Archives: 04/2012

11-Year-Old Entrepreneur Discovers Business Can Be a Picnic

In my home province of Quebec, an 11-year-old boy is building children’s picnic tables in his garage (using jigs his father built for him) and selling them at a very reasonable price at local home stores. You won’t need to speak French to get the gist of it. What he’s learning is surely invaluable, and it seems as though, in a sane world, this sort of activity would be readily available to all children who enjoy working with their hands.

Thanks to the rapid productivity growth enjoyed by earlier generations of North Americans, families in this part of the world no longer have to rely on the income generating capacity of their children for survival. But does it make any sense to divorce work and entrepreneurship from education as thoroughly as we currently do? In the places where co-op work experiences are being offered to high school students, the practice seems popular. And in a truly free education marketplace, there would be an incentive for educators to meet that demand wherever it exists.

Detroit Doesn’t Need More Federal Money

With the City of Detroit heading toward bankruptcy, The Hill reports that Mayor Dave Bing has signed a $330,000 contract with a Washington lobbying firm to help the city grab more money from federal taxpayers. At the same time, Rep. Hansen Clarke (D-MI) wants up to a $1 billion in “emergency aid” (i.e., bailout) for Detroit from Uncle Sam.

I typed “federal funds Detroit” in a Google search and the following headlines popped up on the first page:

Cockrel: ‘Idiotic Management of Federal Funds Cost Needy Detroit Resident a Chance at Jobs

Detroit Poorly Managed Federal Funds

Detroit Could Lose $20 Million in Federal Funds Due to Mismanagement

State Seeks Better Oversight of Detroit’s Federal Funds

Officials Examining Detroit’s Finances Find Federal Funds Poorly Managed

As I clicked through the search pages a pattern emerged: most of the articles are either about Detroit receiving federal funds or Detroit mismanaging federal funds. And Mayor Bing and Rep. Clarke think the rest of the country should give Detroit more money?

Federal subsidies create a disincentive for local governments to prudently manage their financial affairs. Just like an unemployment check creates a disincentive for an unemployed worker to take a less desirable job that would at least get them back in the workforce, federal handouts allows local officials to avoid pursuing reforms that aren’t politically desirable in the short term, but that would be good for the city in the long-term. In short, Detroit ultimately has to be responsible for Detroit.

A recent piece in the Wall Street Journal from David Beito and Daniel J. Smith, which compared the post-tornado recovery efforts in Joplin, Missouri to Tuscaloosa, Alabama, is illustrative. According to Beito and Smith, “Joplin is enjoying a renaissance while Tuscaloosa’s recovery has stalled.” Why? Whereas Tuscaloosa has pursued central planning and federal aid, Joplin has taken a decentralized, bottom-up approach that has enabled local businesses to spur the recovery.

Beito and Smith conclude:

In an age of mounting deficits and limited federal attention spans, hoping for more subsidies from Washington, D.C. is a risky bet at best. Joplin’s safer wager is in the good sense and independently generated resources of those individuals and businesses most directly affected by nature’s fury.

Detroit and other cities that are in financial trouble should take note.

Wal-Mart, FCPA and Mexico

Last fall in this space I described the Foreign Corrupt Practices Act as “a feel-good piece of overcriminalization” that Congress should never have passed. Over the weekend a front-page New York Times investigation alleged that Wal-Mart’s Mexican subsidiary had paid millions in bribes to local officials for permission to build stores around the country. Worse, when executives in America learned of the payments, they chose to sweep the matter under the rug rather than pursue an investigation, and that choice may have implicated high-level company execs in FCPA violations. [WSJ summary; Wal-Mart written statement and video]

I’m writing up a longer piece on the controversy. In the mean time, a few points:

  • The original payments to Mexican officials are said to have exceeded $24 million; meanwhile, $12 billion in stock market value, or 500 times that sum, was vaporized in one day on Monday. Wal-Mart’s high legal exposure arises through the interaction of various FCPA provisions with each other and with other federal and state laws, including possible liability under state corporate law and Sarbanes-Oxley. Collateral costs, such as executive distraction and probes into its operations in other countries, could debilitate the largest U.S. retailer for some time.
  • A good place to begin on the legal issues is Mike Koehler’s FCPA Professor with coverage here and here.
  • According to Peter Henning at NYT DealBook, it may be too late for the feds to file criminal charges against individual defendants over the original payments because of FCPA’s five-year statute of limitations. On the other hand, DoJ will have various theories to go after the company itself: it can claim that later financial results are misstated, or that there was a conspiracy at least one step of which was taken within the last five years, or that records were destroyed which could serve as an obstruction of justice charge under Sarbanes-Oxley. If the original wrongdoers wind up walking free while managers who arrived on the scene later take a full legal hit, well, that wouldn’t be the first time.
  • Some proponents of the FCPA are claiming vindication: how can the Cato types be right in calling this law vague and punitive when it failed to deter a cover-up at a company as big and image-sensitive as Wal-Mart? UCLA corporate law specialist Stephen Bainbridge has a nice riposte: “In other words, the FCPA imposes huge burdens and liability risks on honest companies, but fails to deter dishonest ones, so we’re going to leave it on the books as is. I’m left scratching my head in wonderment at the folly of it all.”
  • Daniel Fisher at Forbes scores an interview with the eminent Yale management professor Paul MacAvoy whose analysis of the case follows:

    …all large U.S. corporations operating abroad must play a dangerous game in order to obtain the permits and permissions they need. MacAvoy, who has served on the boards of Chase Manhattan, American Cyanamid and Alumax, said Wal-Mart’s mistake was steering all the payments to a pair of lawyers who allegedly were friends of the company’s Mexico counsel. That concentrated the risk and the likelihood of a big, crater-the-company scandal instead of a series of small ones.

    From my experience, he said, most companies have “local representatives involved in negotiations and they pay the local reps a fee for the representation without asking how that fee gets redistributed.”

    “The consultant does the dirty work,” he said. “This case went wrong by the concentration of the funds and the coverup of the process.”

Portuguese Finance Minister Admits Keynesian Stimulus Was a Flop

President Obama imposed a big-spending faux stimulus program on the economy back in 2009, claiming that the government needed to squander about $800 billion to keep the unemployment rate from rising above 8 percent.

How did that work out? One possible description is that the so-called stimulus became a festering pile of manure. About three years have passed, and the joblessness rate hasn’t dropped below 8 percent. But the White House has been sprinkling perfume on that pile of you-know-what and claiming that the Keynesian spending binge was good policy.

But not every politician is blindly ideological like Obama. Vitor Gaspar, Portugal’s Finance Minister, is willing to admit error. Here are some relevant excerpts from a New York Times report.

Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired. Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes. But it didn’t turn things around, and may have made things worse.

Why does the Portuguese Finance Minister have this view? Well, for the simple reason that the economy got worse and more spending put his country in a deeper fiscal ditch.

The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. …The main fear among investors is that Portugal is going to have to ask for a second bailout from the International Monetary Fund and the European Union, which committed $103 billion of financial aid in 2011.

Maybe the big spenders in Portugal should import some of the statist bureaucrats at Congressional Budget Office. The CBO folks could then regurgitate the moving-goalposts argument that they’ve used in the United States and claim that the economy would be even weaker if the government hadn’t wasted more money.

But perhaps the Portuguese left doesn’t think that will pass the laugh test.

In any event, some of us can say we were right from the beginning about this issue.

Not that being right required any keen insight. Keynesian policies failed for Hoover and Roosevelt in the 1930s. So-called stimulus policies also failed for Japan in 1990s. And Keynesian proposals failed for Bush in 2001 and 2008.

Just in case any politicians are reading this post, I’ll make a point that normally goes without saying: Borrowing money from one group of people and giving it to another group of people does not increase prosperity.

But since politicians probably aren’t capable of dealing with a substantive argument, let’s keep it simple and offer three very insightful cartoons: here, here, and here.

If Only Politicians Were More Like Good Parents

Sometimes I wish politicians were more like good parents. I know that doesn’t sound very libertarian – the last thing we want is for politicians to become humanity’s moms and dads – but there’s at least one thing good parents do that most politicians constantly avoid: saying “no.”

When kids want their food pyramids to have a base of candy, center of ice cream, and peak of ice cream with candy sprinkles, good parents say “no.”

When young ‘uns want to show off their mumblety-peg skills with the Bowie knife they found in dad’s old camping gear, good parents say “no.”

And when the children want to borrow the family sedan for a little off-road speed competition, good parents say “no.”

Of course, saying no all the time doesn’t make life with the kiddos easy or fun. The kids get angry. Mom and dad fume. “I hate you” may even be uttered. But refusing to help the children seriously endanger their arteries, digits, or worse – even if it makes the parents’ life tougher – is what good parenting is all about.

If only our politicians would exercise the same restraint. But they don’t, with the latest case-in-point being the drive to keep interest rates on subsidized federal student loans at super-low levels.  It will be the centerpiece of a three-state presidential tour beginning today.

Currently, interest rates on subsidized loans – loans on which Washington pays the interest while a borrower is in school and for a six-month period after graduation – are at 3.4 percent, a surface-skimming level reached after the College Cost Reduction and Access Act of 2007 cut rates in half over a five year period. Rates are scheduled to return to 6.8 percent in July.

The argument proffered for keeping the rates at 3.4 percent is that interest rates generally are at historic lows, and 6.8 percent would simply be too high. Much more important, though, seems to be the political reality: President Obama appears intent on currying favor with both college students and, frankly, any voters looking at exorbitant college prices and asking “how the heck am I going to pay for that?”

But it’s not just the current president who appears to be playing politics. Mitt Romney, the presumptive GOP challenger to Mr. Obama, yesterday also urged Congress to freeze the rate at 3.4 percent.

This certainly looks like election-year politics, and no doubt the unusual focus on student loan rates – not exactly a political thriller – stems from that. But the reality is that policymakers have been lavishing cheap money on students for decades because it helps keep relations cordial with the kiddos. The ultimate result, however, hasn’t been greater college affordability, but damage inflicted on millions of Americans.

First and foremost, all the cheap aid has enabled colleges to raise their prices at breakneck speeds, rendering the aid largely self-defeating and college pricing insane.

Second, giving dirt-cheap ducats to wannabe students – no matter how poorly prepared they are, or how little they actually want to tackle college work – has resulted in massive overconsumption and noncompletion of postsecondary education, and left millions without the earnings-upping degrees they need to pay their college debts. At four-year institutions more than 40 percent of first-time, full-time students fail to complete their studies within six-years, and in community colleges almost 80 percent don’t finish in three years. Most not done in those time frames will never finish.

Finally, there’s the cost to taxpayers. Overall, federal student loans originated in just 2010-11 involved $104 billion in taxpayer money, and if those loans don’t get paid back, or interest rates are slashed, it is taxpayers who will take the hit. That, of course, seems unfair at any time, but making it even worse is that the nation is facing a nearly $16 trillion debt. But good luck getting the politicians to pin down the cuts that will offset the billions of bucks that will be lost if student loan rates are kept at 3.4 percent. Sure, you’ll get uber-confident promises that the move won’t cost taxpayers “one nickle,” but you sure won’t find anything concrete in the legislation that would keep rates low.

Federal student aid is, frankly, a classic example of garbage parenting. No matter how much damage the policies inflict, the politicians do anything they can to stay best friends with the kids.

Plain Language Regulation?

Now where have we seen this before? S. 2337 would require that federal regulations use plain writing that is clear, concise, well-organized, and appropriate for the subject matter and intended audience.

Well, according to the “Plain Writing Association,” efforts to produce plain writing in government go back as far as the 1977 issuance of a report on federal paperwork. President Carter commanded simple and clear regulations in 1978.

Twenty years later, President Clinton issued a memorandum calling for “Plain Language in Government Writing.”

There’s even a “PlainLanguage.gov” Web site already. Because the last Congress passed Public Law 111-274, the Plain Language Act of 2009.

Maybe passing another law will do it. Maybe the search for locution that provides a level of clarity sufficient for public consumption comes from alternate changes in public policy than to amend the expression of their societal impact. (ahem)

Cybersecurity Bills? No, Thanks

Prominent academics, experienced engineers, and professionals published an open letter to Congress yesterday, stating their opposition to CISPA and other overly broad cybersecurity bills. Highlight:

We take security very seriously, but we fervently believe that strong computer and network security does not require Internet users to sacrifice their privacy and civil liberties. The bills currently under consideration, including Rep. Rogers’ Cyber Intelligence Sharing and Protection Act of 2011 (H.R. 3523) and Sen. McCain’s SECURE IT Act (S. 2151), are drafted to allow entities who participate in relaying or receiving Internet traffic to freely monitor and redistribute those network communications. The bills nullify current legal protections against wiretapping and similar civil liberties violations for that kind of broad data sharing. By encouraging the transfer of users’ private communications to US Federal agencies, and lacking good public accountability or transparency, these “cybersecurity” bills unnecessarily trade our civil liberties for the promise of improved network security.

Cato’s recent Capitol Hill briefing on cybersecurity covered many similar points, and additional ones, too. CISPA and three other bills are scheduled for consideration on the House floor this week.