Is being pro-business and pro-capitalism the same? Does capitalism generate an unfair distribution of income? Was capitalism responsible for the most recent financial crisis? Dr. Jeffrey Miron at Harvard answers these questions by exposing three common myths of capitalism.
May 19, 2013
Top Three Common Myths of Capitalism
May 14, 2013
Time to free the CBC
In Maclean’s, James Cowan makes the case for liberating the CBC from the shackles of government subsidy, as it’s now out-competing private business in several fields:
The online success of the CBC should be laudable. Its website received an average of 6.2-million unique visitors last year, making it the most popular Canadian website. Around 4.3-million people visit the CBC News site each month, besting both The Globe and Mail and Huffington Post. Adding to this success is an ambitious five-year plan that will open digital-only news operations in cities like Hamilton and Kamloops and allocate 5 per cent of the overall programming budget to digital content. Once upon a time, it was only private TV and radio broadcasters who had reason to grumble about competing with the Crown corporation; in building its online empire, the CBC is taking on everyone from newspapers to Netflix.
In doing so, the CBC has strayed a long way from its original purpose: to sustain Canadian culture when and where the market cannot. The problem is, the CBC’s traditional funding model now allows it to build its digital empire unfettered by economic reality. In its last quarter, 60 per cent of the company’s expenses were paid by government subsidies while just 21 per cent of its revenue comes from advertising. All media companies are struggling to adapt to shifting consumer and advertising patterns brought about by the digital age; only the CBC had $1.2 billion in government cash to fund its experiments and ease the transition.
Broadcasters would argue the CBC has always operated from an unfair advantage. But the current scenario is different in several respects. For one, the Corp.’s legislated mandate to be “predominantly and distinctly Canadian” arguably placed it at a commercial disadvantage. Further, capital and regulatory requirements made it implausible for commercial broadcasters to serve many areas of the country. But nobody needs to ask the CRTC’s permission to create a website, and the startup costs for a digital service are far less than those of a television or radio station. If small cities like Kamloops need a local digital news service, that’s a need that could be plausibly served by entrepreneurs. The CBC is increasingly no longer complementing the market, but instead meddling within it.
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May 1, 2013
April 11, 2013
Ontario’s Green Energy Act is pushing the province to the top … of the retail electricity price table
Ontario loves to be at the top of rankings, but Ontario electricity users should be upset that we’re surging to the top of this particular ranking:
Ontario’s Green Energy Act (GEA) will soon put the province at or near the top of North American electricity costs, with serious consequences for the province’s economic growth and competitiveness, concludes a new report from the Fraser Institute, an independent, non-partisan Canadian think-tank.
“Already, the GEA has caused major price increases for large energy consumers, and we’re anticipating additional hikes of 40 to 50 per cent over the next few years,” said Ross McKitrick, Fraser Institute senior fellow and author of Environmental and Economic Consequences of Ontario’s Green Energy Act.
“The Ontario government defends the GEA by referring to a confidential 2005 cost-benefit analysis on reducing air pollution from power plants. That report did not recommend pursuing wind or solar power, instead it looked at conventional pollution control methods which would have yielded the same environmental benefits as the GEA, but at a tenth of the current cost. If the province sticks to its targets for expanding renewables, the GEA will end up being 70 times costlier than the alternative, with no greater benefits.”
[. . .]
The study shows that the GEA’s focus on wind generation is particularly wasteful: 80 per cent of Ontario’s wind-power generation occurs when electricity demand is so low that the entire output is surplus and must be dumped on the export market at a substantial loss. The Auditor General of Ontario estimates that the province has already lost close to $2 billion on surplus wind exports, and figures from the electricity grid operator show the ongoing losses are $200 million annually.
The wind grid is also inherently inefficient due to the fluctuating nature of the power source. The report calculates that due to seasonal patterns, seven megawatts of wind energy are needed to provide a year-round replacement of one megawatt of conventional power.
“Consequently, the cost of achieving renewable energy targets for the coming years will be much higher than the Ontario government’s current projections,” McKitrick said.
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March 15, 2013
Is Lockheed’s C-130 Hercules the all-time champion in US pork barrel politics?
Ian Geldard linked to this rather interesting history lesson on the Lockheed C-130 transport aircraft (the RCAF is also a user of this type of plane, along with a large number of other air forces):
USAF Lockheed Hercules C-130 at Yokota Air Base in Tokyo (Photo from Wikimedia)
Here’s where the story starts to get interesting. After 25 years, the Pentagon decided that it was well stocked with C-130s, so President Jimmy Carter’s administration stopped asking Congress for more of them.
Lockheed was in trouble. A few years earlier, the Air Force had started looking into replacing the Hercules with a new medium-sized transport plane that could handle really short runways, and Lockheed wasn’t selected as one of the finalists. Facing bankruptcy due to cost overruns and cancellations of programs, the company squeezed Uncle Sam for a bailout of around $1 billion in loan guarantees and other relief (which was unusual back then, as William Hartung points out his magisterial Prophets of War: Lockheed Martin and the Making of the Military-Industrial Complex).
[. . .]
So what did Lockheed do about the fate of the C-130? It bypassed the Pentagon and went straight to Congress. Using a procedure known as a congressional “add-on” — that is, an earmark — Lockheed was able to sell the military another fleet of C-130s that it didn’t want.
To be fair, the Air Force did request some C-130s. Thanks to Senator John McCain, the Government Accountability Office (GAO) did a study of how many more C-130s the Air Force requested between 1978 and 1998. The answer: Five.
How many did Congress add on? Two hundred and fifty-six.
[. . .]
The Air Force’s approach of passing unwanted Herks off to the Air Guard and Reserves worked out nicely for Lockheed. The company allied with Air Guard and reservist advocacy groups to lobby Congress further. In an era of base closures, heavily lobbied governors would use the arrival of new planes to argue for the continuing life of bases in their states. In turn, states and their congressional delegations would fight to get new planes or hang onto existing ones. It was a veritable Lockheed feedback loop. Washington Post reporter Walter Pincus quoted a Pentagon official as seeing C-130 politics as a twist on the old military-industrial complex: “a triangle of the Guard, Lockheed, and politicians.”
The result: the military was often prevented from retiring the oldest Herks, the ones that really needed to be put out to pasture. For example, as Pincus reported, the Joint Chiefs and the Air Force concluded in 1996 that they had 50 more C-130s than they needed, but Congress stymied efforts to retire any of them. One tactic used was to hold nominees hostage: a Kentucky senator repeatedly held up Air Force promotions until four Kentucky Air Guard C-130s were taken off the chopping block.
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February 14, 2013
Crony capitalists make pitch for industrial policy in defence purchases
Canada doesn’t really have a defence industry — certainly not in the sense of Britain, France, or the United States. We have some companies which happen to make products of use to the military (armoured vehicles, for example), but our government is not tightly tied to the fortunes of these companies in some sort of maple-flavoured Military-Industrial Complex. Some movers-and-shakers want to change that:
It goes without saying that the proposal to siphon funds to defence contractors is gussied up in industrial-policy jargon. For instance, we’re told how defence industries are “important sources of technological dynamism and innovation [and] leading-edge participants in global value chains.” (Who today isn’t part of a global value chain?) Also in keeping with current industrial-policy trendiness, the government is instructed to be strategically selective in KIC-starting the sector. “KIC,” you see, stands for “Key Industrial Capabilities,” which is what we’re told we should focus on.
But despite the alluring bells and whistles, the message to firms selling to the government is clear: Either pay up or forget about getting the contract. From now on, if the committee gets its way, how you plan to spread the industrial booty around the Canadian economy will weigh directly in the balance with how your product performs. The new fighter jet doesn’t accelerate quickly enough to elude missiles? Well, never mind that, it comes with a new plant in Mississauga. Shells pierce the new tank’s armour? Too bad. But the innovation spinoffs for Thunder Bay are just too good to pass up.
You might think that interpretation extreme. Surely safety for our soldiers and value-for-money for our taxpayers come first. But what else could be meant by the recommendation that bidders specify the industrial benefits they’re offering as part of their bid itself, rather than as an add-on after the performance characteristics of their product or service have won them the contract?
Suppose that instead of causing defence contracts to be inflated with offsets for Canadian industry, this committee consisting of a high-tech CEO, a former chief of staff at national defence, an IP specialist in a defence company, a retired general and Paul Martin’s one-time policy guru recommended levying a 5% tax on all government defence purchases and using the revenues thus generated to subsidize Canadian defence contractors?
I sent the original Globe and Mail URL to Jon saying, “The very last thing Canada should be attempting is to use government money to build a ‘defence industry’. Let the military buy what they need on the open market — regardless of country of origin — at market prices. The fetish to have a domestic defence industry is pure crony capitalism clothed in a “patriotic” fig leaf.”
February 6, 2013
Why does every infrastructure project cost more?
In his nominally NFL-related column, Gregg Easterbrook usually manages to insert interesting topics that are not in the least related to football:
Where Is the Bridge to Nowhere When You Really Need It? Another reason unprecedented increase in the national debt is not resulting in newly built infrastructure to help the economy grow is that government projects keep taking longer and costing more. Two years ago on Reuters, your columnist opined, “A combination of top-heavy bureaucracy, union rules, cost-plus profits and graft have made recent federally funded construction projects insanely expensive and slow. When the funding comes from borrowing by Washington, then businesses, unions and local petty officials have a self-interest in running up the cost while dragging their feet.”
That column ended by noting the slow pace and cost overruns in plans to replace the Tappan Zee Bridge on the Hudson River north of New York City.
Now two years have passed, and guess what’s happened to the Tappan Zee Bridge replacement project? It’s no closer to beginning. New York Magazine reports that $88 million has been spent just to study a bridge replacement — not for architecture drawings, just study. The original Tappan Zee Bridge, completed in 1955, cost $675 million in today’s dollars and required three years to complete. New York State officials are saying the replacement will cost at least $3 billion and take five years to build. New York Magazine warns the price is lowballing for an expected cost much higher.
New York is demanding that the federal government fund most of the new bridge. Borrowed funny-money would be used; contractors and unions would have every incentive to drag their feet, running up the bill, while corrupt politicians would want the project to last as long as possible, so there was more funny-money to steal.
Meanwhile the existing Tappan Zee Bridge continues to crumble and nothing’s being done. At the current snail’s pace, a new bridge is many years away. What if the existing bridge collapses? Politicians will claim they were never warned, just as they claimed they were never warned before storm surge from Hurricane Sandy smashed up lower Manhattan, Long Island and Hoboken, N.J. Running up the national debt is bad enough; not building what the country needs is even worse. But politicians observe that behaving recklessly, then blaming others, is what advances their careers. Barack Obama acted recklessly with the nation’s finances, and was re-elected. Chris Christie did nothing to prepare New Jersey’s low-lying city from storm surge, then blamed others, and made the cover of Time magazine. Where is the political leader who will place acting responsibly ahead of self-promotion?
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January 20, 2013
Corporate welfare — it’s the American way
Sheldon Richman on the amazingly inefficient US tax code and some of the ways it got that way:
When Congress and President Obama came up with their beyond-the-last-minute deal to put off addressing the coming fiscal crisis, The Wall Street Journal turned the spotlight on a little-noticed, yet too typical aspect of Washington’s machinations: “The bill’s seedier underside is the $40 billion or so in tax payoffs to every crony capitalist and special pleader with a lobbyist worth his million-dollar salary. Congress and the White House want everyone to ignore this corporate-welfare blowout,” the Journal reported.
So a bill that was represented as the first steps toward fiscal responsibility (try not to laugh too hard) contained billions of dollars in corporate welfare. And it was a bipartisan affair.
[. . .]
Manipulating the tax code to benefit particular interests has obvious appeal for politicians — it’s a source of power and influence — and a code that did not permit such manipulation would be much less attractive to them. Outright cash subsidies from the taxpayers, while not unheard of, smacks too much of cronyism and is more likely to alienate taxpayers. But complicated exceptions written into the tax laws can be presented as creative governance on behalf of the public interest. But it is cronyism as offensive as outright subsidies.
[. . .]
Corporate welfare is not primarily about lowering taxes. That would be a worthwhile goal, of course, and could be achieved simply by slashing tax rates and simplifying the code. But when taxes are lowered selectively by writing complicated exceptions into the law, the goal is to bestow privileges on cronies, not to reduce the burden of government on all. Corporate welfare, among its many sins, violates equal protection under the law.
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January 2, 2013
December 28, 2012
The Military-Industrial Complex leads to “a bloated corporate state and a less dynamic private economy”
An older article from Christopher A. Preble, reposted at the Cato Institute website:
The true costs of the military-industrial complex, they explain, “have so far been understated, as they do not take into account the full forgone opportunities of the resources drawn into the war economy.” A dollar spent on planes and ships cannot also be spent on roads and bridges. What’s more, the existence of a permanent war economy, the specific condition which President Dwight Eisenhower warned of in his famous farewell address, has shifted some entrepreneurial behavior away from private enterprise, and toward the necessarily less efficient public sector. “The result,” Coyne and Duncan declaim, “is a bloated corporate state and a less dynamic private economy, the vibrancy of which is at the heart of increased standards of living.”
The process perpetuates itself. As more and more resources are diverted into the war economy, that may stifle — or at least impede — a healthy political debate over the proper size and scope of the entire national security infrastructure, another fact that Eisenhower anticipated. Simply put, people don’t like to bite the hand that feeds them.
And that hand feeds a lot of people. The Department of Defense is the single largest employer in the United States, with 1.4 million uniformed personnel on active duty, and more than 700,000 full-time civilians. The defense industry, meanwhile, is believed to employ another 3 million people, either directly or indirectly.
What’s more, these are high paying jobs. In 2010, when the average worker in the United States earned $44,400 in wages and benefits, the average within the aerospace and defense industry was $80,100, according to a study by the consulting firm Deloitte. And 80 percent of that industry’s revenue comes from the government.
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December 18, 2012
The real reason it’s so hard to cut military spending
From the January issue of Reason, Veronique de Rugy explains how the system is set up to protect military spending from even the most determined spending cuts:
The Department of Defense, with its 2.3 million workers, is the single largest employer in the United States. The defense industry, which is the main private-sector recipient of defense dollars, directly or indirectly employs another 3 million people. This, in a nutshell, is why it’s so hard to cut government spending in general and military spending in particular.
The scope and reach of the government are far bigger than we think, explains John J. Dilulio of the National Academy of Public Administration in the Spring 2012 issue of National Affairs. It’s more than just the money Washington spends or the people it employs. It’s also the people in the private sector who live off that spending. It’s the nonprofit organizations paid to help administer government programs. It’s the contractors who run the programs, the contractors’ sub-contractors, and so on.
[. . .]
Even when military contractors’ profits have reached an all-time high, Congress seems committed to sheltering the companies from any budget cuts. Industry lobbying probably plays a role here. According to the Center for Responsive Politics, the U.S. defense and aerospace lobby doled out $24 million to political campaigns and committees during the 2008 campaign cycle and spent nearly $60 million on lobbying in 2011. Lockheed Martin alone spent $15 million in 2011 on its lobbying efforts, plus $2 million in political contributions. Boeing spent $16 million on lobbying the same year.
In his seminal 1971 article “The Theory of Economic Regulation,” the Nobel-winning economist George Stigler noted that agencies eventually become captive of the very interest groups they were ostensibly designed to police. Writing regulation or even spending legislation requires in-depth industry knowledge, so federal agencies and lawmakers tend to hire directly from the very companies they must oversee or spend money on.
The reverse is true too. In order to gain better access to their regulators and government funds, companies hire lobbyists who used to work for Congress or government agencies. Of the 408 lobbyists employed by the military industry to apply pressure on Congress, 70 percent used to work on Capitol Hill.
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October 15, 2012
Crony capitalism: a bipartisan plague
Veronique de Rugy writes about the problem both major US political parties have (and neither really wants to get rid of):
In his 1986 memoir The Triumph of Politics, former Reagan administration budget director David Stockman wrote: “I had long insisted, to any liberals who would listen, that the supply-side revolution would be different from the corrupted opportunism of the organized business groups; that it would go after weak [corporate welfare] claims like Boeing’s, not just weak clients such as food stamp recipients. Giving the heave-ho to the well-heeled lobbyists of the big corporations who keep the whole scam alive would be dramatic proof that we meant business, not business-as-usual.”
After four years as the Reagan administration’s fiscal whiz kid, Stockman left, objecting to the president’s inability or unwillingness to make good on his promises to cut government spending. Crony capitalism, having avoided a showdown with a principled adversary, has thrived ever since.
Cronyism is the practice by which government officials — Democrats and Republicans, liberals and conservatives — give preferential treatment to particular firms or industries in exchange for votes, campaign contributions, or the pleasure of promoting pet projects. Favored companies reap financial rewards, reduce their exposure to risk, and gain an advantage over rivals who don’t get the same government help.
[. . .]
Corporate double dipping isn’t new. Bipartisan federal, state, and local support for the “weak claims” of corporations has been going on for far more than 30 years, and not just in new and exotic industries such as alternative energy. The target of David Stockman’s ire, aerospace giant Boeing, continues to receive almost unfathomably huge direct and indirect subsidies from the federal government. Ninety percent of the value of the loan guarantees issued by the Export–Import Bank in 2011 went to subsidize Boeing. As a result, Carney reports, Boeing “accounted for 45.6 percent, or $40.7 billion, of Ex-Im’s total exposure in fiscal 2011.” With the help of federal guarantees, the company gained contracts from the likes of Air China and Air India.
Boeing shows its gratitude to taxpayers by overcharging them at every turn. The nonprofit Project on Government Oversight recently reported that “Boeing charged the U.S. Army $1,678.61 for a plastic roller assembly that could have been purchased for $7.71 internally from the Department of Defense’s own supplies. In another transaction, a thin metal pin worth 4 cents that the Pentagon had on hand, unused by the tens of thousands, ended up costing the Army $71.01 — a markup of more than 177,000 percent.” The watchdog group’s investigation found that Boeing overcharged the Army nearly $13 million in dozens of transactions, jacking up the price on small, mundane parts and in some cases charging thousands of times more than they were worth. What Stockman called the “corrupted opportunism of the organized business groups” has become business as usual.
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September 24, 2012
One thing the Occupy movement was absolutely right about: crony capitalism
In the Calgary Herald, Mike Milke says that the Occupy protest movement was spot-on in their criticism of crony capitalism:
With the recent first anniversary of Occupy Wall Street, consider one beef from protesters that was legitimate: crony capitalism.
In general, Occupy Wall Street types could be described as a little too naive about the downside of more government power, and too critical of people who exchange goods and services in markets.
But insofar as any protester was annoyed with politicians who like to subsidize specific businesses — corporate welfare in other words, and which is an accurate example of abused capitalism — hand me a protest sign and give me a tent.
When taxpayer dollars are given or “loaned” (wink, wink, nod, nod) to specific businesses, such taxpayer-financed subsidies are not cheap.
According to the OECD, in 2008, at least $48 billion was proposed for automotive companies alone. Annually, global taxpayer subsidies to the energy industry clock in at more than $100 billion. And in Canada, between 1994 and 2007, governments spent $202 billion on all types of subsidies to multiple corporations in all sorts of industries.
July 4, 2012
British banks are “a cossetted, subsidised industry with captive consumers”
If any industry has more than its fair share of “too big to fail” wards of the state, it’s the banking sector. Allister Heath in the Telegraph:
There is a horrendous problem, certainly, and urgent reform is required. But the ailment has been fundamentally misdiagnosed: banking has become a ward of the state, a cossetted, subsidised industry with captive consumers, and it is that which has crippled it. We have been there before, in other sectors, and the medicine is always the same. This may come as a shock, but we need more capitalism in banking, not less.
Banks need to be allowed to go bust, like every other private company. It was a disgrace that taxpayers were called upon to bail out some of the City’s grandest names. This must never happen again. The reason capitalism works so well, whenever it is tried properly, is that the principle at its heart — profit and loss — is the toughest of disciplines and the best of motivators. It is more ruthless than anything regulators, however clever, could ever dream up. It allows two conflicting emotions, greed and fear, to balance one another out. Shareholders, creditors and bosses want to make money — but they know that a step too far might entail ruin.
That, at least, is how it works for much of UK Plc — but no longer in banking, where profits have been privatised and losses nationalised. It is an obscene perversion of capitalism. Forget the nonsense about “light touch” regulation: the problem is that the fear of failure ceased to exist. Market discipline was replaced by extreme laxity.
There was no longer much need for prudence, proper capital buffers or strict internal controls: the taxpayer was ready to pick up the bill if anything went wrong, while incompetent regulators signed everything off. The Labour government which introduced this mad system wasn’t deliberately seeking to subsidise risk: it merely made a terrible mistake, though with the politically useful side effect of reducing the cost of credit and increasing its availability. The real blunder was that the Financial Services Authority had no plan to cope with a bank going bust. It simply assumed failure would never happen. After all, how could it? Gordon Brown had abolished booms and busts.
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June 11, 2012
We can’t “save” capitalism, because we don’t “have” capitalism
James Delingpole in the Telegraph (the italicized opening paragraph is a quite from Tim Morgan):
Reforming capitalism so that it serves the majority, and strengthening the individual against the collectivist and the corporate, are inspiring visions. This is where government should be taking Britain.
Easier said than done, of course — as I was reminded yesterday when I Tweeted it under the headline “How to rescue capitalism….” only to have some Twentysomething smartarse Tweet back “Rescue it? Bury it!”
This is the kind of fifth-form, sub-Banksy political analysis which passes for conventional wisdom these days. It’s the dominant strain of thinking at the Guardian, at the BBC, among the studio audience at Channel 4′s apocalyptically lame 10 O’Clock Live, on Twitter, in the right-on brains of groovester opinion-formers all the way from Ben Goldacre to Graham Linehan to Polly Toynbee — and, of course, across the world in the entire Occupy movement. Capitalism, they all maintain, has failed.
No, capitalism has not recently been tried: that’s the real problem. And what I particularly like about Morgan’s report — well worth reading in full — is that it addresses this extremely important point. What we’re experiencing around the world at the moment is not laissez-faire, self-correcting, authentic, free-market capitalism but an excedingly corrupt and bastardised form thereof.
What we’re seeing is a grotesque stitch up between the banking class, the corporate class and the political class — at the expense of the rest of us.
One day, I like to hope, those of us on the libertarian right will find common cause with (at least some of) the Occupy crowd and unite against our real enemy.
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