Obama Disses Alaska

Fifty million Americans who live in the northeast will experience what is predicted to be a historic blizzard from Monday evening through Tuesday. Cities and towns will virtually or literally close down. People will be told to stay indoors for their safety and to facilitate the crews that will labor to clear the roads of snow.

In other words, welcome to Alaska, a place that is plenty cold most of the year and which is no stranger to snow and ice.

Alaska, however, has something that the whole world considers very valuable; oil and natural gas. Lots of it. In 1980 a U.S. Geological Survey estimated that the Coastal Plain could contain up to 17 billion barrels of oil and 34 trillion cubic feet of natural gas.

In 1987, the U.S Department of Interior confirmed the earlier estimate, saying that “in place resources” ranged from 4.8 billion to 29.4 billion barrels of oil. Recoverable oil estimates ranged from 600 million barrels at the low end to 9.2 billion barrels at the high end.

A nation with an $18 trillion debt might be expected to want to take advantage of this source of revenue, but no, not if that debt was driven up by the idiotic policies of President Barack Obama and not if it could be reduced by the same energy industry that has tapped similar oil and natural gas reserves in the lower 48 states by drilling on private, not public lands.

Instead, on Sunday President Obama referred to the Arctic National Wildlife Refuge (ANWR) as “an incredible place—pristine, undisturbed. It supports caribou and polar bears” and other species and, guess what, tapping its vast oil and natural gas reserves would not interfere in any way with those species despite the whopping lie that “it’s very fragile.”

At Obama’s direction, the Interior Department announced it was proposing to preserve as wilderness nearly 13 million acres of land in ANWR’s 19.8 million-acre area. That would include 1.5 million acres of coastal plains that Wall Street Journal reported to be “believed to have rich oil and natural gas reserves.”

Not a whole lot of people choose ANWR as a place to vacation. It is a harsh, though often beautiful, area that only the most experienced visitor might want to spend some time. I would want to make every environmentalist who thinks any drilling would harm the area have to take up residence in its “pristine” wilderness to confirm that idiotic notion.

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Alaska caribou near oil drilling site.

They would find plenty of caribou, polar bears and other species hanging out amidst the oil and gas rigs, and along the pipe line. The Central Arctic Caribou Herd that migrates through the Prudhoe Bay oil field, just next to ANWR has increased from 5,000 animals in the 1970s to more than 50,000 today. There is no evidence than any of the animal species have experienced any decline.

The Coastal Plain lies between known major discovery areas and the Prudhoe Bay, Lisburne, Endicott, Milne Point and Kuparuk oil fields are currently in production In 1996, the North Slope oil fields produced about 1.5 million barrels of oil per day or approximately 25% of the U.S. domestic production. Alaska is permitted to export its oil because of its high levels of productivity.

So why has Obama’s Department of the Interior decided it wants to shut off energy exploration and extraction in a whopping 13-million acres of what is already designated as a wildlife refuge and along its coastlines on the Beaufort and Chukchi seas? The answer is consistent with Obama’s six years of policies to deny Americans the benefits of the nation’s vast energy reserves, whether it is the coal that has previously provided 50% of our electrical energy—now down by 10%–or access to reserves of oil and natural gas that would make our nation energy independent as well as a major exporter.

The good news is that only Congress has the authority to declare an area as wilderness. It has debated the issue for more than 30 years and in 12 votes in the House and 3 votes in the Senate it has passed legislation supporting development and opposing the wilderness designation.

And guess who is the new chairman of the Senate Energy and Natural Resources Committee? Sen. Lisa Murkowski, an Alaskan Republican. She also heads up the appropriations subcommittee responsible for funding the Interior Department!

This latest Obama ANWR gambit is going to go nowhere. It does, however, offer the Republican Congress an opportunity to demonstrate its pro-energy credentials.

“I cannot understand why this administration is willing to negotiate with Iran, but not Alaska,” said Sen. Murkowski when informed of Obama’s latest attack.

© Alan Caruba, 2015

Will New AG Support Civil Forfeiture Reform?

The Wednesday hearings on the confirmation of a new Attorney General, Loretta Lynch, lasted hours because members of the Senate Judiciary Committee were often called away to vote. In the wake of the scandals surrounding the manner in which Eric Holder’s Department of Justice has functioned, the hearing, led now by Republicans, could have been harsh, but it was not. The Wall Street Journal characterized the mood in the hearing room as “cordial.” Watching it on CSPAN, I can confirm that.

In early November the Wall Street Journal, in an opinion titled “The Next Attorney General: One area to question Loretta Lynch is civil asset forfeiture”, it noted that “As a prosecutor Ms. Lynch had also been aggressive in pursuing civil asset forfeiture, which has become a form of politicking for profit.”

“She recently announced that her office had collected more than $904 million in criminal and civil actions in fiscal 2013, according to the Brooklyn Daily Eagle. Liberals and conservatives have begun to question forfeiture as an abuse of due process that can punish the innocent.”

That caught my eye because the last thing America needs is an Attorney General who wants to use this abuse of the right to be judged innocent until proven guilty. Civil forfeiture puts no limits on the seizure of anyone’s private property and financial holdings. It is a law that permits this to occur even if based on little more than conjecture. It struck me then and now as a bizarre and distinctly un-American law.

Writing in the Huffington Post in late 2014, Bob Barr, a former Congressman and the principal in Liberty Strategies, told of the passage of the Civil Asset Forfeiture Reform Act (CAFRA) in 2000 “as a milestone in the difficult—almost impossible—task of protecting individual rights against constant incursions by law-and-order officials.” The problem is that civil forfeiture was and is being used to seize millions.

“The staggering dollar amounts reflected in these statistics, however,” wrote Barr, “does not pinpoint the real problem of how law enforcement agencies at all levels of government employ the power of asset forfeiture as a means of harming, and in many instances, destroying the livelihood of individuals and small businesses.”

“In pursuing civil assets, the government need never charge the individuals with violations of criminal laws; therefore never having to prove beyond a reasonable doubt that they are guilty of having committed any crimes.”

As noted above, as the U.S. Attorney for the Eastern District of New York, Ms. Lynch’s office had raked in millions from civil forfeiture. Forbes magazine reports that she has used it in more than 120 cases and, prior to the hearing to confirm her as the next Attorney General US News & World Report noted on January 26 that Ms. Lynch’s office had quietly dropped a $450,000 civil forfeiture case a week before the hearings. She clearly did not want to answer questions on this or any other comparable case.

Just one example tells you why there is legitimate concern regarding this issue and it appeared in a January 3rd edition of Townhall.com. I recommend you read the account written by Amy Herrig, the vice president of Gas Pipe, Inc, a Texas company that an editor’s note reported as “faced with extinction of a civil asset forfeiture to the federal government of more than $16 million. Neither Herrig nor her father, Jerry Shults, have been charged with any criminal offense.”

Jerry Shults is a classic example of an American entrepreneur. After having served in the Air Force and serving in Vietnam where he earned a Bronze Star, Shults moved to Dallas where he began selling novelty items at pop festivals throughout Texas. Since the first store that he opened had gas pipes exposed in the ceiling, he dubbed it Gas Pipe, Inc. Suffice to say his hard work paid off for him. By the late 1990s, he had seven stores, a distribution company, a five-star lodge in Alaska, and was an American success story. By 2014 the company had grown to fourteen stores and other notable properties.

By then he had been in business for nearly 45 years and employed nearly two hundred people. And then someone in the northern district of Texas, Dallas division, initiated a civil forfeiture seizure against him. I was so appalled by his daughter’s description of events I secured a copy of the September 15 complaint that was filed. I am no attorney, but it looked to me as spurious as one could have imagined, except for the details of Gas Pipe’s assets. On 88 single-spaced pages, those were spelled out meticulously and all were subject to seizure despite the fact that not a single instance of criminality had been proven in a court of law. Imagine having 45 years of success erased by one’s own government in this fashion. It is appalling.

Assuming Ms. Lynch will be approved for confirmation as our next Attorney General, civil forfeiture is the largely hidden or unknown issue that could spell disaster for countless American businesses, large and small, in the remaining two years of the Obama administration. She has a record of pursuing it. The upside of this is that the current AG, Eric Holder, in early January announced that the DOJ would no longer acquire assets seized as part of a state law violation.

On the same day of Ms. Lynch’s hearing, January 28, writing in The Hill’s Congress Blog, former Representative Rick Boucher (D-VA) was joined by Bruce Mehlman, a former Assistant Secretary of Commerce in the George W. Bush administration, to raise a note of warning. “The topic of civil asset forfeiture should be an important part of the discussion with Lynch. As U.S. Attorney for the Eastern District of New York, Lynch was the top official in a hotbed of civil asset forfeiture—helping to bring in hundreds of millions of dollars under the program in recent years.”

Ms. Lynch was not asked about civil forfeiture by either the Republican or Democrat members of the Senate Judiciary Committee. It was a lost opportunity and, if the new Attorney General applies her enthusiasm for it to the entire nation, it will be yet another Obama administration nightmare.

© Alan Caruba, 2015

California Housing Market Bubble Set to Burst — Will America Be Next?

AEI’s National Mortgage Risk Index for Agency purchase loans hit a series high of 11.84% in December, with FHA and VA hitting their own series highs. The addition of about 215,000 loans brought the total number of risk-rated loans to 5.3 million.

Link to view the full January 2015 presentation.  Below is a summary.

All of the indices except Fannie/Freddie rose in December and hit series highs. If FHA were to adopt VA’s risk management practices, the composite index would drop to about 9%.

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Origination Shares and MRIs by Lender Type

A dramatic decline in purchase loan market share for large banks continued in December, offset by an equally dramatic increase in the nonbank share. Large banks are the only lender type with net MRI decline since November 2012; hence, we must look beyond large banks to asses credit trends.

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First-time Homebuyer Share of Purchase Loans*

The share for the combination of government-guaranteed and private-sector loans was estimated to be 50% in December, well above the comparable figure in the latest NAR survey of home buyers (36%).

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Additional Detail on Total DTIs

  • 37% of Fannie/Freddie loans have total DTIs > 38%, up from 14% in 1990 (based on Fannie random sample).
  • FHA and VA have a sizable share of loans with DTIs > 50%, an extremely high pre-tax payment burden. VA’s residual-income underwriting is key to limiting defaults.
  • High total DTIs crowd out participation in defined contribution retirement plans such as 401(k)s, most of which come with employer match. These provide a reliable and attractive means for private wealth accumulation, particularly for lower-income families.

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Range of SMRIs for Home Purchase Loans Across States

There is a wide range for the composite SMRI, and states at the extremes tend to have low or high concentrations of FHA/RHS loans. The variation across states for Fannie/Freddie SMRI is narrow. The SMRI for FHA/RHS loans is uniformly high – above 20% in 48 states—, while the SMRI for VA loans is roughly half that for FHA/RHS loans at both the low and high end.

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Housing Risk in Major California Metro Areas

House price risk in California is relatively high and has risen substantially since 2012.

Combination of elevated mortgage and housing cycle risk in historically volatile California market cause for concern, especially in lower income and minority areas such as Riverside-San Bernardino and Central Valley.

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Housing Risk in Major Texas Metro Areas

While not as high as in California, house price risk in the top four metros in Texas is generally well above the national average and has risen since 2012. The plunge in oil prices will increase house price risk in Texas.

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For more information, please view the full January 2015 presentation by clicking here.

What About Julia? A True Story

I spent the past weekend celebrating my daughter Amelia’s third birthday. One of the stops we made was in the local Build-A-Bear store to buy her a new teddy bear. While we were there we ran into a woman, let’s call her “Julia”, who worked in the daycare location where we used to send Amelia.

What has President Obama really done to help the real ‘Julias’ of the world; is it the “free” community college plan?

It turns out that Julia works in the Build-A-Bear store, along with the daycare center, all the while holding down a third job to make ends meet. Julia kept smiling the entire time we were in the Build-A-Bear, and I admired her for doing so, despite the obvious fatigue showing on her face. Watching a fatigued Julia work despite her exhaustion reminded me that Julia lives in the real world, and in the real world, real policies have real implications for real people. My interaction with Julia, who is a flesh-and-blood person living in the real world, makes me wonder what happened to the faux-Julia from the 2012 Obama interactive web campaign ad (note: this ad has been removed from the campaign website)? Do you remember her? It was a campaign ad designed to highlight the government’s involvement through Obama’s policies, in the life of a fictitious woman named Julia.

The Julia I ran into in the Build-A-Bear already has access to student loans for college and, if President Obama was honest with her about the additional taxes which will be taken out of her three part-time paychecks to pay for “free” community college whether she attends community college or not, I’m not sure she would be so willing to take the deal. If President Obama was even more transparent and explained to her how excessive government involvement in the student-loan business has been a primary-driver of the elevated costs of a college education, she would probably be even less likely to look favorably upon the deal.

What about Obamacare; surely that helped Julia? It’s likely that Julia has to work three separate part-time jobs because Obamacare has incentivized companies to move positions from full to part-time. Obamacare’s mandates, which redefine “full-time” work as a 30-hour work week has, as most government programs do, created a tidal wave of unintended consequences which birthed an incentive for companies to make the Julias of the world part-time and to reduce their hours to under 30 per week.

President Obama may talk a big game about young single-women and all of the beneficial policy prescriptions he has filled for them but his real legacy is frightening. President Obama had lorded over an economic recovery which ranks as the worst in modern times which, when combined with the devastation in middle-class incomes during the Obama years, has forced the Julias of America to trade a future of boundless opportunity for a present consisting of paycheck-to-paycheck survival. President Obama has also forced our Julias to trade a few dollars in savings on readily available contraceptives for hundreds of extra dollars per month in inflated healthcare premiums as a result of Obamacare red tape and mandates.

The Julias of America, working those part-time jobs to stay above water as the waves come crashing in, have been celebrated by this President when it comes to his rhetoric, and abandoned by him when it comes to policy leadership. As conservatives, we will always be at a tactical disadvantage to the far-left purveyors of that failed ideology because they insist on telling the American people about all of the “free” stuff they are going to “give away.” Being a conservative means telling the American people the truth about the real costs of “free” government giveaways, both in terms of their tax dollars and in terms of the damaging effects on the free market through the distorting effects of government third-party-payer models. These are never easy conversations to have but, if we lose elections on the right side of the truth, did we really lose?

As I watched “Julia” work to keep those kids happy in the Build-A-Bear store, despite the obvious exhaustion in her eyes, my frustration grew because I knew that it didn’t have to be this way. If we could just get more money in Julia’s pockets through tax cuts, if we could get Julia the healthcare freedom she needs to make her own cost and quality decisions with regard to her healthcare future and, if we could get the government anchor off of the backs of the small Build-A-Bear businesses that expend precious resources complying with their government masters in the regulatory, tax, and healthcare compliance front, then maybe the Julias of America could trade the look of exhaustion while working their third job of the week, for a look of satisfaction that a better tomorrow is right around the corner.

EDITORS NOTE: This column and the featured image originally appeared in the Conservative Review.

Why Is Day Care Scarce and Unaffordable?

It’s time to call off the child care regulators by JEFFREY A. TUCKER:

Social democrats want to nationalize childhood by having government fund and manage universal day care. Social conservatives want the family to be the day care, which is a lovely idea when it’s affordable. Libertarians don’t seem much interested in the subject at all. That leaves virtually no one to tell the truth about the only solution to the shortage and high price of day care: complete deregulation.

Let’s start the discussion right now.

The Obama administration has the idea to model a new program for national day care on a policy from World War II that lasted from 1944 to 1946 in which a mere 130,000 children had their day care covered by the federal government. Here’s what’s strange: right now, the feds (really, taxpayers) pay for 1.3 million kids to be in day care, which means that there are 10 times as many children in such programs now as then. The equivalent of the wartime program is already in place now, and then some. The shortages for those who need the service continue to worsen.

How did this wartime program come about? The federal government had drafted men to march off to foreign lands to kill and be killed. On the home front, wives and moms were drafted into service in factories to cover the country’s productive needs while the men were gone. That left the problem of children. Back in the day, most people lived in close proximity to extended family, and that helped. But for a few working parents, that wasn’t enough.

Tax-funded day care

Tax-funded day care became part of the Community Facilities Act of 1941 (popularly known as the Lanham Act). The Federal Works Agency built centers that became daytime housing for the kids while their moms served the war effort. Regulation was also part of the mix. The federal Office of Education’s Children’s Bureau had a plan: children under the age of 3 were to remain at home; children from 2 to 5 years of age would be in centers with a ratio of 1 adult to 10 children. The standards were never enforced — there was a war on, after all — and the Lanham Act was a dead letter after 1946.

The program was a reproduction of another program that had begun in the New Deal as a job creation measure (part of the Works Project Administration and the Federal Economic Recovery Act, both passed in 1933). It was later suspended when the New Deal fell apart. Neither effort was about children. The rhetoric surrounding these programs was about adults and their jobs: the need to make jobs for nurses, cooks, clerical workers, and teachers.

Obama’s day care solution

Obama wants not only to resurrect this old policy but to make it universal, because day care is way too expensive for families with two working parents. This proposal is piling intervention on intervention; it is not a solution. Do parents really want kids cared for in institutions run the same way as the US Postal Service, the TSA, and the DMV? Parents know how little control they have over local public schools. Do we really want that model expanded to preschoolers?

Still, for all the problems with the Obama proposal, its crafters acknowledge a very real problem: two parents are working in most households today. This reality emerged some 30 years ago after the late 1970s inflation wrecked household income and high taxes robbed wage earners. Two incomes became necessary to maintain living standards, which created a problem with respect to children. Demand for daytime child care skyrocketed.

The shortage of providers is most often described as “acute.” Child care is indeed expensive, if you can find it at all. It averages $1,000 per month in the United States, and in many cities, it’s far pricier. That’s an annual salary on the minimum wage, which is why many people in larger cities find that nearly the whole of the second paycheck is consumed in day care costs — and that’s for just one child. Your net gains are marginal at best. If you have two children, you can forget about it.

Perhaps this is why Pew Research also reports a recent rise in the number of stay-at-home moms. It’s not a cultural change. It’s a matter of economics. And the trends are happening because the options are thinning. Parents are being forced to pick their poison: lower standard of living with only one working spouse, or a lower standard of living with two working spouses. This is a terrible bind for any family with kids.

The reason behind the day care shortage

The real question is one few seem to ask. Why is there a shortage? Why is day care so expensive? We get tennis shoes, carrots, gasoline, dry cleaning, haircuts, manicures, and most other things with no problem. There are infinite options at a range of prices, and they are all affordable. There is no national crisis, for example, about a shortage of gyms. If we are going to find a solution, surely there is a point to understanding the source of the problem.

Here is a principle to use in all aspects of economic policy:

When you find a good or service that is in huge demand, but the supply is so limited to the point that the price goes up and up, look for the regulation that is causing the high price.

This principle applies regardless of the sector, whether transportation, gas, education, food, beer, or day care.

Child care is one of the most regulated industries in the country. The regulatory structures began in 1962 with legislation that required child care facilities to be state-licensed in order to get federal funding grants. As one might expect, 40 percent of the money allocated toward this purpose was spent on establishing licensing procedures rather than funding the actual care, with the result that child care services actually declined after the legislation.

This was an early but obvious case study in how regulation actually reduces access. But the lesson wasn’t learned and regulation intensified as the welfare state grew. Today it is difficult to get over the regulatory barriers to become a provider in the first place. You can’t do it from your home unless you are willing to enter into the gray/black market and accept only cash for your business. Zoning laws prevent residential areas from serving as business locations. Babysitting one or two kids, sure, you can do that and not get caught. But expanding into a public business puts your own life and liberty in danger.

Too many regulations

Beyond that, the piles of regulations extend from the central government to state governments to local governments, coast to coast. It’s a wonder any day cares stay in business at all. As a matter of fact, these regulations have cartelized the industry in ways that would be otherwise unattainable through purely market means. In effect, the child care industry is not competitive; it increasingly tends toward monopoly due to the low numbers of entrants who can scale the regulatory barriers.

There is a book-length set of regulations at the federal level. All workers are required to receive health and safety training in specific areas. The feds mandate adherence to all building, fire, and health codes. All workers have to get comprehensive background checks, including fingerprinting. There are strict and complex rules about the ratio of workers per child, in effect preventing economies of scale from driving down the price. Child labor laws limit the labor pool. And everyone has to agree to constant and random monitoring by bureaucrats from many agencies. Finally, there are all the rules concerning immigration, tax withholding, minimum wages, maximum working hours, health benefits, and vacation times.

All of these regulations have become far worse under the Obama administration — all in the name of helping children. The newest proposal would require college degrees from every day care provider.

And that’s at the federal level. States impose a slew of other regulations that govern the size of playgrounds, the kind of equipment they can have, the depth of the mulch underneath the play equipment, the kinds of medical services for emergencies that have to be on hand, insurance mandates that go way beyond what insurers themselves require, and so much more. The regulations grow more intense as the number of children in the program expands, so that all providers are essentially punished for being successful.

Just as a sample, check out Pennsylvania’s day care regulations. Ask yourself if you would ever become a provider under these conditions.

A couple of years ago, I saw some workers digging around a playground at a local day care and I made an inquiry. It turned out that the day care, just to stay in business, was forced by state regulations to completely reformat its drains, dig new ones, reshape the yard, change the kind of mulch it used, spread out the climbing toys, and add some more foam here and there. I can’t even imagine how much the contractors were paid to do all this, and how much the changes cost overall.

And this was for a well-established, large day care in a commercial district that was already in compliance. Imagine how daunting it would be for anyone who had a perfectly reasonable idea of providing a quality day care service from home or renting out some space to make a happy place to care for kids during the day. It’s nearly unattainable. You set out to serve kids and families but you quickly find that you are serving bureaucrats and law-enforcement agencies.

The economic solution to the day care shortage

Providing day care on a profitable basis is a profession that countless people could do, if only the regulations weren’t so absurdly strict. This whole industry, if deregulated, would be a wonderful enterprise. There really is no excuse for why child care opportunities wouldn’t exist within a few minutes’ drive of every house in the United States. It’s hard to imagine a better at-home business model.

What this industry needs is not subsidies but massive, dramatic, and immediate deregulation at all levels. Prices would fall dramatically. New options would be available for everyone. What is now a problem would vanish in a matter of weeks. It’s a guaranteed solution to a very real problem.

The current system is a problem for everyone, but it disproportionately affects women. It is truly an issue for genuine feminists who care about real freedom. The regulatory state as it stands is attacking the right to produce and consume a service that is important to women and absolutely affects their lives in every way. In the 19th century, these kinds of rules were considered to be a form of subjugation of women. Now we call it the welfare state.

From my reading of the literature on this subject, I’m startled at how small is the recognition of the causal relationship between the regulatory structure and the shortage of providers. It’s almost as if it had never occurred to the many specialists in this area that there might be some cost to forever increasing the mandates, intensifying the inspections, tightening the strictures, and so on.

A rare exception is a 2004 child care study  by the Rand Corp. Researchers Randal Heeb and M. Rebecca Kilburn found what should be obvious to anyone who understands economics. “Relatively modest changes in regulations would have large and economically important consequences,” they argue, and “the overall effect of increased regulation might be counter to their advocates’ intentions. Our evidence indicates that state regulations influence parents’ child care decisions primarily through a price effect, which lowers use of regulated child care and discourages labor force participation. We find no evidence for a quality assurance effect.”

This is a mild statement that reinforces what all economic logic suggests. Every regulatory action diminishes market participation. It puts barriers to entry in front of producers and imposes unseen costs on consumers. Providers turn their attention away from pleasing customers and toward compliance. Regulations reduce competition and raise prices. They do not serve the stated objectives of policy makers, though they might serve the deeper interests of the industry’s larger players.

Creating a free market for child care

And so the politicians and activists look at the situation and say: we must do something. It’s true, we must. But we must do the right thing, which is not to create Orwellian, state-funded child care factories that parents cannot control. We must not turn child care into a labyrinthian confusion of thousands of pages of regulations.

We need to make a market for child care as with any other service. Open up, permit free entry and exit, and we’ll see the supposed problem vanish as millions of new providers and parents discover a glorious new opportunity for enterprise and mutual benefit.

But isn’t this laissez-faire solution dangerous for the children?

Reputation and market-based quality control govern so much of our lives today. A restaurant that serves one bad meal can face the crucible at the hands of Yelp reviewers, and one late shipment from an Amazon merchant can ruin a business model. Markets enable other active markets for accountability and intense focus on consumer satisfaction.

It’s even more true of child care. Even now, markets are absolutely scrupulous about accessing quality, as these Yelp reviews of day care in Atlanta, Georgia, show. As for safety, insurers are similarly scrupulous, just as they are with homes and office buildings. As with any market good, a range of quality is the norm, and people pick based on whatever standards they choose. Some parents might think that providers with undergraduate degrees essential, while others might find that qualification irrelevant.

In any case, markets and parents are the best sources for monitoring and judging quality; certainly they have a greater interest in quality assurance than politicians and bureaucrats. If any industry is an obvious case in which self-regulation is wholly viable, child care is it. Indeed, the first modern day care centers of the late 19th century were created by private philanthropists and market entrepreneurs as a better alternative to institutionalizing the children of the destitute and poor new immigrants.

The shortages in this industry are tragic and affect tens of millions of people. They have a cause (regulation) and a solution (deregulation). Before we plunge wholesale into nationalized babysitting, we ought to at least consider a better way.

ABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events.  His latest book is Bit by Bit: How P2P Is Freeing the World.

3 Myths about “Tax Reform”

How both Left and Right get it wrong by ROBERT P. MURPHY:

Conservative pundits are supposed to be hard-nosed and economically savvy, but when it comes to tax reform they can be as emotional and misguided as progressives.

The question of tax reform may be a moral issue, but it only makes sense to discuss reform if the conversation is grounded in economics.

Unfortunately, when discussing “tax reform,” American pundits on both the Right and Left often ground their analyses on simple fallacies. I’ll expose three widespread myths about tax reform.

Myth 1: The economic damage of a tax is measured by the amount of revenue it raises for the government.

You see examples of this myth all the time. For example, the Congressional Budget Office (CBO) will “score” a tax bill based on how much revenue it will raise compared to the status quo, and then the bill’s opponents might vilify it as “the biggest tax hike in recorded history!” Or, going the other way, a politician might promise to cut taxes and “return that money to the citizens.”

The reality is that there are different ways to raise, say, a million dollars in tax receipts. They are all damaging economically, but some are more harmful than others. This is because the structure or form of a tax has a great effect on how much it alters incentives, even holding the dollar amount fixed.

Suppose the government wants to raise $1 billion and has to choose between two methods of doing it. Using method A, the IRS sends a bill for $100 to 10 million randomly selected adults. Using method B, the IRS imposes a surtax of $10 million on each of the first 100 companies that hire new employees.

Even though both approaches would raise an extra $1 billion for the government, clearly the first method — relying on a modest lump-sum tax distributed over many people — would disrupt the economy much less than the second method, which would introduce absurd bottlenecks into the labor market and cause employers to engage in a game of chicken.

Myth 2: Tax reform should reward saving and risk taking.

This second myth is especially popular among conservative writers. The grain of truth here is that the tax code should not arbitrarily penalize saving and investment. Yet many writers go beyond this correct statement and end up recommending that the government actively promote these activities through tax incentives.

The “correct” amount of saving, in terms of economic theory, is that which people choose in a free market. People have underlying preferences for present versus future consumption, and they engage in mutually advantageous trades — guided by interest rates — to rearrange the timing of their income and consumption.

It is true, as many critics complain, that the income tax imposes a “double tax” on labor income if it is saved and invested. However, the real problem here (from the point of view of resource allocation) is that a tax on dividend and interest income imposes an artificial penalty on future consumption versus present consumption. This is the sense in which a flat income tax of 10 percent will cause more economic inefficiency than a flat consumption tax of 10 percent, and it is the basis of many proposals to reform the tax code.

Yet, the problem here isn’t the government’s failure to reward (or encourage) saving; the problem is that the income tax artificially punishes deferred consumption relative to immediate consumption. Because it reduces the (after-tax) interest rate, an income tax makes future consumption more expensive than it would be in a tax-free world, and therefore unnecessarily alters people’s intertemporal consumption choices. This distorts the economy more than it needs to, just as surely as if the government had levied a tax of 11 percent on Coke and 9 percent on Pepsi, rather than a 10 percent tax on both.

Myth 3: It’s always economically beneficial to move in the direction of “tax bads, not goods.”

recent column by Washington Post opinion writer Charles Krauthammer epitomizes this third and final myth. Krauthammer calls for a $1 per gallon hike in the federal gasoline tax, citing benefits such as reduced climate-change damage, less conventional air pollution, and an elbow in the side of hostile regimes dependent on oil exports.

But as a good conservative, Krauthammer doesn’t want the extra revenue feeding Big Government, so he also calls for a dollar-for-dollar refund of Social Security taxes. As Krauthammer summarizes: “The point is exclusively to alter incentives — to reduce the disincentive for work (the Social Security tax) and to increase the disincentive to consume gasoline. It’s win-win.”

There are different layers to unpack in Krauthammer’s case. Those who wish to delve deeply into the technical details can consider my critique of the “textbook” case for a carbon tax. Those who are really brave they can read about the “tax interaction effect,” which shows how the prior existence of distortionary taxes (such as an income tax) reduces the benefit of bringing in a new tax on a “negative externality,” even if the revenues are fully used to offset the original tax.

For the purposes of this article, however, let me try something much simpler. If you read Krauthammer’s column, you will see that there is nothing special about $1 for his recommended gasoline tax; he clearly pulled that amount out of the air. Moreover, he doesn’t even hint at the downside of his proposal. So why not impose a gas tax of $10 or $100 per gallon? Think of how much money could be refunded in Social Security taxes, and how many jobs would be created, while we really stuck it to Russia and Iran!

Even if we stipulate for argument’s sake the mainstream economics concept of “negative externalities” that require a penalty tax, it is still important to get the size of the tax right. The “economically optimal” level of gasoline consumption, and carbon dioxide emissions, is not zero, even if we concede the popular computer models about global warming. Krauthammer does not show any evidence that he even is aware of how an economist actually weighs the pros and cons of changes to the tax code.

Krauthammer is not alone; plenty of writers make the same mistake he did, as well as fall victim to the earlier myths I addressed. To paraphrase Murray Rothbard, it is no crime to be ignorant of the economic analysis of tax reform, for it is a technical subject. But such people should stop writing about the topic.

ABOUT ROBERT P. MURPHY

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/

Obamacare Must Go!

Can anyone remember how awful the U.S. healthcare free market system was that it needed to be replaced by the Affordable Care Act, otherwise known as ObamaCare? Can’t remember? That’s because it was ranked one of the best of the world and represented 17.9% of the nation’s economy in 2014. That’s down from the 20% it represented in 2009 when ObamaCare was foisted on Americans.

Heartland - Health Care NewsOne of the best ways to follow the ObamaCare story is via Health Care News, a monthly newspaper published by The Heartland Institute. The January issue begins with an article by Sean Parnell, the managing editor, reporting that ObamaCare enrollment is overstated by 400,000.

“The U.S. Department of Health and Human Services (HHS) once again lowered its estimate of the number of Americans enrolled in health plans through government exchanges in 2014. The 6.7 million enrollees who remain are far lower than the eight million touted in May at the end of the last open-enrollment period.”

ObamaCare has been a lie from the moment it was introduced for a vote, all 2,700 pages of it, to the present day. Everything President Obama said about it was a lie. As to its present enrollments, they keep dropping because some 900,000 who did sign up did not make the first premium payment or later stopped paying.

Michael Cannon, Director of Health Policy Studies at the Cato Institute, said the dropout rate is a troubling trend. “It means that potentially hundreds of thousands of Exchange enrollees are realizing they are better off waiting until they get sick to purchase coverage. If enough people come to that conclusion, the exchanges collapse.”

Elsewhere in this month’s edition, there is an article, “States Struggle to Fund Exchanges”, that reports on the difficulties that “states are experiencing difficulty in paying the ongoing costs of the exchanges, especially small states. “’The feds are asking us to do their jobs for them. We get saddled with the operating costs,’ said Edmund Haislmaier, senior research fellow for health care policy studies at The Heritage Foundation.” Some are imposing a two percent tax on the insurance companies which, of course, gets passed along to the consumer. Even so, the exchanges are not generating enough income to be maintained.

Why would anyone want ObamaCare insurance when its rates keep rising dramatically? In Nebraska the rates have nearly doubled and another article notes that “A 2014 study finds large numbers of doctors are declining to participate in health plans offered through exchanges under the Affordable Care Act, raising questions about whether people buying insurance through exchanges will be able to access health care in a timely manner.” One reason physicians gave was that they would have to hire additional staff “just to manage the insurance verification process.”

Dr. Kris Held, a Texas eye surgeon, said ObamaCare “fails to provide affordable health insurance and fails to provide access to actual medical care to more people, but succeeds in compounding existing health care costs and accessibility problems and creating new ones.”

Health Care News reports what few other news outlets have noted. “In Section 227 of the recently enacted ‘Cromnibus’ spending measure, Congress added critical but little-noticed language that prohibits the use of funds appropriated to the Centers for Medicare and Medicaid Services to pay for insurance company bailouts.” William Todd, an Ohio attorney, further noted that “Congress did not appropriate any separate funding for ‘bailouts.’” Todd predicted that “some insurers are likely to raise premiums to avoid losses, or they will simply stop offering policies on the exchanges altogether.”

The picture of ObamaCare failure emerging from these excerpts is a very true one. Its momentum, in fact, is gaining.

In mid-December, the Wall Street Journal opined that “With the Supreme Court due to rule on a major ObamaCare legal challenge by next summer, thoughts in Washington are turning to the practical and political response. If the Court does strike down insurance subsidies, the question for Republicans running Congress is whether they will try to fix the problems Democrats created, or merely allow ObamaCare damage to grow.”

King v. Burwell will be heard in March with a ruling likely in June. “Of the 5.4 million consumers on federal exchanges, some 87% drew subsidies in 2014, according to a Rand Corporation analysis.”

The Wall Street Journal recommended that “The immediate Republican goal should be to make insurance cheaper so people need less of a subsidy to obtain insurance. This means deregulating the exchanges, plank by plank. Devolve to states their traditional insurance oversight role, and allow them to enter into cross-border compacts to increase choice and competition. Allow insurers to sell any configuration of benefits to anyone, anywhere, and the private market will gradually heal.”

Or, to put it another way, eliminate ObamaCare entirely and return to the healthcare insurance system that had served Americans well until the White House decided that socialism was superior to capitalism.

The problem with the Affordable Care Act is that the cost of the insurance sold under the Act is not affordable and ObamaCare is actually causing hospitals and clinics to close their doors, thus reducing healthcare services for those who need them.

ObamaCare must go. If the Republicans in Congress did nothing more than repeal ObamaCare, the outcome of the 2016 election would be a predictable win no matter who their candidate will be. If not repeal, some separate actions must be taken such as eliminating the tax on medical instruments.

If the Republican Congress fails to take swift and deliberate action on ObamaCare between now and the 2016 elections, they will have defeated themselves.

© Alan Caruba, 2015

The Crowding-Out Tipping Point: Increasing economic growth means shrinking government by James A. Dorn

The size and scope of government in the United States today would have been beyond the imagination of the American founders. For more than a century after the Constitution’s ratification, Americans took limits on government power seriously.

At the start of the 20th century, total government spending was less than 10 percent of GDP, with the majority of spending taking place at the state and local levels. In 1900, federal spending was a mere 2.8 percent of GDP compared to 21.1 percent in 2014. Meanwhile, state and local spending stood at 5 percent of GDP in 1900, but reached 11.5 percent in 2014. Overall government spending now stands at nearly 33 percent of GDP.

That tectonic shift is largely due to the growth of entitlements and the regulatory state. Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; government imposes huge regulatory costs on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save, and invest.

How big is too big?

There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. An overreaching government diminishes economic freedom and limits private exchange opportunities, restricting the range of choices open to individuals.

In a pioneering study of the link between government growth and national wealth, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.

Factors of growth

One of their study’s key findings was that secure property rights — which includes a legal system that protects persons and property, enforces contracts, and limits the power of government by a just rule of law — play an important role in promoting economic growth.

The late Bernhard Heitger, an economist at the Kiel Institute for World Economics, more fully developed the positive relationship between property rights and economic growth in his pathbreaking article in the winter 2004 Cato Journal. In that article, Heitger distinguished between proximate and ultimate determinants of economic growth. The former are well known: additions to physical and human capital and technological progress (also known as “total factor productivity”). But Heitger was interested in the question of what drives capital accumulation and innovation. His answer: the structure of property rights and the associated incentives.

Conventional growth theory took private property rights and incentives as givens. Heitger rigorously showed that private property rights and the rule of law are the ultimate sources of economic growth and the wealth of nations. Well-defined private property rights improve efficiency and increase per capita income. In turn, as a nation grows richer, people demand stronger protection of their property rights, advancing institutional change.

Using data from an international cross-section of countries from 1975–95, Heitger found that “a doubling of the property rights index more than doubles per capita income” and that “more secure property rights significantly raise the accumulation of physical and human capital.”

Bauer’s foresight

That outcome would not have surprised Peter Bauer, a pioneer of development economics. He was critical of the simplistic idea that physical capital accumulation is the key determinant of economic growth. As early as 1957, in his classic Economic Analysis and Policy in Underdeveloped Countries, Bauer noted:

It is misleading to think of investment as the only or the principal determinant of development. Other factors and influences, such as institutional and political forces, the qualities and attitudes of the population, and the supply of complementary resources, are often equally important or even more important.

In the same book, Bauer also anticipated modern endogenous growth theory, stating: “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.” What mattered to Bauer, and to other classical liberals, in the process of development was freedom — namely, the freedom to pursue one’s happiness without government interference except to protect life, liberty, and property. (See James A. Dorn, “Economic Development and Freedom: The Legacy of Peter Bauer.”)

In that sense, Bauer argued that “the principal objective and criterion of economic development” is “the extension of the range of choice, that is, an increase in the range of effective alternatives open to people.” Free markets — resting on effective private property rights — and free people are thus the ultimate determinants of economic growth. When government expands beyond its core functions, it undermines the primacy of property, diminishes the principle of freedom, and erodes the wealth of nations.

The United States falls

The loss of economic freedom in the United States is revealed in the annual Economic Freedom of the World Report, published by the Fraser Institute along with the Cato Institute and a number of global think tanks. In 2000, the United States was the second most economically free country in the world, based on data from 1998. Today it is ranked 12th, based on 2012 data.

To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law. A legal framework that safeguards persons and property means incentivizing individuals to take responsibility for their actions and allowing people to learn from their mistakes. It means cutting back the size and scope of government and not bailing out businesses.

The nature of government is coercion; the nature of the market is consent. The “great constitutional charter” that George Washington referred to in his first inaugural address (April 30, 1789) was intended to bind Congress to the powers enumerated in Article 1, Section 8 of the Constitution. Thomas Jefferson reiterated Washington’s admonition by stating in his first inaugural address (March 4, 1801): “The sum of good government” is “a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

Wise and frugal

The challenge for the 114th Congress is to return to “a wise and frugal government.” A first step would be to understand the detrimental effects of expanding government power on economic liberties — especially on private property rights. If history has taught us anything, it is that the size and scope of government matter, both for freedom and prosperity.

ABOUT JAMES A. DORN

James A. Dorn is vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference.

Competition and Monopoly: A Refresher by Lawrence W. Reed

“Gym Now Stresses Cooperation, Not Competition,” blared a headline in the New York Times a decade ago. The story was about an elementary school where “confrontational” games, team sports, and elimination rounds were changed or scrapped so that differences between students’ athletic abilities would be minimized.

Perhaps this is fine for grade-school gym class, but it would make for rather boring Olympic games. And were it imposed on production and trade, it would condemn millions to poverty and early death. Let’s review some fundamental principles.

In economics competition is not the antithesis of cooperation; rather, it is one of its highest and most beneficial forms. That may seem counterintuitive. Doesn’t competition necessitate rivalrous or even “dog-eat-dog” behavior? Don’t some competitors lose?

In my view, competition in the marketplace means nothing less than striving for excellence in the service of others for self-benefit. In other words, sellers cooperate with consumers by catering to their needs and preferences.

Many people think that competition is directly related to the number of sellers in a market: The more sellers there are, or the smaller the share of the market any one of them has, the more competitive the market. But competition can be just as fierce between two or three rivals as it can be among 10 or 20.

Moreover, market share is a slippery notion. Almost any market can be defined narrowly enough to make someone look like a monopolist instead of a competitor. I have a 100 percent share of the market for articles by Lawrence Reed, for example. I have a far smaller share of the market for articles generally.

Not so long ago, XM and Sirius were the only two satellite-radio providers in the United States. For a year and a half the federal government prevented the two from merging, fearing that a harmful monopoly would result. Economists argued that XM and Sirius were competing not only with each other but as two of many companies in a huge media marketplace that includes free radio, iPods and other MP3 players, Internet radio stations, cable radio services, and even cell phones—all of which, along with likely new technologies, would continue to compete even after the merger. Ultimately, economic reasoning prevailed and the merger was allowed.

Governments don’t have to decree competition; all they have to do is prevent and punish force, violence, deception, and breach of contract. Enterprising individuals will compete because it is in their financial interest to do so, even if they’d prefer not to.

Competition spurs creativity and innovation and prods producers to cut costs. You wouldn’t think of stopping a horse race in the middle and complaining that one of the horses was ahead. The same should be true of free markets, where the race never ends and competitors enter and leave continuously.

Theoretically, there are two kinds of monopoly: coercive and efficiency. A coercive monopoly results from a government grant of exclusive privilege. Government, in effect, must take sides in the market to give birth to a coercive monopoly. It must make it difficult, costly, or impossible for anyone but the favored firm to do business. The U.S. Postal Service is an example. By law no one else can deliver first-class mail.

In other cases the government may not ban competition outright but simply bestow privileges, immunities, or subsidies on one or more firms while imposing costly requirements on all others. Regardless of the method, a firm that enjoys a coercive monopoly is in a position to harm consumers and get away with it.

An efficiency monopoly, by contrast, earns a high share of a market because it does the best job. It receives no special favors from the law. Others are free to compete and, if consumers so will it, to grow as big as the “monopoly.” Indeed, an efficiency monopoly is not much of a monopoly at all in the traditional sense. It doesn’t restrict output, raise prices, and stifle innovation; it actually sells more and more by pleasing customers and attracting new ones while improving both product and service.

An efficiency monopoly has no legal power to compel people to deal with it or to protect itself from the consequences of its unethical practices. An efficiency monopoly that turns its back on the very performance which produced its success would be, in effect, posting a sign that reads, “COMPETITORS WANTED.”

Antitrust Law

Where does antitrust law come into all this? From its very inception in 1890, antitrust has been plagued by vagaries, false premises, and a stagnant conception of dynamic markets.

The Sherman Antitrust Act of 1890 put the government on record as officially favoring competition and opposing monopoly without ever coming close to any solid definition of either term. It simply made it a criminal offense to “monopolize” or “attempt to monopolize” a market without ever saying what kind of actions qualified.

The first lawsuit the government filed ended disastrously for the Justice Department: The Supreme Court ruled in 1895 that the American Sugar Refining Company was not guilty of becoming a monopolist when it merged with the E. C. Knight Company. The evidence suggested that the merged companies would have made for a very strange monopoly indeed—one that substantially increased output and greatly cut prices to consumers.

In The Antitrust Religion (Cato, 2007), Edwin S. Rockefeller explains how the self-serving legal community invented sinister-sounding terms for quite natural phenomena and at the same time enjoys a feeling of self-righteousness in “protecting” the public from those evils. Such terms include “reciprocity” (“I won’t buy from you unless you buy from me”); “exclusive dealing” (“I won’t sell to you if you buy from anyone else”); and “bundling” (“Even though you only want Chapter One, you have to buy the whole book.”) Another work I strongly recommend on this subject is a classic by economist D. T. Armentano, The Myths of Antitrust.

In a free market unencumbered by anti-competitive intrusions from government, these factors ensure that no firm in the long run, regardless of size, can charge and get any price it wants:

• Free entry of newcomers to the field, whether they be two guys in their garage or a giant firm that sees an opportunity to expand into a new product line.

• Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force.

• Competition of substitutes. People are often able to substitute a product different from yet similar to the monopolist’s.

• Competition of all goods for the consumer’s dollar. Every business competes with every other business for consumers’ limited dollars.

Bottom line: Consider competition in a free market not as a static phenomenon but rather as a dynamic, never-ending leapfrog process in which the leader today can be the follower tomorrow.

larry reed new thumbABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

CLICHÉS OF PROGRESSIVISM #41 – “Rockefeller’s Standard Oil Proved That We Needed Anti-Trust Laws” by Lawrence W. Reed

Among the great misconceptions about a free economy is the widely-held belief that “laissez faire” embodies a natural tendency toward monopoly concentration. Under unfettered capitalism, so goes the familiar refrain, large firms would systematically devour smaller ones, corner markets, and stamp out competition until every inhabitant of the land fell victim to their power. Supposedly, John D. Rockefeller’s Standard Oil Company of the late 1800s gave substance to this perspective.

Regarding Standard Oil’s chief executive, one noted historian writes, “He (Rockefeller) iron-handedly ruined competitors by cutting prices until his victim went bankrupt or sold out, whereupon higher prices would be likely to return.”

Two other historians, co-authors of a popular college text, opine that “Rockefeller was a ruthless operator who did not hesitate to crush his competitors by harsh and unfair methods.” That’s what the superficial orthodoxy holds.

In 1899, Standard refined 90 per cent of America’s oil—the peak of the company’s dominance of the refining business. Though that market share was steadily siphoned off by competitors after 1899, the company nonetheless has been branded ever since as “an industrial octopus.”

Does the story of Standard Oil really present a case against the free market? In my opinion, it most emphatically does not. Furthermore, setting the record straight on this issue must become an important weapon in every free market advocate’s intellectual arsenal.

Theoretically, there are two kinds of monopoly: coercive and efficiency. A coercive monopoly results from, in the words of Adam Smith, “a government grant of exclusive privilege.” Government, in effect, must take sides in the market in order to give birth to a coercive monopoly. It must make it difficult, costly, or impossible for anyone but the favored firm to do business.

The United States Postal Service is an example of this kind of monopoly. By law, no one can deliver first class mail except the USPS. Fines and imprisonment (coercion) await all those daring enough to compete.(Editor’s Note: In the years since this article was written, technology in the form of fax machines, overnight delivery services, the Internet and e-mail have allowed the private sector to get around the government monopoly in traditional, first-class mail delivery).

In some other cases, the government may not ban competition outright, but simply bestow privileges, immunities, or subsidies on one firm while imposing costly requirements on all others. Regardless of the method, a firm which enjoys a coercive monopoly is in a position to harm the consumer and get away with it.

An efficiency monopoly, on the other hand, earns a high share of a market because it does the best job. It receives no special favors from the law to account for its size. Others are free to compete and, if consumers so will it through their purchases, to grow as big as the “monopoly.”

An efficiency monopoly has no legal power to compel people to deal with it or to protect itself from the consequences of its unethical practices. It can only attain bigness through its excellence in satisfying customers and by the economy of its operations. An efficiency monopoly which turns its back on the very performance which produced its success would be, in effect, posting a sign, “COMPETITORS WANTED.” The market rewards excellence and exacts a toll on mediocrity. It is my contention that the historical record casts the Standard Oil Company in the role of efficiency monopoly—a firm to which consumers repeatedly awarded their votes of confidence.

The oil rush began with the discovery of oil by Colonel Edwin Drake at Titusville, Pennsylvania in 1859. Northwestern Pennsylvania soon “was overrun with businessmen, speculators, misfits, horse dealers, drillers, bankers, and just plain hell-raisers. Dirt-poor farmers leased land at fantastic prices, and rigs began blackening the landscape. Existing towns jammed full overnight with ‘strangers,’ and new towns appeared almost as quickly.”

In the midst of chaos emerged young John D. Rockefeller. An exceptionally hard-working and thrifty man, Rockefeller transformed his early interest in oil into a partnership in the refinery stage of the business in 1865.

Five years later, Rockefeller formed the Standard Oil Company with 4 per cent of the refining market. Less than thirty years later, he reached that all-time high of 90 per cent. What accounts for such stunning success?

On December 30, 1899, Rockefeller was asked that very question before a governmental investigating body called the Industrial Commission. He replied:

I ascribe the success of the Standard to its consistent policy to make the volume of its business large through the merits and cheapness of its products. It has spared no expense in finding, securing, and utilizing the best and cheapest methods of manufacture. It has sought for the best superintendents and workmen and paid the best wages. It has not hesitated to sacrifice old machinery and old plants for new and better ones. It has placed its manufactories at the points where they could supply markets at the least expense. It has not only sought markets for its principal products, but for all possible by-products, sparing no expense in introducing them to the public. It has not hesitated to invest millions of dollars in methods of cheapening the gathering and distribution of oils by pipe lines, special cars, tank steamers, and tank wagons. It has erected tank stations at every important railroad station to cheapen the storage and delivery of its products. It has spared no expense in forcing its products into the markets of the world among people civilized and uncivilized. It has had faith in American oil, and has brought together millions of money for the purpose of making it what it is, and holding its markets against the competition of Russia and all the many countries which are producers of oil and competitors against American oil.

Rockefeller was a managerial genius—a master organizer of men as well as of materials. He had a gift for bringing devoted, brilliant, and hard-working young men into his organization. Among his most outstanding associates were H. H. Rogers, John D. Archbold, Stephen V. Harkness, Samuel Andrews, and Henry M. Flagler. Together they emphasized efficient economic operation, research, and sound financial practices. The economic excellence of their performance is described by economist D. T. Armentano:

Instead of buying oil from jobbers, they made the jobbers’ profit by sending their own purchasing men into the oil region. In addition, they made their own sulfuric acid, their own barrels, their own lumber, their own wagons, and their own glue. They kept minute and accurate records of every item from rivets to barrel bungs. They built elaborate storage facilities near their refineries. Rockefeller bargained as shrewdly for crude as anyone before or since. And Sam Andrews coaxed more kerosene from a barrel of crude than could the competition. In addition, the Rockefeller firm put out the cleanest-burning kerosene, and managed to dispose of most of the residues like lubricating oil, paraffin, and vaseline at a profit.

Even muckraker Ida Tarbell, one of Standard’s critics, admired the company’s streamlined processes of production:

Not far away from the canning works, on Newton Creek, is an oil refinery. This oil runs to the canning works, and, as the new-made cans come down by a chute from the works above, where they have just been finished, they are filled, twelve at a time, with the oil made a few miles away. The filling apparatus is admirable. As the new-made cans come down the chute they are distributed, twelve in a row, along one side of a turn-table. The turn-table is revolved, and the cans come directly under twelve measures, each holding five gallons of oil—a turn of a valve, and the cans are full. The table is turned a quarter, and while twelve more cans are filled and twelve fresh ones are distributed, four men with soldering cappers put the caps on the first set. Another quarter turn, and men stand ready to take the cans from the filler and while they do this, twelve more are having caps put on, twelve are filling, and twelve are coming to their place from the chute. The cans are placed at once in wooden boxes standing ready, and, after a twenty-four-hour wait for discovering leaks, are nailed up and carted to a nearby door. This door opens on the river, and there at anchor by the side of the factory is a vessel chartered for South America or China or where not—waiting to receive the cans which a little more than twenty-four hours before were tin sheets lying on flat-boxes. It is a marvelous example of economy, not only in materials, but in time and in footsteps.

Socialist historian Gabriel Kolko, who argues in The Triumph of Conservatism that the forces of competition in the free market of the late 1800s were too potent to allow Standard to cheat the public, stresses that “Standard treated the consumer with deference. Crude and refined oil prices for consumers declined during the period Standard exercised greatest control of the industry.”

Standard’s service to the consumer in the form of lower prices is well-documented. To quote from Professor Armentano again:

Between 1870 and 1885 the price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885. Clearly, the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of additional profits.

That story continued for the remainder of the century, with the price of kerosene to the consumer falling to 5.91 cents per gallon in 1897. Armentano concludes from the record that “at the very pinnacle of Standard’s industry ‘control,’ the costs and the prices for refined oil reached their lowest levels in the history of the petroleum industry.”

John D. Rockefeller’s success, then, was a consequence of his superior performance. He derived his impressive market share not from government favors but rather from aggressive courting of the consumer. Standard Oil is one of history’s classic efficiency monopolies.

But what about the many serious charges leveled against Standard? Predatory price cutting? Buying out competitors? Conspiracy? Railroad rebates? Charging any price it wanted? Greed? Each of these can be viewed as an assault not just on Standard Oil but on the free market in general. They can and must be answered.

Predatory price cutting is “the practice of deliberately underselling rivals in certain markets to drive them out of business, and then raising prices to exploit a market devoid of competition.”  Let’s see if it’s a charge that holds water or just one of those one-liners progressives like to toss out whether the evidence is there or not.

In fact, Professor John S. McGee, writing in the Journal of Law and Economics for October 1958, stripped this charge of any intellectual substance. Describing it as “logically deficient,” he concluded, “I can find little or no evidence to support it.”

In research for his extraordinary article, McGee scrutinized the testimony of Rockefeller’s competitors who claimed to have been victims of predatory price cutting. He found their claims to be shallow and misdirected. McGee pointed out that some of these very people later opened new refineries and successfully challenged Standard again.

Beyond the actual record, economic theory also argues against a winning policy of predatory price cutting in a free market for the following reasons:

  1. Price is only one aspect of competition. Firms compete in a variety of ways: service, location, packaging, marketing, even courtesy. For price alone to draw customers away from the competition, the predator would have to cut substantially—enough to outweigh all the other competitive pressures the others can throw at him. That means suffering losses on every unit sold. If the predator has a war-chest of “monopoly profits” to draw upon in such a battle, then the predatory price cutting theorist must explain how he was able to achieve such ability in the absence of this practice in the first place!
  2. The large firm stands to lose the most. By definition, the large firm is already selling the most units. As a predator, it must actually step up its production if it is to have any effect on competitors. As Professor McGee observed, “To lure customers away from somebody, he (the predator) must be prepared to serve them himself. The monopolizer thus finds himself in the position of selling more—and therefore losing more—than his competitors.”
  3. Consumers will increase their purchases at the “bargain prices.” This factor causes the predator to step up production even further. It also puts off the day when he can “cash in” on his hoped-for victory because consumers will be in a position to refrain from purchasing at higher prices, consuming their stockpiles instead.
  4. The length of the battle is always uncertain. The predator does not know how long he must suffer losses before his competitors quit. It may take weeks, months, or even years. Meanwhile, consumers are “cleaning up” at his expense.
  5. Any “beaten” firms may reopen. Competitors may scale down production or close only temporarily as they “wait out the storm.” When the predator raises prices, they enter the market again. Conceivably, a “beaten” firm might be bought up by someone for a “song,” and then, under fresh management and with relatively low capital costs, face the predator with an actual competitive cost advantage.
  6. High prices encourage newcomers. Even if the predator drives everyone else from the market, raising prices will attract competition from people heretofore not even in the industry. The higher the prices go, the more powerful that attraction.
  7. The predator would lose the favor of consumers. Predatory price cutting is simply not good public relations. Once known, it would swiftly erode the public’s faith and good will. It might even evoke consumer boycotts and a backlash of sympathy for the firm’s competitors.

In summary, let me quote Professor McGee once again:

Judging from the Record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard’s pricing policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could readily have made more.

A second charge is that Standard bought out its competitors. The intent of this practice, the critics say, was to stifle competitors by absorbing them.

First, it must be said that Standard had no legal power to coerce a competitor into selling. For a purchase to occur, Rockefeller had to pay the market price for an oil refinery. And evidence abounds that he often hired the very people whose operations he purchased. “Victimized ex-rivals,” wrote McGee, “might be expected to make poor employees and dissident or unwilling shareholders.”

Kolko writes that “Standard attained its control of the refinery business primarily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refinery owners later reopened new plants after selling to Standard.”

Buying out competitors can be a wise move if achieving economy of scale is the intent. Buying out competitors merely to eliminate them from the market can be a futile, expensive, and never-ending policy. It appears that Rockefeller’s mergers were designed with the first motive in mind.

Even so, other people found it profitable to go into the business of building refineries and selling to Standard. David P. Reighard managed to build and sell three successive refineries to Rockefeller, all on excellent terms.

A firm which adopts a policy of absorbing others solely to stifle competition embarks upon the impossible adventure of putting out the recurring and unpredictable prairie fires of competition.

A third accusation holds that Standard secured secret agreements with competitors to carve up markets and fix prices at higher-than-market levels.

I will not contend here that Rockefeller never attempted this policy. His experiment with the South Improvement Company in 1872 provides at least some evidence that he did. I do argue, however, that all such attempts were failures from the start and no harm to the consumer occurred.

Standard’s price performance, cited extensively above, supports my argument. Prices fell steadily on an improving product. Some conspiracy!

From the perspective of economic theory, collusion to raise and/or fix prices is a practice doomed to failure in a free market for these reasons:

  1. Internal pressures. Conspiring firms must resolve the dilemma of production. To exact a higher price than the market currently permits, production must be curtailed. Otherwise, in the face of a fall in demand, the firms will be stuck with a quantity of unsold goods. Who will cut their production and by how much? Will the conspirators accept an equal reduction for all when it is likely that each faces a unique constellation of cost and distribution advantages and disadvantages?

    Assuming a formula for restricting production is agreed upon, it then becomes highly profitable for any member of the cartel to quietly cheat on the agreement. By offering secret rebates or discounts or other “deals” to his competitors’ customers, any conspirator can undercut the cartel price, earn an increasing share of the market and make a lot of money. When the others get wind of this, they must quickly break the agreement or lose their market shares to the “cheater.” The very reason for the conspiracy in the first place—higher profits—proves to be its undoing!

  2. External pressures. This comes from competitors who are not parties to the secret agreement. They feel under no obligation to abide by the cartel price and actually use their somewhat lower price as a selling point to customers. The higher the cartel price, the more this external competition pays. The conspiracy must either convince all outsiders to join the cartel (making it increasingly likely that somebody will cheat) or else dissolve the cartel to meet the competition.

I would once again call the reader’s attention to Kolko’s The Triumph of Conservatism, which documents the tendency for collusive agreements to break apart, sometimes even before the ink is dry.

A fourth charge involves the matter of railroad rebates. John D. Rockefeller received substantial rebates from railroads who hauled his oil, a factor which critics claim gave him an unfair advantage over other refiners.

The fact is that most all refiners received rebates from railroads. This practice was simply evidence of stiff competition among the roads for the business of hauling refined oil products. Standard got the biggest rebates because Rockefeller was a shrewd bargainer and because he offered the railroads large volume on a regular basis.

This charge is even less credible when one considers that Rockefeller increasingly relied on his own pipelines, not railroads, to transport his oil.

Did Standard Oil have the power to charge any price it wanted? A fifth accusation says yes. According to the notion that Standard’s size gave it the power to charge any price, bigness per se immunizes the firm from competition and consumer sovereignty.

As an “efficiency monopoly,” Standard could not coercively prevent others from competing with it. And others did, so much so that the company’s share of the market declined dramatically after 1899. As the economy shifted from kerosene to electricity, from the horse to the automobile, and from oil production in the East to production in the Gulf States, Rockefeller found himself losing ground to younger, more aggressive men.

Neither did Standard have the power to compel people to buy its products. It had to rely on its own excellence to attract and keep customers.

In a truly free market, the following factors insure that no firm, regardless of size, can charge and get any price it wants:

  1. Free entry. Potential competition is encouraged by any firm’s abuse of the consumer. In describing entry into the oil business, Rockefeller once remarked that “all sorts of people . . . the butcher, the baker, and the candlestick maker began to refine oil.”
  2. Foreign competition. As long as government doesn’t hamper international trade, this is always a potent force.
  3. Competition of substitutes. People are often able to substitute a product different from yet similar to the monopolist’s.
  4. Competition of all goods for the consumer’s dollar. Every businessperson in competition with every other businessman to get consumers to spend their limited dollars on him.
  5. Elasticity of demand. At higher prices, people will simply buy less.

It makes sense to view competition in a free market not as a static phenomenon, but as a dynamic, never-ending, leap-frog process by which the leader today can be the follower tomorrow.

The sixth charge, that John D. Rockefeller was a “greedy” man, is the most meaningless of all the attacks on him but nonetheless echoes constantly in the history books.

If Rockefeller wanted to make a lot of money (and there is no doubting he did), he certainly discovered the free market solution to his problem: produce and sell something that consumers will buy and buy again. One of the great attributes of the free market is that it channels greed into constructive directions. One cannot accumulate wealth without offering something in exchange!

At this point the reader might rightly wonder about the dissolution of the Standard Oil Trust in 1911. Didn’t the Supreme Court find Standard guilty of successfully employing anti-competitive practices?

Interestingly, a careful reading of the decision reveals that no attempt was made by the Court to examine Standard’s conduct or performance. The justices did not sift through the conflicting evidence concerning any of the government’s allegations against the company. No specific finding of guilt was made with regard to those charges. Although the record clearly indicates that “prices fell, costs fell, outputs expanded, product quality improved, and hundreds of firms at one time or another produced and sold refined petroleum products in competition with Standard Oil,” the Supreme Court ruled against the company. The justices argued simply that the competition between some of the divisions of Standard Oil was less than the competition that existed between them when they were separate companies before merging with Standard.

In 1915, Charles W. Eliot, president of Harvard, observed: “The organization of the great business of taking petroleum out of the earth, piping the oil over great distances, distilling and refining it, and distributing it in tank steamers, tank wagons, and cans all over the earth, was an American invention.” Let the facts record that the great Standard Oil Company, more than any other firm, and John D. Rockefeller, more than any other man, were responsible for this amazing development.

Summary

  • If the Standard Oil Company was any kind of “monopoly,” it was not a “coercive” one because it did not derive its high (and temporary) market share from special government favors. There were lots of competitors to it, here and abroad. If it was a monopoly, then it was of the “efficiency” variety, meaning that it earned a high market share because consumers liked what it offered at attractive prices.
  • The prices of Standard products (chiefly kerosene in the company’s early history) steadily fell. The quality steadily improved. Total production grew from year to year. This is not supposed to be the behavior of an evil monopolist, who supposedly restricts output and raises prices.
  • Accusations against Standard—predatory price cutting, buying up competitors, conspiracy to restrict output and raise prices, securing railroad rebates, etc—sound plausible on the surface but fall apart upon close inspection.

For further information, see:

“John D. Rockefeller and the Oil Industry” by Burton Folsom

“How Capitalism Saved the Whales” by James S. Robbins

“John D. Rockefeller and His Enemies” by Burton Folsom

“A Review of Chernow’s biography of Rockefeller” by D. T. Armentano

“Herbert Dow and Predatory Pricing” by Burton Folsom

ABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government. See the index of the published chapters here. This article first appeared in The Freeman, the journal of the Foundation for Economic Education, FEE, in March 1980. Footnotes can be found in that version on FEE.org. The author is president of FEE and the editor of this series of “Clichés.” If you wish to republish this article, please write editor@fee.org.

The Pursuit of Profit Is Pro-Social by Matthew McCaffrey

A value-creating business is “social” whether it pursues an explicit social agenda or not.

You can’t throw a rock these days without hitting someone who’s talking about entrepreneurship and why we need to encourage more of it. In the public and private sectors — especially in higher education — innovation, enterprise, and entrepreneurship are buzzwords like never before.

A big beneficiary of this trend is the field of social enterprise. Unlike ordinary businesses, the conventional explanation goes, social enterprises use their commercial activities to promote a broader aim of human well-being rather than simple profit maximization. An example is Jamie Oliver using the restaurant business to provide culinary training to disadvantaged youth or sell food that encourages healthier living, even if doing so hurts the bottom line. Because of these kinds of expansive goals, social enterprises tend to be looked on favorably by business students, governments, and the media.

But while social enterprises certainly do create value, emphasizing “social” goals over profits can be misleading because it implies that traditional profit-seeking entrepreneurship fails to produce wide-ranging benefits for large numbers of people. Thinking of social enterprise as distinct from conventional business helps obscure the vital truth that profit seeking is not only compatible with increases in human welfare, it is probably the most powerful force for producing them ever devised.

In fact, that’s the beauty of free-market enterprise: it’s social whether it pursues an explicit social agenda or not. Critics of government intervention often point out that good intentions don’t equate to good policies. Likewise, the absence of good intentions doesn’t equate to bad policy, and lacking a specific social goal doesn’t make entrepreneurs antisocial. Think of Adam Smith’s observation about the butcher, brewer, and baker, which reveals that commerce is social because it’s mutually beneficial, not because entrepreneurs necessarily have a larger agenda.

When a company like Uber charges a price for its services, it’s being social in the sense that it’s creating value for consumers, not just for itself. And the market is simply an elaborate network of voluntary exchanges in which buyers and sellers constantly make each other better off — which is why they do business to start with.

Free enterprise is therefore social enterprise, but the reverse is true as well: enterprise is social if and to the extent that it’s free. We are truly social when we choose our relationships and refrain from choosing our neighbors’. In a free market, the term “social enterprise” is redundant because it’s in the marketplace that human beings express some of their most fundamental social instincts. Buying and selling teach us about peaceful interaction for mutual gain — and reveal to us just how profoundly our well-being depends on our commitment to benefiting others.

However, if we choose coercion over peaceful cooperation, we abandon hope of a working social order. Any social enterprise worthy of the name is therefore hostile to economic intervention, because every intervention is a step away from social cohesion and toward conflict.

Unsurprisingly, the corporate state is the primary cause of antisocial tendencies in real-world enterprises. Take, for example, intellectual-property law. What could be more antisocial than prohibiting people from sharing ideas and using them to improve the welfare of others? Yet many who promote enterprise take it for granted that “protecting” ideas is an essential part of entrepreneurship.

This attitude hints at a broader institutional problem: the sort of enterprise supported by public rhetoric is rarely the kind of healthy economic activity that would be produced in a free economy. Instead, public support for enterprise tends to mean support for a few privileged ventures at the expense of others. Sadly, it’s common for governments the world over to emphasize the need for more entrepreneurship while simultaneously promoting policies that distort, penalize, or even outlaw it. That’s why it’s more important than ever to be wary of the different meanings attached to words like “social” and “enterprise” and how these useful terms come to be associated with harmful economic ideas.

If economics tells us anything, it’s that we can’t effectively promote enterprise without first abandoning the networks of privilege and regulation that undermine entrepreneurship and divert human talent into destructive practices. A vital step toward that goal is seriously considering the rhetoric we use to describe the market. Language radically alters perceptions of commerce and can make the difference between thinking of enterprise as zero-sum profit seeking or as the key to the countless benefits of peaceful exchange.

ABOUT MATTHEW MCCAFFREY

Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.

 

Obama Has Two More Years Left to Destroy the U.S. Economy

As 2015 began the Journal Editorial Report on Fox News was devoted to having its reporters, some of the best there are, speculate on what 2015 holds in terms of who might run for president and what the economy might be. The key word here is “speculate” because even experts know that it is unanticipated events that determine the future and the future is often all about unanticipated events.

How different would the world have been if John F. Kennedy had not been assassinated? One can reasonably assume there would not have been the long war in Vietnam because he wanted no part of the conflict there. Few would have predicted that an unknown Governor from Arkansas would emerge to become President as Bill Clinton did. Who would believe we are talking about his wife running for President? That is so bizarre it is mind-boggling.

Most certainly, few would have predicted that an unknown first term Senator from Illinois, Barack Hussein Obama, would push aside Hillary Clinton to become the first black American to be nominated for President and to win in 2008. Despite the takeover of the nation’s healthcare system with a series of boldfaced lies, he still won a second term.

Obama now has two more years in which to try to destroy the U.S. economy; particularly its manufacturing and energy sectors. The extent to which he is putting in place the means to do that still remains largely unreported or under-reported in terms of the threat it represents.

Obama Says Planet is WarmingThe vehicle for the nation’s destruction is the greatest hoax of the modern era, the claim that global warming must be avoided by reducing “greenhouse gas” emissions.

A President who lied to Americans about the Affordable Care Act, telling them they could keep their insurance plans, their doctors, and not have to pay more is surely not going to tell Americans that the planet is now into its 19th year of a cooling cycle with no warming in sight.

To raise the ante of the planetary threat hoax, he has added “climate change” when one would assume even the simple-minded would know humans have nothing to do with the Earth’s climate, nor the ability to initiate or stop any change.

In 2015, the White House is launching a vast propaganda campaign through the many elements of the federal government to reach into the nation’s schools with the climate lies and through other agencies to spread them.

In particular, Obama has been striving to utilize the Environmental Protection Agency to subvert existing environmental laws and, indeed, the Constitution unless Congress or the courts stop an attack that will greatly weaken the business, industrial and energy sectors. It will fundamentally put our lives at risk when there is not enough electricity to power homes and workplaces in various areas of the nation. At the very least, the cost of electricity will, in the President’s own words, “skyrocket.”

Why doesn’t anyone in Congress or the rest of the population wonder why White House policies are closing coal-fired plants that provided fifty percent of our electricity when Obama took office and now have been reduced to forty percent? Did you know that more than 1,200 new coal-fired plants are planned in other nations with two-thirds of them to be built in India and China? We live in a nation that has such huge reserves of coal we export it.

The EPA attack on these plants is so illegal and unethical that one of the nation’s leading liberal attorneys, Laurence H. Tribe, who began teaching about environmental law 45 years ago, went on record to declare the EPA’s proposed Clean Power Plan is unconstitutional.

The plan is a regulatory proposal to reduce carbon emissions from the nation’s electric power plants. Tribe pointed out that a two-decade old Supreme Court precedent forbids the federal government from taking action to commandeer the powers of state governments by leaving them no choice but to implement it.

“The brute fact,” said Tribe “is that the Obama administration failed to get climate legislation through Congress. Yet the EPA is acting as though it has the legislative authority anyway to re-engineer the nation’s electric generating system and power grid. It does not.”

As 2014 came to a close, the Obama administration either proposed or imposed more than 1,200 new regulations on the American people.

Alex Newman, writing in the New American, calculated they will add “even more to the already crushing $2 trillion per year cost burden of the federal regulatory machine.” Not surprisingly, “most of the new regulatory schemes involve energy and the environment—139 during a mere two-week period in December, to be precise.”

“In all,” Newman reported, “the Obama administration foisted more than 75,000 pages of regulations on the United States in 2014, costing over $200 billion, on the low end, if new proposed rules are taken into account.” Just one, the EPA’s “coal ash” regulation, “is expected to cost as much as $20 billion, estimates suggest.”

Then add to that the EPA’s “ozone rule” that is estimated to cost “as much as $270 billion per year and put millions of American jobs at risk under the guise of further regulating emissions of the natural gas.” Released the day before Thanksgiving, “Experts also pointed out that the EPA’s own 2007 studies showed no adverse health effects from exposure to even high levels of ozone.”

These are just two examples of the regulatory strangulation of the nation’s economy and energy infrastructure.

This is Obama’s agenda for the remaining two years of his second and thankfully last term in office. Whether you know anything about the science of the climate or have ever even read the Constitution, the sheer disaster of ObamaCare should have told you by now that everything Obama has put in motion has had the single objective of destroying the nation’s economy in every possible way.

The voters have put Republicans in charge of both houses of Congress and their primary responsibility will be to reverse and repeal the damage of Obama’s first six years. The courts will play a role, but this is a job for our elected representatives.

© Alan Caruba, 2015

BREAKING NEWS: 10 States File Article V Applications to Rein in the Out-of-Control Federal Government

PURCELLVILLE, Va., Jan. 20, 2015 /PRNewswire/ — The Convention of States Project announces that 10 states have filed their Article V Applications for an amending convention of the states calling for fiscal restraint, limiting the size, scope and jurisdiction of the federal government and term limits. The states that have filed Article V legislation in at least one house include: Arizona, Massachusetts, Missouri, Montana, New Hampshire,New Jersey, North Dakota, South Carolina, Virginia and Wyoming.

These filings demonstrate the unity of purpose by the American people with the sole purpose of fighting back against the overreach of the federal government. In one week, resolutions were filed in all regions of the United States from New England/Northeast to the Northwest; from the South to the Southwest; from the East to the Midwest.

“Politicians and pundits try to tell us that the nation is divided on party lines, but the reality is that it’s a manufactured spectacle in order to divide the people,” Explained Mark Meckler, co-founder, The Convention of States Project. “As we saw in last week’s Gallup 2014 year-end review, 66% of Americans think that the federal government is the biggest problem in America. We are seeing Americans unite across the country galvanized by the solution that is Article V—the final check on federal power reserved to state legislators.”

The arrogance of the ruling elite in Washington, D.C. have not solved any of America’s challenges, or given the people new ideas. The Convention of States Project has a solution as big as the problem in Article V of the Constitution. A united nation acting through the state legislatures can solve America’s toughest challenges today: fixing healthcare, stopping the out-of-control spending, getting rid of the IRS and curbing over regulation.

About the Convention of States Project

The Convention of States Project is currently organized in all 50 states, including hundreds of thousands of volunteers, supporters and advocates committed to stopping the federal government’s abuse of power.  Mark Levin, Sean Hannity, Glenn Beck, Governor Bobby Jindal, David Barton, Col. Allen West, Senator Tom Coburn (OK), Sarah Palin, Mike Huckabee, AMAC and U.S. Term Limits, among others have endorsed the Project. Article V applications have already been passed in Alaska, Florida and Georgia. We stand ready with 32 Prime Sponsors to pass this year and hope to meet the 34 state requirement by the end of 2015. For more information visit www.ConventionofStates.com.

The EPA’s Methane Madness: The EPA thinks cow flatulence is a serious problem

The Obama administration’s attack on America’s energy sector is insane. They might as well tell us what to eat. Oh, wait, Michelle Obama is doing that. Or that the Islamic State is not Islamic. Oh, wait, Barack Obama said that.

Or that the Environmental Protection Agency (EPA) is about protecting the environment. It used to be decades ago, but not these days.

There was a time when the EPA was devoted to cleaning up the nation’s air and water. It did a very good job and we now all breathe cleaner air and have cleaner water. At some point, though, it went from a science-based government agency to one for which science is whatever they say it is and its agenda is the single minded reduction of all sources of energy, coal, oil and natural gas, by telling huge lies, citing junk science, and generating a torrent of regulation.

Americans have been so blitzed with global warming and climate change propaganda for so long one can understand why many just assume that these pose a hazard even though there hasn’t been any warming for 19 years and climate change is something that has been going on for 4.5 billion years. When the EPA says that it’s protecting everyone’s health, one can understand why that is an assumption many automatically accept.

The problem is that the so-called “science” behind virtually all of the EPA pronouncements and regulations cannot even be accessed by the public that paid for it. The problem is so bad that, in November 2014, Rep. David Schweikert (R-AZ) introduced a bill, HR 4012, the Secret Science Reform Act, to address it. It would force the EPA to disclose all scientific and technical information before proposing or finalizing any regulation.

As often as not, those conducting taxpayer funded science studies refuse to release the raw data they obtained and the methods they used to interpret it. Moreover, agency “science” isn’t always about empirical data collection, but as Ron Arnold of the Center for the Defense of Free Enterprise, noted in 2013, it is “a ‘literature search’ with researchers in a library selecting papers and reports by others that merely summarize results and give opinions of the actual scientists. These agency researchers never even see the underlying data, much less collect it in the field.”

The syndicated columnist, Larry Bell, recently noted that “Such misleading and downright deceptive practices openly violate the Information Quality Act, Executive Order 12688, and related Office of Management and Budget guidelines requiring that regulatory agencies provide for full, independent, peer review of all ‘influential scientific information.’” It isn’t that there are laws to protect us from the use of junk science. It’s more like they are not enforced.

These days the EPA is on a tear to regulate mercury and methane. It claims that its mercury air and toxics rule would produce $53 billion to $140 billion in annual health and environmental benefits. That is so absurd it defies the imagination. It is based on the EPA’s estimated benefits from reducing particulates that are—wait for it—already covered by existing regulations!

Regarding the methane reduction crusade the EPA has launched, Thomas Pyle, president of the Institute for Energy Research, says “EPA’s methane regulation is redundant, costly, and unnecessary. Energy producers are already reducing methane emissions because methane is a valuable commodity. It would be like issue regulations forcing ice cream makers to spill less ice cream.”

“The Obama administration’s latest attack on American energy,” said Pyle, “reaffirms that their agenda is not about the climate at all—it’s about driving up the cost of producing and using natural gas, oil, and coal in America. The proof is the EPA’s own research on methane which shows that this rule will have no discernible impact on the climate.”

S. Fred Singer, founder and Director of the Science and Environmental Policy Project as well as a Senior Fellow with The Heartland Institute says “Contrary to radical environmentalists’ claims, methane is NOT an important greenhouse gas; it has a totally negligible impact on climate. Attempts to control methane emissions make little sense. A Heartland colleague, Research Fellow H. Sterling Burnett, says “Obama is again avoiding Congress, relying on regulations to effectively create new laws he couldn’t legally pass.”

As Larry Bell noted, even by the EPA’s own calculations and estimates, the methane emissions limits, along with other limits on so called greenhouse gases “will prevent less than two-hundredths of a degree Celsius of warming by the end of this century.”

That’s a high price to pay for the loss of countless plants that generate the electricity on which the entire nation depends for its existence. That is where the EPA is taking us.

Nothing the government does can have any effect on the climate. You don’t need a PhD in meteorology or climatology to know that.

© Alan Caruba, 2015

EDITORS NOTE: The featured image is courtesy of The Peoples Cube.

CLICHÉS OF PROGRESSIVISM #40 — “The Rich Are Getting Richer and the Poor Are Getting Poorer”

Imagine you could go back in time 50 years. Suppose the reason you are doing so is to put policies into place that would ensure that the rich got richer and the poor got poorer. (Why anyone would want to do this is beside the point, but stay with me.) What policies would you set?

  1. You would want to price poor, unskilled people out of the labor market with an ever-increasing minimum wage;
  2. You would provide special favors, artificial competitive advantages, and taxpayer subsidies to the politically well-connected (i.e., those already rich);
  3. You would stifle new, small businesses with stacks of regulations and bureaucratic paperwork;
  4. You would (literally) pay people to stay in poverty, to be dependent on government, so that any work ethic would be suppressed and eroded.
  5. You would implement an erratic and largely inflationary monetary policy that erodes savings and creates destructive booms and busts.

All five of these in combination might do the trick. Throw up barriers to the progress of the poor, or pay people to stay poor, or rig the system so the rich and politically well-connected get artificial economic advantages and chances are, the poor will indeed get poorer and the rich will get richer.

By now you have probably noticed that every one of the policies above has been implemented to varying degrees since the Great Society. And yet the poor have still not gotten poorer in the United States.

According to professional skeptic Michael Shermer:

The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.

Detractors will try to argue that the poorest quintiles have a smaller percentage of the overall pie. And that might be true, but the pie is much, much bigger. Would you rather have 50 percent of a million or 20 percent of a billion? Another way of putting this is: Would you rather be better off, even if that meant certain people were super well off? Or would you rather everyone were worse off, as long as everyone were relatively equal?

That the poorest among us are still, on balance, doing better today than they were 50 years ago is a remarkable testimony to what relatively free people and markets can do, even as governments put up roadblocks. So if the poor aren’t getting poorer, why do people say they are?

If one starts with the assumption that an equal distribution of wealth is the ultimate goal, then he or she is not terribly concerned with how much of that wealth is created to begin with. But some people, at least, understand that wealth has to be created and that when there is more wealth created the poorest among us will tend to be better off. The choice of starting points boils down then to whether one cares about distributing wealth evenly or growing overall wealth through productive activity.

One reason this particular cliché manages to hang around is that people generally take a static view of the economy. The idea is that wealth is like a giant pie, which neither grows nor shrinks, but gets carved up and distributed certain ways. So, some people end up with the false idea that the only way the rich can be richer is if part of the wealth pie is taken from the poor. From this they conclude justice demands a different distribution of the pie. Advocates of “meritocracy” believe the static pie should be divided according to talent and hard work. Advocates of “social justice” think the pie should be divided according to some concept of equality. Both are wrong, but the fundamental error is in thinking that wealth is a static pie to start with. It is not.

Wealth can better be imagined as a growing pie, or better, a growing ecosystem. Of course, wealth doesn’t always grow, but it tends to—as long as people have the incentives to be productive. Merit and hard work tend to be rewarded in this growing pie, but rewards more generally accrue to those who create value for others.

In other words, someone who works really hard might not be rewarded if no one finds his work valuable—say, a man who digs ditches and fills them up again. Likewise, work that might be considered meritorious in an obscure academic journal might not confer any earthly good on humanity outside of the journals’ four-person review committee.

Advocates of so-called social justice want the wealth pie to be divided according to an arbitrary and subjective abstraction like “fairness” or equal outcomes. But carving up wealth according to some nebulous concept of justice ignores the actual ecosystem in which people operate. In other words, such a concept ignores the behaviors, incentives and exchanges that encourage people to be productive—i.e. to generate wealth. By distributing from rich to poor, you end up paying poorer people to be less productive, while punishing more productive people. The distribution that would flow from people making more goods and services available to all is lost by degree, making everyone worse off. If taxation and redistribution for the sake of equal outcomes makes us all worse off than we would otherwise have been, how is this social justice?

Egalitarian concepts of social justice also ignore any moral considerations that might attach to how an unequal distribution might have come about. If growing overall wealth is about people creating different degrees of value for each other, and taking different risks, then the rewards of value creation will never flow equally. Some people will make more money than others, for example, whether it’s because they were smarter investors, cleverer innovators, or better organizers. The rest of us enjoy the fruits of those efforts, so we might want successful people to keep investing, innovating and organizing — even if that means they get richer. And we might want to acknowledge that they deserve what they have.

(Editor’s Note: Economist Thomas Sowell has said, “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” I often ask this question of a redistributionist in the presence of another person and ask the former to specifically tell me how much is his ‘fair share’ of what the other person in our presence has earned. I’m still waiting for a satisfactory answer.)

Those of us who are not as productive (or, politically well-connected, as the case may be) still enjoy remarkable abundance in relatively free societies. In the United States, for example, all quintiles have become wealthier overall, over the last 30 years.

It is also true that there are fewer desperately poor people around the world. In only 20 years, extreme global poverty has been cut in half.  That is a remarkable achievement—one that is attributable to policies of liberalization (freer markets) around the world, which progressive activists and egalitarians decry. In other words, those who say the poor are getting poorer are simply wrong. And there are hundreds of millions of people thriving today who can talk about how much better things have gotten.

Summary

  • Progressives should be honest and admit that the anti-free market policies they’ve promoted and achieved in the last half-century have disadvantaged the poor and conferred favors upon the rich and politically well-connected.
  • Amazingly, in spite of those policies, the poor overall are still better off than they were 50 years ago. Imagine the progress that might have happened had these policies not been in place!
  • Redistributing wealth is just slicing the pie differently, at the risk of shrinking the pie. It’s a static view of wealth, one that’s greatly inferior to a view of baking a bigger pie for everybody.

For further information, see:

How the World is Getting Better” by Phil Harvey

The World is Getting Better” by Sam Harris

The Free Market: Lifting All Boats” by Don Mathews

Dear Ultra-Rich Man” by Max Borders

Free the Poor” by Julian Adorney

The Quackery of Equality” by Lawrence W. Reed

If you wish to republish this article, please write editor@fee.org.

ABOUT MAX BORDERS

Max Borders is the editor of The Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

(Editor’s Note: The author is director of content at the Foundation for Economic Education and editor of its journal, The Freeman.)