labor law is not as bad as Spain’s. If you want to fire someone here, you need to coach him and help him to improve his poor performance. You need to give him a reasonable amount of time to improve, and you need to document your conversations with him. When you actually fire him, you need to have a witness to the conversation, because the employee may choose to file a wrongful termination suit. But if you’ve taken the necessary steps, the firing can happen fairly easily. Unless you’re being patently unfair the employee will likely lose the wrongful termination suit.
But the U.S. has decided to “help” its employees in a different way. It’s called the Affordable Care Act – aka “Obamacare”. It requires that any business with 50 or more full time employees must offer a health insurance package that meets the qualifications of the law. And it defines a full time employee as someone who works over 30 hours per week.
Obamacare will cost employers of 50 or more people a minimum of $2.28 more per hour per employee. It will cost that business a total of $5.58 per hour if the employee has a family that she wants to insure. Its effect is to strongly encourage businesses to get rid of minimum wage jobs – forcing them to find ways to automate wherever possible.
The law also increases the Medicare tax from 2.9 percent to 3.8 percent of each employee’s pay. This increase may be called a Medicare tax, but it’s being used to fund provisions of Obamacare.
This law has singlehandedly made a huge dent in the growth rate of the U.S. economy. Most job creation in our country comes from small businesses. In fact it’s precisely those businesses that have less than 50 employees that are the biggest engines of economic growth. It is those businesses that are struggling to grow and become medium sized and eventually large businesses. But this law creates a huge disincentive to grow beyond 50 employees. It also creates a great incentive to hire lots of low paid part time workers or better yet, automate and higher as few workers as possible.
These small businesses are often just hanging on financially. They are competing in a world marketplace and must do everything possible to keep costs low. The smart business woman knows that she will not succeed against her international competition unless she is innovative and frugal. Why would she knowingly hire that 51st employee when she knows it will add a huge cost? Why would she hire full time workers when she can just hire a few more part time workers for a much lower cost?
So what this law has done is to take the businesses that provide most of the new jobs and added a huge new cost. And the American government can’t understand why economic growth has only averaged about 2 percent over the last 6 years. We have good infrastructure and a fairly well educated population. But businesses just don’t seem to be hiring and growing. I wonder why.
But this is just one of many ways that Obamacare is hurting the growth of the American Economy. Let’s look at one other way.
The law has tentacles that reach into many different aspects of business. One of them is a misguided attempt to help Americans better understand whether or not their food is healthy. Part of Obamacare created a new menu labeling law. It’s a crazy regulation that will make absolutely no difference in public health.
Look at the pizza business. The great majority of American’s who order pizza do so by phone or online, and then have it delivered. They never go into a pizza joint. But the law requires that every one of those tens of thousands of pizza joints post menu boards on the wall with calorie counts. Not only will the customers never see the signs, but it will be impossible to make the signs simple and easy to understand. That is because there are literally millions of ways to order a pizza. Domino’s alone offers 37 million possible ways to order their pizzas.
I’m pretty sure that most people know that pizza is a rather high calorie food. They already know that eating a lot of pizza is not a good way to lose weight. The country absolutely does not need nanny state laws that require signs in restaurants that people will never see, and even if they did, would be unable to decipher because of their complexity. And yet, each store will need to spend a couple thousand dollars to create one of these signs.
Think of it as just a few hundred more rocks in those boats that our magical cruise ship is pulling. It will slow it down just a little bit more.
As discussed in Chapter 2 the Internet has been one of the greatest drivers of economic growth of the last 25 years. That is because it is a new and incredibly powerful technology that is just beginning to reach its potential. But it’s also because it has been largely free of government regulations – until now. Now it’s time for the government to start damaging that goose that laid the golden egg.
The Federal Communications Commission has decided to regulate the internet like a public utility. And we all know how innovative public utilities are. The long term result of this will be the slowing and eventual halting of the innovations that make the internet such an amazing thing.
The stated reason for the rules is to prevent companies from blocking access to particular websites or slowing down service. Never mind that the FCC didn’t present any evidence at all that this was happening or even likely to happen.
So the FCC is going to regulate the internet in much the same manner that they’ve always regulated the monopoly telephone service providers during the 20th century. Even though the internet is about the farthest thing from a monopoly.
Even though congress has considered and then refused to allow such rules in the past, the FCC has grabbed the power anyway. Internet service providers will not be allowed to employ any “unjust or unreasonable practices”. No one knows what that means today, but the FCC bureaucrats will get to decide on a case by case basis in the future. And of course they will do so by listening to paid lobbyists.
With these new rules internet companies must be sure that their innovations don’t “unreasonably disadvantage” others. That may have made sense for monopoly telephone service providers 50 years ago. But it makes no sense for the dynamic and highly competitive internet world. Competition will force that to happen anyway. Instead of letting competition force providers to innovate and reduce costs, the government will discourage any innovation because the companies will be afraid to make any changes at all.
So, even though the costs of moving data over the internet has been dropping 30 percent per year due to innovation and competition, the federal government feels like it needs to step in and control it.
The entire thing is completely ludicrous. But the internet is so dynamic that we won’t see a dramatic slowing in its growth for quite some time. And when we do, most people will just assume that it’s because it is a maturing industry. They won’t realize that it could have continued to grow at dramatic rates had the government not stepped in and begun issuing costly and unnecessary regulations.
More rocks to tow behind our cruise ship.
Every nation needs carefully structured basic banking regulations. The primary purposes are to:
•Reduce the level of risk that depositors are subject to.
•Prevent banks from being used for criminal purposes.
•To protect confidentiality.
•To treat customers fairly.
The US has had all these regulations in place since the great depression of the 1930’s. And the systems worked quite well until recently.
But now the government has gone much further and introduced an entirely new set of regulations – known as Dodd-Frank. This was a law that was created after the financial meltdown of 2008. It has numerous provisions that are spelled out over thousands of pages. It established a number of new government agencies tasked with overseeing various parts of the law.
•The Financial Stability Oversight Council and Orderly Liquidation Authority monitors the financial health of major firms who are considered “too big to fail.” “Too big to fail” is a phrase that began to be used during the crisis of 2008. The idea is that some financial firms are so large that if they failed they would cause irreparable harm to the entire US economy. The Authority has the power to break up companies that have become so large as to be a risk to the economy.
•The Consumer Financial Protection Bureau is supposed to prevent predatory mortgage lending and make it easier for consumers to understand the terms of a mortgage.
•The Volker Rule is supposed to limit speculative trading by banks.
•The SEC Office or Credit Ratings is supposed to ensure that credit rating agencies provide reliable credit ratings.
Now these are all laudable goals. Nearly all regulations of all types have laudable goals. But like most recent government regulations they are doing serious harm to our economy.
The overall Dodd Frank act has already spawned over 5000 pages of regulations. All banks and financial firms must abide by all these rules. Banks are ending up hiring full time staffs of people who do nothing but make sure the bank is in compliance. Many of the larger banks can afford this, but smaller banks around the country really struggle with the costs of all this. This then limits the amount of money that they have available to lend out. And when banks have less money to lend, especially to small business, the economy cannot grow as fast as it should.
So these small banks are having to focus much of their time, money and energy on complying with these rules. If they instead could focus on helping out the small businesses in their communities, the economy would see dramatic improvement.
The new rules also limit the types of capital that banks can access. Banks should be able to take some calculated risks in order to increase loan demand and create opportunities for small businesses. The rules severely limit that.
The new mortgage lending rules have impacted the banks’ willingness to issue new mortgages. Many banks are considering getting out of the mortgage lending business altogether. Since home buying is a major driver of the economy, when rules like these get in the way it is a sure drag on the economy.
Another boat full of rocks being towed by our cruise ship.
When we think of corruption in the world we usually think of various third world countries. And that is correct. The United States does not have a significant corruption problem when compared to these countries. According to Transparency International the US ranks number 17 out of 175 in its Corruption Perceptions Index. That’s not to say that corruption is non-existent. Again, according to Transparency International,
“Corruption among government and political figures remains a concern. From fraud and embezzlement charges to the failure to uphold ethical standards, there are multiple cases of corruption at the federal, state and local level. Recent high profile scandals have involved councilmen in California and the District of Columbia, as well as mayors in New Jersey and an Illinois governor. Money laundering convictions and ethics violations by U.S. Congress representatives have also furthered citizen distrust.”
What is the economic impact of corruption? According to Corruptionwatch.org.za “Corruption and bad management practices eat into the nation’s wealth, channeling money away from such projects and the very people most dependent on government for support.
Countless studies around the world show how corruption can interrupt investment, restrict trade, reduce economic growth and distort the facts and figures associated with government expenditure. But the most alarming studies are the ones directly linking corruption in certain countries to increasing levels of poverty and income inequality.
Corruption can also harm the chances of success for small and micro-enterprises. It’s been demonstrated around the world – particularly in developing economies – that small businesses pay more than twice as much of their earnings as larger companies, limiting their ability to grow and become job creating.”
For much of the world corruption is likely the number one reason that individual countries remain poor and the people aren’t able to lift themselves out of poverty.
Maria is running a large multi-national corporation that would like to expand into a lesser developed country. She is considering two countries that are similar in other aspects, like infrastructure, rule of law, security etc., but one is low on the corruption perceptions index and the other is higher. Of course, she decides to go to the country with less corruption. Because not only would locating in the more corrupt country likely result in a real cost to her company if she is forced to pay bribes to get anything done, but it potentially can hurt her company’s reputation.
Walmart is currently in court in Mexico defending itself against charges of paying bribes in order to get some licenses it needed to open a store there. One of the most important concerns of any chief executive officer is with the reputation of his company. He simply cannot afford to put himself into a situation where the company can’t get things done without paying a bribe, but may cause the company irreparable harm if it’s ever caught doing so.
“A 2008 PricewaterhouseCoopers report, based on a survey of 390 senior executives in 14 countries, confirms the high costs that businesses pay for corruption in terms of market distortion, reputational damages, legal risks and deterioration of the company’s internal structure. Almost 45 per cent of respondents said they had not entered a specific market or pursued a particular opportunity because of corruption risks, while close to 40 per cent reported having lost a bid because of corrupt officials. More than 70 per cent of the respondents believe that a better understanding of corruption would help them compete more effectively, make better decisions, improve corporate social responsibility and enter new markets. Corruption is ultimately economically inefficient for companies.” (Transparency.org)
Corruption can also make companies less efficient. “A 2006 study exploring the impact of corruption on firms’ efficiency in 13 Latin American countries shows that more-corrupt countries have less efficient firms that need more input (that is, more labor) to produce a given level of output (Rossi and Dal Bo 2006). The study suggests that corruption diverts managerial efforts away from the supervision and coordination of the productive process, compelling firms to employ more factors in order to make up for the poorer coordination and related inefficiency.” (Transparency.org)
Once corruption takes root in a country, it is extremely difficult to remove. The US is blessed to be one of the less corrupt nations of the world. This is largely because we have a strong, independent judiciary and a free press that loves to find and expose corruption in public officials and business. As long as this continues we will probably not ever find ourselves in the situation that much of the world faces. The corruption problem the US faces is of a different sort. It’s the legal form of corruption that’s called crony capitalism.
Today in the US nearly every large business and every business that wants to grow large someday must develop friends in the government. Why? The simple answer is because their competitors are all doing it and if they don’t they will be crushed. What do their friendships buy for these companies?
Well, one of the most important benefits they receive has to do with regulations. Because these business people are already working in a particular industry, they are the experts. They sit down with the regulators in Washington and “help” them to craft new regulations. In some cases these regulations were already in the works and the industry reps help them to be crafted to do as little harm as possible to their businesses, while potentially harming their competitors more. Or causing it to be more difficult to start new businesses in their industry, thus keeping out the competition to those who are already in the game.
In other cases the industry reps will actually suggest regulations to the government. It may sound counter-intuitive, but businesses actually like regulations because they can be crafted to make it impossible for new businesses to start up.
Let’s look at one of the businesses in recent years that has been most successful in helping themselves by having contacts and friends in high places within the government. Goldman Sachs.
Goldman-Sachs was founded in 1869 and provides merger and acquisition advice, underwriting services, asset management and prime brokerage to its clients – which includes governments, businesses and individuals. It has grown to receiving over $40 billion of revenue annually today.
Goldman Sachs for many years has had a revolving door of executives that have worked in high levels of the government. Most of their executives, top lobbyists, and consultants have worked for the government at some point in their careers. They were chief economic advisors to the Bush, Clinton and Obama administrations. They were White House Chiefs of Staff, Chief Counsels and Special Assistants. They were ambassadors and Treasury Secretaries and top advisors to Treasury Secretaries.
Is it any surprise then, that in 2008 during the worst fiscal crisis this country went through since the Great Depression, the government decided to bail out Goldman Sachs? It was decided that they were “too big to fail”. That if they went bankrupt it would cause irreparable harm to the US economy. Is it also any surprise that one of their closest competitors Lehman Brothers that did not have the connections in the government was allowed to go bankrupt? Lehman Brothers requested that they be converted from an investment firm to a deposit taking bank, but were denied. If they had been approved they would have been placed under the protection of the government and given access to as much government cash as they needed. But when Goldman Sachs requested the same thing, they were quickly approved.
Not only were they given this lifeline, they were also given access to $10 billion from the Troubled Asset Relief Program.
They were given legal protections too. They were selling securities associated with sub-prime mortgages that Goldman Sachs expected to lose most of their value. At the same time they were buying securities that would go up in value if these if these mortgage securities fell. But did they inform their customers about what they were doing as required by law? No. Did the SEC prosecute this fraud? No. Very likely this was because a Goldman Sachs vice president had recently become the managing executive of the SEC’s enforcement division.
Let’s look at another industry that is strongly in the grip of crony capitalism – Pharmaceuticals. It is well known that it is extremely expensive and time consuming to win US Food and Drug Administration approval for a new drug. And it certainly shouldn’t be easy. Any new drug should be thoroughly tested before being approved for use by the American public.
What is less well known is that the drug companies know that they must hire former FDA employees in order to navigate the complex process that the FDA has put into place. Then the FDA brings many of these same people in to serve on its drug screening panels. The drug companies are also required to make direct payments to the FDA. So, once again we see very close ties between the regulator and the regulated.
The entire drug approval process is broken. The drug makers know that they cannot win patent protection for any naturally occurring molecules. So they spend little to no time or money researching the many natural remedies that are already out there. In fact they actively work to discredit them. But they will literally spend billions to create, test and market some new manmade molecule.
And the FDA will help them by banning natural substances once the artificial drug has been approved. They actually banned L-Tryptophan, a natural substance that has been used for many years to help control depression. Then, many years later it was again allowed after the artificial drug had been well established in the marketplace.
The FDA doesn’t approve any of the claims of benefits from supplements unless they have gone through their billion dollar approval cycle. Of course no one can possibly take a supplement through that cycle because they could never get a patent on it. Without the patent they could never re-coup their investment.
So the result is that the FDA does provide some protection to the public. But by making the process mind-numbingly complex and incredibly expensive they are also effectively preventing many beneficial substances from coming to market. And they are causing the big pharmaceutical firms to focus their research on the most exotic compounds instead of truly researching the incredible bounties that nature has already provided to us.
We will probably never know how many people have suffered and died because some simple substances that can already be found naturally were never properly researched, tested and sold. The system is badly broken and we are all paying the price.
We’ve all heard the horror stories of how workers were mistreated in the late 19th and early 20th centuries. During the industrial revolution workers were often paid extremely low wages, worked 10 -12 hours a day, six or seven days a week, and toiled in very dirty and dangerous environments. They often died young and broke.
Clearly the union movement that began during this time was a huge benefit to people. Through collective bargaining the unions were able to dramatically improve the lives of vast numbers of people, not just in the US but around the developed world. But this chapter isn’t about those private sector unions. It’s about public employee’s unions.
In many ways these are completely different things. This is because these employees are not negotiating concessions with private, for-profit organizations, but with the local, state and federal governments. In other words they are negotiating with politicians who are elected to represent you and me.
Unfortunately in many, or even most cases they end up negotiating with politicians that the union has helped to elect through massive donations to their campaigns. So there is a pretty obvious conflict of interest here. The politician owes his election to the same union that he is now supposed to negotiate with. In fact, any time the union wins higher wages for the workers, they take more of their pay as union dues too. And then turn around and donate more to the campaigns of the politicians that support them. Obviously the union is very likely to get all that they ask for.
What makes this even worse is that in 28 states, workers are forced to join the union and then the state actually collects their dues directly from their paychecks and then gives that money to the unions. It’s a pretty cozy deal and everyone wins – right? The employee’s pay and benefits steadily increase, the union’s dues steadily increase, and the supportive politicians gain higher and higher contributions to their campaigns. It’s a great situation for everyone – everyone that is, except the taxpayer.
There’s an old saying that socialism is a great form of government – until you run out of other people’s money to give away. Well, this is the same thing. Many states are now in the situation where they have run out of money to give away. Our three most populous states, New York, California and Illinois, now are running deficits so large that they cannot possibly borrow or tax their way out of them. Far and away the largest cause of these deficits is the high rates of pay and pensions to current and former state employees.
In 2014 the unfunded liabilities of all 50 states pension plans hit $4.7 trillion. Think about that for a minute. The states that created the pension plans have a responsibility to fund them appropriately so that when their employees retire that will be paid the pensions that have been promised to them. They are not doing so – to a colossal extent. $4.7 trillion!!! In Illinois alone the total unfunded liability for the state’s pension plan amounts to over $25,000 for every man, woman and child in the state. It is in the process of gobbling up the entire state’s budget.
So how is all of this a drag on our cruise ship? How is this adding rocks to the boats that we are towing? Obviously, taxes must be raised to pay for these high wages, benefits and pensions. Any time taxes are higher than they would otherwise need to be, businesses that must pay them have less funds available for investment and growth. Less investment and growth means fewer jobs. Fewer jobs means more unemployment and more government spending to support the unemployed. And the cycle of slow overall economic growth continues.
General Electric is often cynically called “Government Electric” because of its close ties to the U.S. Government. Many of its top executives and corporate counsels are also on the government payroll. Jeffrey Immelt – the CEO of GE is a noted Obama political backer. He was on the president’s Economic Recovery Advisory Board and also the chair of the president’s Council on Jobs and Competitiveness until it was disbanded. There is probably no company that is better at exploiting its connection to the government than GE.
Although GE has historically been a large industrial corporation, by the time of the economic crisis in 2008 40 percent of GE’s revenue and 50 percent of its profits came from its GE Capital arm. It made half of its money by lending – primarily to consumers. Because GE was considered one of the financially strongest companies in America, it had the best credit rating that exists. It used that to borrow at rates even lower than banks get. And then it turned around and lent that money to consumers – including sub-prime borrowers (people with poor credit ratings). And, although it borrowed money at very low short term rates, it often lent it for much longer terms. This is a highly risky maneuver, but it made their earnings look great. At least for a while.
But when the financial meltdown happened in 2008 GE quickly ran out of credit and it was looking like they would incur huge losses. It became clear that most of its subprime loans would never be paid back. Instead of accepting the results that their poor and sometimes unethical decision making caused, they picked up the phone and called their friends in the government. Jeffrey Immelt called Treasury Secretary Paulson. As a result the government jumped in and changed the rules of the game to massively help their friend Jeff Immelt.
GE had been borrowing money in the form of commercial paper. Commercial paper is a form of short term loan that many businesses use just to make payroll or other short term expenses. But GE was using it to fund long-term corporate and commercial real estate loans. This goes against the most basic of banking principles. And they had borrowed $80 billion this way! If they couldn’t roll over that $80 billion they would have had to sell their long term loans at a huge loss. And this is what should have happened. They would have lost an enormous amount of profit, but they certainly would not have gone bankrupt.
Instead the government jumped in and essentially nationalized the entire commercial paper market. This allowed GE to avoid the huge losses that they should have incurred because of their poor management. Clearly the government would never have stepped in for just any company. They did so because of the close relationship and friendships that top government bureaucrats had with top executives at GE.
Here’s another example of how GE’s close relationship with the government has allowed them to make extraordinary profits. Congress outlawed incandescent light bulbs at GE’s urging ostensibly because the new style fluorescent bulb was more energy efficient. But of course GE could earn far more with the new expensive bulb than with the old inexpensive ones. And even though GE then chose to outsource the production of the fluorescent bulbs to China, no one in Congress ever complained.
I don’t have a problem with GE’s decision to outsource production to China. Every company should do whatever it takes to keep the cost of their products as low as possible. Competition should then force them to lower their prices and the consumer will ultimately benefit. That’s the way a market economy should work. I do have a problem with the fact that they contribute a huge amount to the campaigns of politicians and then reap the benefit of laws that are written specifically for their benefit.
(Author’s Note: This section on Crony Capitalism relies heavily on the excellent work of Hunter Lewis in his book “Crony Capitalism in America”.)
Every business must pay taxes on its income. The rate at which it must pay varies dramatically based on a large number of things. The corporate tax code in the US is enormously complex, and businesses spend a huge amount of time and effort working to do legal things that will reduce their tax rates. As a result there are two ways in which corporate taxes effect the growth of our economy. The first is the rate itself. The higher the rate, the less economic growth there will be. This is simply because businesses must send money to the government instead of investing it in productive opportunities.
The second is the complexity of the code itself. Every minute that is spent finding ways to avoid taxes is a minute that is wasted from doing the productive work of the business.
Let’s look at a couple scholarly studies that have been conducted recently.
In 2010 an in-depth study was conducted and published in the American Economic Journal. The study looked at the impact of corporate income tax rates across 85 countries. The authors used an enormous amount of data gathered from PricewaterhouseCoopers. They created a fictional business and then factored out all other variables in each of the 85 countries as best they could. They found that “effective corporate tax rates have a large and significant effect on corporate investment and entrepreneurship”.
Another study prepared by the Wilson Center looked at Canada. Over the last 10 years Canada reduced its overall corporate tax rate significantly. It was 40.1 percent in 2002, but by 2012 was down to 25 percent. The study found that this reduction allowed the unemployment rate to decrease dramatically. In 2010 the unemployment rate was 8.1 percent. If the corporate tax rate had not decreased the rate would have been 8.8 percent. The study also found that for a 1 percent drop in the corporate tax rate, the economy increased in size by 1/2 percent. The dramatic decrease in corporate tax rates between 2000 and 2010 caused the economy to grow by 4.9 percent more than it would have been, and total personal income was 3.7 percent higher. This amounted to an increase in annual personal income of $1,310 per person.
Two completely independent studies looking at very different things both found that corporate taxes have a negative impact on the economy and lowering them improved the economy. But there’s nothing surprising there. The real question is – why do we tax corporations anyway? It’s pretty obvious that they will simply pass the increased costs on to the consumer of their products anyway, so why not just tax the consumer?
So what is the tax rate for corporations in the US? 40 percent. That’s right 40 percent! It’s one of the highest tax rates in the world! Most people would scream if they were taxed anywhere near that much. But US corporations have to give 40 cents of every dollar they earn to the federal government. That is money that they can’t invest or give to their shareholders.
Politicians generally love to spend money on things that they think the public wants, but they hate to increase taxes. Tax increases tend to anger a lot of voters and angry voters tend to vote against the politicians who increased their taxes. So what to do? Tax those rich corporations! Corporations don’t vote. We can just tell the voters that they are making too much profit anyway. It’s only right that they should pay for all these great services that the government is providing.
Of course the problem is that by doing so they are harming their constituents because those companies have to send money to the government and therefore can’t invest, grow the business and hire more employees.
Politicians will do everything possible to hide the amount of taxes that are actually being paid. They don’t want the public to really see the numbers. Why do you think that taxes are withheld automatically from your paycheck? Why not just have everyone send in a check to the government every three months or so. Because then you would see exactly what it is costing you and it would be much more painful.
Let’s say that you are earning $75,000 a year and paying a 15 percent tax rate. Instead of having the money withheld the government could just tell everyone to send them a check at the end of each quarter of the year. How big would that check be? $2,812. Every three months you would have to sit down and write a check to the government for $2,812.
How would you react to that? Would you be angry at how large that figure is? Would you call your congressman and tell him to stop spending so much money? If he didn’t stop spending so much would you vote against him at the next election? The answer to all those questions is probably – yes. So there is absolutely no chance that the automatic withholding of taxes from paychecks will ever end. The politicians don’t want people to feel the pain of their taxes. If people never even see the money they won’t complain so much about losing it.
It’s the same thing with corporate taxes. Individual citizens never see the huge taxes that corporations pay. They never see the amount of time that companies spend trying to avoid those taxes. They never see the billions of dollars that are held in other countries because if they were brought back to the US the corporation would need to pay taxes on them. They never see the incredible harm that high corporate taxes cause the economy.
Corporate taxes – especially at 40 percent add a lot more rocks to the boat that our cruise ship is towing. Many, many tons of rocks.
The first thing the citizens of each country should do is make an honest attempt to keep score. On a scale of 1 – 10, how well are we performing on each of the necessary items? If 10 is perfection – some place like Hong Kong before the Chinese took it back from Great Britain, and 1 is some place like Cuba or North Korea today, here are my appraisals for the U.S.
Our overall average is fair – 6.4. But clearly we could do much better if we worked on getting rid of crony capitalism, excessive regulations and high corporate taxes. This is not surprising.
I gave those categories the worst scores – two 3’s and a 4. As discussed earlier in Chapter 3, those are the primary reasons our country continues to have slow and unsteady economic growth.
I gave the categories of Educated Work Force, Rule of Law and Roads the next lowest scores. We have an excellent university and community college system, but our elementary, middle and high school systems are extremely uneven. Typically students who are lucky enough to grow up in middle and upper income neighborhoods end up with a reasonably good education. Those who grow up in poor neighborhoods and go to their local public school (instead of a charter school) almost always have much lower levels of educational attainment. The only reason the US does fairly well compared to other developed nations on science scores is because so many people end up going back to school as adults. So I give us a 6.
Although the US has an excellent legal system I can only give us a 7 on the Rule of Law category. There is a huge push today to dramatically increase the minimum wage. In terms of economic growth and the development of job skills for young people this is completely wrongheaded. Otherwise I would probably give us a 9 or even a 10.
We do have an excellent highway system in this country, but we are not maintaining and expanding it at anywhere near the levels required. Rush hours in most major cities are a daily nightmare. Our bridges require many billions of dollars of repairs. And local politicians can, and do get in the way of national priorities. I can only give us a 6.
It is tremendous that everyone in the US has access to safe drinking water. But our population and usage of water continues to grow and we are not growing the water infrastructure to match. Score: 7.
We have excellent ports and very good internet service in our country. But unions control the ports and they have shown a willingness to shut them down in spite of the fact that port workers are extremely well paid. The internet has been a beacon of free enterprise and growth, but now the government has decided that it needs to be regulated. I still give it a 7, but I’m very worried that I may need to lower that score in the near future.
Our airports are really quite good, but long security lines cost people enormous amounts of time and frustration. Additionally there has been a large amount of consolidation of the airlines over the last 20 years. This means less competition, which inevitably is leading to higher prices. Overall I give us a 7.
The other 4 categories are 8’s & 9’s. Let’s give ourselves a round of applause.
The United States is truly blessed.
•We have been given incredible natural resources in nearly every category that we need. Oil, Gas, Coal, timber, productive farmland, fresh water and valuable minerals of every sort. Since the founding of our country we have developed these resources magnificently.
•Our ancestors developed the infrastructure of the country to be second to none. We have fine railroads, ports, airports, utility systems, roads and internet.
•Our population is made up mostly of immigrants or the children of immigrants. Most people came here by choice. They also came here because they wanted to work hard and succeed. This makes for an enormously entrepreneurial country. Entrepreneurs create wealth more than anyone else.
•Our constitution is written with the intent of providing the most freedom possible. It envisions a small government that stays out of the way of people to live their lives and pursue their own happiness. This encourages creativity and allows people to be the best they can be.
These four attributes have made the incredible country that we enjoy today. We have been provided a magical cruise ship that can speed through the water and continually provide better living standards and more opportunities for every American.
Unfortunately we have become complacent and are negatively affecting every one of the things that are needed to continue that growth. We are not maintaining and growing our infrastructure as well as we should. We are over-taxing, over-regulating, and allowing government and big business to write rules that limit competition and hamper growth.
We tax corporations at one of the highest rates in world. The very companies that can innovate and develop new technologies and products that can drive growth forward are being taxed at extreme rates to pay for excessive government expenditures. Many of those expenditures are then used to pay for the development and oversight of more regulations.
Most regulations and regulatory agencies began with good intentions. There was a problem and most people felt the only way to solve it was through government intervention. But these agencies take on lives of their own and grow far beyond what was originally envisioned. They are not actively controlled by congress and continue to write new regulations long after the costs outweigh the benefits. In fact, no one seriously even considers the costs of new regulations.
And many large businesses have found that it is easier to succeed by working with lawmakers to create new regulations that tilt the playing field to their advantage.
Just as it takes many miles to stop or turn an ocean liner, it is going to take an extended period of time and persistent effort to make the changes that are needed in this country.
We need to overhaul our tax code. If individuals don’t feel the pain of paying taxes then they will support higher government spending than they should. By making businesses pay a large share of the total taxes in our country people never really see it. They don’t realize that businesses are spending money complying with the tax code and spending a huge amount in taxes that could be better spent investing, competing and growing.
As I discussed in Chapter 3 we need an Economic Protection Agency in order to truly understand the cost of each significant regulation and prepare a well thought out cost-benefit analysis. It’s unfortunate that we need a brand new government agency to protect us from the existing government agencies. But it’s the only real way out of this mess.
In the part of this book where I discuss Crony Capitalism I give four examples. They all have one thing in common. They distort prices. By business and government working together in a way that benefits existing businesses and harms others they are distorting the very mechanism that makes free enterprise work. They are getting in the way of a true free market and true competition. This in turn causes prices to be higher and availability of products to be lower than they should be. So what is the solution? It’s really nothing more than a simple test. Does any law or regulation have the effect of distorting prices? If so, it should be repealed.
It may sound naïve, but it’s really as simple as that. Virtually every time government works with business to enact new laws or regulations, some businesses are benefitting and some are being harmed. If we stop this and let the free market function properly society will benefit.
We can do this. The 2 percent or less growth rate that we’ve been experiencing since the 2008 recession is highly unusual. Our economy should be growing at rates in excess of 5 percent per year. With the changes I’ve outlined in this book, we can offer much higher levels of opportunity to many more citizens. We can reinvigorate the American Dream. Let’s do it!
3 [+ http://www.wsj.com/articles/the-weekend-interview-with-j-patrick-doyle-how-pizza-became-a-growth-stock-1426286353+]
4 [+ https://www.fhwa.dot.gov/publications/publicroads/96spring/p96sp16.cfm+]
6 Bloomberg Businessweek January 18, 2015
7 [+ http://en.wikipedia.org/wiki/Rail_transportation_in_the_United_States, & Association of America’s Railroads – May 2014+]
10 Institute for Energy Research
12 [+ http://theweek.com/articles/550126/marketbased-solution-californias-water-crisis+]
13 [+ http://www.mckinsey.com/insights/high_tech_telecoms_internet/the_great_transformer+]
18 [+ http://www.publiccharters.org/get-the-facts/public-charter-schools/+]
19 Red tape rising: Five years of regulatory expansion By Diane Katz and James L. Gattuso
22 Crony Capitalism in America by Hunter Lewis
23 [+ http://www.wsj.com/articles/the-weekend-interview-with-j-patrick-doyle-how-pizza-became-a-growth-stock-1426286353+]
24 [+ http://www.investopedia.com/ask/answers/13/dodd-frank-act-affect-me.asp+]
25 [+ http://www.transparency.org/files/content/corruptionqas/Impact_of_corruption_on_growth_and_inequality_2014.pdf+]
27 Crony Capitalism in America – by Hunter Lewis
28 [+ http://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/ResearchPapers/Effect-of-Corporate-Taxes-on-Investment.pdf+]
29 [+ http://www.wilsoncenter.org/sites/default/files/corporatetaxfinale.pdf+]
1. Cruise Ship:
2. Hamburger: [+ http://www.dreamstime.com/royalty-free-stock-photography-hamburger-closeup-image21221937+]
3. McDonalds: [+ http://topinfopost.com/2014/12/01/four-countries-got-rid-of-mcdonalds+]
5. Interstate Highways: [+ http://highwayactof1956.weebly.com/map-of-the-us-interstate-highway-system.html+]
6. Pacific Highway Bridge: [+ https://www.cardcow.com/199348/pacific-highway-interstate-bridge-spanning-columbia-river-portland-ore-vancouver-wash-oregon/+]
7. Railroad: [+ http://coxy.squarespace.com/coxys-n-scale-and-railroad-bl/2006/12/23/long-live-the-bnsf.html+]
10. Electricity: [+ http://www.businessgreen.com/bg/analysis/2344280/overlooking-electricity-storage-could-undermine-uk-green-energy-goals+]
12. Internet: [+ http://yourstory.com/2015/02/facebook-reliance-communications-internet-org/+]
14. The World in hands:
16. Pygmy Owl:
18. Cycle of Corruption:
I was born in Chicago, Illinois in 1956, graduated from Lewis University in 1979 with a degree in Economics and the University of Arizona in 1980 with an M.B.A. I worked for IBM for 5 years and then Raytheon for 29 years. I’ve been married to the same wonderful woman for 27 years and have two fantastic daughters. During this time entire time I’ve been refining my ideas about economic policy and government. Everything I’ve observed has made me an economic conservative, but socially more middle of the road.
What’s the story behind your latest book?
I’ve probably been writing this book in my mind for my entire life, but it really came together in the last year. I actually had a dream that pictured that economy as a giant passenger train with the fuel coming from all the passenger’s ideas. And with extra cars filled with rocks constantly being loaded onto the train. The rocks are added every time we create more regulations, allow crony capitalism to happen or over spend and over tax our people. The people keep coming up with new ideas that will make the train speed forward, but the regulations, etc keep adding extra weight and slowing it down. I eventually came to realize that trains are a little old fashioned and changed it into a magical cruise ship.
What motivated you to become an indie author?
I know that economics tends to be a rather boring topic, and very few people willingly read books on the topic unless they are forced to in school. But I’m not a PhD economist. So I try to write in a manner that is easy and kind of fun to read while still making the important points. Our nation’s future is dependent on our economic success. If people don’t understand economics and what it takes for our economy to grow, they will vote for politicians that pander to their short term wants and our nation will inevitably face a long period of decline. Along with it, fewer people will have opportunities to improve themselves. I write because I strongly believe that our free market economy is humanity’s greatest invention ever. We need to do whatever it takes to keep it healthy.
Since the 2008 recession the American economy has grown at a rate of less than 2% per year. This is far less than the growth rate after any other recession since World War II. Why is this happening? We are over-taxing, over-regulating and allowing crony capitalism to get in the way. This book explores the infrastructure and system of laws that are necessary for a successful modern economy. It takes a look at the status of each of those items in the U.S. It considers how well we are maintaining and growing our infrastructure, and then delves into the real problems. Our corporate tax rate is one of the highest in the world, we have a runaway regulatory system that continues to add hundreds of extremely costly new regulations each year, and we allow certain big businesses to have unprecedented influence on our politicians. Taken together these are having a massive negative impact on the success of our economy. This book is a quick and easy read because of its extensive use of examples and stories. Yet it makes a powerful case that some relatively simple changes could have a profound impact on the health of our economy and the well-being of every citizen.