Detailed Abstractions

Unless you were lucky enough to be traveling or otherwise unavailable on Sunday, you were likely deluged with Mr. Obama’s media storm to sell not only health care, but apparently many other items as well.

First, it should be noted that this WH is above all, extremely insecure.  The President could be seen on 5 Sunday news shows: NBC, ABC, CBS, CNN and Univision.   But he didn’t have time for Fox, the number one rated Sunday news show…

Regardless of the WH being extremely petty and worrying more about perceived injustices than an honest discussion with those who might disagree, what he actually said is far more serious.

When asked if a health care mandate was a tax increase on ABC’s this week, the President responded:

…”I absolutely reject that notion,” the president said….

“What it’s saying is, is that we’re not going to have other people carrying your burdens for you anymore,” said Obama. “Right now everybody in America, just about, has to get auto insurance . Nobody considers that a tax increase.”…

Using flawed logic is nothing new for Presidents, but this one isn’t even close.  Hhe’s analogizing the privilege of driving with the “privilege” of being a citizen.

The difference of course as that by my very birth, I have a “right” to be a citizen, whereas driving has always remained a privilege with constraints.  You see, I can forgo auto insurance, so long as I don’t drive.  There are many ways around without a car in this day and age, but if I “choose” to drive, then constraints can be placed on me.

Health care on the other hand would be required simply because I existed and no other reason.  & If the government says, “You have to buy this” – it is a tax increase as not paying it can land you in very serious legal troubles.

On CBS’s Face the Nation, with an omnipotent sense of when health care, our fearless leader goes further:

…Obama put his support behind the idea of taxing employers that offer high-cost insurance plans.

“I do think that giving a disincentive to insurance companies to offer Cadillac plans that don’t make people healthier is part of the way that we’re going to bring down health care costs for everybody over the long term,” Obama said on NBC’s “Meet the Press.”…

Even ignoring the fact that this goes against his basic premise that more people need more health care, one wonders if there is anything our President doesn’t know.  So far, he’s taken over banks, car companies, told car companies with whom to merge, who to hire, who to fire, what to build… and now we find out he knows how much health care is too much.

But let’s not stop there.  Not only is our community organizer one of the smartest men in America when it comes to economics and health care, he’s also a brilliant strategist with respects to Afghanistan:

…”What I’m not also gonna do, though, is put the resource question before the strategy question,” Obama told NBC’s David Gregory on “Meet the Press.” “Until I’m satisfied that we’ve got the right strategy I’m not gonna be sending some young man or woman over there- beyond what we already have.”…

I’m not sure exactly what happens to man to think he has the answers to every single last question. Maybe it’s just arrogance and ignorance, as Hayek stated:

If most people are not willing to see the difficulty, this is mainly because, consciously or unconsciously, they assume that it will be they who will settle these questions for the others, and because they are convinced of their own capacity to do this.

Whatever the reason he believes so strongly in his ability to decide what’s best for our own good, history shows us without question where this inevitably leads.  Hayek again:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

Let’s hope we begin to understand the value of humility before we do too much damage.

For those who don’t know, usury laws are used by governments around the world to prevent lenders from charging others “excessive” interest.  These laws are in use in most countries around the world including the United States.  They are usually sold, as they are today, as vehicles to promote social well being by restricting predatory practices against the poor.

& when you have a champion of the poor such as President  Obama, this is right up his alley (here):

Last Thursday executives of the nation’s leading credit card companies were summonsed to the principal’s office and told to clean up their act….

From the President’s post-meeting remarks:

“…we want to preserve the credit card market. But we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with — people finding themselves starting off with a low rate and the next thing they know their interest rates have doubled; fees that they didn’t know about that are suddenly tacked on to their bills; a whole lack of clarity and transparency in terms of the terms and conditions of their credit cards.

And so there’s going to be action in Congress. Our administration is going to be pushing for reform in this area.”…

Of course we should all be for transparency as obfuscation by lenders is just another word for fraud, however the idea that the government will know what makes a risk and be able to set ceilings or adjustments of interest rates is crazy.

You may ask, “But if it’s for the poor?”

And therein lies the problem – a recent paper published by the Harvard University Economics Department tries to answer the question (here):

…Understanding the economic motivation and impact of financial regulation in this setting may aid understanding of regulation and development today.

…Our investigation into the causes and consequences of financial regulation entails answering who and what determines regulation and who benefits and loses from it….

They note in their research:

…The evidence we uncover appears most consistent with financial regulation being used by incumbents with political power for their own private interests—controlling entry and competition while lowering their own cost of capital. By limiting the maximum legal interest rate, usury laws cause credit rationing that increases the cost of entry in the market. Since wealthy incumbents already have access to capital via their reputation, relationships, creditworthiness, and collateral, they are relatively immune to such restrictions…

As with other such government attempts to control the market, it not only fails to do what was expected, but it in fact moves to the opposite corner.

Don’t think that business leaders don’t already know this however.  Knowing that motives aren’t completely discernible, the research certainly suggests the wealthy fully understand these laws and their impact to their interests:

…As further corroboration of private interests, we find a positive relation between wealth-based suffrage restrictions and other forms of economic regulation designed to exclude certain groups, such as general incorporation laws that permit free entry of firms. Usury laws are tighter when incorporation restrictions are also tight. The combination of these two policies restricts free entry further and implies financial regulation is adopted in conjunction with other exclusionary policies designed to limit access to outsiders. This evidence seems to conflict with the public-interest motivation, which is supposed to include or help underserved or disadvantaged groups rather than limit access….

Meaning only that IF these laws were used as social support to the poor, then it would stand to reason that they would not be used in conjunction with other barriers to entry such as licensing, incorporation statutes, and other regulations.

But in fact, this is what we find.  We find that businesses know all too well how to protect their interests even as our leaders tell us how much they are protecting ours.

The true irony of this is that liberals who push this type of legislation routinely do so in the name of economic/social justice.  Fairness for the poor.  Help for our downtrodden brethren…

All the while the legislation they implement continues to hurt the poor more and more each day by limiting their chances and protecting already entrenched interests.

Well, we’ve moved from Cash for Clunkers onto Cash for Appliances and politicians everywhere have patted themselves on the back for what a fine job the original program did.

According to most news reports, sales were up a tremendous amount due to this program.  ABC News reports Auto Sales Up in August Thanks to Cash for Clunkers, Bloomberg reports U.S. Consumer Spending Climbs on ‘Cash for Clunkers, and CNN reports 4th UPDATE: Auto Industry Posts Best US Sales Of Year.

If one just reads the headlines and do the normal drive-bys on the news, this is yet another government program which is a rousing success.

This assumes of course you only look on the surface.  Looking further, there were many consequences of this program that probably wasn’t helpful.  Listing the potential and real negatives is a worthwhile endeavor if we truly wish to analyze the situation.  Since I can’t sum up the problems with this program any better than Cato has, Chris Edwards posted on their blog:

* A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.

* Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.

* Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine!

* The federal bureaucracy has added 1,100 people to handle all the clunker administration. Again, taxpayers are the losers….

* The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.

This isn’t to say they’re weren’t positives.  This only mean that using a vision which includes more than the past couple of months to analyze the situation will objectively result in either seeing this as a smaller success than currently marketed, or more likely, seeing this as an actual failure.

This is a continuous issue with basic human thinking.  All humans due to brain wiring and evolution have certain built in biases that cause us to make ineffective decisions.  By better understanding those biases, we can seek to minimize them.  Without minimization though, this thinking results in quick based resolutions that are overreaching and often end with a result much different from intended.

A few easy recent examples come to mind.  Sarbanes-Oxely, the Patriot Act, and McCain-Feingold.

Using SOX, lots of new regulations were added to company finance reports due to Enron, MCI, and other companies.  However the regulations can’t possibly prevent what took place nor can they do any better than what happened.  In Enron’s case, corrupt management ruined a business and they went to jail.  SOX will not prevent another Enron and I think the incentives against doing it again already exist when CEOs, CFOs, and others lose their business and their freedoms.

The true result of SOX?  A new industry of people and millions and millions spent by companies to ensure compliance, which is passed on to consumers that will not prevent future fraud (Bernie Madoff?).

Another example – even small decisions made too fast can turn out to be completely wrong.  Here in St. Louis, MO, they renamed a part of I70 after Mark McGwire due to his home run record.  It was a travesty to begin with as the road used to be named after Mark Twain, but after the steroid scandal included Mr. McGwire the idiocy and quickness of the decision was easy to see.

Additionally, the economy; lots of us still wish for the 90s when jobs were extremely plentiful, pay was high, and the economy was moving forward with lots of momentum.  Long term view?  It turned out to be a ponzi scheme that was mostly paper profits which resulted in a bubble that, as with all bubbles, burst.   Indeed, there was no new business cycle or new business rules that changed the economy in such a way as to guarantee no more downturns.  Several very large companies declared bankruptcy, CEOs went to jail, and millions of individuals lost a lot of their retirement money as their 401Ks nosedived.

In some ways though, making quick decisions makes complete sense.  In our very quick world, we are forced to make decisions quickly and lots of times, make those decisions based upon partial information.  In business, product innovation, management decisions, battlefield tactics, and in many other places this is necessary and having the skill to do this well is a requirement in most aspects of today’s professional life.

However, even though quick decisions on partial information are required in today’s world, we must still be cognizant of potential long term ramifications if we truly intend to leave a world for our children and grandchildren that is better than we found it.

Otherwise, we can continue to only contemplate things in small slices of time and we will certainly continue down the road of bad decisions.

Of course that’s just my two synapses rubbing together… I could be wrong.

There’s an article well worth reading at the Economist discussing the Obama’s administration flagrant dismissal of current bankruptcy laws (here).

…Bankruptcies involve dividing a shrunken pie. But not all claims are equal: some lenders provide cheaper funds to firms in return for a more secure claim over the assets should things go wrong. They rank above other stakeholders, including shareholders and employees. This principle is now being trashed…

..The Treasury has also put a gun to the heads of GM’s lenders. Unsecured creditors owed about $27 billion are being asked to accept a recovery rate of 5 cents, says Barclays Capital, whereas the health-care trust, which ranks equal to them, gets 50 cents as well as a big stake in the restructured firm. If creditors refuse to co-operate, the government will probably seek to squash them using the same fast-track legal process…

Since Obama, and his proponents, call him a Constitutional scholar I assume it would be nothing new to him to understand how in our history bankruptcy laws came to be.

During the time of the founding fathers, they left an oppressive country to find freedom.  One of the key pieces of oppression they wanted to stamp out in the New World was debtor’s prison and debt inheritance; where one bad decision could affect generations of family members.

They learned by the errors of the Old Country, that not only did the old way overly favor the creditors, but it also slowed down investment and innovation.

It’s pretty easy and intuitive to understand why this would be.  Anyone taking a loan today to start a new business knows the worst possible result will be bad credit for a limited time and potential seizure of assets to pay back creditors.  This is obviously a lot less intimidating for entrepreneurs than the potential consequences in the Old Country freeing up more people to push for more success.

Creditors also know how to manage their risk based upon the current laws.  For instance, secured creditors get first shot at monetary recover, lowering their risk, while unsecured creditors have a higher risk and are further down the line.

& all of this worked.  The brilliance is not only in how & why the laws were fashioned over time, but also the consistency to which these laws were implemented.

In our own history, many success stories of pioneers in this or that industry had all been bankrupt at one time or another.  Thomas Edison, Henry Ford, Benjamin Franklin, and many others, whose innovations we might have never have seen under old bankruptcy standards.

The founding fathers even found it so important, they codified the ability to enact uniform bankruptcy laws in  Article One, Section Eight of the United States Constitution.  While they did still hold to debtor’s prison for a little while, it was stamped out completely in mid 1800′s. (though today for various debts you can still be jailed, such as debts acquired through fraud or failing to pay child support)

Now we have POTUS playing politics with the rule of law.  Ensuring money goes to unions before secured creditors, the same unions who are using that money to buy up assets of the companies they helped to bankrupt.

As has been a constant refrain of mine in this blog over the past few weeks (or is it 100 days?), when the ends justify the means, where does one stop.

This weekend during a radio address, Obama used his time to tell us all about the plight Americans have in dealing with credit card companies.

WaPo Article:

President Obama used his weekly radio and Internet address to reiterate his call for credit card reform, saying the nation can no longer tolerate an “anything goes” mentality by the credit card companies…

It seems he has lost the understanding that when two entities enter freely into a contract, capitalism ensues and the government should only need to be involved in a very limited fashion which is to ensure the contracts are followed.

But, when there is blame to go around, we know Obama will blame business first:

“Americans know that they have a responsibility to live within their means and pay what they owe. But they also have a right to not get ripped off by the sudden rate hikes, unfair penalties, and hidden fees that have become all-too common in our credit card industry,” he says in the address. “You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application.”

I’m unsure of all these “stings attached” and “hidden fees” on the dozens of cards I’ve had in my lifetime, but maybe I’ve just been lucky.

One thing I do know is that not one single American has had to consult accountants, lawyers or specialized software in order to sign up, receive, and use a credit card.

I  however know of only 2 people who are brave enough to figure their taxes without any professional help.

So I ask you Mr. President, with all due respect, could we possibly use some of this same logic on the tax code and governmental problems with hidden fees, unfair penalties, and sudden rate hikes?