Coyote Blog

Timothy Carney has a really interesting deconstruction of the US Chamber of Commerce agenda, and it is a good reminder of the forces at work pushing this country towards a corporate state (similar to France and Germany).  When large corporations lobby via the Chamber of Commerce, it is apparently not for low taxes and free markets, but rather targeted interventions and subsidies.  The article does not have a money quote I could find, but this should give you an idea of what the author discovered in the Chamber of Commerce rankings of Congressmen:

On the House side, it’s a similar picture. The Republican with the lowest Chamber score was [Ron] Paul.   Even Rep. Barney Frank, D-MA, who wants to regulate everything except Fannie Mae, scored 14 points higher than Paul on the Chamber’s scorecard.

Suffice it to say a ranking system that has folks like Ron Paul last is not based on free markets and small government.  Apparently, the Chamber marks down Congressmen who did not vote for all the bailout and stimulus packages, did not vote for various alternative energy subsidies, and did not vote to expand college loan subsidies.

The victor of almost any new regulation or licensing program is typically incumbents, and particularly large incumbents.  In my own business, there have been a series of new government regulations added over the years, with the effect that an industry formerly dominated by hundreds of ma and pa operators has consolidated to barely four or five players.  No one else can afford the compliance costs.  Licensing is almost always incumbent protection, and the government even frequently turns over the approval process for new entrants to the current incumbents (e.g. medicine and law).  And subsidies are almost by definition support incumbents over potential new entrants.

Postscript: In terms of incumbent protection, keep an eye on carbon permits.  There will be a ton of pressure to give free or discounted permits to current incumbents, as was done in Europe.  This would be a huge structural barrier to competition, as incumbents can service their current market share for free but new entrants (or expansions of existing entrants) will require expensive new permits.

I found out today, the hard way, that Arizona has a law specifying exactly how a pool contract is to be paid for a pool construction or renovation job.  Yes, we sure would not want to leave it to individual choice and negotiation to determine contract terms.  The craziest part is that I am required, by law, to pay 100% of the cost of the job to the pool contractor before the gunite or finish coat of the pool is shot.  In other words, I must pay all of the contracted price before the job is complete with no hold back.

This is absolutely crazy.  I have never in my life not had a hold-back in a construction contract.  Three times  (all with my company) I have had contractors go bankrupt or disappear before the job is complete, in at least two cases leaving so much work unfinished that even the hold-back was not enough to cover the loss.   Typically, contractors bolt before the punch list is complete, and only the hold-back keeps them focused at all on finishing the job to my satisfaction.  I am not happy, particularly since Phoenix pool contractors are going bankrupt right and left in this economy.

This is yet another example where “regulation” in fact means “in the tank for favored industries that make campaign contributions.”

Michael Smith comments over at EconTalk on a comment by one Mark K (via Cafe Hayek)

Mark K wrote:

These jokers on Wall Street, who according to Russ made ‘innovative’ products like credit default swaps, showed us unregulated free market capitalism in all its glory.

The notion that we have an “unregulated free market” is false.

If we had an unregulated free market, the organizations and individuals that made stupid investment decisions — those “jokers on Wall Street” — would now be bankrupt, to be replaced by more competent organizations and managers. Instead, under the current system, they are “bailed out” — at your expense — and allowed to continue operating.

If we had an unregulated free market, the investment rating agencies that rated securities containing subprime loans as “AAA” would be disgraced, bankrupt and out of business — no one on earth would deal with them any longer — they wouldn’t be able to pay people to use their services. Instead, under our current system, not only are all those rating services still in business, the S.E.C. requires that all issuers of investments use those rating agencies.

If we had an unregulated free market, no one would be forcing bankers to make riskier loans than they wish to, as is currently done by legislation such as the Community Reinvestment Act and threats of lawsuits from organizations like ACORN and from the Federal Government‘s Justice Department (Clinton‘s DOJ filed 13 major lawsuits against banks for failure to lend to “minorities“).

If we had an unregulated free market, there would be no central banking entity in charge of a fiat money supply with the ability to:

a) Make vast amounts of credit available at below-market interest rates.

b) Follow such a persistent policy of inflation as to convince virtually everyone in the country that purchasing a house is “a good investment”.

c) Eliminate ( or at least significantly reduce) risk aversion by guaranteeing bankers that they (the Fed) will always be there as “lender of last resort”.

d) Condone and make possible a preposterously over-leveraged fractional reserve banking system under which banks currently hold total reserves of only about 4% and are thus extremely vulnerable to any sort of a run or loss of confidence in the bank.

If we had an unregulated free market there would be no quasi-government entities like Fannie and Freddie and the FHA to insure that trillions of dollars of that cheap credit made possible by the Fed was directed into the residential housing market, producing an unsustainable boom in housing construction, which, when it ends, leads inevitably into an economic bust.

If we had an unregulated free market, the Federal Government would not now be contemplating looting the American taxpayers of another trillion dollars or so to pay off various special interests that helped the latest collection of looters get into power.

We don’t have an unregulated free market. We have a “mixed economy”, with a few elements of capitalism struggling under the weight of literally thousands of pages of rules and regulations and dozens of government agencies interfering in virtually every aspect of our economic lives.

And under this set-up, it is you, the “little guy”, the individual who doesn’t have a powerful lobby in Washington to get the rules bent in your favor — you, who cannot command an audience with Congress to beg for your personal bailout — you, who can do nothing as government uses your funds to save the incompetent and the dishonest from the consequences of their own actions — it is you who gets screwed.

We don’t have an unregulated free market; we have an out-of-control government intent on looting us blind.

I have written on this topic quite a bit, but via Cato comes another great example of how licensing and regulation, while promoted as consumer protections, much more frequently are incumbent protection against new competitors.  Cato has a video of some folks in Oregon who started a moving business, only to find that sate law effectively requires them to get permission of current moving companies before they can operate  (apparently, someone in Oregon is enamored of medieval guild systems).

How the law works is that when a new mover submits his application for a business license, existing movers can file an objection (which apparently is pro forma).  The new company must then justify to the state why another moving company is justified by the marketplace.  Of course, absolutely no guidance is given how such a thing might be proven.

I would have found this unbelievable, had not my company faced the exact same requirement in another context.  In Shasta County, California, we wanted a liquor license to sell beer at the store we run at McArthur-Burney Falls State Park.  We were told that we could not have a license until we had proven to the County that there was enough demand for another liquor outlet.  It was for our protection, they told me — we wouldn’t want you to get in a situation where you might fail.

I have written about liquor licensing before – if ever there was a regulatory regime whose time was long past, this is it.  The extensive fingerprinting and background checks one must go through to get a license are outdated remnants of a concern for the return of organized crime, a problem that was obviated by legalization  (so that, as usual, the government regulatory regime to fix a problem was instituted at the same moment the problem went away).  Now, the liquor licensing process is used as a club by existing competitors to keep new entrants out.  My bet is that organized crime is now on the other side of the fence, using the liquor licensing process to hammer honest competitors.  And if you really want to see abuse, read the whole Rack ‘N Roll saga by Radley Balko.

I bet you are just overcome with suspense wondering if we got our license.  In Shasta County, we eventually succeeded, mainly because the store was in a gated park with an entrance fee, and we could make the argument that competition did not really cross the gates of the park.  Years later, we lost a similar battle in Lake Havasu City, AZ, where a group of local business people have really organized the town to their benefit and use every tool they can, from zoning to licensing, to keep competitors out.

A few posts ago I discussed some of the onerous build code hurdles we had to pass in retrofitting our house to pass a pool inspection.  In short, the code is designed to keep small children from getting out of the house on their own to a pool area.  Dead bolts must be 54″ off the ground where they cannot reach them, the doors must have automatic closers (and thereby be difficult for small children to open) and windows cannot open wide enough to allow the kids to pass.  This is, of course, nominally for the safety of kids.

I pointed out one obvious critique of this regulation:  the vast, vast majority of kids do not drown in pools by sneaking out of the house.  They drown in pools when their parents know full well they are outside and fail to supervise them closely.

But I failed to discuss an even more obvious critique.  Can anyone see any possible problem with making it impossible for small children to exit the house?  Perhaps, say, in a fire?   Once I bring my house up to code, because none of the children’s wing of the house has any window or door except to the pool area, the state will have made it absolutely impossible for small children to escape in a fire.   Yes, the state has forced me to turn the back of my house into a fire trap for kids.  That is, of course, unless I reverse all the changes 5 seconds after the inspector leaves my property, which of course I would never, ever do because I am a good American who pledged allegiance to the state every shool day of my childhood.

Nothing makes purity more interesting than temptation.  This applies to ideological purity just as much as the physical sort.  As a libertarian, my greatest temptation to call for government action comes when I deal, as a retailer, with Visa and Mastercard (V/MC).

This post is not a call for government action, so I guess I am resisting temptation.  But I at least need to vent, sort of like a monk pounding his head on the wall after getting the Victoria’s Secret catalog in the mail.  So here is my rant.

First, let’s start with how credit card companies make their money.  I will confess that I do not know how the card companies (V/MC) and the card processors (often large banks) split the take, so this is how they make money together.  V/MC and the processors charge fees to merchants.  Typically this is a fixed fee per transaction plus a percentage.  On average, a merchant might be paying 2.5-3.5% of a transaction.  The card companies also make money from card holders, charging annual fees, interest fees, etc.

You will have seen of late that most credit cards offer various loyalty programs, from airline miles to cash rebates.  You might have thought those were marketing expenses paid by the credit card companies.  Wrong.  The card companies simply charge merchants a higher fee for processing transactions using these cards.  In a sense, the card companies have organized with card users to use their power to extract extra value from merchants.

All of this I can generally live with.   Visa and MasterCard, through both their credit facility and their implicit standardization, bring enormous value to retailers and customers.  Its a big circular game anyway — customers get 1% back and think they are getting a deal, merchants pay this extra 1% in fees, and then add it into the price of what they are selling.  It’s a wash, except to the extent that customers with reward cards in the end extract a bit of value from customers who pay cash (for reasons explained below).

For this value one must accept the typically arrogant and indifferent customer service provided by any monopoly  (American Express is particularly awful to deal with as a retailer).   But they are no worse to deal with than the government, so its unclear how the government could make the service any better.

What tends to tick me off, though, are rules and restrictions.  Like the creeping work rules in the UAW contract, these are in many ways more insidious than the service and pricing.  Here is what set me off today, from one of my card processors  (in this case Bank of America, which, to be fair, is someone I would recommend for merchant account processing).  Click to enlarge.

So, why are businesses breaking these rules so often?  Let’s take a look:

• No minimum transaction. Remember that V/MC charges a minimum fee, from 10-40 cents or so, per transaction.  So if someone buys a pack of gum in our store, likely 100% of the sales price is going to V/MC.  Typically it takes at least a one dollar total sale for there to be any money left over beyond paying cost of goods sold and the credit card folks.  So merchants logically want to set a minimum.   V/MC hates this practice, but it is rampant.  I plead the fifth on our own practices.
• Surcharging. Credit card customers cost more than cash customers.  Sure, we get some non-sufficient funds checks, but the eventual cost of these is nowhere near 2.5% of sales.  Merchants logically don’t like having their cash customers having to subsidize the frequent flyer rewards of their credit customers.  However, unlike transaction minimums, card processors have mostly been able to drive out cash discounts.
• Requiring ID and Fraudulent Transactions. I will take these two together, since they are so ironic one after the other.  V/MC is telling merchants that they can’t check ID, which is the only reasonable approach to limiting fraud, but that they can’t submit fraudulent transactions.  You say that the text says “known fraudulent?”  Well, read on –

To the latter point, I think most people assume that the credit card companies are absorbing the fraud, which is how they justify the fees they charge.  Wrong again.  Credit card companies only absorb credit risk.  Over the last 10+ years, they have pushed fraud back on the retailer.  If a consumer claims fraud on his card with some transaction, then the credit card company refunds the customer and takes the money from the merchant unless the retailer can absolutely prove he made delivery to the consumer personally (which he can’t prove because he can’t check identification) .  Merchants bear the cost of fraud, not card companies.  Which I could accept (since I have more ability than the card companies to control fraud) expect the card companies ban me from controlling fraud.  So I have to take financial responsibility for something I am not allowed to prevent.  And that really ticks me off.

Anyway, maybe someday we can organize a large merchant boycott, where, even for a day, we all refuse to accept Visa and Mastercard.  Of course we would be breaking the rules, because that is not allowed by our V/MC agreement.

Postscript: I suspect that a few retailers with some power are starting to crack this, at least for themselves.  Costco only takes American Express.  Sams Club only take one card (MC, I think).  My guess is that both, with their large size, bargained for exclusivity in exchange for concessions on fees and/or terms.

Postscript #2: I expect comments like, “Well so-and-so always makes me show an ID.”  I don’t doubt you.  I am merely saying that by doing so, they have either negotiated an exception to the V/MC agreement (very unlikely, as V/MC holds to these rules like the Maginot Line) or the retailer is breaking the rules.