In a stunning example of truthfulness, AFL-CIO President Richard Trumka gives the perfect reasoning to why government is inherently inefficient.  While discussing the President’s recent pledge to review business regulations for balance (here), Mr. Trumpka said (here via The Hill):

…the White House’s planned government-wide review of regulations could end up being a “distraction” for agencies already dealing with scarce resources.

“To the extent that analysis draws them away from enforcing the regulations and protecting the health and safety of workers, we think it’s a distraction,” Trumka said. “We think we would have rather not seen it.”

And there you have it – since the incentives to pass and sustain business regulations for the AFL-CIO are political and not about the workers, business regulation becomes and end in itself; with the means already justified.

Short sighted of course, as getting rid of regulations which work to stall economic growth (regardless of  the regulations’ initial intentions) would help more people get hired.

Additionally, the reduction in the number of regulations could in fact realign the scarce resources dealing with these issues towards the most important regulations instead of being bogged down with the more political regulations.

But when the incentives are more about political power than worker protection, this is the end result.  Just as Mr. Tumpka stated,   even working towards improving the balance between economic growth and worker protections, is by itself, by definition, wrong.

Zimbabwe: Agree with us or we’ll steal your capital investments (here)

Wired reports on Darpa – that agency which built the internet, now wants a new mathematical language to describe everything (here):

The very first step? Create a unified mathematical language for everything the military sees or hears.

The armed forces are overwhelmed by all the data its various sensors are sniffing out. They want a single data stream that combines drone video feeds, cell phone intercepts, and targeting radar. Darpa’s solution, found in the brand-new Mathematics of Sensing, Exploitation, and Execution program is to design an algorithm that teaches the sensors how to interpret the world — how to think, how to learn and what data, accordingly to collect.

The Economist debates: This house believes that restricting the growth of cities will improve quality of life (here).  An interesting topic, with the debate revolving around whether size is a problem and if so, forcing a certain size or giving individuals freedom to choose.  Research, not (yet at least) discussed,  has been attempted in the past to find the perfect size for a city; meaning how large does a city get before standard city services such as garbage collection or policing become less effective with the addition or each new citizen.

Either way, I’m still for free choice.

SCOTUS Blog on an upcoming Supreme Court arguments about corporate “person hood” (here):

At 10 a.m. Tuesday, the Court will hear one hour of oral argument on a government appeal arguing that business corporations do not have a right of of “personal privacy” that shields from compelled public disclosure the records they turn over to federal agencies.

From Stratfor, especially needed in light of gun control regulation based upon a single incident, Separating Terror from Terrorism. The piece concludes with this:

Recognizing that terrorist attacks, like car crashes and cancer and natural disasters, are a part of the human condition permits individuals and families to practice situational awareness and take prudent measures to prepare for such contingencies without becoming vicarious victims. This separation will help deny the practitioners of terrorism and terror the ability to magnify their reach and power.

President Obama is planning to sign an executive order to review business regulations (via LA Times here):

WASHINGTON (AP) — Taking another step toward mending his relationship with the business community, President Barack Obama will order a review of federal regulations with an eye toward getting rid of those that stifle job creation and hurt economic growth.

Upon hearing this news, I was immediately reminded of the Simpsons’ episode.  The episode is about NASA, who having problems with funding, decides to put an average man in space for marketing purposes.  The press conference (here):

Scientist: Ladies and gentlemen and members of the press.  I’d like to
           present the new generation of NASA astronauts: the average
           American.
            [Curtain rises to show Homer wearing a "Hail to the Chef"
           apron and Barney dressed as a golfer]
Reporter: Jim Wallace, Associated Press.  [clears throat] Is this a
           joke?
Scientist: [cheery] Far from it, Jim.  One of these men will prove space
           travel is within the reach of the common man.
Reporter: Toby Hunter, Minneapolis Star.  No really, is this a joke?
Scientist: No, Toby, and no more questions about whether this is a joke.
            [Everyone lowers their hand, dejected]

Please don’t misunderstand – I’m hoping, like a lot of people, that the President is serious about this.  However, almost every single action taken by this administration shows an absolute love of controlling by regulations, even when no obvious reason for doing so exists.

This is after all the same President who gave us an executive order which prevented anyone from drilling for oil offshore due to one oil spill on a platform owned by BP (DA post here). 

This was all prior to the government report released late last year, which held BP accountable, but even after blaming BP for the entirety of the incident, they announced a month later continued blanket regulations against an all of the industry.

Even the President’s own fact finding commission is wondering what many others questioned before – what is this continued ban is supposed to fix?  They plan to press the administration on the issue soon.

And that’s just regulations for a small part of the energy industry.  This is also the same administration who pushed for financial reform.  Financial reform which as pushed before they had anyone had any idea what took place.  The reform which included controls on market segments which are known to have little to no impact on the financial crisis like hedge funds, derivatives, executive compensation and more (here & here).  (more…)

MasterCard made a decision to stop taking credit card transactions for donations to Wikileaks and hackers struck back (here):

The website of MasterCard has been hacked and partially paralysed in apparent revenge for the international credit card’s decision to cease taking donations to WikiLeaks….

Though not very inventive nor innovative, they used an old and mostly discarded technique by anyone claiming the title “hacker” known as DOS (Denial of Service) – continued:

…A group of online activists calling themselves Anonymous appear to have orchestrated a DDOS (“distributed denial of service”) attack on the site, bringing its service at www.mastercard.com to a halt for many users….

& if that weren’t enough to prove a bunch of third graders have too much computer time on their hands, they decided to name their playground bullying an “operation”:

…”Operation: Payback” is the latest salvo in the increasingly febrile technological war over WikiLeaks. MasterCard announced on Monday that it would no longer process donations to the whistleblowing site, claiming it was engaged in illegal activity….

Irregardless, the truth is oppression by government or oppression by mob rule, is still oppression and by covertly attacking private business to try and punish specific policies or to try and force a change in policies is little better than taking your money forcefully at gunpoint.

It’s a truism of real leaders since the dawn of time; they find themselves, not from true success and stable times, but rather from adversity and chaos. When faced with those seemingly insurmountable odds, it’s the strongest who remain calm, read the landscape, and discover new answers from which they can seek out continued success.

Though under great stress, we humans tend towards the flight or flight response. True leaders however, can use these difficulties against themselves to provide both motivation and a sense of urgency to gain the ingenuity required for such challenges.

This is understood well in society. Like business leaders who understand innovation can be helped significantly by design constraints (here):

Great designers understand this. Charles Eames says design is all about innovating around constraints. And it’s the constraints – the scarcity – that fires the designer’s creativity. Smart business people “get it” too. Amazon founder Jeff Bezos embraces self-imposed scarcity saying, “One of the only ways to get out of a tight box is to invent your way out.”

They understand that principle of economic scarcity. As do military leaders. Sun Tzu notes in the Art of War:

For to win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill.

For President Obama, the Tea Party & the Republicans taking back control of the House of Representatives could give him the opportunity to display true deft.

Assuming it does happen as predicted (here via the Philly Inquirer) however, the President is accorded a tough task ahead.

He would now have the body responsible for appropriations bills (all spending bills much start in the House & they are very important. For instance, they can kill health care by simply not funding it….) mainly in place due to running against him. Secondarily, while they don’t wish to be seen as obstructers, their willingness to work with Obama will be small even without their election strategy. Because any bill passed, regardless of how/why, if it turns out to be a good or well liked idea, Obama will naturally take credit to further his chances for re-election in 2012.

& the Democrats know that neither the President nor health care is a selling point for this election, even if they are communicating differently. The facts are that se hasn’t really made many direct candidate speeches, just backyard BBQs in key districts in key states. They are essentially, and correctly, playing against their weakness – his popularity.

Not a bad strategy in the short term, but I think people have heard him speak enough and any celebrity (yes, while the President is certainly more important and more powerful than any normal celebrity, s/he is still a celebrity) runs the risk of over saturation.

Irregardless, with Obama, the question is can he live inside those constraints?

What we know is given a new landscape, the answer for tomorrow’s question will not be the same answer as today’s. I think if he can push himself with a sense of urgency, surveys the landscape to see what he has and what he can accomplish with what he has. Then uses both the sense of urgency and strategic thinking by changing his game plan when the field of battle changes…. well, then we’ll see a real leader who may live up to his Nobel Peace Prize (here).

Or said more succinctly, it’s a crappy state of affairs you might find yourself in Mr. President, but challenges is how leaders prove themselves.

Honestly, I don’t think he’ll be able to do it. I think he’s too insecure (here) about himself and his handlers seem to know little more than an approval ratings drop equals time for Obama to give more speeches. & I don’t honestly think that’s likely to change…. but predictions are better left to Ms. Cleo.

What is likely however is the people around him understand exactly this point.  They do know it. The question is whether their emotions towards their beliefs (see: Confirmation Bias here & here) combined with the difficulty of telling a President who gives great speeches to shut up. Not to mention game theory predicts leaders to surround themselves with “yes men”.

All of that makes significant and required change seem unlikely, but I’d never count out someone who made it to the Presidency, nor, the team that helped him get there.

So Mr. President, here’s your chance.

Well currently, the question is moot as the US government does own 61% of GM stock.  So they are the controlling shareholder, but it seems once again, pundits, journalists, and the rest are acting as if it’s a good thing only because it’s not as bad is it could be.

Via the Economist (here subtitled: An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not):

AMERICANS expect much from their president, but they do not think he should run car companies. Fortunately, Barack Obama agrees. This week the American government moved closer to getting rid of its stake in General Motors (GM) when the recently ex-bankrupt firm filed to offer its shares once more to the public…

Which sounds nice in theory, but in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares.  With roughly 500 million shares available, this means the US government current owns 305 million shares.  At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars.

So even if a theoretical IPO that generates excitement were to happen, in order for the government to recoup $50 billion dollars the stock price will have to increase to $163 dollars a share or by more than 400 times it’s current price.

But of course when it’s not your money you lost, but taxpayers money, I guess that changes the calculus….

The Economist continues:

…Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool: perhaps favouring the unions who donate to Democrats or forcing the firm to build smaller, greener cars than consumers want to buy….

& here’s where it gets more confusing.  After stating the obvious concerns one would normally have when any business starts making decisions based upon politics instead of what’s best for the company (& also what they are legally bound to do, their fiduciary responsibility), they tell us those fears are wrong:

…Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside….

While simultaneously explaining to us how they did in fact make tons of political decisions:

Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior….

DA posted about how the Obama administration used their leverage and power to bend the law to help the Unions over other creditors who should’ve legally be first in line for any monies (here).

But of course, that wasn’t the only political meddling in GM (the Economist):

Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends….

Then why does the Economist think it’s a good idea?

[President Obama] his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold….

& there we have it.  So long as there wasn’t a huge amount of political intervention and there’s a possibility that the government might recoup all their money…. Thing are good for The Economist.

Of course “good” is being defined by potential future results.  The truth is, the US government buying up private businesses creates far more implications that whether the stock prices rise enough to recoup the money they were given.

Enter Harvard Law School on Corporate Governance and Financial Regulation.  Instead of asserting some win based upon theoretical future value, they asked the more important question (here):

In our paper When the Government Is the Controlling Shareholder, recently made publicly available on SSRN, we analyze the ways in which existing corporate law structures of accountability change when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms.

& the implications are vast.  In their full research paper (here), they ask a much more serious and long term question.  Which is, what rights do other shareholders have when the government owns a controlling interest and is forcing companies to make decisions that will not benefit shareholders in the long term?

Normally, shareholders have legal rights at the state level where officers of any company are held legally liable to their fiduciary responsibility:

In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a “caretaker” of another’s rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest.” The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor ANYONE ELSE’S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals….

What this is for, is so shareholders can be protected.  If a company you own shares in decides to willfully make decisions which are counter to this responsibility, shareholders can sue for compensatory damages.

But what if the main decision maker is the federal government?  Even though the Economist seems to be ok with this, though recent history shows this is an incredibly naive position to take (from the full report):

Even though government investment started less than three years ago, there are already troubling anecdotes….

For instance, after the government purchased 71% of AIG and AIG gave 165 million dollars in bonuses which were contractually guaranteed, the “owners” responded with threats.  Senators and Congressmembers bemoaned this.  Told us it was unethical for AIG to follow their contractual obligations because the government owns them.  Even President Obama:

….urged Congress to draft legislation that sends “a strong signal to the executives who run these firms that such compensation will not be tolerated.”

As if Senators, Congressmen, and the President have any idea what pay should be in the first place… (DA post here), but they went further (from the full report):

Barney Frank, chairman of the House Financial Services Committee pushed the idea of suing AIG….

Since they have majority ownership:

[Barney Frank] “I still believe that we have a right legally to recover this, because we can assert our ownership rights and say, yes, you may have a contractual right to a bonus but your rotten performance means you should forfeit it”…

Additionally:

…”senior Treasury officials have been meeting several times a week all spring to review, one by one, the payments to the company’s executives. But the time-consuming discussions have never been resolved whether any of the executives should get paid.”  Now, even routine bonuses are pre-cleared with Kenneth Feinberg, the “compensation czar.”

& what of the bank bailouts?

…bailout recipients faced mounting pressure from the President and Congress to increase lending.  President Obama said he would “hold banks ‘fully accountable’ for the assistance they recieved and that they ‘will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer’”…

What about foreclosures, from people who can’t pay their mortgages?

Rep. Barney Frank “acknowledged that struggling homeowners [weren't] getting help as fast as many in Congress had hoped”, and urged bank executives to put in place a foreclosure moratorium until the government could implement mitigation programs.

These same people who also went after GM & Chrysler for closing too many dealerships.  And then there’s Citigroup, Bank of America, etc, etc, etc. (DA post here).

But this is Harvard, so they talk about ways other countries have handled this.  For instance, the UK started another government agency.  Theoretically it’s independent of politics, with a sole goal to find businesses which need to be saved and to save them.

Which of course is an entire other conversation…. why anyone believes the government can make the bad decision of buying a failing private company and solve the conflict of interest by simply building another government agency is…. well, it’s stupid.

It would be like having an entire corrupt police force arguing that the solution to the corruption is to merely hire more cops.

& therein lies the true problem.  When the press, politicians, and us normal voters, refuse to look into the future to see the true implications of such actions, we end up with answers like “since our [government's] original plan didn’t work, it must only be because we didn’t go far enough.”

I would submit to those willing to critically contemplate, that the decision itself was wrong & all these implications were obvious, known, and serve as further proof that politics and business don’t mix.

More importantly however, they fail in their analysis on a fundamental level.  True critical thinking can never rely on results as proof of anything.  Because it’s always possible to make a bad decision, and have positive results in spite of it.  It’s also completely possible that you make the most perfect decision ever, but it still fails.

So no – the question isn’t really whether the government made a good investment, whether taxpayers will actually recoup the $50 billion spent, or whether GM ultimately succeeds in the long run.

The question should be- should we have done it regardless of the answer to any of those questions?

& I would proffer the answer is easy: no.  The long range implications of such dangerous behavior isn’t worth saving one single car company.

Of course, that’s just my two synapses firing…. they could always be misfiring

Over @ Concuring Opinions, Nate Oman has an interesting post about the defenses of a free market (whole thing here):

Broadly speaking, I think that there are three families of arguments that can be made in defense of markets. Most commonly within the legal academy markets are defended on the basis of efficiency….

The second defense of markets is libertarian. This looks a lot of like the efficiency argument but is actually quite different, notwithstanding the fact that libertarians frequently confuse the two. In the libertarian argument what matters is not welfare but freedom. Freedom is taken as a good in and of itself, even if choices might result in reductions of welfare for the chooser….

The third argument is a defense of markets as markets.

Both the efficiency and the libertarian defenses of markets are reductionist in the sense that they see the good of markets in a unitary way. Markets are good because — properly constructed — they move resources around to maximize welfare….

Markets are good because they provide cooperation in the face of disagreement over the definition of the good and “social stability.”…

It’s a very decent article, though as a non-card carrying libertarian, I need to disagree with some of his minor points.  Namely, that libertarians are by group interested in freedom alone.  In fact, libertarians, just like other demographic groups get to the same answers through different paths and all three paths are prevalent in the current party.

For some libertarians, it is an…. intellectual/efficiency argument alone.  They believe markets aren’t necessarily moral or perfect at rationing, but they firmly believe that a free market leads to the best possible solution for the most people.

For me, I take the freedom approach.  To maximize individual welfare means one must maximize individual choices.  This might seem as too moralistic or philosophical for some as to be practical or useful, but it seems logical that reducing one mans’ freedom is antithetical to maximizing welfare.

& to be thoroughish, lots of libertarians are just tired of all the other parties and joined that cool one with that goofy, “Who is Ron Paul” stuff.  In reality, like most organizations, libertarians are not absolutists either way using a combination of thoughts to form their basis for their beliefs, but I digress.

The author continues about the third way:

On this view, traders are not cowardly, greedy, souless parasites (see, e.g., Shylock) constantly tempting the virtuous away from the path of justice with filthy lucre. Rather, commerce encourages courage, honesty, and fidelity. It encourages cooperation rather than predation. It allows people with widely disparate views of the ultimate ends and purposes of life to peacefully cooperate with one another. Commerce rewards the frugal and the farsighted, while punishing the wastrel and the spendthrift…..

But he tells us….

The third, pluralist view of the good of markets gets scant attention…

While this maybe a true statement, but the reality is that all three defenses coexist to form both a cohesive political and philosophical framework (though I do have issues with libertarians on foreign policy).

If we can start with the idea that maximizing welfare includes maximizing freedom, efficiency, freedom, & moral markets work together.

When starting with the paramount of freedom in economics, one also gets into the land of (un)intended consequences and perverted incentives.  Hayek talked about this a great deal – the fact that due to the shear size and complexity of the market, any attempted centralized interference will change incentives and unlikely for the better.  Unlikely, because the “status quo” we all question exists through millions and millions of individual transactions.

For lack of a better term, a collective wisdom emerges, order out of chaos.  An answer, that we might not like, but something for which a centralized system is (highly) unlikely to do better than free individuals.  The result is the most efficient use of resources we can hope to achieve while maintaining the most individual freedoms we can.

What about the morals? Well….it’s not as if we don’t have recent examples to help us out.  Leaving out the current mess of a tax code, take the recent financial crisis.

Predatory lenders?  Sure.  Fraudulent and speculative borrowers? Sure.  The reason why it worked so well?  Government incentives pushed quasi-government agencies to purchase loans without much oversight.

Why no oversight?  No skin in the game.  They couldn’t fail.  The market believed it & they believed it.  & in the end, the government proved them right.  Do the wrong thing, over and over and over and over again until it finally collapses and someone else ends up paying the bill….

So while the author is probably correct that we don’t use a moral market argument much, especially in an atmosphere of language such as “fat-cats”, he’s incorrect that this moral option is a “third” argument.  It is indeed part and parcel of the framework that markets are more efficient, better at maximizing freedom, and yes, even better at incenting moral behavior as well.

More on market morals here

Here we go again…. yet another marketing campaign by the Obama Administration to tout bail out packages that has yet to do anything they’ve previously promised (DA Post here) as a rousing success.   These silly marketing games seem to work well for politicians, but what logic tells us is that you can’t prove a negative.  The Obama Administration can tout bailout monies spent for any reason in to any success they please because proving that it would’ve been better without the money is a nonexistent hypothetical situation for which we can only guess.

& with upcoming elections, for which Democrats currently seem to be in some trouble (polling data here via RealClearPolitics), they will continue this regardless of any true facts which show the opposite.  This week, with some gall, they plan to use the auto show in Detroit (here via Policito):

When the president travels to Michigan on Friday, he’ll tout the revival of General Motors and Chrysler since the auto companies received billions in federal aid and government-assisted bankruptcies….

I say with gall, because they fully intend to tout even more success with blown money when the only major car company to NOT take bail out money is doing better than their rivals (here via Star-Tribune):

DEARBORN, Mich. – Four years ago, Ford mortgaged everything down to the blue oval logo to save itself. Now, even as Americans remain skittish about the economy, it’s reaping big rewards and stealing business from stumbling rivals.

Ford said Friday that it made $2.6 billion from April through June, its fifth straight quarterly profit. The company, which reported record losses in 2008, now predicts it will end 2011 with more cash than debt.

With its two longtime Detroit rivals still finding their way after spending time in bankruptcy last year, Ford, which never took government bailout money, extended its success story…..

Yep, instead of using this time to stand up for the ingenuity, the self reliance, the perseverance of private individuals working without taking tax money, they will use this to tell us all how much better off we are than if they hadn’t.

Oh… and in case you might be one of those people who know about Ford’s success, they have an answer for that as well (here via Detroit News):

Washington — The Senate’s top Democrat argued Ford Motor Co. probably would have collapsed if the government hadn’t bailed out its top two competitors….

So there you have it, even with logical evidence to the contrary, not only did the all knowing government help out two companies that are still barely surviving, but also completely fixed a company for which they contributed nothing directly.