Fred Smith

Bailouts Wanted — All Taxpayers Solicited!

by Fred Smith on May 17, 2012 · 0 comments

in Features

Business spends around the world almost $1 trillion annually, seeking to sell its goods and services. These communiqués are focused almost exclusively on influencing the choices that consumers make. Logical, of course, since failure to sell one’s products in the private world means bankruptcy. But, in today’s world, sustainable profitability requires also that businesses find ways of reducing costly political predation (excessive regulation, government support of competitors, high taxes, direct governmental agency competition). And business does spend a minor fraction of its overall communication budgets on political advertising.  Unfortunately, these ads tend toward rent-seeking — increasing the overall burden of government on others — not on reducing the firm or sector’s vulnerability to such predation.

A recent example was a full-page ad by the National Association of Realtors in Politico [PDF] calling for a number of expanded housing subsidies. Now realtors have suffered to varying degrees by past housing promotion policies. The FHA, Fannie and Freddie and a wide array of other special provisions pushed far too much capital into this capital investment sector, rather than allowing capital to flow where it would yield the greatest societal returns. Moreover, the failure of housing markets to clear, for the excess supply to quickly be absorbed at discounted prices (via foreclosures, bankruptcies, lowering sale price, etc) have been slowed by political efforts to delay these adjustments. Thus, one can sympathize with realtors, home owners and others but be saddened by this latest attempt to delay the recovery of the housing markets.

Wouldn’t the housing market be far more stable, far more efficient, if current regulatory and other government interventions disappeared? Wouldn’t realtors be better — once the transition pains were overcome – in that more entrepreneurial world? Perhaps, but clearly that is the path not taken by the National Association of Realtors or other business groups today. Their more entrepreneurial members suffer, too many incompetents remain cluttering the field, and their comparable advantage in wealth creation suffers while their rent-seeking skills expand.  Gradually, realtors (like health or flood insurers) can be expected to be little more than state employees. Sad.

Why Are Statists So Inconsistent?

by Fred Smith on May 14, 2012 · 1 comment

in Politics as Usual, Zeitgeist

From time to time, I think of this question.  Consider free speech — almost every liberal views that as the one part of the Constitution they’d keep. Indeed, they once defended the rights of Nazis (Nazis!) to march in Skokie, Illinois! Now they find it all too easy to support selective speech restrictions: “harmful” speech, campaign finance laws, campaigns to eliminate the “false balance” of the media (re global warming and other PC-controversies).

Free speech now is restricted to intellectuals — academics, the media (if they don’t fall into “false balance”), liberal politicians. But economic interests must be treated differently — they have undue influence and threaten true, democratic “free speech.” Business and business friendly voices have been targeted repeatedly — and campaign laws are but one example. Research papers funded (even with independence guarantees) must carry the equivalent of  a scarlet dollar sign. Experts from the business world are denied a voice on government advisory committees. Activist shareholder groups file shareholder resolutions seeking to force firms to cancel any support of business-friendly policy group voices. The First Amendment they support is only to allow the Chattering Class to chatter in much quieter rooms.

Another statist argument that illustrates this inconsistency is their view on “cooperation.” They seem to view the market as anti-cooperative — only the state, they seem to believe, allows cooperation. Free markets are certainly competitive — indeed the very essence of free market capitalism is Schumpeter’s creative destruction. But, firms certainly do all in their power to cooperate with their customers, their suppliers, their shareholders, their employees, those living in their neighborhood. Such cooperation is essential to sustainable profitability.

Moreover, firms often seek to cooperate even with their fiercest competitors. A firm, after all (a la Coase) is best viewed as that assemblage of tasks that are best performed at roughly the same scale — within the same entity. Typically there will be some tasks — cooperative R&D, resolving intellectual property rights disputes, technology advertising — that is better performed at the supra-firm level (that is via joint ventures). Yet, statists see all such cooperative ventures only through the antitrust regulatory lens. Often they are banned as “anti-competitive!”

Statists fail to understand that the essence of capitalism is cooperation – voluntary exchange. Firms, of course, compete to persuade customers to come to them rather than others, but they do so by making their offers more attractive, more cooperative. Nicer stores, lower prices, more agreeable clerks — all to encourage more cooperation. Yet, all that is depicted as nature savage in tooth and claw! How silly. Individuals compete for mates. Do we really think that is “vicious competition?”

Legacy Risks

by Fred Smith on May 10, 2012 · 0 comments

in Economy, Labor, Precaution & Risk

European and American political and private institutions have made many non-sustainable retirement promises over the last 50 years. These promises cannot be kept and that reality is forcing reform. One primary reform is a shift from defined benefit to defined contribution plans. Critics argue that would shift risks from the company or agency to the individual. But is this true?

While an individual may fail to set aside enough savings for retirement or invest poorly, that is also true for a firm or government entity. The firm or agency may have the resources to make up for a shortfall — but they may not. When firms and — increasingly — political jurisdictions go broke, they leave workers badly shortchanged. In the private sector, the federal Pension Benefit Guarantee Corporation caps benefit payouts for pensions it takes over. And around the country, financially strapped state and local governments are enacting reforms to lower their pension liabilities. In a still-struggling economy where bankruptcies are likely to increase, defined contribution plan that are independent of the resources of a larger entity may often be the less risky option.

Note that in Europe, to avoid crippling taxes during high-tax periods, part of workers’ compensation would be in kind, often in the form of a car or even an apartment. While these were nice perks, their being provided by the employer meant that to lose one’s job meant losjng not just income, but also access to critical necessities of life. The European nations that have better weathered the Great Recession are those that have liberalized their labor markets. Those reforms allowed workers in those countries to receive higher pay and gain these resources more securely themselves. Isn’t the same principle at work in the retirement area?

European Lessons for America

by Fred Smith on May 8, 2012 · 0 comments

in Bailout Watch, Economy, International

George Will warns that America’s system of competitive federalism is threatened by our own “Greeces.” (“In Illinois the bills are coming due,” April 27). Europe has been brought to its knees by the moral hazard from guaranteeing the debt of imprudent entities. Could a default in Illinois create a similar collapse here? Not in the same way.

States are allowed fiscal autonomy and are expected to suffer the consequences of their own fiscal imprudence. Direct federal bailouts are unlikely, but they are not the real threat.  The risk Illinois raises for America is that the Federal Reserve may decide that states are “too big to fail” and move to ensure that failing states can continue to borrow and carry on their non-sustainable fiscal and regulatory policies.

That is what happened in Europe, as the European Central Bank (ECB) rushed to ensure that Greece could continue spending. The ECB is outside of normal political controls. Finding ways to restrain the Fed may be the primary challenge of the next administration.

FDR on FDIC

by Fred Smith on April 18, 2012

in Bailout Watch, Deregulate to Stimulate, Economy

Robert Samuelson’s column (April 8, 2012) discussing President Franklin Roosevelt’s reservations about the longer term implications of Social Security should not be surprising. In 1932, FDR ran as the more market-oriented candidate against interventionist Herbert Hoover. FDR was also reluctant to sign legislation creating the Federal Deposit Insurance Corporation legislation, stating in 1932: “It would lead to laxity in bank management and carelessness on the part of both banker and depositor. I believe that it would be an impossible drain on the Federal Treasury to make good any such guarantee.”

Today, that moral hazard problem has metastasized into a government safety that extends to massive corporations and large institutions — crop insurance for farmers, stimulus and bailout funds for corporations, pension guarantees, and so on.

Now that system is collapsing. It will not be easy to move from a politicized economy to market discipline, but the fact that corporate America has largely moved from defined benefit to defined contribution pension plans illustrates the robustness of the market to adjust. Hopefully, those such as Paul Ryan who recognize this fact will gain the audience within Congress and the administration to achieve the reforms that will be necessary.

CSR: Business’s Shampoo?

by Fred Smith on February 28, 2012

in Economy

To the Editor, Financial Times:

Gillian Tett notes the vogue among CEOs for “corporate social responsibility” (When Making Shampoo Becomes a Service to Society). CSR is a response to those demanding business assume responsibility for ending pollution, poverty, income disparities, discrimination, and the other ills of the world. As Tett notes, charging business with CSR is a back-handed complement.  The critics have more confidence in business’s abilities than they do in governments’.  But, should business accept this assignment? Will the CSR shampoo really wash those attacks right out of business’s hair? Market tests say no.

The marketing notion that the customer is always right — useful in enhancing brand reputation — has mistakenly been transmuted to politics — our critics are always right. CSR has been around for decades yet attitudes toward business have not improved.

CEOs might examine the approach of the American Plastics Council. In the early 1990s, plastics were blamed for threatening the environment and human health. APC responded with the “Plastics Make It Possible” campaign, marketing the myriad societal benefits of plastics. Rather than apologize for what they do, CEOs should seek to clarify that capitalism and its products and services are not only good for “me” but for “all of us.”

Fred Smith, President
Competitive Enterprise Institute

How Worrisome is the Race to the Bottom Argument?

by Fred Smith on February 24, 2012 · 2 comments

in Odds & Ends

Michael Greve’s recently released, The Upside-Down Constitution, traces the evolution of federalism in of our Constitution. He persuasively documents the transition from competitive federalism (a Constitution that protected the citizenry from exploitation by government at all levels) to today’s cartel federalism (one that empowers governments at all levels to exploit the citizenry).

One of several factors that encouraged this upheaval was the Progressive notion that competition encouraged a “race to the bottom”: relentless pressures to maximize profits would force businesses to employ abusive practices (such as child labor). An interesting argument that we still hear often today. It remains the basis for national and international regulation in fields ranging from global warming to religious freedom to human rights: Economic freedom leads to loss of egalitarian justice; political rules encourage a fairer world. But is it true?

Greve provides data on the extent of child labor in the period 1880 to 1930 (p. 188). In the early Industrial Revolution, child labor constituted 6.4 percent of the work force, a figure that began to fall by the turn of the century, reaching 1.4 percent in 1930. He notes it was not until 1938 (by which time child labor had largely disappeared) that federal regulations were enacted. Rising wealth allowed families to forgo putting their children to work (as did the shift away from agricultural employment) and that wealth also led to some prohibitory state rules.

In a world where states must compete for citizens, values other than profits are advanced. There is no race to the bottom. If anything, there is a race to (not the top; utopian ideals are not the stuff of reality) ever higher rungs on the ladder of human progress.

The Demographics of Politics

by Fred Smith on February 23, 2012

in Economy, Politics as Usual, Zeitgeist

Political campaigns are rarely useful in raising the level of public discourse. The current one is no exception. There is great concern over the “loss” of U.S. manufacturing capacity, a charge often blamed on “outsourcing to other nations.” Few consider whether state or federal tax, regulatory, or other policies might have encouraged this “loss.” Rather, most assert it’s due to exploitation of developing countries and demand “fair” trade policies or some form of national industrial policy (bolstered by similarly misinformed claims that this is the policy of once Japan, now China — and IT WORKS!).

Capitalism is a vibrant system and continually finds new ways to meet old needs and new ways to do old things better — which sometimes results in the decline of certain sectors of the economy. All market sectors trend towards fewer inputs (labor, energy, materials) to produce a unit output. Thus, while output increases, employment (or energy use, for that matter) may decrease. This is not a “loss” but the natural consequence of the creative destruction of capitalism. Even employment “losses” are often illusory. Note that for a period, many manufacturing sectors (steel, auto) were organized vertically — everyone associated with that sector was classified as a “manufacturing” worker. Over the last few decades, this vertical structure has transformed into a series of contractually linked firms with some (transportation, office services, maintenance) now classified under separate categories. Jobs weren’t lost (although the dominance of unions is probably less), they’ve simply been renamed.

Manufacturing is less dominant element in the U.S. economy and this decline might well increase. We’ve also experienced a shrinking agricultural sector. The economy does change over time but why do those changes create such political outcries?

Let me suggest a demographic explanation: Established industries are better understood. Of note are their relationships with politicians. Those working in the most prevalent sectors are known constituents who vote and pay taxes. Politicians also take note of the novel firm promising a breakthrough in an industry. Thus, we often have a competing mix of politicians promoting “grandfather” clauses to protect older industries from new legislation and subsidies to “infant” industries.

Those left out of this process (thriving established firms — too new to be pitied, too old to be viewed as “exciting” — and entrepreneurial firms that would threaten the existence of the Grandfathers) bear the costs of supporting others.

Elites of the World, Unite! You Have Nothing to Lose!

by Fred Smith on November 22, 2011

in Deregulate to Stimulate, Economy, Zeitgeist

And they are — but we have much to lose. See Iain Murray’s latest piece on the EU crisis.

The intellectual temptation — the Fatal Conceit — seems dominant in the political world (especially the financial world) today. It is not only a repudiation of limited government and democracy, it is also a repudiation of empiricism. They might have reviewed the record of central banks, IMF, and technocrats like Jeffrey Sachs. For the latter, see William Easterley’s (The White Man’s Burden — an exploration of the record of developmental aid) succinct graphic summary of his policy advice.

We’ve work to do. Never has there been such an opportune time to rethink the welfare/regulatory state, has society been so molten — but we must acquire the resources (directly or via creative alliances with business or other interest groups) to wage our reform efforts at the scale needed. Sigh.

In Memoriam: William Niskanen

by Fred Smith on October 27, 2011 · 2 comments

in Culture, Economy, Features

Post image for In Memoriam: William Niskanen

Bill Niskanen was an individual who will be missed sorely in a world where intellectuals of integrity are a rare breed.  But, he will also be missed as a smiling face in the often grim world of Washington. We at CEI join many others in wishing his wife Kathy and his family our condolences and thoughts.

I came to know Bill many years ago, when I was learning the Washington game at the Council for a Competitive Economy (CCE), which sought to bring together free market business leaders and pro-market public policy scholars.  Then, as now, I thought it critical for liberty-minded intellectuals to reach out to business leaders in our fight for economic liberty. After all, how can we defend capitalism, if we cannot enlist capitalists in that effort?

Bill as a fellow intellectual who had worked in business—most notably as Senior Economist at Ford—had experienced the tensions between the tactical expediencies that often dominate business decisions and the core principles critical for sustainable profitability. His insights and advice on reconciling these tensions were invaluable.

Bill, then a member of President Reagan’s Council of Economic Advisers, spoke at several CCE events and I came to know and like him. He brought a combination of insights into business, government, and economics that was unusual among prominent economists and gave him the ability to analyze a broad array of issues. After CCE closed down, I founded the Competitive Enterprise Institute (CEI). As a tiny start-up, we needed third party legitimacy. I formed an advisory group of influential individuals who were willing to vouch that CEI’s business model was viable and its aims achievable. Bill accepted and became one of CEI’s early advisers. Bill was rather more respectful of economic orthodoxy than I, but amused and possibly impressed by my enthusiasm.

Bill had been one of the speakers at CEI’s Jefferson Group meetings which brought together the free market movement’s “best and brightest” to discuss public policy issues of the day. I recall his introductory remarks to one of his otherwise scholarly talks: “Now don’t worry, as Henry VIII said to his wives, I won’t keep you long!” And Bill, a tall man, also repeated the observation, “All great economists are tall. There are, of course, two exceptions, Milton Friedman…” and then he’d stop and grin (knowing that one would soon recall Galbraith).

Bill was always helpful whenever I sought to explore new areas of policy and to venture among academics. He and Chris Culp encouraged me to contribute a chapter, “Cowboys versus Cattle Thieves,” in their book, Corporate Aftershock: The Public Policy Lessons from the Collapse of Enron and other Major Corporations, and I think it is one of my best. It would not have happened without his push.

In social situations, Bill was always friendly and a bit bemused by the bustle of the business-social life inside the Beltway. Fran and I would often meet Bill and Kathy at the growing number of right-of-center soirees that have come to brighten the statist atmosphere of Washington. I only wish we could have had many more such exchanges. The impression I always got from Bill was that of a happy warrior with a conviction that logic would eventually prevail. That theme rested not always easily with my “In politics, logic is for losers” cynicism, but we both recognized that there are many niches in the war for liberty.

One of Bill’s ideas that strongly influenced me and that I’ve incorporated into mine was his view that government could approximate the efficiencies of the market only if—for whatever reason—it faced competitive pressures to perform. For example, sometimes two government agencies are assigned similar missions (the air role of both the Air Force and the Navy, for example). Competition spurs both groups to do better. This “warring bureaucracy” model of politics is critical, as it argues against the conventional wisdom that eliminating redundancy and “duplication” in government is always desirable. Competition in the private sector is important. Bill noted it is, if anything, even more important in the political world. CEI’s focus on competitive federalism is an aspect of his influence.

Bill’s major role in the free market movement was as Chairman of the Cato Institute from 1985 to 2008. Bill and Cato President Ed Crane made for an interesting and creative leadership team. Ed is one of the most forceful and principled individuals I’ve known. Bill was equally principled, but put greater priority in exploring new frontiers of economic theory. Together, they made for a formidable team in putting ideas into action. His legacy at Cato extends from the theoretical to the practical. Sound scholarship that forms the underpinnings of creative approaches to solving the problems that ever-expanding government creates.

A mark of Bill’s influence is the fact that his ideas live on, not just at Cato, but among all those who are working to maximize individual freedom in America and around the world. He will be greatly missed—for his accomplishments but most of all, for himself. It was an honor to know and to work with him.

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