Random Observations on Government

Ronald Reagan was the most conservative president in the last 75 years. Despite interest rates of 20% when he took office, during the first 5 years of his presidency the economy grew by a total of 17.7%. Barack Obama is the most progressive president in American history. Despite interest rates close to zero throughout his terms, during the first 5 years of his presidency the economy grew by a total of 5.8%... and it's getting worse, shrinking at an annual rate of 2.9% in the first quarter of 2014!

At the very moment in time when crime in the United States is at record lows, local police departments are morphing into paramilitary armies. How many times have you heard of someone buying a brand new toy and letting it sit in the closet? Probably not that often…

Barack Obama’s never been a big fan of American Exceptionalism or hegemony, despite the fact that American leadership has ushered two generations of relative peace after two world wars in the first 40 years of the 20th century. He is however a big fan of international consensus and cooperation. The UN is a good example of just such cooperation. They are the ones who brought us a UN Human Rights Council featuring such freedom loving states as Russia, China, Saudi Arabia and Cuba. Barack Obama likes that non-US centric model so much that he has decided the United States will relinquish its management of the Internet traffic cop organization, ICANN (Internet Corporation for Assigned Names and Numbers). So now such liberty stalwarts as China, Venezuela and Iran will have just as much to say about the freedom of the Internet as the United States does. That should work out well.

Despite mounting proof that NOAA and other organizations manipulated data to further the myth of global warming… despite record cold temperatures and ice packs in the Great Lakes, Barack Obama believes “Climate Change” (AKA “Global Warming”) is as great a threat to national security as is terrorism.

Why is it that over the last 5 years GDP has grown by 6% yet the stock market is up by over 120%. Could it have anything to do with Big Government?

There are over 3,000 counties in the United States. Why are 7 of the 10 richest located adjacent to Washington, DC? No, that couldn’t have anything to do with Big Government.

The bad news: In 2014 there are 127,000 fewer native born Americans working than there were in 2000, despite that group growing by 17 million people. The good news: Since 2000 there have been approximately 5.7 million jobs created in the United States. The worse news: According to the Center for Immigration Studies, all of that 5.7 million net job growth has gone to immigrants – legal and illegal – leaving a total of 58 million working age native born Americans without work.

After years of practically non existent border enforcement, and his administration signaling to millions of poor that if they can just get to the United States they just might be able to stay, Barack Obama blames Republicans for the tens of thousands of unaccompanied children who are flooding across America’s southern border. Constitution be damned, he’s going to use executive action to solve America’s immigration problem. Regardless of the rhetoric, the outcome of Obama’s unilateral action will likely be amnesty for millions of illegal immigrants who will soon thereafter be converted into Democrat voters.

Despite crystal clear evidence that ethanol is worse for the environment than gasoline… Despite the fact that prices for everything from beef to plastic and everything in between are rising because so much farmland is dedicated to ethanol corn production… Despite the fact that ethanol significantly raises the price of gasoline… Congress just passed another Farm Bill that will provide tens of billions of dollars to maintain the ethanol cabal.

Congress’s approval ratings are at historic lows, in the single digits, yet somehow American voters regularly return over of 90% of their Congressmen and Senators to Washington.

Despite the fantasy that progressive policies are good for the poor, in the end they are bad for everyone, except those in government and the friends of those in government. If you’re riding the Wall Street gravy train then you love big government. If you’re a big business who uses government to limit competition and pad your bottom line, you love big government. If you’re a government employee with practically lifetime employment, 50% higher salaries than your private sector counterparts and the power of life or death over businesses, you love big government.

If however you are an entrepreneur seeking to start a business and create jobs, you are oppressed by big government. If however you are an unskilled youth seeking to get your first job, your opportunities are limited by big government. If however you a simple wage earner who wonders where the rest of your check went, big government exploits you.

None of this is rocket science, nor is there anything here particularly surprising. Nonetheless, Americans continue to vote for big government progressives in both parties and wonder why things never seem to get any better. The question is not whether this unsustainable and suffocating government system will end, but when. The more important question is, will the entity we know as the United States survive intact or will it devolve into anarchy and chaos and become just another ghost of a failed state on history’s chronicle of mankind’s evolution? If people with no sense of liberty, no appreciation for small government and no allegiance to the the Constitution keep getting elected, the outlook doesn't look good.

My rapidly fading love affair with Wal-Mart

The first time I ever saw a Wal-Mart I was a grad student getting my MBA down in Tallahassee, FL. One opened up down the road from my apartment and I was immediately taken by the big bright stores with lots of stuff and what seemed to be pretty low prices. In class I learned the secrets to Wal-Mart’s success in its niche of “Always low prices”.   It demanded efficiencies from its suppliers. It became fanatical about using information technology to optimize its sourcing and distribution channels. It paid its employees the community average or sometimes slightly more, but never significantly so. And of course the company benefited tremendously from scale. At the end of the day Wal-Mart became a spectacular success because it provided the goods people wanted at the lowest prices possible.

Thus began a two decade long love affair with Wal-Mart. For most of the last twenty years I’ve spent most of my shopping dollars, particularly food, but other items as well, at Wal-Mart. It helped that, as I hate to shop, I could go there and get pretty much everything I needed in one place, from apple juice to socks to those little trees you put in your car to make it smell good.

I remember around 2003 when a friend of mine got married in Key West. I went to Wal-Mart and purchased a pair of those mesh shoes with the rubber sole that you could wear in the ocean. They cost about $7.95. I remember how amazed I was that they could manufacture that pair of shoes in China, label them, ship them across the ocean, transport them to my store where people would receive them, inventory them, display them and eventually charge me for them, and do so at a profit! Even if they paid their workers in China a penny a day I still didn’t see how they could do all of those things and still make a profit.

When my love affair with Wal-Mart began the company had 1,500 stores mostly serving rural communities across the country and generated about $25 billion a year in sales. Today they have 10,000 stores around the world and generate half a trillion dollars in revenue annually.

Like it or not, Wal-Mart has changed the face of American retail. By using the best of the free market the company has saved Americans hundreds of billions of dollars over its lifetime, savings that they might have used to can use to provide more food to their children, to give to charity to buy their kid a computer for college, or just buy another flat screen TV. By any definition Wal-Mart is an American success story.

Unfortunately however, my love affair with Wal-Mart is fading… and fast. The first injury to the relationship was when the company supported ObamaCare in an effort to increase pressure on its smaller competitors. The second was when they supported the taxing of online sales. Since those two events I’ve reduced the money I spend in Wal-Mart by well over 50%. Now I’m beginning to wonder if I need to redirect most of what’s left. According to Bloomberg, the company is considering supporting the Obama administration’s move to raise the minimum wage. While Wal-Mart knows that it would incur higher wage costs, it also knows that because of its size and efficiency it can better weather the increase than most of its competitors.

And that’s the problem. If Wal-Mart wants to raise the wages of its employees, it has every right to do so and most people would applaud it in the process. Indeed that is the route the Gap and Costco have chosen. But alas, that is not the route Wal-Mart seems to be taking. (They supported an increase back in 2007 as well.) Instead the company is seeking to use to use the power of government to tilt the marketplace in its favor. It wants to use the government to force higher costs on its smaller, less efficient competitors. Essentially it wants the government to put its competitors at a competitive disadvantage.

This is the worst of capitalism – crony capitalism – when businesses use government to harm competitors or keep them at bay. Whether it’s Obamacare or a minimum wage increase or restaurants seeking to keep food trucks off the streets, it’s not only the competitors who lose, it’s the consumers and the market itself. Had Sears or K-Mart used the power of government to strangle baby Wal-Mart in its crib the company would not today be the largest retailer in the world. If AT&T had succeed in defending its government sanctioned monopoly and keeping MCI and other startup telephone companies at bay for another 100 years do you think we’d have iPhones, Netflix, or fixed price wireless plans? No. Of course not. The marketplace survives and thrives the less government intervenes. Wal-Mart of all companies should understand this.

By getting into bed with government Wal-Mart is repudiating the very thing that allowed it to prosper in the first place – the free market. Now that the company has used that free market to become the 800 lb gorilla in the retail marketplace it has repeatedly sought to harness the power of government to keep potential rivals from enjoying the same opportunity. Crony capitalism is the most despicable form of capitalism because it hides behind the mask of free markets.  Thankfully however crony capitalism usually fails because the propped up company often becomes fat and lazy and forgets how to compete. If Wal-Mart wants to betray free markets, so be it, I just hope it’s not too long before the markets decide to strike back.

Big Business + Government... Why Wall Street records don't mean happy days are here again...

On Friday, the stock market, driven by record profits and a better than expected jobs report, - not to be confused with a good one - closed at its all time record high. Closing at 1,614, the S&P 500 closed up 148% from the low it reached in 2009. Not bad given that the economy is up a paltry 5.5% over that same period. Already the markets are up over 10% since the beginning of the year. There are a number of reasons for this.

One is the fact that the 500 companies represented the index have been reporting strong revenue and earnings growth, particularly among technology companies like Apple, Google and Facebook. Another factor is that the Fed’s money pump. The Federal Reserve has been pumping $85 billion a month into the economy since the beginning of the year, doubling the $40 billion a month it had been pumping in since 2010. By the Fed driving bond rates to close to zero, the stock market is the natural beneficiary of the dearth of competitive returns. Where else are investors going to put their money?

Then there is the economy. Last week the government announced that the unemployment rate had dropped 7.5% in March, down from a high of 10% in October of 2009.  Those jobs numbers sound great, until you look a little closer. The primary reason the rate is down 25% in 4 years is not because of job growth, but rather because so many people have grown discouraged that they have stopped looking for a job all together. Basically, since Barack Obama became president, 9.5 million Americans have simply left the workforce and as such are simply no longer counted. Had those people still been looking for a job - U-5, the rate would be 8.9%, which might not be such good news for stocks.

The reality is that while the stock market may be going gangbusters, the country as a whole is a different story. The simple reason is the stock markets, by definition, reflect the fortunes of big businesses. Currently, for a company to be listed in the S&P 500 it must have a market capitalization of at least $4 billion. That leaves out 99.9 percent of all companies in the United States, including the jobs engine: Small businesses. Small businesses create 64% of all new jobs, employ tens of millions of people and are the places from which large successful businesses emerge.

Basically Wall Street is heading for the stars while Main Street limps along. This is no accident. Two pieces of legislation clearly demonstrate the problem. The first is Obamacare. In 2009 it was passed despite the fact that a majority of Americans never favored it. How? Collaboration between the Democrat party and big business advocacy. Companies as diverse as General Motors, Wal-Mart and Pfizer pushed for the passage of the sainted Obamacare because they understood that the legislation would create a significant benefits for them. In many cases big companies like Wal-Mart understood that they could unload some of their costs on the public, or more importantly, they could saddle small business competitors with healthcare costs they could not afford. As competition dried up, up would go their revenue and profits…

Just as expected, Obamacare has resulted in small businesses hiring fewer workers or hiring more employees on a part time basis to keep below Obamacare’s 50 employee threshold. The most recent jobs report shows this shift to part time workers. The April report showed that the average workweek per employee in the US dropped by .2 hours. That is the equivalent of firing over 700,000 people. That larger number of workers working fewer hours means that small businesses are saddled with greater accounting, training and management costs while simply seeking to maintain their current productivity levels.

The second piece of legislation that showcases the big business / government cabal is the Internet Sales Tax bill, euphemistically called “The Marketplace Fairness Act”. The legislation would force online retailers to collect sales taxes for every taxing authority in the country whether they have a presence there or not. Simply put, state and local governments cannot live within their means and seek to squeeze every dollar they can from largely defenseless small businesses. Big businesses meanwhile seek to kneecap potential competitors by foisting upon them regulatory compliance costs they simply can’t afford. A small business doing $1.5 million a year selling backpacks or tee shirts will typically not be able to keep up with the 9600 different taxing authorities that exist around the country. Although the legislation requires each state provide one clearinghouse for tax collection within its domain, it will still leave small businesses open to legal jeopardy from each of the 9600 local taxing authorities.

Here’s just one example. Have you ever looked at your grocery store receipt and noticed some items have a T beside them while others don’t? The ones with the T next to them are taxable and the others are exempt. Some jurisdictions tax staples like milk and eggs while others don’t – and each is constantly shifting the rules. Some communities exempt some forms of chocolate while exempting others. How is a small business selling gift cheese from Wisconsin supposed to understand if it’s fine cheeses count as untaxed staples or taxed luxuries in 9600 different jurisdictions with 9600 different sets of rules? If complying with that law sounds daunting, it is, and that is exactly why many big businesses, including Amazon.com are supporting it: Less competition = more profits.

At the end of the day this stock market bonanza should not be seen as a sign of a robust economic revival. Unfortunately it’s more like a pig wearing lipstick. It’s the result of governments who refuse to live within their means conspiring with big businesses who seek to eliminate competition. The hapless saps caught in the middle are the American worker, who has fewer employment opportunities, and the nascent entrepreneur who finds that maintaining or starting a business is simply becoming unsustainable or impossible. We expect that from government, but it’s a sad day in America when two shining beacons of free market success like Wal-Mart and Amazon embrace the antithesis of free markets – regulation – in order to undermine the opportunity for other entrepreneurs to enjoy that same success they achieved.

Regulation vs. Prosperity... America goes gently into that good night

Thanks to the Founding Fathers, in 2013 the United States has built the wealthiest nation in history on free markets and the rule of law. (And thanks to their more recent successors, we’re simultaneously the poorest… but that’s another discussion.) While the Founding Fathers were remarkable for much, what is perhaps their greatest legacy is their recognition that Americans, like all men, are imperfect.

In 1787 after almost a decade of the greatly flawed Articles of Confederation, the 2nd Continental Congress was formed and would eventually produce the Constitution we have today. What was so amazing about the document was the fact that it had built into a wide variety of it limitations and strictures intended to both delineate and restrict power. The overarching idea that powered the construct of the Constitution was the fact that an unfettered government would become tyrannical. The founders understood that limited government was supposed to act only in those areas that citizens could not on their own – think national defense, courts, treaties – and, importantly, only based on the powers granted to it under the Constitution.

Fast forward to today where their work has proven itself well placed with a prodigious American prosperity been built on its foundations of free markets and the rule of law. More than any nation in history, we have benefited from the fact that virtually any American citizen or resident has had the opportunity to start a business. Sometimes they invest their money in a neighbor’s plan to start a sandwich shop and other times they roll up their sleeves and start something on their own. More than anything in the world, that freedom of opportunity has set America up for success and driven us to achieve the greatest level of wealth ever created.

Unfortunately, that freedom of opportunity is rapidly disappearing… In an effort to ameliorate every problem that might befall a citizen, the federal government has passed laws and created regulations that touch virtually every aspect of our lives. This Sisyphean exercise has not only failed, but it has laid the foundation for the undermining of the freedom and opportunity that made America the wealthiest nation in the world.

Economic growth comes largely from small businesses. 70% of all new jobs come from small businesses. Small businesses are where innovation begins. Think about it. You’re probably not surprised that the PC revolution was not driven by the behemoth IBM but rather by two upstart companies named Apple and Microsoft. You’d probably not be surprised to discover that ESPN was founded by an unemployed sportscaster rather than one of the three major networks. You’re also probably not surprised that it was Google, a company started by two college students, that figured out how to effectively harness the opportunity in online advertising while America’s mega media companies stumbled from one failed business model to the next. Big companies always start out as small ones.

Small business is where new ideas get to play themselves out and figure out what works. This is because small companies are typically nimble, they don’t have legacy products or services they are concerned with undermining, and perhaps most importantly, owners and investors are usually very close to the action. They normally are right in the mix of where everything is happening so they can observe and react quickly to the needs of markets. Big lumbering, billion dollar companies with tens of thousands of employees and multiple levels of hierarchy rarely have the insights or quickness to see opportunities ahead.

And of course starting a business is risky. You never know if customers are going to like your product or service. Suppliers can be unyielding in their financial terms. Employees can be fickle and unreliable. Competitors abound. And of course it can be incredibly expensive. Nonetheless, some intrepid Americans do venture forth to hang out their shingle and pursue the dream of turning an idea into a flourishing business. They might get rich, but they might go broke too… but to them it’s worth the risk.

And as if it were not hard enough to find success as a small business, it’s becoming far more difficult in one respect that the entrepreneur has very little control over: Regulation.

The nearby chart shows the growth in federal regulations over the last 60 years. That growth is set against a GDP growth chart for the same period – measured by average rate of growth over the decade. The correlation is crystal clear, and painful to behold.

Each page of the Federal Register represents dozens of byzantine regulations that must be administered by millions of bureaucrats, often with draconian consequences for violations. For small businesses such regulations are nothing short of a nightmare. Not only do they have to navigate the equally challenging state and local government regulations, but they must increasingly deal with mandates crafted in Washington by bureaucrats who are professional pencil pushers with no experience in actually running a business, nevermind an awareness of the unique challenges faced by small businesses.

The Federal Register is the catalog of all federal regulations. In the 1950's it would see an average of 10,400 pages per year published.  During the decade the US economy grew at an average rate of 4.2% a year (inflation adjusted). In the 60's it would see 16,800 pages per year on average while GDP would average 4.44% growth per year. That was the last decade of treading water. By the 70's Register pages would be 48,000 per year GDP growth dropped to an average of 3.75% per year. The first decade of the new millenia there would be 77,000 pages published per year and as one might expect, the decade’s growth was an anemic 1.73% per year on average.

As regulation has increased GDP growth has decreased. That is no coincidence. Perhaps the greatest way regulation cuts growth and hinders prosperity is that it smothers small businesses and benefits large ones. Unlike big businesses, small businesses can’t generally afford lobbyists to influence legislation nor armies of lawyers and accountants to figure out how to minimize its impact. The result is less innovation, fewer jobs and at the end of the day, smaller GDP growth and less prosperity.

And if you think this discussion of the correlation between GDP and regulation is just a game of semantics, think about it this way. Take your income… How would you like to double it? At the 4.4% average annual growth rate the experienced in the 1960’s, it would take you 16 years to double it. Not quick, but not horrible. At the 1.7% rate experienced during the first decade of the 21st century, it would take you 41.6 years. And that’s not an anomaly, it’s 50 year trend. More regulation means less growth, which means less prosperity.

With the regulations spawned by Obamacare only now making their way onto the books we can expect even more slowing to come. This is not a Democrat vs. Republican issue… this is a conservative vs. liberal issue. As the liberal progressives have sought to use the force of government to create a perfect world where everyone lives in a state of bliss unencumbered by the sometimes harsh vagaries of life and protected from the consequences of choices, they have in fact destroyed the fount from which emerged the American prosperity that allowed them to focus on frivolous things in the first place. Here’s an analogy: In order to guarantee every passenger is comfortable and that a plane could never crash, liberals have loaded the plane up with so many pillows and so much safety equipment that it can’t get off of the ground in the first place. As anyone stranded on the tarmac for seven hours inside a JetBlue plane could probably tell you it doesn’t take long for dystopian conditions to begin to emerge.

Just as aerodynamics of flight can’t support a plane that can’t get off the ground, free market economics can’t drive an economy that is so constricted by regulation that it can no longer be called a free market in the first place. Welcome the America of the 21st century, where prosperity becomes but a distant memory and a once great people go gently into that good night…