Category Archives: Capitalism

From Pachyderm: Robert L. Bradley, Jr.

From the Wichita Pachyderm Club: Robert L. Bradley, Jr. He is CEO and Founder of Institute for Energy Research, visiting fellow at the Institute of Economic Affairs in London, and an adjunct scholar at both the Cato Institute and the Competitive Enterprise Institute. His topic at the Pachyderm Club was “The Contra-Capitalist Corporation (In Search of Heroic Capitalism).” This audio recording was made on November 2, 2018. The accompanying visual presentation may be viewed here.

Shownotes

Historic preservation tax credits, or developer welfare?

A Wichita developer seeks to have taxpayers fund a large portion of his development costs, using a wasteful government program of dubious value.

When you hear of a program titled “historic preservation tax credits” you might find yourself in agreement. Preserving history: Who can be against that? And tax credits: Aren’t those just technical adjustments on someone’s tax form?

The Colorado-Derby Building, now renamed and used by the Wichita public school district.
The Colorado-Derby Building, now renamed and used by the Wichita public school district.
If you look closely, however, you’ll find that the historic preservation tax credits program can include buildings with only the slightest historic significance, and has great cost to taxpayers.

The Colorado-Derby Building at 201 N Water Street in Wichita has been nominated for placement on the Register of Historic Kansas Places. It’s a nondescript building which currently houses administrative offices for the Wichita public school district and is known by a different name. Still, it is eligible for placement on the register for being an “example of this private investment trend,” that being the building of office buildings midcentury. A laudable accomplishment, but hardly notable.

The real reason for seeking placement on the register of historic places is money. By using historic preservation tax credits the developer of this building can get taxpayers to pay for much of the costs of rehabilitation. Almost half, which will be millions in this case.

Under the program this building is entering, its owners will receive 25 percent of rehabilitation expenses. The federal government provides tax credits of 20 percent. It’s likely that the owners of this building will also seek these credits.

So with both tax credit programs, 45 percent of the cost of rehabilitating this building could be paid for by taxpayers. And, given the history of the developer, it’s likely he will find other ways to get taxpayers to pay for even more.

Tax credits

USD 259 Alvin E. Morris Administrative Center 2008-04-07 11Tax credits may be a mystery to many, but there is no doubt as to their harmful effect on state and federal budgets. When using tax credits, the government, conceptually, issues a slip of paper that says something like “The holder of this document may submit it instead of $500,000 when making a tax payment.” So instead of paying taxes with actual money, the holder of the credit pays with, well, a slip of paper worth nothing to the government treasury.

This is a direct cost to the government, according to both reason and the Kansas Division of Legislative Post Audit. Last year, after conducting an audit of Kansas tax credit programs, auditors explained: “Tax credits, which the government offers to try to induce certain actions by the taxpayer, reduce income tax revenues because they are subtracted directly from the amount of taxes due.” (emphasis added)

The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. But tax credits are equivalent to government spending. The problem is that by mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institutes’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, perhaps we should require that government write checks instead of issuing credits.

Back to Kansas: The audit of the historic preservation tax credits program found that in 2001, when the program was started, the anticipated cost to the state was about $1 million per year. By 2007, the actual cost to the state was reported at almost $8.5 million.

Further, the audit found what many already knew: tax credit aren’t an efficient way of transferring subsidy to developers. Most of the time, the developers sell the credits to someone else at a discount, as the audit explains: “The Historic Preservation Tax Credit isn’t cost-effective. That credit works differently than the other three because the amount of money a historic preservation project receives from the credit is dependent upon the amount of money it’s sold for. Our review showed that, on average, when Historic Preservation Credits were transferred to generate money for a project, they only generated 85 cents for the project for every dollar of potential tax revenue the State gave up.”

It would be more efficient for everyone if the state would simply write checks to the developers instead of issuing tax credits. But then the actual economic meaning of the transaction would be laid bare for all to see.

Then, what qualifies as historic can change as political conditions require. Earlier this year the Wichita city council reversed a decision by the Historic Preservation Board and allowed a property owner to proceed with the demolition of three formerly historic buildings in southern downtown Wichita.

The historic preservation tax credit program is a government handout mechanism we no longer need. Today, most of the money goes to wealthy developers or corporations that can afford to redevelop downtown hotels and lofts with their own money — instead of asking low-income families to pay sales tax on their groceries to fund their tax credits.

Material from the Kansas State Historical Society
Nomination for listing on Register of Historic Kansas Places

Colorado-Derby Building – 201 N Water St., Wichita, Sedgwick County

Constructed in 1959-1960, the nine-story Colorado-Derby Building is an early example of a Modern Movement speculative office tower erected within a pattern of development that shaped Wichita’s downtown at midcentury. New buildings erected as icons on the skyline were intended to refresh, modernize, and revitalize the downtown core through public and private investment in civic and commercial improvements. Frank and Harvey Ablah recognized the onset of this trend and constructed the Colorado-Derby Building to provide speculative office space, redeveloping the site of the Ablah Hotel Supply Company. Named for its largest and most prominent tenant, the Colorado-Derby Building was fully occupied when it opened in 1960 and maintained high occupancy rates over the following decade. The construction and subsequent occupancy of this building illustrates the continuing importance of manufacturing industries to the economy of Wichita at midcentury and the ability of these industries to contribute to the economic and physical revitalization of downtown. The blocks immediately surrounding the building continued to develop in a similar fashion over the following decade with large-scale modern buildings and parking lots replacing smaller commercial and industrial buildings built a half-century earlier. All of this development activity culminated in a formal Urban Renewal project utilizing federal funds in the late 1960s. In Wichita, private investment focused on providing office space for industrial companies, rather than public funding initiated the revitalization that transformed downtown. The Colorado-Derby Building is nominated under Criterion A an important early example of this private investment trend.

Myth: Markets promote greed and selfishness

When thinking about the difference between government action and action taken by free people trading freely in markets, many myths abound.

Tom G. Palmer has written an important paper that confronts these myths about markets. The second myth — Markets Promote Greed and Selfishness — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

Palmer is editor of the recent books for Students for Liberty: The Morality of Capitalism, After the Welfare State, Why Liberty, and Peace, Love & Liberty.

Myth: Markets promote greed and selfishness

Myth: People in markets are just trying to find the lowest prices or make the highest profits. As such, they’re motivated only by greed and selfishness, not by concern for others.

Tom G. Palmer: Markets neither promote nor dampen selfishness or greed. They make it possible for the most altruistic, as well as the most selfish, to advance their purposes in peace. Those who dedicate their lives to helping others use markets to advance their purposes, no less than those whose goal is to increase their store of wealth. Some of the latter even accumulate wealth for the purpose of increasing their ability to help others. George Soros and Bill Gates are examples of the latter; they earn huge amounts of money, at least partly in order to increase their ability to help others through their vast charitable activities.

A Mother Teresa wants to use the wealth available to her to feed, clothe, and comfort the greatest number of people. Markets allow her to find the lowest prices for blankets, for food, and for medicines to care for those who need her assistance. Markets allow the creation of wealth that can be used to help the unfortunate and facilitate the charitable to maximize their ability to help others. Markets make possible the charity of the charitable.

A common mistake is to identify the purposes of people with their “self-interest,” which is then in turn confused with “selfishness.” The purposes of people in the market are indeed purposes of selves, but as selves with purposes we are also concerned about the interests and well being of others — our family members, our friends, our neighbors, and even total strangers whom we will never meet. And as noted above, markets help to condition people to consider the needs of others, including total strangers.

As has often been pointed out, the deepest foundation of human society is not love or even friendship. Love and friendship are the fruits of mutual benefit through cooperation, whether in small or in large groups. Without such mutual benefit, society would simply be impossible. Without the possibility of mutual benefit, Tom’s good would be June’s bad, and vice versa, and they could never be cooperators, never be colleagues, never be friends. Cooperation is tremendously enhanced by markets, which allow cooperation even among those who are not personally known to each other, who don’t share the same religion or language, and who may never meet. The existence of potential gains from trade and the facilitation of trade by well-defined and legally secure property rights make possible charity among strangers, and love and friendship across borders.

Corporate cronyism harms America

As the Wichita Business Journal features an interview with Charles Koch today, here’s a repeat of his article from September 2012 in which he address many of the same topics as covered in the WBJ interview.

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

The editorial in today’s Wall Street Journal by Charles G. Koch, chairman of the board and CEO of Wichita-based Koch Industries contains many powerful arguments against the rise of cronyism. The argument above is just one of many.

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

“Rent-seeking” was always a difficult term to use and understand. It had meaning mostly to economists. But “cronyism” — everyone knows what that means. It is a harsh word, offensive to many elected officials. But we need a harsh term to accurately describe the harm caused, as Koch writes: “This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

The entire article is available at the Wall Street Journal. Koch has also contributed other articles on this topic, see Charles G. Koch: Why Koch Industries is speaking out and Charles Koch: The importance of economic freedom.

Charles G. Koch: Corporate Cronyism Harms America

When businesses feed at the federal trough, they threaten public support for business and free markets.

By Charles G. Koch

“We didn’t build this business — somebody else did.”

So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation’s big financial institutions or auto makers, there would be no irony in the message at all.

It shouldn’t surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they “believe government and big business work together against the rest of us.”

Businesses have failed to make the case that government policy — not business greed — has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac “affordable housing” quotas, directives such as the Community Reinvestment Act, and the Federal Reserve’s artificial, below-market interest-rate policy.

Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.

With partisan rhetoric on the rise this election season, it’s important to remind ourselves of what the role of business in a free society really is — and even more important, what it is not.

Continue reading at The Wall Street Journal

Your local chamber of commerce: Working for you?

Your chamber of commerce radio buttonsVery often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

We may soon have an example of this in Wichita, where business leaders are tossing about ideas for tax increases. I distinguish between “business leaders” and “capitalists.”

Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case. Here, in an excerpt from his article “Tax Chambers” Stephen Moore explains:

The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

“I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal February 10, 2007. The full article can be found here.

Americans for Prosperity-Kansas applauds Sedgwick County Commission for rejecting public financing for Bowllagio

TOPEKA, KAN — The Kansas chapter of the grassroots group Americans for Prosperity applauds the Sedgwick County Commission for rejecting the proposed tax-increment financing (TIF) district for the Bowllagio development in Wichita.

“We are pleased that Sedgwick County commissioners unanimously voted against public funding for this entertainment development,” said AFP-Kansas grassroots coordinator Susan Estes. “Commissioners apparently realized it wasn’t a good deal for taxpayers in Wichita and Sedgwick County.”

Estes said this proposed development was another example of a developer receiving several layers of public financing, and that additional public financing would give the Bowllagio developers an unfair advantage over competing businesses.

“Those who will benefit from today’s vote are the taxpayers and the existing businesses who have worked for years to invest in this community,” she said. “This would have been just another example of government picking winners and losers in the marketplace.”

Although some may say today’s vote was a “win” for opponents of the TIF district, Estes says it was more of a win for good government.

“This isn’t a victory in the traditional sense,” she said. “The bottom line is, we believe the Sedgwick County Commissioners today acted in the best interests of their constituents.”

From Americans for Prosperity-Kansas.

Charles Koch profiled in Forbes

The new issue of Forbes features a cover story on Charles and David Koch. It is very interesting and seems a balanced and fair article, but there are a few things that stand out. (Inside The Koch Empire: How The Brothers Plan To Reshape America.)

An example: “Both Kochs innately understand that — unlike the populist appeal of their fellow midwestern billionaire Warren Buffett and his tax-the-rich advocacy — their message of pure, raw capitalism is a much tougher sell, even among capitalists.”

I think the author should have written “even among business executives” rather than capitalists. That’s because Charles Koch has been outspoken about business cronyism, in September writing in The Wall Street Journal: “Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

I would imagine that most of the business leaders seeking government subsidies and mandates consider themselves capitalists. That’s a problem.

Then: the description of “pure” capitalism as raw. I think we’re starting to realize just how raw politics and government have become. Capitalism, however, is a system based on respect for property and peaceful, beneficial exchange. Tom G. Palmer in the introduction to The Morality of Capitalism explains: “Far from being an amoral arena for the clash of interests, as capitalism is often portrayed by those who seek to undermine or destroy it, capitalist interaction is highly structured by ethical norms and rules. Indeed, capitalism rests on a rejection of the ethics of loot and grab, the means by which most wealth enjoyed by the wealthy has been acquired in other economic and political systems. … It’s only under conditions of capitalism that people commonly become wealthy without being criminals.”

Often corporations are criticized by liberals as being too focused on short-term gains, that corporate raiders buy firms, gut them, chop them up, sell off assets, lay off employees, pile on debt — you know the story as used against Mitt Romney. But look at how Koch Industries operates:

Charles spent $6 billion upfront to buy Georgia-Pacific, and rather than satisfy quarterly earnings estimates or dividend-hungry investors, he immediately directed the new division’s cash flow toward paying down the $15 billion in liabilities that it inherited. …

The Koch long-game strategy is absolute: If it makes sense to them, the Kochs stay with the plan, no matter how burdensome or how long it takes. “We buy something not to milk it but to build it, to take its capabilities and add to them, and build new businesses,” [Charles] Koch says.

That sounds like a business strategy the left should embrace, not vilify.

Another curious statement by the author: “Given their strict adherence to the principals of transparent free markets, the Kochs’ secrecy seems hypocritical.” This is curious because transparency is an attribute not often associated with advocacy for free markets. Transparency is more associated with government as a desirable goal. Charles and David Koch are private citizens, not agents of government.

There’s good news near the end of the article:

The brothers’ new political emphasis in the coming year? Fighting corporate welfare.

While Obama talks about getting rid of lobbyists, Charles says, the “only way he can achieve that stated objective is to get government out of the business of giving goodies. That’s like flies to honey,” he adds. “The first thing we’ve got to get rid of is business welfare and entitlements.”

There’s much more in the article, available at Inside The Koch Empire: How The Brothers Plan To Reshape America.

Capitalism and business: The same thing?

Is “capitalism” and “business” the same thing? Most people would probably answer yes, but that’s a mistake.

In a video from LearnLiberty.org, a project of Institute for Humane Studies, Professor Steve Horwitz explains the difference: “He refutes the often recited claim that ‘What is good for General Motors is good for America’ by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas ‘supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices.'”

Still, you may be asking: Isn’t business and free-market capitalism the same thing? Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

We see this confusion daily in Wichita and Kansas. Many members of the Wichita City Council — Democrats and Republicans — hold pro-business views. But the cronyism — the continual creation of subsidies, preferential treatment, no-bid contracts, and general intervention into the economy — destroys capitalism.

What about the local chamber of commerce? Isn’t it a bastion of capitalism? Here’s Stephen Moore: “In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper.” (Local chambers of commerce: tax machines in disguise.)

This accurately describes the Wichita Metro Chamber of Commerce. Earlier this year it decided that eight government subsidy programs supporting the Ambassador Hotel were not enough: The Chamber said there must be a ninth.

Fortunately, the Kansas Chamber of Commerce does a much better job supporting capitalism and free market principles.

At the state government level we also have to be watchful, even though we have a conservative governor and legislature (sort of). Earlier this year Kansas Governor Sam Brownback supported extending the STAR bonds program, thereby giving life support to cronyism for another five years. Kansas STAR bonds vote a test for capitalism. A majority of legislators supported him. Other anti-capitalist programs have been started or expanded at his initiative.

What’s wrong with Charles and David Koch?

In a column on his website, Fran Tarkenton wonders why Charles and David Koch are the targets of so much criticism. He writes: “So why do we vilify people who represent the greatness of America? Is it just because they have different political beliefs? It’s time to stop demonizing people who do things the right way and generate tremendous wealth — and value to all Americans. Those are the people we should celebrate, whether you agree with their politics or not! If we want to preserve America as the great place it is, we need more entrepreneurs, more innovators — and a free market to foster them.”

Tarkenton writes of “how poisonous our political atmosphere is.” Here’s an example: A common complaint by leftists is that Wall Street is overly focused on short-term results — the quarterly profit numbers — rather than on long-term investment and growth. Koch Industries, however, is privately held, and in a recent Wichita Eagle article, a company official said “[private ownership] allows us to focus on the long term as opposed to quarter to quarter.” You’d think liberals would be happy with a company that can afford to ignore the short term and focus on the long term, but instead they criticize Koch for not being public, wondering what it is the company has to hide.

By the way, this focus on the long term may be why since 1960 the value of Koch Industries has increased faster than the value of the broad-based S&P index of the 500 largest U.S. Companies, by a factor of 16 times.

Tarkenton several times mentions Charles and David Koch’s fight against cronyism. Contrast this with General Electric, a company headed by a friend of President Obama. A report from ProPublica shows some of the lengths that GE goes to avoid paying taxes: “General Electric’s tax department is famous for inventing ways to pay Uncle Sam less. So it should come as no surprise that its CEO, Jeff Immelt, is in the crosshairs as the new chairman of the President’s Council on Jobs and Competitiveness. … GE’s tax department is well known for its size, skill and hiring of former government officials. About 20 years ago, GE’s tax employees totaled a few hundred and were decentralized. Today, there are almost 1,000. The department’s strong suit? Reducing the taxes GE reports for earnings purposes.”

A New York Times article explains the lengths that GE went to to protect a tax loophole that it benefited from. The tax system is a major vehicle for the implementation of cronyism.

The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.

The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended — a flourish made in jest, he said through a spokeswoman.

That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district.

Other companies that are revered by the political left play the game too. A report from the Urban-Brookings Tax Policy Center explained how Starbucks manipulated the tax system to its benefit: “By shifting paper profits among divisions, firms can reduce their overall tax liability. Such efforts will lead to unnecessary accounting and compliance costs for firms and unnecessary enforcement costs for the IRS. For example, The New York Times reported that Starbucks successfully added a provision to the bill that deems coffee roasting, but not coffee preparation, a manufacturing activity. This provision gives Starbucks a tax incentive to increase the bean prices charged to its retail outlets, making the roasting part of the business more profitable and the retail part of the business less profitable. Such efforts could decrease Starbucks’s tax bill, but serve no other discernable public policy purpose.”

What’s Wrong with the Koch Brothers?
By Fran Tarkenton

To succeed in football and in business, I worked with a lot of people. I learned how to figure out who the great people were, people who were doing the right thing, people with great ethics who I could trust and learn a lot from. I also learned how to identify people who weren’t trying to do the right thing.

It’s very important in business to be able to tell the difference, because a great mentor like Sam Walton, Bernie Marcus, or Robert Woodruff can have a monumental impact, but a bad influence can cause big problems.

This political season, there has been one business name that has been demonized and vilified above all others: the Koch brothers, Charles and David Koch of Koch Industries. They have been demonized as right-wing zealots, and I’ve even seen the work of scholars dismissed just because their organization has some connection to the Koch brothers.

The kneejerk attacks and venom that comes out whenever their names are even mentioned really bothers me, and it’s a sign of just how poisonous our political atmosphere is. I don’t know the Koch brothers personally, but I know people who do, and who know them well. And I’ve also been able to observe the things they do, and the way they conduct themselves publicly. Everything I’m seeing and hearing tells me that these are exemplary business leaders who we should be celebrating, not attacking.

Start by looking at how Koch Industries grew to become the juggernaut it is today. The family patriarch, Fred Koch, built the company on an innovative process he developed in the oil business. Then his sons grew the company the right way. They didn’t cozy up to the government for subsidies, handouts, or preferential treatment. Instead, they came up with great ideas that solved problems in the lives of people, ideas that provided real value. Their business empire was built on innovation, reinvention, and hard work, not cronyism. I greatly admire that! And they’ve donated millions to medical research and the arts, among other causes.

Now, the Koch brothers are more known for the money they spend on political activities. They fund a variety of think tanks and organizations, all dedicated to promoting free market practices and small government. And that is where they are demonized and tarred and feathered by their political opponents. But from everything I have ever seen, what is remarkable is that none of their political activities are dedicated to cronyism, setting their company up for a big windfall if it wins the debate. Rather, they are advocating for more competition, reduced barriers to entry for new players, and less connection between the board room and the DC halls of power, not a special place at the table.

The only reason for doing that is because they really believe in it. Why should we demonize people who deeply believe in something and do whatever they can to promote it? If the Koch brothers spent millions of dollars on politicians who would subsidize their products and outlaw their competitors, that would be wrong. But instead, they advocate for an end to market distortions, government interventions in the private sector, and cronyism in general. They’re not trying to get more of the government pie; they just really believe they have a vision to help America, because they love this country and the values it stands for.

The truth is that everything we have in this country is because of entrepreneurs, large and small. From the corner store up to the most successful business people — whether conservatives like the Koch brothers, liberals like Steve Jobs at Apple, or libertarians like Jeff Bezos of Amazon — the great wealth of this country comes from people helping other people by creating value. Without value, when businesspeople are just in it for themselves and don’t care about value, only about accruing benefits to themselves, everything falls apart — including the business itself! Those who do create value are the reason we have the great society we have. Since their business began, the Koch brothers have been part of the value-creating class, not the crony class of business owners.

So why do we vilify people who represent the greatness of America? Is it just because they have different political beliefs? It’s time to stop demonizing people who do things the right way and generate tremendous wealth — and value to all Americans. Those are the people we should celebrate, whether you agree with their politics or not!

If we want to preserve America as the great place it is, we need more entrepreneurs, more innovators — and a free market to foster them.

And in case you’re wondering, the Koch brothers did not approve this message.

Free will and government charity

Those who call on government intervention to take care of the less fortunate and who rely on Christian teachings to support such government action, often conveniently forget that government is based on coercion, not the free will that God created us with. As P.J. O’Rourke wrote: “There is no virtue in compulsory government charity, and there is no virtue in advocating it. A politician who portrays himself as ‘caring’ and ‘sensitive’ because he wants to expand the government’s charitable programs is merely saying that he’s willing to try to do good with other people’s money. Well, who isn’t? And a voter who takes pride in supporting such programs is telling us that he’ll do good with his own money — if a gun is held to his head.” Below, Jason Karber elaborates.

Jesus did encourage people to help the less fortunate. What I don’t recall from Sunday school is any instance where Jesus implored the government to use force to transfer resources from one group to another.

Indeed the Christian belief system is not exclusive of free-market capitalism. Free-will in Christianity, and free markets in economies appear complimentary to me. While the citizens of government planned economies starve, the poor in the United States are threatened more by obesity than starvation. Many people who are on record as staunch free-market capitalists are generous donors of time and money on their own accord. Freedom provides better lives for everyone, and less freedom via a bigger government will ultimately reduce the quality of life for all.

While I understand that not everyone within a political group think alike, I do chuckle a bit when the policies embraced by liberals include removing any religious ideology and prayer from public schools, while calling our leaders hypocritical for not mandating Biblical principals using public policy.

Jason Karber

Charles G. Koch: Corporate cronyism harms America

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

The editorial in today’s Wall Street Journal by Charles G. Koch, chairman of the board and CEO of Wichita-based Koch Industries contains many powerful arguments against the rise of cronyism. The argument above is just one of many.

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

“Rent-seeking” was always a difficult term to use and understand. It had meaning mostly to economists. But “cronyism” — everyone knows what that means. It is a harsh word, offensive to many elected officials. But we need a harsh term to accurately describe the harm caused, as Koch writes: “This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

The entire article is available at the Wall Street Journal. Koch has also contributed other articles on this topic, see Charles G. Koch: Why Koch Industries is speaking out and Charles Koch: The importance of economic freedom.

Charles G. Koch: Corporate Cronyism Harms America

When businesses feed at the federal trough, they threaten public support for business and free markets.

By Charles G. Koch

“We didn’t build this business — somebody else did.”

So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation’s big financial institutions or auto makers, there would be no irony in the message at all.

It shouldn’t surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they “believe government and big business work together against the rest of us.”

Businesses have failed to make the case that government policy — not business greed — has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac “affordable housing” quotas, directives such as the Community Reinvestment Act, and the Federal Reserve’s artificial, below-market interest-rate policy.

Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.

With partisan rhetoric on the rise this election season, it’s important to remind ourselves of what the role of business in a free society really is — and even more important, what it is not.

Continue reading at The Wall Street Journal

Charles Koch: The importance of economic freedom

Charles Koch, chairman of the board and CEO of Wichita-based Koch Industries, contributes the following article on the importance of economic freedom and the harm of cronyism. Another article written by him on this topic is Charles Koch: Why Koch Industries is speaking out. Koch is also the author of the book The Science of Success: How Market-Based Management Built the World’s Largest Private Company. More about the importance of economic freedom may be found at www.economicfreedom.org, a project of the Charles Koch Institute, and also at Perspectives.

In 1990, the year before the collapse of the Soviet Union, I attended an economic conference in Moscow.

Like my father during his visits to the U.S.S.R. in the early 1930s, I was astonished and appalled by what I saw.

Simple necessities, such as toilet paper, were in short supply. In fact, there was none at all in the airport bathroom stalls for fear it would be stolen. Visitors using the facilities had to request a portion of tissue from an attendant beforehand.

When I walked into one of Moscow’s giant department stores, there was next to nothing on the shelves. For those shoppers who were lucky enough to find something they actually wanted to buy, the purchase process was maddening and time-consuming.

Although the government provided universal healthcare, I never met anyone who wanted to stay in a Soviet hospital. Medical services might have been “free,” but the quality of care was notoriously poor.

Reality check
My experiences in the Soviet Union underscore why economic freedom is so important for all of us.

Nations with the greatest degree of economic freedom tend to have citizens who are much better off in every way.

No centralized government, no matter how big, how smart or how powerful, can effectively and efficiently control much of society in a beneficial way. On the contrary, big governments are inherently inefficient and harmful.

And yet, the tendency of our own government here in the U.S. has been to grow bigger and bigger, controlling more and more. This is why America keeps dropping in the annual ranking of economic freedom.

Devil’s bargain
Citizens who over-rely on their government to do everything not only become dependent on their government, they end up having to do whatever the government demands. In the meantime, their initiative and self-respect are destroyed.

It was President Franklin Roosevelt who said: “Continued dependence on [government support] induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”

Businesses can become dependents, too. If your struggling car company wants a government bailout, you’ll probably have to build the government’s car — even if it’s a car very few people want to buy.

Repeatedly asking for government help undermines the foundations of society by destroying initiative and responsibility. It is also a fatal blow to efficiency and corrupts the political process.

When everyone gets something for nothing, soon no one will have anything, because no one will be producing anything.

Cronyism
Under the Soviet system, special traffic lanes were set aside for the sole use of officials in their limousines. This worsened driving conditions for everyone else, but those receiving favored treatment didn’t care.

Today, many governments give special treatment to a favored few businesses that eagerly accept those favors. This is the essence of cronyism.

Many businesses with unpopular products or inefficient production find it much easier to curry the favor of a few influential politicians or a government agency than to compete in the open market.

After all, the government can literally guarantee customers and profitability by mandating the use of certain products, subsidizing production or providing protection from more efficient competitors.

Cronyism enables favored companies to reap huge financial rewards, leaving the rest of us — customers and competitors alike — worse off.

One obvious example of this involves wind farms. Most cannot turn a profit without the costly subsidies the government provides. Meanwhile, consumers and taxpayers are forced to pay an average of five times more for wind-generated electricity.

We see far too many legislative proposals that would subsidize one form of energy over another, penalize certain emissions from one industry but not another, or place protective tariffs that hurt consumers.

Legacies
Karl Marx famously said: “From each according to his abilities, to each according to his needs.”

The result of this approach is not equality, but rather a lowering of everyone’s standards to some minimal level.

Some people worry about the disparity of wealth in a system of economic freedom. What they don’t realize is that the same disparity exists in the least-free countries.

The difference is who is better off.

Under economic freedom, it is the people who do the best job of producing products and services that make people’s lives better.

On the other hand, in a system without economic freedom, the wealthiest are the tyrants who make people’s lives miserable.

As a result of this, the income of the poorest in the least-free countries is one-tenth of what it is in the freest.

Elected officials are often asked what they would like as their legacy. I’m never going to run for office, but I can tell you how I would answer that question.

I want my legacy to be greater freedom, greater prosperity and a better way of life for my family, our employees and all Americans. And I wish the same for every nation on earth.

Wichita-area economic development policy changes proposed

The City of Wichita and Sedgwick County are considering a revision to their economic development policies. Instead of promoting economic freedom and a free-market approach, the proposed policy gives greater power to city bureaucrats and politicians, and is unlikely to produce the economic development that Wichita needs.

A new feature of the proposed policy implements property tax forgiveness for speculative industrial buildings, with a formula that grants a higher percentage of tax forgiveness as building size increases. And, in a stroke of pure bureaucratic central planning, the ceilings of these buildings must be at least 28 feet high.

The policy requires that projects have an estimated ratio of public benefits to public costs of at least 1.3 to 1, although there are factors that allow exceptions. This ratio should be met for both the city’s general fund, and its debt service fund. This — if the city actually enforces this — would be a welcome change. But within the last year, the city ignored a large negative cost-benefit ratio for the Ambassador Hotel, and instead used a positive ratio for the city’s general fund. See Fact checking the Wichita Ambassador Hotel campaign.

Wichitans also need to realize that the “benefits” in the calculation are in the form of increased tax revenue paid to the city, county, etc. There is no consideration of actually rewarding the taxpayers that pay for — and assume the risk of — economic development incentives.

There is also the curious focus on jobs that pay above-average wages. But what about workers who don’t have the skills to earn above-average wages? Shouldn’t they be able to benefit from the city’s economic development efforts?

There is also the focus on exports: “A ‘Value-Added Job’ produces goods and/or services that are sold predominately outside of the MSA. Importing wealth into the community through value added jobs grows the local economy. Whereas non-value-added jobs typically re-circulate wealth within the community.” This is reminiscent of mercantilism, an economic strategy where exports are prized and imports are discouraged. It ignores the benefit that Wichitans receive from trading with themselves.

There are also targeted industries and a list of eligible business activities.

Clawbacks — the recovery of incentives if a company fails to live up to its agreed-to goals — are important in the new proposed policy. But the city has had clawbacks in effect, in the form of personal guarantees from TIF developers, for example. But last year the city decided not to enforce that agreement, and instead refinanced the debt at credit risk to the city.

The record on economic development

Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. The shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.

In his 2012 State of the City address, Brewer took credit for creating a similar percentage of jobs in Wichita.

Rarely mentioned are the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity and jobs are lost somewhere else in order to pay for the incentives.

Also, at least some of these jobs would have been created without the efforts of GWEDC. All GWEDC should take credit for is the marginal activity that it purportedly created. Government usually claims credit for all that is good, however.

Danger going forward

The danger we in the Wichita area face is the overwhelming urge of politicians to be seen doing something. For example, in response to the departure of Boeing, Wichita Mayor Carl Brewer called for the community to “launch an aggressive campaign of job recruitment and retention.”

It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians and bureaucrats, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.

We’ve seen the disappointing results — not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita and Sedgwick County policy, do we really know which industries should be targeted? Are we sure about the list of eligible business activities? Is 1.3 to 1 really the benchmark we should seek, or we be better off and have more jobs if we insisted on 1.4 to 1 or relaxed the requirement to 1.2 to 1?

This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and other cities engage in: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs and other economic development programs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances. Wichita and Sedgwick County are moving in the wrong direction.

Palmer, activist for capitalism, to speak in Wichita

I’d like to call your attention to, and invite you to attend, a lecture next week in Wichita. The speaker is Tom G. Palmer, and he will be speaking on topics from his recent book The Morality of Capitalism.

I met Tom last year when I spent my summer vacation attending Cato University, which Tom is director of. He is a fascinating speaker. His background includes feats such as smuggling books, photocopiers, and faxes into the Soviet Union. Currently he is Vice President for International Programs at the Atlas Economic Research Foundation, General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, a Senior Fellow at the Cato Institute, and Director of Cato University. He travels across the world speaking on political science, public choice, civil society, and the moral, legal, and historical foundations of individual rights. His appearance in Wichita is presented by the Kansas Policy Institute.

The Wichita event is on Wednesday May 16th, at the Hyatt Regency Hotel. A reception begins at 5:30 pm, with the presentation at 6:30 pm. He’s also appearing in Overland Park the day before.

RSVP is requested by e-mailing James Franko at [email protected] or by calling 316-634-0218. Or, click here to RSVP online.

For more information and to register for these events see The Morality of Capitalism.

Intellectuals vs. the rest of us

At a recent educational meeting I attended, someone asked the question: Why doesn’t everyone believe what we (most of the people attending) believe: that private property and free exchange — capitalism, in other words — are superior to government intervention and control over the economy?

It’s question that I’ve asked at conferences I’ve attended. The most hopeful answer is ignorance. While that may seem a harsh word to use, ignorance is simply a “state of being uninformed.” That can be cured by education. This is the reason for this website. This is the reason why I and others testify in favor of free markets and against government intervention. It is the reason why John Todd gives out hundreds of copies of I, Pencil, purchased at his own expense.

But there is another explanation, and one that is less hopeful. There is an intellectual class in our society that benefits mightily from government. This class also believes that their cause is moral, that they are anointed, as Thomas Sowell explains in The vision of the anointed: self-congratulation as a basis for social policy: “What all these highly disparate crusades have in common is their moral exaltation of the anointed above others, who are to have their very different views nullified and superseded by the views of the anointed, imposed via the power of government.”

Murray N. Rothbard explains further the role of the intellectual class in the first chapter of For a New Liberty: The Libertarian Manifesto, titled “The Libertarian Heritage: The American Revolution and Classical Liberalism.” Since most intellectuals favor government over a market economy and work towards that end, what do the intellectuals get? “In exchange for spreading this message to the public, the new breed of intellectuals was rewarded with jobs and prestige as apologists for the New Order and as planners and regulators of the newly cartelized economy and society.”

There it is: Planners and regulators. We have plenty of these at all levels of government, and these are prime examples of the intellectual class. Is it any wonder that the locus of centralized planning in south-central Kansas — sustainable communities — is at a government university?

As Rothbard explains, intellectuals have cleverly altered the very meaning of words to suit their needs:

One of the ways that the new statist intellectuals did their work was to change the meaning of old labels, and therefore to manipulate in the minds of the public the emotional connotations attached to such labels. For example, the laissez-faire libertarians had long been known as “liberals,” and the purest and most militant of them as “radicals”; they had also been known as “progressives” because they were the ones in tune with industrial progress, the spread of liberty, and the rise in living standards of consumers. The new breed of statist academics and intellectuals appropriated to themselves the words “liberal” and “progressive,” and successfully managed to tar their laissez- faire opponents with the charge of being old-fashioned, “Neanderthal,” and “reactionary.” Even the name “conservative” was pinned on the classical liberals. And, as we have seen, the new statists were able to appropriate the concept of “reason” as well.

We see this at work in Wichita, where those who advocate for capitalism and free markets instead of government intervention are called, in the case of Wichita Mayor Carl Brewer and Wichita Eagle editorial writer Rhonda Holman, “naysayers.”

The sad realization is that as government has extended its reach into so many areas of our lives, to advocate for liberty instead of government intervention is to oppose many things that people have accepted as commonplace or inevitable. To advocate that free people should trade voluntarily with other free people — instead of forming a plan for them — is to be dismissed as “not serious.”

Rothbard further explains the role of intellectuals in promoting what they see as the goodness of expansive government:

Throughout the ages, the emperor has had a series of pseudo-clothes provided for him by the nation’s intellectual caste. In past centuries, the intellectuals informed the public that the State or its rulers were divine, or at least clothed in divine authority, and therefore what might look to the naive and untutored eye as despotism, mass murder, and theft on a grand scale was only the divine working its benign and mysterious ways in the body politic. In recent decades, as the divine sanction has worn a bit threadbare, the emperor’s “court intellectuals” have spun ever more sophisticated apologia: informing the public that what the government does is for the “common good” and the “public welfare,” that the process of taxation-and-spending works through the mysterious process of the “multiplier” to keep the economy on an even keel, and that, in any case, a wide variety of governmental “services” could not possibly be performed by citizens acting voluntarily on the market or in society. All of this the libertarian denies: he sees the various apologia as fraudulent means of obtaining public support for the State’s rule, and he insists that whatever services the government actually performs could be supplied far more efficiently and far more morally by private and cooperative enterprise.

The libertarian therefore considers one of his prime educational tasks is to spread the demystification and desanctification of the State among its hapless subjects. His task is to demonstrate repeatedly and in depth that not only the emperor but even the “democratic” State has no clothes; that all governments subsist by exploitive rule over the public; and that such rule is the reverse of objective necessity. He strives to show that the very existence of taxation and the State necessarily sets up a class division between the exploiting rulers and the exploited ruled. He seeks to show that the task of the court intellectuals who have always supported the State has ever been to weave mystification in order to induce the public to accept State rule, and that these intellectuals obtain, in return, a share in the power and pelf extracted by the rulers from their deluded subjects.

And so the alliance between state and intellectual is formed. The intellectuals are usually rewarded quite handsomely by the state for their subservience, writes Rothbard:

The alliance is based on a quid pro quo: on the one hand, the intellectuals spread among the masses the idea that the State and its rulers are wise, good, sometimes divine, and at the very least inevitable and better than any conceivable alternatives. In return for this panoply of ideology, the State incorporates the intellectuals as part of the ruling elite, granting them power, status, prestige, and material security. Furthermore, intellectuals are needed to staff the bureaucracy and to “plan” the economy and society.

The “material security,” measured in dollars, can be pretty good, as shown by these examples: The Wichita city manager is paid $185,000, the Sedgwick county manager is paid $175,095, and the superintendent of the Wichita school district is paid $224,910.

Political cronyism has become the way

“A society whose businesses engage in cronyism instead of serving people will not be prosperous, and in America it is clear that cronyism is becoming a more common choice,” writes Sam Patterson at EconomicFreedom.org.

Cronyism is the practice of seeking business success through government rather than through markets. The difference is that business succeeds in the market by providing goods and services that people are willing to buy. Political cronyism, on the other hand, results in people being forced to buy from, or to otherwise involuntarily subsidize, certain business firms that have succeeded in the political arena.

In Kansas, despite the fiscal conservatism of Kansas Governor Sam Brownback and many members of the legislature, political cronyism thrives. An example is the increased powers given to the Kansas PEAK program (Promoting Employment Across Kansas). A more recent example is the vote to extend the STAR bonds program. Both programs provide business firms a way to obtain money isolated from market forces. Instead, applicants must meet the guidelines of a government program.

In Wichita and Sedgwick County, cronyism is firmly established as economic development policy. It’s little wonder that our policies are failing and we are losing people and income to other states.

Cronyism Undermines the Beneficial Role of Business in Society

By Sam Patterson

The role that business plays in society is straightforward — businesses produce goods and services that people consider beneficial. If a business can do that while wisely using resources, it makes a profit. Successful businesses benefit society by producing goods or services which improve people’s lives, and are then rewarded with profit. Those profits enable businesses to innovate or offer more goods and services, further improving people’s lives. Businesses must cater to the needs of society or they will find that they are not rewarded with profit and may well no longer exist.

At least, that’s how it works in a free market. There is another path for businesses to make profit other than providing valuable products. It’s called cronyism. Cronyism occurs when a business colludes with government officials to create unfair legislation and/or regulations which give them benefits they could not have otherwise obtained voluntarily.

Continue reading at Cronyism Undermines the Beneficial Role of Business in Society.

Raising minimum wage not the solution

As calls mount to raise the federal minimum wage, we need to remember that this law — as well-intentioned as it may be — is not the solution to unemployment or raising the standard of living of workers.

The great appeal of a higher minimum wage mandated by an act of Congress is that it seems like a wonderfully magical way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects. Milton Friedman explained in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain minimum amount. The law can’t compel you to hire someone, nor can it force employers to keep workers on the payroll.

The problem is that people lose their jobs in a dispersed manner. A few workers here; a few there. They may not know who is to blame for their situation. Newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher minimum wage level.

If we are truly concerned about the plight of low-wage and low-skilled workers we can face some realities and deal with them openly. The primary reality is that some people are not able to produce output that our economy values highly. These workers are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is not producing graduates with the skills needed for well-paying jobs. But this is a problem that can be fixed.

Another way to increase wages is to encourage more capital investment. But capital is a dirty word to liberals, as it conjures up images of rich people. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man using the backhoe is more productive, although the worker using the shovel is undoubtedly working harder. But it is productivity that is valued. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a way that increased the output of workers and our economy.

These savers and investors are not necessarily wealthy people. Anyone who defers current consumption in order to save and invest — no matter how small the amount — provides capital to industry.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These people and organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

Mike Pompeo: We need capitalism, not cronyism

In a guest column written for Americans for Prosperity, Kansas, U.S. Representative Mike Pompeo of Wichita explains why political cronyism, sometimes called crony capitalism, is wrong for our country. Pompeo coins a useful new term: “photo-op economics” to describe why some politicians support wasteful federal spending projects — as long as the spending is wasted in their districts. Then logrolling — the trading of legislative favors — applies, and those legislators who received votes from others to support wasteful spending must now reciprocate and support other wasteful spending.

Pompeo touches on an important aspect of public policy that is not often mentioned: “Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.” This describes the problem of the seen and unseen, as explained by Frederic Bastiat and Henry Hazlitt in the famous parable of the broken window.

We Need Capitalism, not Cronyism

By U.S. Representative Mike Pompeo

The word “conservative” brings to mind family values, lower taxes, fiscal responsibility — and limited government. Limited government means a government limited in size, in its claim on national wealth, and — importantly — limited in the ends to which government’s power is used. It also means federal elected officials must act in the nation’s best interest and not allow their own parochial concerns to dominate their decision making. A big obstacle on the path to restoring limited government in America is cronyism.

We all know the story. A flawed system has created incentives that make it easier for some companies to succeed by hiring a lobbyist rather than improving productivity or satisfying customers. Lobbyists for these businesses and the politicians who support them want the federal government picking winners and losers across our economy — so long as they are selected as “winners.” In my first term in Congress, we have eliminated earmarks that rewarded politically connected, rent-seeking advocates for federal largesse by tucking provisions into bills without adequate vetting or thorough review. But ever clever politicians have another tool — the tax code — to accomplish much the same outcome. This form of cronyism must stop too.

“Tax earmarks” — be they deductions or credits — provide certain industries and businesses a means to gain financial advantage. Tax earmarks distort our free choices, waste tax dollars, and raise prices to provide goods and services that free markets provide more abundantly and more cheaply. They also force federal tax rates up, penalizing those who don’t receive them, because higher rates are required to capture the same revenue given all of the special interest tax earmarks now in effect. And, unlike standard earmarks, tax earmarks tend to be renewed year after year after year.

One current fight against the insidious political tool of tax earmarks involves the energy sector. I am leading the charge to eliminate over two dozen energy tax credits tucked into the Internal Revenue Code. My proposed legislation would get rid of every single tax credit related to energy — ending tax favoritism that today goes to wind and solar, algae and electric vehicles and tax credits that go to the oil and gas industry as well. Tax subsidies miscast the role of the federal government. Energy sources are either viable without subsidies or else they do not make economic sense for taxpayers.

Subsidies and giveaways redistribute wealth from productive, self-sustaining enterprises to unproductive, less efficient, albeit politically connected, ones. Although subsidies may have positive local effects, they penalize successful businesses — leading to less innovation, decreased productivity, fewer jobs, and higher prices for consumers. Cronyism also mistreats unsubsidized competitors, who wind up subsidizing their own competition to the detriment of their employees, consumers, and free-market competition.

Together with tried-and-true conservative leaders like House Budget Committee Chairman Paul Ryan (WI), and Tea Party leaders like Sen. Jim DeMint (SC), and Sen. Mike Lee (UT), I am fighting to end this form of cronyism. Conservative groups including Americans for Prosperity, Americans for Tax Reform, Club for Growth, Council for Citizens Against Government Waste, Freedom Action, Heritage Action, National Taxpayers Union, and Taxpayers for Common Sense have all rallied to the side of limited government on this issue. They understand that picking winners and losers in the energy marketplace does not create long-term economic growth, and it harms our economic and political systems.

One example of a tax earmark that should be eliminated is the Production Tax Credit (PTC) that goes to the wind industry. Yet, some Republican and Democrat members of Congress, not surprisingly from “wind states,” are pushing for yet another multi-year extension of the PTC, a multi-billion dollar handout to Big Wind. The PTC manipulates the energy market, drives up electricity bills for consumers and businesses, and creates a dangerous economic bubble. The PTC is a huge subsidy. Applied to oil companies, it would be the equivalent of giving $30 for every barrel of oil produced, according to the Heritage Foundation. The PTC has existed for the past 20 years, but it has not succeeded yet in making unsubsidized wind competitive. Politicians who pretend that a few more years of the PTC will make wind competitive could be right, but that is not a responsible bet to make with taxpayer dollars.

Supporters of Big Wind, like President Obama, defend these enormous, multi-decade subsidies by saying they are fighting for jobs, but the facts tell a different story. Can you say “stimulus”? The PTC’s logic is almost identical to the President’s failed stimulus spending of $750 billion — redistribute wealth from hard-working taxpayers to politically favored industries and then visit the site and tell the employees that “without me as your elected leader funneling taxpayer dollars to your company, you’d be out of work.” I call this “photo-op economics.” We know better. If the industry is viable, those jobs would likely be there even without the handout. Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.

Here’s the data. The “green energy” 1603 grant program has given away $4.3 billion to 36 wind farms just since 2008. All together, these farms now employ 300 people. That’s $14 million per job. This is an unconscionable return on investment, especially for your tax dollars. Given that consumers also pay higher energy prices for electricity generated from wind, one has to wonder why some in Washington continue to push for Big Wind subsidies. Often the answer is that politicians care more about making good political investments than they do about making bad financial investments.

In this respect, the PTC handout is virtually indistinguishable from the program that led to the Solyndra debacle. The Obama Administration gave 500 million taxpayer dollars to a private solar panel company to prop up a failed business model. As soon as government money ran out, the company folded. Solyndra could not attract sufficient private capital for financing because its solar panels could not compete in the consumer market. So it turned to its lobbyists in Washington and friends in the Obama Administration for its financing. The result was a skewed consumer marketplace and the waste of taxpayer dollars. Like the earmark for the Bridge to Nowhere, political allocation of your taxpayer dollars is failed policy.

I get the game. Elected officials in Michigan want your money for electric cars. Those from California want your money for solar panels. And those from the Midwest want your money for wind turbines. In a country that has a $15 trillion national debt, annual deficits of over $1 trillion as far as the eye can see, and a $100 trillion unfunded liability in entitlement programs, this must stop.

I believe that American ingenuity will eventually bring new energy sources to market successfully. It may be wind or algae, it may be biomass or solar. It may be the enormous natural gas and oil reservoirs that can now be reached affordably right here in North America. I also believe that American families making good choices for themselves will lead the way in deciding which new energy source or technology succeeds. Trying to pick that next great source from Washington, D.C. — and with your money — just leads to more cronyism, more debt, more bad decisions, more dependence on the Middle East and a much less limited federal government — outcomes that none of us can afford.

Congressman Mike Pompeo represents Kansas’ 4th Congressional District.

For President Obama, internet is just another job-killer

John Hinderaker of Powerline Blog seems to understand just where President Barack Obama thoughts come from.

Hinderaker writes: “This is one more reminder — as if we needed it — that President Obama has no understanding of the economy. He is, at heart, a Luddite. He doesn’t understand that when work is made more efficient, as by the internet, our economy becomes more productive and we are all better off.”

Luddites were 19th-century English textile artisans who smashed mechanical looms because they felt the machines were destroying jobs. Here’s the full article, including video: Welcome to Texas!

Intellectuals against the people and their freedoms

At a recent educational meeting I attended, someone asked the question: Why doesn’t everyone believe what we (most of the people attending) believe: that private property and free exchange — capitalism, in other words — are superior to government intervention and control over the economy?

It’s question that I’ve asked at conferences I’ve attended. The most hopeful answer is ignorance. While that may seem a harsh word to use, ignorance is simply a “state of being uninformed.” That can be cured by education. This is the reason for this website. This is the reason why I and others testify in favor of free markets and against government intervention. It is the reason why John Todd gives out hundreds of copies of I, Pencil, purchased at his own expense.

But there is another explanation, and one that is less hopeful. There is an intellectual class in our society that benefits mightily from government. This class also believes that their cause is moral, that they are anointed, as Thomas Sowell explains in The vision of the anointed: self-congratulation as a basis for social policy: “What all these highly disparate crusades have in common is their moral exaltation of the anointed above others, who are to have their very different views nullified and superseded by the views of the anointed, imposed via the power of government.”

Murray N. Rothbard explains further the role of the intellectual class in the first chapter of For a New Liberty: The Libertarian Manifesto, titled “The Libertarian Heritage: The American Revolution and Classical Liberalism.” Since most intellectuals favor government over a market economy and work towards that end, what do the intellectuals get? “In exchange for spreading this message to the public, the new breed of intellectuals was rewarded with jobs and prestige as apologists for the New Order and as planners and regulators of the newly cartelized economy and society.”

Planners and regulators. We have plenty of these at all levels of government, and these are prime examples of the intellectual class.

As Rothbard explains, these intellectuals have cleverly altered the very meaning of words to suit their needs:

One of the ways that the new statist intellectuals did their work was to change the meaning of old labels, and therefore to manipulate in the minds of the public the emotional connotations attached to such labels. For example, the laissez-faire libertarians had long been known as “liberals,” and the purest and most militant of them as “radicals”; they had also been known as “progressives” because they were the ones in tune with industrial progress, the spread of liberty, and the rise in living standards of consumers. The new breed of statist academics and intellectuals appropriated to themselves the words “liberal” and “progressive,” and successfully managed to tar their laissez- faire opponents with the charge of being old-fashioned, “Neanderthal,” and “reactionary.” Even the name “conservative” was pinned on the classical liberals. And, as we have seen, the new statists were able to appropriate the concept of “reason” as well.

We see this at work in Wichita, where those who advocate for capitalism and free markets instead of government intervention are called CAVE people, an acronym for Citizens Against Virtually Everything. Or, in the case of Wichita Mayor Carl Brewer and Wichita Eagle editorial writer Rhonda Holman, “naysayers.”

The sad realization is that as government has extended its reach into so many areas of our lives, to advocate for liberty instead of government intervention is to oppose many things that people have accepted as commonplace or inevitable.

Rothbard further explains the role of intellectuals in promoting what they see as the goodness of expansive government:

Throughout the ages, the emperor has had a series of pseudo-clothes provided for him by the nation’s intellectual caste. In past centuries, the intellectuals informed the public that the State or its rulers were divine, or at least clothed in divine authority, and therefore what might look to the naive and untutored eye as despotism, mass murder, and theft on a grand scale was only the divine working its benign and mysterious ways in the body politic. In recent decades, as the divine sanction has worn a bit threadbare, the emperor’s “court intellectuals” have spun ever more sophisticated apologia: informing the public that what the government does is for the “common good” and the “public welfare,” that the process of taxation-and-spending works through the mysterious process of the “multiplier” to keep the economy on an even keel, and that, in any case, a wide variety of governmental “services” could not possibly be performed by citizens acting voluntarily on the market or in society. All of this the libertarian denies: he sees the various apologia as fraudulent means of obtaining public support for the State’s rule, and he insists that whatever services the government actually performs could be supplied far more efficiently and far more morally by private and cooperative enterprise.

The libertarian therefore considers one of his prime educational tasks is to spread the demystification and desanctification of the State among its hapless subjects. His task is to demonstrate repeatedly and in depth that not only the emperor but even the “democratic” State has no clothes; that all governments subsist by exploitive rule over the public; and that such rule is the reverse of objective necessity. He strives to show that the very existence of taxation and the State necessarily sets up a class division between the exploiting rulers and the exploited ruled. He seeks to show that the task of the court intellectuals who have always supported the State has ever been to weave mystification in order to induce the public to accept State rule, and that these intellectuals obtain, in return, a share in the power and pelf extracted by the rulers from their deluded subjects.

And so the alliance between state and intellectual is formed. The intellectuals are usually rewarded quite handsomely by the state for their subservience, writes Rothbard:

The alliance is based on a quid pro quo: on the one hand, the intellectuals spread among the masses the idea that the State and its rulers are wise, good, sometimes divine, and at the very least inevitable and better than any conceivable alternatives. In return for this panoply of ideology, the State incorporates the intellectuals as part of the ruling elite, granting them power, status, prestige, and material security. Furthermore, intellectuals are needed to staff the bureaucracy and to “plan” the economy and society.

The “material security,” measured in dollars, can be pretty good, as shown by these examples: The Wichita city manager is paid $185,000, the Sedgwick county manager is paid $175,095, and the superintendent of the Wichita school district is paid $224,910.