Milton Monday #2: Monopolies

Another common myth is that government needs to step in to break up monopolies, but often times government is the cause of monopolies. Either they, by law, are the sole provider of a good or service (public education or first class mail for example) or they put in place regulations that stifle competition.
Video here.

What's interesting, is that he may have been wrong about De Beers as well, as their diamond monopoly seems to not be as effective as it once was. They are a rare exception, in that most diamonds are found only within a small, geographic location, known in ecnonomics as a "geographical monopoly". For example, if the only oil well in the world were found in my backyard, then I would have a monopoly on oil.

Don't Touch My Junk: A Practical Critique of Bureaucracy

Well Thanksgiving was last week (hope you all had a great one), and a lot of controversy has been stirred up over the new screening policies (or as some might call them, public displays of affection) of the Transportation and Security Administration (TSA).

Security, as we all can agree, is very important at airports since we don't want another 9/11 on our hands. But is Uncle Sam best suited to keep us safe? The following question was on my exit exam for SDSU, and I elaborated using the TSA as an example:

Do you agree or disagree with the following statement: "Bureaucrats are lazy, inefficient workers who are part of an entrenched, powerful institution?"

To which I responded:

I agree with this statement, for the most part. I'll start with where I disagree. I disagree that ALL bureaucrats are lazy. There are some very civic-minded people working for our bureaucracy that have the best of intentions and have the good of our country at heart and try to do the very best they can.

That being said, bureaucracy, but its very nature is not conducive to efficiency and hard work. In the private sector, workers have to work hard and prove themselves efficient to maintain their job, and the business itself craves efficiency and hard work to maintain profits and remain competitive against other competitors. A private organization's goals are profits.

A bureaucracy's goal, but contrast, is to legitimize its existence. Government workers unionize and strike to protest paycuts, etc. Should a private business become inefficient, the business could become insolvent and fail while the good businesses thrive. If a bureaucracy becomes inefficient and shows few results, a bill will probably be passed to throw more funding at the agency!

Bureaucracies are also very powerful and entrenched institutions. I can't think of a single instance where one was successfully abolished. Abolish the Department of Education? Abolish the Environmental Protection Agency? It seems that once these responsibilities have been ceded to inefficient government, it somehow becomes blasphemy to say that someone other than the government may be better at tackling these issues, and the agencies hence become immortal, and the government has a virtual monopoly over the activity in question.

A perfect current example is the TSA situation, where a lot of people are becoming very unhappy with the extensive scanning the government monopoly (TSA) is requiring at all airports. After 9/11, in rash action to a massive tragedy, the Senate voted 100-0 to approve the TSA, essentially taking over airport security in the United States.

What does the TSA have to lose if they prove inefficient and a shoe bomber or something gets on a plane? They won't be fired, they won't lose customers, and they'll simply have more money dumped into their budget.

Private airlines would best be suited to handle their own airplane security. They have skin in the game and will lose customers if they show to be unsafe airlines or treat customers in a way that will turn them away.

Better yet, the private sector has an advantage, where airlines could exploit niches. One airline may boast themselves as being the safest in the air, and customers know going with that airline will subject them to higher, more invasive levels of screening, and the customer accepts that.

Another airline might realize that other customers would rather keep some dignity and sacrifice some safety on their flight by using lesser screening methods. There is a tradeoff; but customers get to decide for themselves. It's impossible to prevent all the 9/11 type incidents, but since private industry has the most to lose, they also have the most incentive to prevent such a tragedy. Bureaucracy, on the other hand, is one-size-fits all and does not let customers decide what level of security is important to them.

Echo in the Room?

Looks like Newt Gingrich was reading my blog yesterday, judging by this article:

Free Cities - Article - National Review Online

India vs. Hong Kong vs. U.S.A.

This is an excerpt from the book I'm currently reading, Give Me a Break by John Stossel. It really illustrates how free market capitalism makes life better for everyone--especially the poor--by raising all of society up.

Again, this is the work of John Stossel, not mine. Any typing errors, however, are mine.

Economic Freedom

You may doubt that a relatively free market is the prime reason America is prosperous. Isn't it our natural resources? Or democracy? Something unique about Americans' character?

No. If you look at societies that succeed at bettering the lives of their people, and compare them to those that fail, it's clear that what makes the difference is economic freedom.

India is desperately poor. When we were filming in Calcutta for the ABC special "Is America #1?", I was surrounded by kids begging. Yet India has democracy, and plenty of natural resources. Then why is India poor? The popular answer is overpopulation, but that's totally wrong. The population density of India is roughly equal to that of New Jersey. New Jersey does pretty well.

If overpopulation or lack of resources created poverty, then Hong Kong should be poor. Hong Kong has 20 times as many people per square mile as India, and no valuable natural resources. Yet Hong Kong is rich; the average income there is higher than in Great Britain or Canada. This is a recent development. In the 1920s, Hong Kong was as poor as India. But in a relatively short time it became rich because of one key ingredient: economic freedom.

Economic freedom prevailed because Hong Kong's British governors provided limited government. They built roads and schools, and enforced simple and understandable laws against murder and theft. But that was about it. Hong Kong thrived because its rulers didn't do too much. After keeping the peace, the British officials basically sat around and drank tea.

No Federal Trade Commission, no OSHA, no labor laws or minimum wage. "When you leave things alone, people just get on with it. It's very simple," said David Tang, who's made lots of money running an elegant club in Hong Kong and selling clothing at a chain of stores called Shanghai Tang.

Bretigne Schaffer, who worked in Hong Kong for the Asian Wall Street Journal, told us that without the "crutch" of government handouts, people in Hong Kong are inspired to create things. And thanks to Hong Kong's flat 15 percent tax, they get to keep more of what they create. "It's possible to save enough money that you can start your own business," says Schaffer, "and become very rich." Easier than in America, she says, "with all the different taxes, all the different employee benefits you have to pay out, and all the regulations."

To illustrate that on TV, I decided I would try to open a business in Hong Kong. I found out that I could, without a lawyer, set up a legal business in just one day. All I had to do was wait in one line and fill out one form. The next day I had a booth in a shopping mall selling ABC Frisbees. I failed, of course. ("Is America Number 1?" showed shoppers not buying anything from my store.) But the freedom I had to try, and fail, is what allowed Hong Kong to thrive. As Nobel Prize-winning economist Milton Friedman put it, Hong Kong is just a rock, but "on this rock people can produce for themselves a higher standard of living than they can produce in Britain with its centuries of history. Incredible. [It's] because of freedom."

This freedom may not endure. Communist China now runs Hong Kong. So far the island's stunning success has deterred the Communists from imposing their usual rules, but they may yet kill the goose that's been laying golden eggs.

By contrast, I dare you to try to start a business in India. We didn't even try to open one while I was in Calcutta, because the paperwork takes years. If you want to be an entrepreneur, you must submit reams of papers, and then wait for days, months, or even years while bureaucrats debate the merits of your application. When Kentucky Fried Chicken wanted to open outlets in India, Parliament spent months debating whether the request should be allowed. A government minister worried the chicken wasn't healthy enough.

The regulation is all well intended--to make sure the food's clean, the building's safe. But the result is that good ideas die in the piles of paper forms that we saw bundled on regulators' shelves.

Give Me A Break. Pages 233-235. Copywrite 2004 by John Stossel. HarperCollins Publishers Inc. New York. Used with permission per the reproduction allowances detailed with the copywrite information.

Ketchup and Capitalism

Over the Fourth of July weekend, I was reminded of some reasons why free market capitalism is the best system out there.

If any of you just happened to visit a Walmart and saw the pre-Fourth of July insanity--I literally saw two separate Walmart parking lots COMPLETELY full--then you might have seen a little of what I'm talking about. Even with the crazy amounts of people buying everything in sight to stock up for their weekend adventures, I still managed to buy all the staples that I, and everyone else, needed to celebrate. Never was Walmart sold out of what I needed.

A keen eye probably would have noticed that the prices were probably a little higher than usual, although I failed to pay attention because I was hungry looking for chips. One of the great features of the free market is the ability for sellers to raise prices in times of high demand. Some may use the terms "gouging" or "profiteering", but who is hurt in the exchange? Yes, I paid a higher price...but did so willingly, of my own accord, because I needed my Fourth of July kicks more than I wanted the money I gave the cashier. These free market mechanisms also gave me an added benefit: since they were able to raise their prices, I was able to actually find what I needed, and there were few shortages/empty shelves.

Smart shoppers would have realized that prices will be higher leading up to the 4th, so they'd check through their cupboards for the lost ketchup bottle, bag of chips, or can of baked beans. Which points out another free market benefit: efficient use of scarce resources. There's nothing efficient about buying a higher priced ketchup when there's a perfectly good bottle already purchased sitting in your cupboard. Raising prices helps guide consumers in making these decisions, reducing shortages by creating efficiencies.

Another free market benefit shows itself AFTER the 4th. I found myself wandering into Walmart again. Since the store stocked up heavily so they could make a killing profit-wise for the 4th, many things were over-stocked. Surplus 4th of July goods were a fraction of the price they normally are any time of the year. I got a 40 ounce bottle of Heinz ketchup for only $1 dollar. I also noticed baked beans, chips, pop, paper plates, beer, etc. etc. were all dirt cheap as well. Less demand for the cliche 4th of July goods coupled with over-supply makes for some great deals.

To give another example, look at gas prices before/after hurricane Katrina. Leading up to one of the worst hurricanes ever, gas prices steadily increased in anticipation of broken oil rigs, higher travel, etc. Conventional wisdom says we should hate oil companies for doing such a thing, but the unseen side is that oil companies were stocking up barrels in warehouses (reducing pre-Katrina supply) in anticipation of shortage problems post-Katrina. Just as there was no shortage of ketchup in Walmart, after Katrina, which involved essentially evacuating entire states, gas was soon available after the hurricane. There were massive shortages, yes, but that shows the magnitude of the hurricane was beyond even the most risky oil speculators' wildest dreams. But to get things back to normal, allowing prices to do what they wish was the key; using price caps would only have resulted in massive shortages. Hell, I'm sure oil companies would have air-lifted entire gas stations into New Orleans if they knew they could make $120/gallon on gas. But when you're fleeing for your life, I'll buy gas for that much. People fleeing for their lives prior to the hurricane had to pay high prices for gas, but luckily for the "greed" of oil companies trying to make a profit, the most people possible were able to fuel their cars for evacuation with the fewest shortages.

Four Ways to Spend Money

Economist Milton Friedman (may he rest in peace), on the four ways to spend money:

Reputation Tarnished; Not Good Enough for Headhunters

Toyota today agreed to pay more than $16 million in penalties because of the faulty gas pedal fiasco, representing the

Although it sounds good to stick it to a company that has hurt its customers, an investigation and penalty like this (a favorite pastime of headhunters like Henry Waxman) is a redundant penalty unnecessary to keeping companies honest and consumers protected in a free market.

Why? Reputation. Toyota has already lost millions in sales from its tarnished reputation. It has lost the faith of its consumer base, and millions of people in the next few years will think twice before buying a Toyota, which is a much larger cost than any arbitrary penalty anti-business congressmen can think up.

As economist John Lott puts it in his book Freedomnomics:

"...future profits are what a firm stands to lose if it cheats its customers. The potential loss of profits stemming from the loss of a good reputation helps keep businesses honest. This holds true so long as a business is concerned with its future profits."

How many moms out there do you think will be buying a Toyota any time soon?

To get a little more conspiratorial, it's interesting to note that General Motors (Government Motors) is more than 50% owned by the government, so perhaps the government is simply trying to kick the legs out of its non-union worker automaker competition?

How the Great Depression Really Ended

A lot of people think that FDR ended the Great Depression with his big-government, New Deal policies, but a closer look really shows that his policies in reality perpetuated the depressed economy, rather than fix it. I fear that some of the same actions taken by the current administration are pushing us down the same path, creating a stagnate economy for years to come and provide government with excuses to take from us more of our freedoms in the name of "security."

I read a great book on just this topic which looks into this subject in depth, The Forgotten Man: A New History of the Great Depresson, by Amity Shales, which I highly recommend if your reading list is getting short.

From today's Wall Street Journal:

Did FDR End the Depression?

The economy took off after the postwar Congress cut taxes

By BURTON FOLSOM JR. AND ANITA FOLSOM

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let's start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the "right to a useful and remunerative job" provided by the federal government if necessary.

Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR's ideas as the best way to achieve full employment after the war.

Congress—both chambers with Democratic majorities—responded by just saying "no." No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

Corporate tax rates were trimmed and FDR's "excess profits" tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945.

Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call "supply-side economics." If the tax bill "has the effect which it is hoped it will have," George said, "it will so stimulate the expansion of business as to bring in a greater total revenue."

He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.

Congress substituted the tonic of freedom for FDR's New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

Mr. Folsom, a professor of history at Hillsdale College, is the author of "New Deal or Raw Deal?" (Simon & Schuster, 2008). Mrs. Folsom is director of Hillsdale College's annual Free Market Forum.

A License to Work?

John Stossel makes some great points. The most severe recession in history really puts into context how ridiculous it is to make someone pay $2000 dollars simply to get licensed to sell flowers. Government at its best ;-)

From FoxNews.com:

John Stossel - FOXNews.com - March 11, 2010
The Right to Work

Licensing everything from florists to lawyers interferes with the freedom to make a living and harms consumers by limiting competition and protecting established firms.

The people of Louisiana must sleep soundly knowing that their state protects them from ... unlicensed florists.

That's right. In Louisiana, you can't sell flower arrangements unless you have permission from the government. How do you get permission? You must pass a test that is graded by a board of florists who already have licenses. To prepare for the test, you might have to spend $2,000 on a special course.

The test requires knowledge of techniques that florists rarely use anymore. One question asks the name of the state's agriculture commissioner -- as though you can't be a good florist without knowing that piece of vital information.

The licensing board defends its test, claiming it protects consumers from florists who might sell them unhealthy flowers. I understand the established florists' wish to protect their profession's reputation, but in practice such licensing laws mainly serve to limit competition. Making it harder for newcomers to open florist shops lets established florists hog the business.

Other states are considering adopting Louisiana's licensing law, but before any do, I hope that the law will be stricken. The Institute for Justice, a public-interest law firm, has challenged the licensing in court, saying it violates liberty and equal protection, and so is unconstitutional.

"One of the most fundamental tenets of the American dream is the right to earn an honest living without arbitrary government interference. What could be more arbitrary than saying who can and who cannot sell flowers?" IJ President Chip Mellor says.

Others states have their own sets of ridiculous licensing rules. In Virginia, you need a license to be a yoga instructor. Florida threatened an interior designer with a $25,000 fine if she didn't do a six-year apprenticeship and pass a test, at a cost of several thousand dollars. Fortunately, the Institute for Justice got that law overturned.

I'm rooting for IJ because licensing interferes with the freedom to make a living, harms consumers by limiting competition and protects established firms. By the way, this will be the subject of my Fox Business show on Thursday night.

It's an old story. Established businesses have always used government to handcuff competition. Years ago, small grocers tried to ban supermarkets. A&P was going to "destroy Main Street," the grocers cried. Minnesota legislators responded to their lobbying by passing a law that forbade supermarkets to hold sales. Consumers were hurt.

OK, while licensing of florists, interior designers and yoga teachers is ridiculous, what about more important professions, like law? Surely people need protection from people who would practice law without a license. Again, I say no. Lawyers' monopoly on helping people with wills, bankruptcies and divorces is just another expensive restraint of trade.

David Price recently spent six months in a Kansas jail because he wrote a letter on behalf of a man who was wrongly accused of practicing architecture without a license. When Price refused to promise never to "practice law" again, a judge sent him to jail.

All he did was write a letter. Price didn't misrepresent his credentials. However, he did save a man from paying $3,000 to a lawyer. Perhaps that was his real offense.

Some of the most famous lawyers in American history, including Thomas Jefferson, Abraham Lincoln and Supreme Court Justice Benjamin Cardozo, had no license from the state. Their customers decided whether they were worthy of being hired.

Competition is better than government at protecting consumers from shoddy work. Furthermore, licensing creates a false sense of security. Consider this: When you move to a new community, do you ask neighbors or colleagues to recommend doctors, dentists and mechanics even though those jobs are licensed? Of course. Because you know that even with licensing laws, there is a wide range of quality and outright quackery in every occupation. You know that licensing doesn't really protect you.

A free competitive market for reputation protects consumers much more effectively than government can. Today, online services like Angie's List make it even easier for consumers to get better information about businesses than government licensing boards will ever provide. We do need protection from shoddy businesses. But it's freedom and competition that produce the best protection.