Four taxi drivers are suing Uber and seeking class-action status, alleging they’ve seen up to a 40 percent dip in business since the ride-hailing service began operating in violation of local regulations.
Archive for the ‘The Corporate State’ Category.
I would be all for reductions in tax levels, but I don't think that current Federal tax rates are particularly a barrier to growth and prosperity. A much bigger, and ever-growing barrier to growth is regulation.
5-10 years ago, in my small business, I spent my free time, and most of our organization's training time, on new business initiatives (e.g. growth into new businesses, new out-warding-facing technologies for customers, etc). Over the last five years, all of my time and the organization's free bandwidth has been spent on regulatory compliance. Obamacare alone has sucked up endless hours and hassles -- and continues to do so as we work through arcane reporting requirements. But changing Federal and state OSHA requirements, changing minimum wage and other labor regulations, and numerous changes to state and local legislation have also consumed an inordinate amount of our time. We spent over a year in trial and error just trying to work out how to comply with California meal break law, with each successive approach we took challenged in some court case, forcing us to start over. For next year, we are working to figure out how to comply with the 2015 Obama mandate that all of our salaried managers now have to punch a time clock and get paid hourly.
Greg Mankiw points to a nice talk on this topic by Steven Davis. For years I have been saying that one effect of all this regulation is to essentially increase the minimum viable size of any business, because of the fixed compliance costs. A corollary to this rising minimum size hypothesis is that the rate of new business formation is likely dropping, since more and more capital is needed just to overcome the compliance costs before one reaches this rising minimum viable size. The author has a nice chart on this point, which is actually pretty scary. This is probably the best single chart I have seen to illustrate the rise of the corporate state:
Postscript: I had thought that all the difficult years converting all of our employees from full to part time to avoid Obamacare sanctions would be the end of our compliance hassles (no company will write health insurance for us, so our only defense against the mandates and penalties is to make everyone part-time). But the hassles have not ended. For every employee, next year we must provide a statement that has a series of codes, by month, for that employee's health care status. It is so complicated that knowledgeable people are still arguing about what codes we should be using. Here is a mere taste of the rules:
A code must be entered for each calendar month January through December, even if the employee was not a full-time employee for one or more of the calendar months. Enter the code identifying the type of health coverage actually offered by the employer (or on behalf of the employer) to the employee, if any. Do not enter a code for any other type of health coverage the employer is treated as having offered (but the employee was not actually offered coverage). For example, do not enter a code for health coverage the employer is treated as having offered (but did not actually offer) under the dependent coverage transition relief, or non-calendar year transition relief, even if the employee is included in the count of full-time employees offered minimum essential coverage for purposes of Form 1094-C, Part III, column (a). If the employee was not actually offered coverage, enter Code 1H (no offer of coverage) on line 14. For reporting offers of coverage for 2015, an employer relying on the multiemployer arrangement interim guidance should enter code 1H on line 14 for any month for which the employer enters code 2E on line 16 (indicating that the employer was required to contribute to a multiemployer plan on behalf of the employee for that month and therefore is eligible for multiemployer interim rule relief). For a description of the multiemployer arrangement interim guidance, see Offer of health coverage in the Definitions section. For reporting for 2015, Code 1H may be entered without regard to whether the employee was eligible to enroll or enrolled in coverage under the multiemployer plan. For reporting for 2016 and future years, ALE Members relying on the multiemployer arrangement interim guidance may be required to report offers of coverage made through a multiemployer plan in a different manner.
Here are some of the codes:
- 1A. Qualifying Offer: Minimum essential coverage providing minimum value offered to full-time employee with employee contribution for self-only coverage equal to or less than 9.5% mainland single federal poverty line and at least minimum essential coverage offered to spouse and dependent(s).
This code may be used to report for specific months for which a Qualifying Offer was made, even if the employee did not receive a Qualifying Offer for all 12 months of the calendar year. However, an employer may not use the Alternative Furnishing Method for an employee who did not receive a Qualifying Offer for all 12 calendar months (except in cases in which the employer is eligible for and reports using the Alternative Furnishing Method for 2015 Qualifying Offer Method Transition Relief as described in these instructions).
- 1B. Minimum essential coverage providing minimum value offered to employee only.
- 1C. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) (not spouse).
- 1D. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to spouse (not dependent(s)).
- 1E. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse.
- 1F. Minimum essential coverage NOT providing minimum value offered to employee; employee and spouse or dependent(s); or employee, spouse and dependents.
- 1G. Offer of coverage to employee who was not a full-time employee for any month of the calendar year (which may include one or more months in which the individual was not an employee) and who enrolled in self-insured coverage for one or more months of the calendar year.
- 1H. No offer of coverage (employee not offered any health coverage or employee offered coverage that is not minimum essential coverage, which may include one or more months in which the individual was not an employee).
- 1I. Qualifying Offer Transition Relief 2015: Employee (and spouse or dependents) received no offer of coverage; received an offer that is not a qualifying offer; or received a qualifying offer for less than 12 months.
I find it telling the progressives have chosen the most vocal and one of the most eloquent opponents of cronyism and corporate welfare as their particular bogeyman.
A teeth whitening service in Connecticut sued the state, arguing that the state regulatory rule banning anyone but dentists from performing the simple whitening procedure should be overturned because its only purpose was to shield one favored group from competition.
The Court sided with Cronyism, ruling in part:
"Even if the only conceivable reason for the LED restriction was to shield licensed dentists from competition," the 2nd Circuit declared, "economic favoritism" is a sufficient justification all by itself. "Much of what states do is to favor certain groups over others on economic grounds," the court said. "We call this politics."
When I went to school, our system was described to me as "majority rule with minority protections". The American system was never supposed to allow for the arbitrary sacrifice of one group to another just because the first group can manufacture more votes.
When first presented with the idea of the Hyperloop (a train running in vaccuum in an underground tube), I was extremely skeptical it made any sense. Sure it might work (after all the London tube started out as a pneumatic system much like those that older ones of us remember sending receipts around department stores). But did it make any economic sense. Was it really likely that, if we can't afford rail lines above ground easily, we could afford to build thousands of miles of air-tight large-diameter tubes? Honestly, it looked to me like any other silly idea on the cover of Popular Mechanics, right next to the titanium zeppelin the size of Connecticut that would someday be doing construction work.
So enter Elon Musk, who is very passionate about the idea, claims to be convinced it will work, and appears to be putting some money behind it. With his support, the idea must immediately be treated as more credible, and it does indeed get a lot of press. But here is the problem for me with Musk: With him, the idea must also be treated as very probably another attempt by him to drain money out of the taxpayers' pockets into his. Because that is what he does in so many of his enterprises.
More than 60 ultra-rich Americans have contributed to both Jeb Bush’s and Hillary Clinton’s federal campaigns, according to an analysis of Federal Election Commission data by Vocativ and The Daily Beast. Seventeen of those contributors have gone one step further and opened their wallets to fund both Bush’s and Clinton’s 2016 ambitions.
After all, why support just Hillary Clinton or just Jeb Bush when you can hedge your bets and donate to both? This seems to be the thinking of a group of powerful men and women—racetrack owners, bankers, media barons, chicken magnates, hedge funders (and their spouses). Some of them have net worths that can eclipse the GDPs of small countries.
Ideology, policy prescriptions, legislative plans -- nothing matters except influence. This will always happen as long as we give politicians so much power. Its why the Coke and Pepsi party look so similar today. At least a few people are noticing:
Is there a single person alive who believes that corporations, trade associations, NGOs, unions, and the like pay the Clintons enormous sums for speeches because they believe their members actually want to hear the Clintons say the same tedious talking points they have been spewing for years? If that were the only value received no profit-minded enterprise would pay the Clintons these vast fees because they would earn, well, a shitty rate of return.
No, the Clintons are not paid to speak. Businesses and other interest groups pay them for the favor of access at a crucial moment or a thumb on the scale in the future, perhaps when it is time to renew the Ex-Im Bank or at a thousand other occasions when a nod might divert millions of dollars from average people in to the pockets of the crony capitalists. The speaking is just a ragged fig leaf, mostly to allow their allies in the media to say they “earned” the money for “speaking,” which is, after all, hard work.
We have such people as the Clintons (and the tens of thousands of smaller bore looters who have turned the counties around Washington, D.C. in to the richest in the country) because they and their ilk in both parties have transformed the federal government of the United States in to a vast favors factory, an invidious place that not only picks winners and losers and decides the economic fates of millions of people, but which has persuaded itself that this is all quite noble. Instead, the opposite is true: This entire class of people, of which the Clintons are a most ugly apotheosis, are destroying the country while claiming it is all in the “public service.” It is disgusting. We need to say that, at least, out loud. . . .
Tear down the aristocracy of pull. This may be our last chance.
This picture was taken at my hotel in Vancouver, BC on Saturday. This is only about a third of the mob trying to get a taxi, a process that took me over 30 minutes. The whole thing was made doubly frustrating by another bit of government interference -- about half the taxis that showed up dropping folks off left the hotel empty despite the huge mass of people waiting. Why? Apparently certain airport taxis are not allowed to pick up people in certain areas. So the taxis had to go all the way back to the airport empty, despite the fact that people there were waiting to go to the airport. Absolute madness of crony government intervention.
Yes, I understand that Saturday is "cruise day" and there is a huge spike in demand as these boats load and unload. But this is exactly why Uber would make so much sense. Think about all the folks that have weekday jobs that would love to earn some extra money driving on a Saturday. Uber allows for just this sort of flexibility.
Government green energy programs are supposedly about subsidizing new energy technologies to reduce their cost and increase their adoption rate. But it appears to me that they are in fact merely about subsidizing favored companies.
Why? Well consider this:
Over the last couple of years, trade remedy actions on clean energy products have intensified. In the wind industry, the Wind Tower Trade Coalition, an association of U.S. producers of wind towers, brought an AD/CVD complaint against imported wind towers in 2011. The U.S. Commerce Department started an investigation, and announced a preliminary decision in December 2012.
This decision found both subsidization and dumping in relation to Chinese imports and imposed an antidumping tariff of between 44.99% and 70.63%, as well as countervailing duties of 21.86%–34.81%. The Commerce Department also established a separate antidumping duty of 51.40%–58.49% on Vietnamese wind tower manufacturers.
In the solar industry, in October 2011, the Coalition for American Solar Manufacturing, a group of seven U.S. solar panel manufacturers led by Solar World Industries America, accused Chinese solar panel companies of dumping products in the United States. The Commerce Department opened an investigation in 2011 and announced the final ruling in 2012. The decision was to impose antidumping tariffs ranging from 24% to 36% on Chinese producers.
All of those actions are not only not consistent with reducing the cost of new energy technologies, they actually raise the cost of wind and solar. The only benefit of these actions is to improve the bottom line of crony-connected green energy companies. There is no reason to believe that this cronyism is not the real rational behind the whole program. If government subsidizes consumer solar purchases 30% and then raises solar panel costs by 30%, they are not making the technology cheaper for consumers, but just finding an excuse to pour tax money into the pockets of a few folks like Elon Musk.
The hefty sales tax that funds Phoenix light rail deficits is about to expire, and as is usual, politicians not only don't want it to expire but they want to double it so they can build more over-priced rail lines.
One of the reasons that stuff like this is so hard to fight is a phenomenon called "concentrated benefits but dispersed costs." This means that, particularly for certain crony handouts, the benefits accrue to just a few actors who, due to the size of these giveaways, have a lot of financial incentive to promote and defend them. The costs, on the other hand, are dispersed such that the final bill might only be a few dollars per taxpayer, such that no individual has much incentive to really pay up to support the fight.
A great example of this is sugar tariffs. These raise the price of sugar (as well as reducing our choices and effectively promoting imperfect substitutes like HFCS) so we as consumers should all fight them. But the higher cost of sugar might only cost us, say, $20 each a year individually. Are you really going to donate $100 in a political cause to save $20? On the other side, these tariffs create millions and millions of dollars in profit for a few sugar producers, such that they have a lot of money and incentive to spend big on lobbying to keep the tariffs in place.
The new Phoenix light rail tax increase gives us a yet another sad example of the phenomenon:
Construction companies, engineering firms and transit service providers are the biggest early supporters of the Proposition 104 campaign to expand Phoenix transportation, while the group fighting the proposed tax increase still seeks major funding.
The MovePHX campaign, supporting the bus, light rail and street improvement plan going before city voters in August, raised $382,900 from March through the end of May, according to finance reports filed Monday.
Opposition group Taken for A Ride — No on Prop 104 received just under $417 from individuals over the same period. A second campaign committee opposed to the proposition formed after the contribution reporting period ended....
More than half of the contributions to the MovePHX campaign during the reporting period came from engineering, design and construction firms, including many that were hired for design and consultation on the Valley's first stretch of light rail.
The largest single donation came from We Build Arizona, a group of engineering, contracting and transit organizations that donated $125,000 to the campaign. TransDev and Alternate Concepts, Inc., which hold bus and light rail service contracts, contributed more than $35,000 combined.
A combined $30,000 came from police, firefighter and food and commercial worker union political action committees.
$382,900 to $417. That is why cronyism is so prevalent.
CEO of Uber France has been arrested because, uh, his competitors have resorted to violence to defend their inferior product. The fact that the victim rather than the perpetrators of violence is getting arrested speaks volumes to how far governments will go to block innovation that hurts politically-connected incumbents.
After days of violent protests and defiance on the part of Uber's French management, two of the company's employees were taken into custody for "illicit activity" today. Uber France CEO Thibaut Simphal and Uber European GM Pierre-Dimitri Gore-Coty were arrested for running the company's ride-sharing service illegally. TechCrunch reports the pair is also being held under suspicion of "concealing digital documents." Last week, French Interior Minister Bernard Cazeneuve took legal action to shut down UberPOP, the service that employs non-professional drivers to provide rides, in response to protests that blocked key transportation hubs.
The French government has ordered police to crack down on Uber in Paris after violence erupted at demonstrations by taxi drivers against the online ride service.
Interior Minister Bernard Cazeneuve said Thursday that he asked the Paris police authority to issue a decree forbidding activity by UberPOP drivers. Similar decrees have already been issued in other major French cities.
Cazeneuve said vehicles using UberPOP will now "be systematically seized" by police when caught operating.
The UberPOP app was ruled illegal by the French government last year, but the U.S. company hasn't yet exhausted all legal recourse and has told its drivers to keep operating.
Responding to Cazeneuve's comments Thursday, Uber said it was "still assessing on which legal ground such measures could be implemented."
Uber said that it is up to the courts to decide what is legal and that no court has so far told it to stop operating.
Angry over Uber's incursion into their industry, taxi drivers held protests around Paris on Thursday that disrupted traffic near airports, major rail stations and key intersections, ensnaring American rock singer Courtney Love in the chaos.
This is the corporate state at work -- any business not explicitly approved by politicians will be suppressed.
For years I have excoriated the City of Glendale, AZ (a western suburb of Phoenix) for its myriad subsidies of the Coyotes NHL hockey team. When Glendale finally had the chance to walk away several years ago, I (and many others) begged the town not to throw good taxpayer money after bad and re-sign some sort of subsidy agreement with the team. For you see, even after getting a stadium at taxpayer expense, the team still demands millions of dollars a year in operating subsidies to stay in town.
But the town insisted on throwing more taxpayer money at the group buying the Coyotes from the NHL out of bankruptcy. The problem was that there was a gap between the NHL's asking price ($200 million) and the team's value in AZ ($100 million). First, they tried to give them a direct subsidy, but the Goldwater Institute sued to stop that and won. So instead, the city buried the subsidy in a stadium management contract. Here is how I described this contract at the time it was signed:
The NHL came down to a price of $175 million, still $75 million or so above what the team is worth. The City had already sought arms-length bids for the stadium management contract, and knew that a fair market price for that contract would be $6 million per year. It ended up paying the buying group $15 million per year for the 15-year contract, representing a subsidy of $9 million a year for 15 years. By the way, the present value of $9 million over 15 years at 8% is... $75 million, exactly what was needed to make up the bid-ask gap. Again, I think the city almost had to do it, because the revenue stream it was protecting is likely higher than $9 million. But this is the kind of bad choices they saddled themselves with by building the stadium in the first place.
So only now that they have signed the contract and a private party has taken over the Coyotes based on the city's contract, Glendale is trying to unilaterally tear up the contract. They have some thin reed of a "conflict of interest" claim that is based on the overlap of payrolls for one guy between the City and the Coyotes by a couple of days. This seems like an absurd claim gen'd up just to try to solve Glendale's buyer's remorse. My gut feel is that it is never going to fly in court.
What a bunch of losers. You should never have signed the contract, but now that it is signed, you actually have an obligation to live by it, particularly since a private party paid $100 million extra for the team mainly on the strength of this contract.c If you want out, declare bankruptcy (which actually might not be too far away for the city).
For reasons I will not get into yet again, cheer-leading local sports subsidies is essentially built into the DNA of most big city newspapers.
'15 Super Bowl visitors boosted tax revenue by double digits
Combined sales tax revenue for January and February totaled $14 million in roughly similar categories for restaurants, bars, hotels and retail in downtown Phoenix, Westgate and Scottsdale. That was up 19.5 percent over the same time a year ago.
That sounds awesome. Take that, all you public subsidy skeptics. Giving the Superbowl the benefit of the doubt and ignoring things like growth and the really good weather this winter, that is $2.28 million increase in taxes which we will generously ascribe all to the Superbowl. And probably mostly taken from non-Arizonans, so its like free money.
It is only later in the article that the paper sheepishly inserts this:
Phoenix, Glendale, Scottsdale and tourism bureaus from Phoenix, Scottsdale, Tempe and Mesa combined to spend more than $5.6 million on Super Bowl events and public safety.
So we spent $5.6 million (probably under-estimated) to make $2.28 million (probably not all Superbowl related). The headline was thus a total crock of Sh*t but typical of how, in small ways and large, the media helps push for bigger and bigger government. I am sure the hotels and restaurants did well -- if so, then they are free to form a consortium to pay for the Superbowl's cost next time. Or better yet, have some other sucker city host it and I will happily watch on TV.
Update: I missed this part:
The Arizona Sports and Tourism Authority and Glendale provided a $6.2 million rebate to the NFL on Super Bowl ticket sales, said Kevin Daniels, authority chief financial officer.
I can't tell from the article if that $6.2 million is or is not in the numbers above. I presume it is netted out before hand so that the gain in sales tax would be $6.2 million higher than reported above if this provision did not exist. But this does mean that another valid headline would be:
Nearly 75% of Superbowl Sales Tax Gains Given to the NFL
For some reason, it appears that building hotels next to city convention centers is a honey pot for politicians. I am not sure why, but my guess is that they spend hundreds of millions or billions on a convention center based on some visitation promises. When those promises don't pan out, politicians blame it on the lack of a hotel, and then use public money for a hotel. When that does not pan out, I am not sure what is next. Probably a sports stadium. Then light rail. Then, ? It just keeps going and going.
The city-owned Sheraton Phoenix Downtown Hotel has lost so much money — more than $28.2 million total — that some city leaders say the hotel must be put in the hands of the private sector.
They also worry that the hotel, Arizona's largest with 1,000 rooms, could harm other projects in the downtown core.
When Phoenix leaders opened the Sheraton in 2008, they proclaimed it would be a cornerstone of downtown's comeback. They had one goal in mind: lure big conventions and tourism dollars. Officials argued the city needed the extra hotel beds to support its massive taxpayer-funded convention center a block away.
The city-owned Hilton Baltimore convention center hotel lost $5.6 million last year — a worse performance than 2013 despite its close location to Camden Yards and the Orioles' playoff run.
It was the seventh consecutive year that the hotel has underperformed financially, according to an audit of financial statements presented Wednesday to the city's Board of Estimates. Under the deal's initial projections, the hotel was supposed to be making $7 million in profit by now — pumping that mone into the city's budget....
The hotel has lost more than $70 million since it opened.
I am sure that politicians in both cities called the lack of a hotel a market failure. But now we see that it was a market success. All the companies who chose not to build a hotel with private money obviously knew what they were doing, and only the political benefits of pandering the the public at large and a few special interests in specific made it seem like an attractive investment to city politicians. Which is all pretty unsurprising, since hotels have pretty much been built off every exit ramp in this country, so there seems to be no private inhibition towards building hotels -- just towards building hotels in bad locations.
I am going to oversimplify, but the essence of bank risk is that they borrow short-term and invest/lend long-term. This is a money-making strategy in that one can often borrow short-term much cheaper than one can borrow long term. This spread between long and short term rates is due to people valuing liquidity. You probably have experienced it yourself when buying a certificate of deposit (CD). The rates for 5 or 10 year CD's are higher, but do you really want to tie your money up for so long? What if rates improve and you find yourself locked into a CD with lower rates? What if you need the money for an emergency? Your concern for having your money locked up is what a preference for liquidity means.
So banks live off this spread. But there are risks, just like you understood there are risks to locking your money in a long-term CD. Imagine the bank is lending for mortgages and AAA corporate customers at 6%. To fund that, they have some shareholder money, which is a long-term investment. But they make the rest up with things like deposits and commercial paper (essentially 90-day or shorter notes). We will leave the Fed out for this. There are two main risks
- Short term interest rates rise, such that the spread between their short term borrowing and long-term investments narrows, or even reverses to negative
- Worse, the short term money can just disappear. In panics, as we saw in the last financial crisis, the commercial paper market essentially dries up and depositors withdraw their money at the first sign of trouble (this is mitigated for small depositors by deposit insurance but not for large depositors who are not 100% covered).
These risks are made worse when banks or bank-like institutions try to improve the spread they are earning by making riskier investments, thus increasing the spread between their borrowing and investing, but also increasing risk. This is particularly so because these risky investments tend to go south at the same time that short-term credit markets dry up. In fact, the two are closely related.
This is exactly what happened to GE. Via MarketWatch:
GE’s news release announcing its latest and greatest reduction of GE Capital summed up the move beautifully, saying “the business model for large wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.”
“Wholesale-funded” refers to GE Capital’s traditional reliance on the commercial paper market for liquidity. The problem with this short-term funding model for a balance sheet with long-term assets is that during a financial crisis, overnight liquidity tends to dry up as it did for GE late in 2008. When the company had difficulty finding buyers for its paper, the Federal Deposit Insurance Corp. stepped in and through its Temporary Liquidity Guarantee Program (TLGP) was covering $21.8 billion of GE commercial paper. GE Capital registered for up to $126 billion in commercial-paper guarantees under the TLGP.
If you have a AAA credit rating, you can always, always make money in the good times borrowing short and investing long. You can make even more money borrowing short and investing long and risky. GE made their money in the good times, and then when the model absolutely inevitably fell on its face in the bad times, we taxpayers bailed them out.
Which leads me to think back to Enron. Enron is associated in most people's minds with fraud, and Enron played a lot of funky accounting games to disguise its true financial position from its owners. But at the end of the day, that fraud was not why it failed. Enron failed because it was essentially a bank that was borrowing short and investing long. When the liquidity crisis arrived and they couldn't borrow short any more, they went bankrupt. Jeff Skilling didn't actually go to jail for accounting fraud, he went to jail for making potentially inaccurate positive statements to shareholders to try to head off the crisis of confidence (and the resulting liquidity crisis). Something every CEO in history has done in a liquidity crisis (back in 2008 I wrote an article comparing Bear Stearns crash and the actions of its CEO to Enron's; two days later the Economist went into great depth on the same topic).
So the difference between GE and Enron? The government bailed out GE by guaranteeing its commercial paper (thus solving its problem of access to short term funding) and did nothing for Enron. Obviously the time and place and government officials involved differed, but I would also offer up two differences:
- Few really understood what mad genius Jeff Skilling was doing at Enron (I can call him that because I actually worked with him briefly at McKinsey, which you can also take as a disclosure). With Enron so opaque to outsiders, for which a lot of the blame has to be put on Enron managers for making it that way, it was far easier to ascribe its problems to fraud rather than the liquidity crisis that was well-understood at Bear or Lehman or GE.
- Enron failed to convince the world it posed systematic risk, which in hindsight it did not. GE and other big banks survived 2008 and got bailed out because they convinced the government they would take everyone down with them. They followed the strategy of the Joker in The Dark Knight, who revealed to a hostile room a coat full of grenades with this finger ready to pull the pins if they didn't let him out alive.
Artist's rendering of 2008 business strategy of GE Capital, Citicorp, Bank of America, Goldman Sachs, GMAC, etc.
Postscript: For those not clicking through, I though this bit from the 2008 Economist article was pretty thought-provoking:
For many people, the mere fact of Enron's collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between hisconviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron's collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.
Yet recent events in the financial markets add some weight to Mr Skilling's story"”though nobody is (yet) alleging the sort of fraudulentbehaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear's counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.
Mr Skilling's defence team unearthed another apparent inconsistency in Mr Fastow's testimony that resonates with today's events. As Enronentered its death spiral, Mr Lay held a meeting to reassure employees that the firm was still in good shape, and that its "liquidity was strong". The composite suggested that Mr Fastow "felt [Mr Lay's comment] was an overstatement" stemming from Mr Lay's need to "increase public confidence" in the firm.
The original FBI notes say that Mr Fastow thought the comment "fair". The jury found Mr Lay guilty of fraud at least partly because it believed the government's allegations that Mr Lay knew such bullish statements were false when he made them.
As recently as March 12th, Alan Schwartz, the chief executive of Bear Stearns, issued a statement responding to rumours that it was introuble, saying that "we don't see any pressure on our liquidity, let alone a liquidity crisis." Two days later, only an emergency credit line arranged by the Federal Reserve was keeping the investment bank alive. (Meanwhile, as its share price tumbled on rumours of trouble onMarch 17th, Lehman Brothers issued a statement confirming that its "liquidity is very strong.")
Although it can do nothing for Mr Lay, the fate of Bear Stearns illustrates how fast quickly a firm's prospects can go from promising to non-existent when counterparties lose confidence in it. The rapid loss of market value so soon after a bullish comment from a chief executive may, judging by one reading of Enron's experience, get prosecutorial juices going, should the financial crisis get so bad that the public demands locking up some prominent Wall Streeters.
Our securities laws are written to protect shareholders and rightly take a dim view of CEO's make false statements about the condition of a company. But if you owned stock in a company facing such a crisis, what would you want your CEO saying? "Everything is fine, nothing to see here" or "We're toast, call Blackstone to pick up the carcass"?
President Obama is preparing to unleash a Colorado-River-sized torrent of stupid. He wants to spend tens of billions of dollars on goofy green energy projects that will have an indiscernible affect on world temperatures but will have a very robust effect on some crony bottom lines. Here is one example:
As part of President Obama’s plans to combat climate change, the White House announced a program on Friday for the U.S. Department of Energy to train 75,000 people to work in the solar power industry by 2020, many of whom will be part of a military veterans jobs initiative called Solar Ready Vets.
Seriously, is the training costs of workers really a substantial portion of a solar installation?
Andrea Luecke, president and executive director of the Solar Foundation, which publishes the annual National Solar Jobs Census, said that Obama’s announcement will not likely increase the size of the solar industry’s workforce but will instead ensure that the industry will be able to find highly skilled workers to fill jobs.
“We’re experiencing difficulty finding more skilled and qualified workers to install and do design work required,” she said, adding that the industry’s workforce has a “skills gap” as well-trained electricians and other workers go back to other construction jobs as the economy gains momentum.
I will translate that trade-group speak for you: We like to pay our workers less than similarly-skilled construction workers so we lose a lot of skilled workers to higher paying construction companies. This program will not add any net employment to the economy but will help us keep wages lower by increasing the supply of qualified workers.
I can't help but think of Henry Ford, who famously raised the wages of his employees substantially. The fake story is that he did this so all his workers could buy his product. The real reason he did this was that he had horrendous labor turnover problems. Like the solar industry, he was training folks who then left for higher paying jobs. So he had to raise his wages to retain trained people. How history would have changed if Ford had instead been able to call Obama and ask him to have the taxpayer pay to feed him with new, trained workers so he wouldn't have to raise his wage rates!
Seriously, did a bunch of technocrats get together and study the whole solar industry and come to the conclusion that solar installation skills were the keystone problem that was holding back the whole industry? Of course not. The solar industry will sink or swim based on panel costs and efficiencies. What happened is someone said, "well the public always seems to like job training programs. Those poll well." And then they called the solar crony association or whatever it is called and they said, "sure, we would love to have taxpayers pay some of our training costs. Thanks, we will be very supportive." And then someone said, "well, won't the Republicans pitch a fit over this?" And then someone had the brilliant idea of making it a veterans program -- "Republicans love soldiers, that will help defuze their opposition." And an expensive crony giveaway was born.
About 5 years ago I said I would be willing to accept a carbon tax whose proceeds were used to reduce various labor tax rates (e.g. social security). Substituting an energy consumption tax for a labor consumption tax was probably at least neutral and maybe even a net positive.
Now, I want to come back to that idea. I don't believe any more than I did then that CO2-driven global warming will be catastrophic. In fact, I am more confident than ever that while CO2-induced warming is a reality, the sensitivity of temperatures to CO2 levels is relatively low. But please, I am willing to fully support a carbon tax that offsets some other existing tax if only we will stop all this stupid crony useless green energy stuff. At least with a carbon tax, the markets will reduce fossil fuel use in the most efficient ways possible. As opposed to programs like this one that will reduce fossil fuel use not at all but will cost a lot of money.
Billionaire John Catsimatidis is working to slip a biofuel mandate that would add $150 million to New Yorkers’ heat expenses into the state budget just as a company he owns completes construction of the largest biofuel plant in the region.
The New York Post reports that Catsimatidis’ lobbyists are putting the pressure on State senators to slip a provision that would require all heating oil sold in New York to contain “2 percent or more of soybean oil and/or spent vegetable oils.”
He is a close friend of the Clintons. Expect a total crony feeding fest should Hillary get elected President,
I followed a link the other day to this academic paper purporting to show that the bailout of GM and Chrysler was a success. I was flabbergasted to see that the authors are Austan D. Goolsbee and Alan B. Krueger. WTF? These folks were part of the Obama Administration. This is their own policy they are passing historical judgement on. This is roughly equivalent to a economics journal seeking a paper on the success or failure of Obamacare and having Valerie Jarrett write it. How does this kind of conflict of interest pass any kind of muster?
I only skimmed the paper. I know these are two smart guys but it seems to include exactly the sort of facile analysis you would expect from a political hack, not two smart economists. I can't believe these guys would have accepted many of the assumptions they make here had they not been directly involved. Just to pick two things at random:
- They seem to stick with the assumption that millions of jobs would have simply gone *poof* had the government not intervened. Yes, this happened at Solyndra, but in most cases industries operate almost seamlessly in bankruptcy. The odds are, for example, that you have flown on an airline in Chapter 11 and didn't even know it. They make a specific argument that somehow it would be bad to have both in bankruptcy at the same time, but I can remember several times when there were multiple major airlines in bankruptcy. In fact, if both went bankrupt at the same time, one could argue it would lessen their market share loss since a major competitor was in the same boat. To the extent that the companies would have continued to operate under Chapter 11, which is 99.9% likely, then all the government did was insert itself into the bankruptcy process to overrule laws about who gets what in a bankruptcy to redirect spoils to their favored constituencies
- Yes, GM and Chrysler are doing OK now, but they usually do OK at the top of a business cycle. To my eye though, nothing fundamentally changed about how they are managed and operate. The same structural and cultural problems that existed before exist today. The same under-utilization of talented workers and valuable assets that existed before exists today. No real reckoning occurred -- in fact the bailout looked to me at the time as an exercise to use taxpayer money to avoid a true housecleaning. These companies have done OK, but what would they have done with a more thorough housecleaning?
I am always amazed that the media will credulously run stories against "corporate welfare" for oil companies (which usually mostly includes things like LIFO accounting and investment tax credits that are not oil industry specific) but then beg and plead for us taxpayers to subsidize movie producers.
I wish I understood the reason for the proliferation of government subsidies for film production. Is it as simple as politicians wanting to hobnob with Hollywood types? Our local papers often go into full sales mode for sports team subsidies, but that is understandable from a bottom-line perspective -- sports are about the only thing that sells dead-tree papers any more, and so more local sports has a direct benefit on local newspapers. Is it the same reasoning for proposed subsidies for Hollywood moguls?
Whatever the reason, our local paper made yet another pitch for throwing tax dollars at movie producers
Notwithstanding a recent flurry of Super Bowl-related documentaries and commercials that got 2015 off to a good start, Arizona appears to be falling behind in a competitive and lucrative business. The entertainment industry pays well, supports considerable indirect employment and offers the chance for cities and states to shine on a global stage.
Seriously? I am sure setting up the craft table pays better than catering a party at my home, but it is a job that lasts 2 months and is then gone. Ditto everything else on the production. And I am sick of the "shines on the world stage thing." Who cares? And is this really even true? The movie Chicago was filmed in Toronto -- did everyone who watched Chicago suddenly want to go to Toronto? The TV animated series Archer gets a big subsidy from the state of Georgia. Have they even mentioned Georgia in the series? Given the tone of the show, would they even want to be mentioned?
When government subsidizes an industry, it is explicitly saying that resources are better and more productively invested in the subsidized industry than in other industries in which the money would have been spent in a free market. Does the author really have evidence that the money I would have spent to improve the campgrounds we operate in Arizona is better taken from me and spent to get a Hollywood movie shot here instead? Which investment will still be here 6 months from now?
Arizona is one of 11 states that don't offer tax incentives, primarily in the form of income-tax credits, and that's the core of the problem. There's also no state film office to help out-of-state crews obtain filming permits, locate vendors, hire temporary staff and so on.
Arizona's tax incentives expired after 2010 and the film office closed in the wake of a recession that hit the state especially hard and necessitated tough spending choices. Although bills to revive those programs have been introduced, they're not given high odds of success in the current session as the governor and lawmakers struggle to close $1.5 billion in deficits over this year and next.
"Right now, there's nobody to call, the phone isn't being answered and nobody responds to e-mails," said Mike Kucharo, a local producer and director who serves as the state-government liaison for the Arizona Production Association, an entertainment trade and networking group. "We need a film office."
Yeah for us! While all the lemmings in other states bid up the price of a few politicians being able to get their picture with Hollywood types on a production set, we have chosen not to play. Good for us. Only an industry insider clown with a straight face could say that we need a taxpayer-funded film office. Really? Do we need a taxpayer-funded florist office to attract flower sales?
Years ago I wrote an article calling sports team subsidies a prisoners dilemma game, where the only winning move was not to play. The NFL has 32 teams, mostly in the largest cities. Without subsidies the NFL would have ... 32 teams, mostly in the largest cities, and taxpayers would have saved billions of dollars. The same is true for film:
Indeed, the number and size of incentives escalated from just two states offering $2 million in combined incentives in 2003 to 40 states offering $1.2 billion just six years later, according to the Tax Foundation.
So subsidies have gone up by over a billion dollars a year, and yet roughly the same films are being made. This is one of the best examples I can think of where politicians are using taxpayer money to increase their personal prestige. The AZ Republic should be embarrassed they are out front actively encouraging this behavior.
Postscript: For all of its flaws in teaching real-world relevant business topics, the Harvard Business School was very good, at least when I was attending it, at teaching business strategy. My memory may be fuzzy here, but I am pretty sure that "40 other groups have all jumped into this activity and have ramped up their spending by a factor of 50 in just six years and all 40 competitors are really focused on winning almost irregardless of the price they pay" is not a very good pitch for investing money in a new field.
Postscript #2: All of this is a wonton violation of the AZ state Constitution, though of course big government advocates are really good at totally ignoring Constitutional limits on government power. Here is what our Constitution says:
Section 7. Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.
Update: From the Manhattan Institute, film tax breaks return 30 cents for every dollar spent
Similar to most targeted tax breaks, movie production incentives routinely fail to deliver on the economic promises made by their proponents. Supporters frequently claim movie incentives create jobs and lead to net gains in tax revenue. However, data from several states find movie production incentives generate less than 30 cents for every lost dollar in tax revenue.
Providing tax breaks specifically to the film industry is an example of government working to choose winners and losers in the marketplace. States could attract almost any industry if they paid for a quarter to a third of its expenditures, but such a policy would be fiscally unsustainable. A better system would be to lower state tax rates for everyone, encouraging economic growth.
Film is a particularly poor industry to subsidize because it does not create long-term employment and other lasting economic benefits for states. Even though a well-made film might boost tourism, productions only offer short-term employment and the workers are highly specialized. Production and workers can easily move from one location to wherever better deals are offered.
I have mentioned a number of times my chicken or the egg arguments with Progressives on the solution to cronyism. Is the problem that government power exists to influence markets, and as long as it exists people will bid to control it? Or is it possible to wield massive make-or-break government power over industry rationally, and only the rank immorality and corrupt speech of corporations stands in the way. The former argues for a reduction in government power, the latter for more regulation of corporations and their ability to participate in the political process.
I believe this is an example in favor of the "power is inherently corrupting" argument. No corporation lobbied for NOx rules on diesel engines. They all fought it tooth and nail. But once these regulations existed, engine makers are all trying to use the laws to gut their competition:
In 1991, the EPA ignored complaints from several makers of non-road engines that rivals were cheating, in order to save fuel, on emissions rules for oxides of nitrous (NOx). Then environmental groups took up the same complaint, whereupon the agency demanded face-saving consent decrees with numerous engine makers, including two Volvo affiliates.
In essence, the engine makers apologized by agreeing in 1999 to accelerate by a single year compliance with a new emissions standard scheduled to take effect in 2006.
Meanwhile, with another NOx standard looming in 2010, Navistar sued the EPA claiming rival engine-makers were seeking to meet the rule with a defective technology. In turn, Navistar’s competitors sued claiming the EPA was unfairly favoring a defective technology pursued by Navistar (these are only the barest highlights of what became a truck-makers’ legal holy war).
While all this was going on, a Navistar joint-venture partner, Caterpillar, complained that 7,262 Volvo stationary engines made in Sweden before 2006 had violated the 1999 consent decree. Now let’s credit Caterpillar with a certain paperwork ingenuity: The Volvo engines were not imported to the U.S. and were made by a Volvo affiliate that wasn’t a party to the consent decree. EPA itself happily certified the engines under its then-current NOx standard, only changing its mind four years later, prodded by a competitor with a clear interest in damaging Volvo’s business.
To complete the parody, a federal district court would later agree that the 1999 consent terms “do not clearly apply” to the engines in question, but upheld an EPA penalty anyway because Volvo otherwise might enjoy a “competitive advantage” against engines to which the consent decree applied.
As a side note, this is from the "oops, nevermind" Emily Litella School of Regulation:
Let it be said that the EPA’s NOx regulation must have done some good for the American people, though how much good is hard to know. The EPA relies on dubious extrapolations to estimate the benefits to public health. What’s more, the agency appears to have stopped publishing estimates of NOx pollution after 2005. Maybe that’s because the EPA’s focus has shifted to climate change, and its NOx regulations actually increase greenhouse emissions by increasing fuel burn.
It is a paradox of our age that the interventionists think the public is too stupid to consult Angie’s List before hiring a lawyer, and so they need politicians to weed out the really bad ones by requiring law licenses. Yet, who determines whether a person (often a lawyer!) is qualified to become a politician? Why, the same group of citizens who were too stupid to pick their own lawyers.
I had an argument with someone of the Left last night. We both agreed that crony government protections and favors of businesses were one of the worst problems in the country. But we couldn't agree on solutions. It was a chicken and egg thing. She thought corporations were at fault for seeking them. I argued that the problem was given the government the power in the first place to grant such requests. She thought the only way to fight it was by empowering government to put more restrictions on business. My argument was that increasing the power of government to intervene in the economy only increased the problem. No resolution. I run into this all the time and need to think my way through a better way of expressing my concerns.
Anyway, I am reminded of all this because Stossel has a nice piece on the parasite economy and cronyism.
Postscript: I can say from this discussion that OFA and Media Matters and Common Cause and the like have really done their job on the Kochs because this particular person was absolutely convinced the #1 best thing we could do to improve the future of America was to shut the Kochs up and prevent them from spending any more money on politics and speech. My son says that is nearly impossible to argue any issue at all on campus without someone laying into the Kochs at some point in the conversation. I find this whole tendency to conduct politics by vilifying individuals rather than discussing issues -- individuals with absolutely no political position -- totally depressing. But it must work, because the Republicans did it too, in fact really pioneered this when they went after George Soros and made him the the secret villain behind everything Conservatives hated. People like Rush Limbaugh may get on the Left nowadays for vilifying the Kochs but go listen to his radio shows from 5 or 10 years ago -- he couldn't go three sentences without saying "Soros".
I love to watch the NFL but that organization and its team owners are some of the worst cronies in the country. A huge portion of their teams' increase in net worth over the last 30 years has come from public funding of its stadiums. These NFL stadiums are used by their teams for 8 regular season games and at most 2 pre-season games a year, or for a total of about 30 hours a year. Taxpayers are being forced to buy buildings with a 0.3% occupancy.
St. Louis is the next to propose a taxpayer fleecing, proposing to spend $400 million before they have even paid off the enclosed stadium they built 20 years ago. What a farce.
Years and years ago I described this as an awful sort of prisoner's dilemma game. If governments colluded in a promise not to subsidize teams, we would still have NFL teams in roughly the same cities but without the billions of dollars in taxpayer money having been passed on to 32 billionaires.