OpenMarket: Business and Government

There’s exciting stuff going on in the world of higher education these days for fans of free markets. Just last week, the University of Arizona’s Center for the Philosophy of Freedom received a $2.9 million grant from the John Templeton Foundation to help build a network of philosophy, politics and economics (PPE) programs at several universities around the world.

Closer to home here in Washington, D.C., the new Ed Snider Center for Enterprise and Markets at the University of Maryland is making a strong showing out of the gate. Earlier this month the Center hosted a debate over income inequality and public policy including current Executive MBA students and outside speakers Yaron Brook and Paul Vaaler. The video content from that event is well worth re-visiting for anyone who was unable to attend in person.

Policies aimed at reducing auto emissions in California and 10 other states are having a troubling set of unintended consequences, according to a recent editorial at Bloomberg View. Editors point out that the “zero-emissions” credits program ends up amounting to a subsidy for electric carmaker Tesla Motors of up to $30,000 per car sold, penalizing the buyers of nonelectric vehicles who end up underwriting the purchase of someone else’s $100,000 Model S. In addition, electric cars may not even be much “greener” than their nonelectric counterparts, when one considers the time of day these cars are charged as well as the source of the electricity—in many parts of the country, exchanging a conventional vehicle for an electric one means trading a gasoline-powered car for one powered by coal.

The Bloomberg editors, unfortunately, suggest solving the problem with two even worse policies: stricter fuel economy standards and a carbon tax. Perhaps if they had read this post by my colleague Richard Morrison, they might also consider a free market approach to the auto industry. Richard suggests treating Tesla fairly by ending both the apparent war against their retail strategy of selling directly to consumers (or owning their own dealerships), as well as eliminating the huge tax subsidies being offered by states like Nevada and New York. If Tesla makes cars that are as awesome as they are made out to be, then surely the company will find consumers who want to drive them—without having to pick their neighbors’ pockets.

A fascinating Kickstarter funding campaign just ended yesterday, and it was a major one. A new card game with the alarming title of “Exploding Kittens” (don’t worry—no actual kittens were harmed) has managed to raise $8,782,571 over the last 30 days. This makes it the third most highly funded Kickstarter campaign ever, and the one with the most total backers.

Exploding Kittens is a wonder of the Internet age—a party game full of goofy images and bizarre characters that was 1000-percent funded in less than an hour of its launch. It’s unlikely to have attracted the venture capital bigwigs from Shark Tank or the product acquisition VPs from Parker Brothers and Hasbro. The title alone is edgy enough to make your average Toys ‘R’ Us executive nervous, yet it’s clearly a product hundreds of thousands of people are willing to pay for. Thank you, Internet.

The advent of online crowd funding, of which Kickstarter is merely the best known platform, has become one of the most exciting developments in recent business history. At a time when voices from the left are again arguing that the history of the “self-made man” in America is built on myth, the projects that have been successfully crowd funded demonstrate that a single person—or a small team—with a good idea can produce something customers love and make some good money in the process. What could be more American than that?

Sometimes cronyism in the business world takes the form of a company receiving special government favors and subsidies—the now-infamous Solyndra, for example—but sometimes it takes the form of being singled out for punitive action instead. The software company Zenefits seems to have ended up in just such a scenario in Utah, where, along among the 50 states, it has been forbidden from operating.

Zenefits offers free human resources software to small businesses and nonprofits, while offering optional insurance brokerage services. If a company decides to buy insurance through them, they make a commission. If not, their clients are free to continue using Zenefits’ services free of charge. According to the company, about 80 percent of their clients are currently in the free-of-charge category.

This model is, not surprisingly, a potential competitive threat to other firms in the HR and insurance businesses, and insurance regulators have decided that offering free services in addition to being an insurance broker violates the Beehive State’s “anti-rebating” statute (see this explanation by Sarah Buhr of Tech Crunch). So despite being a legit operation everywhere else in the country, they are not welcome in Utah.

I was happy to see Zenefits CEO Parker Conrad stand up to this ruling in an op-ed in the Salt Lake Tribune recently, titled “My company is disruptive, but it shouldn’t be banned in Utah.” He emphasizes that recent innovation in the insurance industry has made regulations like Utah’s increasingly obsolete and anti-consumer, while also comparing the hostility to his company to the backlash that has greeted the arrival of Uber, Airbnb, and Tesla Motors dealerships across the country.

Fortunately, things seem to be looking up for the company. Fellow entrepreneurs and investors in Utah were quick to ridicule the decision, greeting it with comments like "Regulators, get out of (the) way. Ridiculous. Embarrassing," and "Last week we kicked Uber and Lyft out of Utah. This week Zenefits. The good (old) boy network is alive and well in the Beehive State." Better yet, the Utah legislature is now considering a bill that would clarify the language of Utah’s insurance regulation to allow businesses like Zenefits to operate in the state. Utah’s governor and lieutenant governor have also signaled support for the reform. It could be only a matter of days before Utah’s small businesses get a chance to check out Zenefits’ offerings for themselves.

Right-of-center groups have for some time become a bit complacent. Sure the left had the universities, the media, and pop culture—but we had the think tanks. In the world of principled and ideologically motivated policy, we were dominant—libertarian and conservative groups were growing in size and influence. We were—for a while—unchallenged.

No longer. The left and its financial supporters have realized that gap in their force array and have poured resources into addressing that deficiency. The Center for American Progress—the left’s Heritage Foundation—and the New America Foundation (CAP’s more intellectual counterpart) have become influential counters.

The most recent example of that is CAP’s new product, Report of the Commission on Inclusive Prosperity. “Inclusive” is one of the many adjectives used to modify “capitalism,” joining terms like “crony,” “conscious,” and “creative” to suggest that—with a bit of tweaking—capitalism can be saved. The report resonates with the old themes of the left: “technological progress benefits primarily highly skilled workers” (the shift from skilled long bowmen to muskets? The shift from skilled bookkeepers to offshored data processors?); an obsession with shifts in the distribution of monetary income (very little discussion of offsetting changes in the quality or prices of goods); worries about worker mobility; a view of the market as one of power struggles rather than evolving voluntary arrangements. 

It’s an interesting glimpse into the way the left is seeking to repackage its messages. Not much new: an appeal to envy, the plea for achieving “creative destruction” in a static economy, an unchanged belief that growth depends on government-led industrial policy, and clichés about technology and education. The left is desperate to retain control of the egalitarian moral high ground. This salvo is unlikely to succeed, but the broader approach should concern us.

This weekend I attended a fascinating event at the University of Maryland’s Robert H. Smith School of Business on the subject of economic inequality. Prof. Rajshree Agarwal put together a program that included a series of short debates by her Executive MBA students, followed by a one-on-one debate on the same questions between University of Minnesota Prof. Paul Vaaler and Ayn Rand Institute Executive Director Yaron Brook.

Participants argued for and against propositions such as “Taxes (existing and new) should be used to reduce inequality of outcomes” and “CEO pays should be capped at some percentage of the lowest paid employee in the firm.” The MBA students were assigned positions and debated based on recent readings, while Vaaler and Brook argued their own personal convictions on the meaning of economic inequality and the role of both business and government in responding to it.

Prof. Vaaler emphasized the role of participatory democracy in setting societal norms for questions like the just distribution of wealth, while Brook dismissed concerns about inequality per se, arguing that economic rewards should flow to whomever has earned them, regardless of the resulting distribution. The MBA students followed up with a highly engaged series of questions for both speakers.

Finally, the students were polled on a series of four questions having to do with inequality and had their responses contrasted with the answers they gave before the debate began. On 3 out of 4 questions, the students moved closer to Brooks’ position—that either inequality is not an issue of paramount concern in the first place, or that public policy measures like capping CEO pay were not well advised.

While the specific result was encouraging from a free market point of view, the fact that business school students were being challenged on these issues at all is especially important. Business schools do an excellent job training future business leaders in areas like program management and creative problem solving, but don’t necessarily focus on questions of politics and morality that are, nevertheless, also vital to operating a business in a heavily-regulated, mixed economy. Prof. Agarwal, who leads the newly launched Snider Center for Enterprise and Markets at the University of Maryland, is doing an excellent job of challenging her students on these issues. I have no doubt that tomorrow’s shareholders will thank her when her students become CEOs themselves.

Over the decades I’ve spent in this Heart of Darkness (a.k.a., the bowels of American politics), I’ve learned two lessons that have encouraged the steady politicization of the American economy:

• When the right time comes, I’ll take a principled stand (sadly, too often, once you’re no longer in office); and
• Of course, we know the “right” answer is often to liberalize current rules, but that would be politically naïve, so our goal should be to avert even worse rules (but, of course, sacrificing principle rarely assuages those favoring more government control).

And both lessons seem to have been forgotten in the Republican rush to avert the threatened action by FCC Chairman Tom Wheeler to transform the Internet into a federally regulated utility. Senator Thune, Representative Upton, and Representative Walden have proposed a “compromise” bill that would strip the FCC of its purported authority to reinterpret the Communications Act to consider the Internet as a “public” utility.

Unfortunately, their language concedes perhaps the most dangerous part of such a reclassification: removing the freedom of network owners to price their services. Well, actually not quite: the Republicans would remove providers’ ability to price in ways that some view as “discriminatory.” They explicitly mention pricing policies that might result in “throttling” (like congestion-managed toll lanes?), unreasonable “network management” (as decided by whom?), and “paid prioritization” (like that used for just-in-time transportation services by most transport companies?).

But proponents argue if FCC is left alone, its rules might even be worse. And, indeed, they probably will be—but FCC action would be administrative, reversible by a future administration or via inevitable legal challenge. If Congress—led by erstwhile opponents of net neutrality—accedes to forcing the Internet into quasi-utility status, the losses could be permanent.

Those contemplating this action should reflect on the consequences of similar regulation on an earlier network—the railroads. This was America’s first national network, knitting together then small town and rural America into the national economy. Railroads dramatically lowered transportation costs—changing the economy and resulting in growth in some regions, contraction in others.

Lawson Bader, president of the Competitive Enterprise Institute (CEI), offered the following response to the State of the Union address this evening:

“Whenever a president starts talking about economic inequality and more ways the government can help, keep one eye on your wallet and the other on your liberty. This especially rings true after President Obama laid out his policy agenda tonight, which continues to drive up costs, increase burdensome regulations, and weaken our economy. It’s clear the need for regulatory restraint and reform has never been greater, and Congress must stem the ever-increasing overreach of executive branch power. All of his plans for programs and benefits under the guise of a free price tag only place heavier costs on Americans. The President did teach us the new concept of ‘middle class economics,’ forgetting an older concept called ‘theft.’"

Read more from Lawson Bader on the State of the Union in Human Events: “Please, stop breaking windows.”

For information about the solutions CEI offers on energy, labor, finance, and other regulatory issues facing the nation, check out the preview to CEI’s forthcoming Agenda for the 114^th Congress here.

Related:

CEI’s Wayne Crews on Regulation -- SOTU in 5 Words

CEI’s Ryan Radia on Cybersecurity -- On Cybersecurity, President Obama Offers Mixed Bag

Government planning often contains contradictory elements that provide inconsistent signals for regulated entities about how to behave. For example, the New Deal of the 1930s featured prosecution of some businesses under antitrust laws – under the premise that “bigness” in business was evil – and an incredibly complicated, and ultimately failed attempt to cartelize most of the nation’s economy through price-fixing under the National Recovery Act (provisions of which were declared unconstitutional by the Supreme Court in the Schechter Poultry case).  

Today, the government continues to routinely send out mixed messages, especially through the welfare state. For example, the federal government has funded pro-marriage messages, citing research that “indicates that married adults and children raised by both parents in stable, low-conflict households do better on a host of outcomes," while at the same time financially punishing married couples through massive marriage penalties in the tax code as well as in eligibility requirements for things like Obamacare tax credits.  As Rep. Thomas Petri (R-Wisc.) has noted:

Lawrence Summers, the enfant terrible of the economics profession, has written a thoughtful column on “Our Loss of Faith in the Future,” noting that today almost nothing seems to get done. He notes broken escalators at LaGuardia, bridges not repaired for years in Cambridge, and argues that our accounting systems fail to measure the costs of such downtime. Still a liberal, Summers suggests changes in accounting rules to measure such downtime losses. This might help a bit but many agencies already keep track of deferred maintenance and, yet, delays continue to increase.

Summers doesn’t mention the massive array of regulatory approvals needed now for almost all governmental and most private ventures. That point was raised in my recent column on the experience of a British businessman, Ernest Benn, writing in 1925 that when he began his business in 1900 he simply did things. By 1925, half his time was spent on the paperwork demanded by regulations. From building a room on one’s home to repairing bridges or sending people to Mars, the major barrier is no longer technology or financing per se but rather the thicket of regulations that slow everything. The result is akin to filling swimming pools with molasses and being surprised that speeds decline. Perhaps Summers’ next columns will attack this problem?