If the Chair Industry Was Regulated Like the Drug Industry

Image result for epipen

There is another pharma scandal in the news over the astronomical increase in EpiPen’s price. Yet, before we begin to blame and denounce the abstraction “capitalism” for all our woes, it might be useful to recall my post on the Shkreli/Daraprim scandal and its discussion of healthcare regulations. This new case appears to be incredibly similar and the site Slate Star Codex has an excellent post contrasting the way the drug industry operates compared to the chair industry:

when was the last time that America’s chair industry hiked the price of chairs 400% and suddenly nobody in the country could afford to sit down? When was the last time that the mug industry decided to charge $300 per cup, and everyone had to drink coffee straight from the pot or face bankruptcy? When was the last time greedy shoe executives forced most Americans to go barefoot? And why do you think that is?

The answer?:

The problem with the pharmaceutical industry isn’t that they’re unregulated just like chairs and mugs. The problem with the pharmaceutical industry is that they’re part of a highly-regulated cronyist system that works completely differently from chairs and mugs.

If a chair company decided to charge $300 for their chairs, somebody else would set up a woodshop, sell their chairs for $250, and make a killing – and so on until chairs cost normal-chair-prices again.

And in his final act, he drives the point all the way home (worth quoting at length):

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

Image result for chair break gif…Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.

When Profits Are Sinister

Profit is often a dirty word among certain political ideologies. However, for those who defend the importance of profits, it is necessary to realize that sometimes they are signs of something amiss. As economist James Bessen explains,

Profits are up. Operating margins for firms publicly listed in the US show a substantial and sustained rise. Corporate valuations are up as well. That is good news for managers and investors. But is it good news for society?

Economists such as Joseph Stiglitz and Luigi Zingales find the rise potentially troubling for two reasons. First, higher profits create greater economic inequality. Rising aggregate profits correspond to a decline in labor’s share of output, contributing to stagnant wages. Also, greater profits for some corporations but not others may create greater wage inequality.

Second, the rise in profits might represent a decline in competition and, with that, a decline in economic dynamism. While a dynamic, competitive economy rewards innovative firms with high profits and punishes poor performers with low profits, sustained aggregate profits suggest, instead, that firms are able to get away with higher prices because competition is limited. Firms engage in political “rent seeking”—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth.

However, the increase in profits could be due to firms “increasingly making profitable investments in new technology, in IT, or in their organizational capabilities.” Bessen’s new research paper gets to the bottom of it:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.

This is how rent-seeking, pro-business (vs. pro-market) attitudes, and crony capitalism drag down our economy.

Check out the full article over at Harvard Business Review.

Abolish the Corporate Income Tax

A recent online debate involving Nathaniel (and me to a much, much lesser extent) brought up corporate income tax. It reminded me of this recent article in the Wall Street Journal. The author lists ten reasons to abolish it altogether:

  1. The “engine of tax complexity disappears. And with it disappears an army of lobbyists in Washington working to get favorable tax treatment for corporations.”
  2. “With no corporate income tax, management would concentrate on what is now pretax profits, an artifact of actual wealth creation.”
  3. “[T]here would be no reason to tax dividends at lower rates to compensate for the fact that they now are paid out of after-tax profits.”
  4. Due to increased profits, “corporations would increase both dividends and investment in plant and equipment, with very positive effects for the economy as a whole and increased revenue to the government through the personal income tax.”
  5. The “stock prices…would rise substantially, inducing a wealth effect as people see their 401(k)s and mutual funds rising in value.”
  6. “[T]he distinction between for-profit and nonprofit corporations would disappear.”
  7. “[M]uch of the $2 trillion of foreign earnings, now kept abroad to avoid being taxed when repatriated, would flow into this country.”
  8. With no corporate income tax, “foreign corporations would flock to invest here…”
  9. In order to compete, foreign countries “would be forced to lower or eliminate their own corporate income taxes, increasing domestic corporate profits and thus domestic investment and personal income…”
  10. Finally, “eliminating the corporate income tax would deal a blow to crony capitalism.”

Check out the full article.

Cronyism in Hong Kong

With the Hong Kong protests still raging–protests that were possibly inspired by the Occupy movement in the U.S.–I was reminded of the “crony-capitalism index” put out by The Economist earier this year. Check out who tops the chart:

Now, the methodology of the index is admittedly crude (even recognized by The Economist itself), especially since it concentrates on rich individuals and “rent-heavy” industries. But worth thinking about.

More Cronyism, or: How America Won’t Get Broadband

2014-03-15 No Service

From Newsweek:

After making a big, bold promise to wire every corner of America, the telecom giants are running away from their vow to provide nationwide broadband service by 2020. For almost 20 years, AT&T, Verizon and the other big players have collected hundreds of billions of dollars through rate increases and surcharges to finance that ambitious plan, but after wiring the high-density big cities, they now say it’s too expensive to connect the rest of the country. But they’d like to keep all that money they banked for the project.

Of course they would.

I picked this article because it’s another example of the split between the interests of big business (read: cronyism) and the interests of folks on the right. As we all know, one (slightly oversimplified) way of looking at the political spectrum in American is urban vs. rural, with rural folks being on the conservative end of the spectrum. So it’s these guys who stand to lose the most when big telecoms lobby to get laws rewritten so they won’t have to run high-speed broadband out to smaller, less-dense areas of the country.

Oh, and Chris Christie shows up again:

And this isn’t bad news for just Montana and North Dakota. The Eastern Seaboard is getting smacked as well. Verizon has made a tentative deal with New Jersey Governor Chris Christie’s administration to stop expanding its FiOS Internet service in that state. The terms would deny access forever to many small businesses and residences. Verizon declined to make anyone available for an interview.

Thanks, Christie, for once again illustrating the difference between cronyism and capitalism. (We covered the Tesla shut-down earlier.)

New Jersey Bans Tesla: Capitalism vs. Cronyism

2014-03-13 Tesla Store

Capitalism and free markets are good. Cronyism is bad. Sometimes trying to explain the difference between the two to people can be hard. The one upside to the state of New Jersey effectively banning Tesla from opening any stores in their state is that at least it makes it easier for people to tell which is which. It’s also helpfully in complete and total violation of your usual expectations for a story about economic liberty:

This is a startling inversion of political stereotypes: Northern Californian capitalists quashed by East Coast Republicans defending the use of government regulations to keep competition out of the marketplace.

In a nutshell, politically powerful car dealers are trying to slam the door on Tesla before Tesla has a chance to show people that buying a car need not be a painful ordeal. Meanwhile car makers, who are often at odds with car dealers, are united to do anything they can to prevent Tesla from changing the whole landscape for car manufacturing in the US. So they are both doubling down on old, outdated laws that gave car dealers geographic monopolies back in the day when car makers had all the power.

And that, in a nutshell, is the curse of government intervention in markets. Even in those cases where it might have been valuable and necessary once upon a time, the laws will still be around decades after their original purpose has been forgotten, and there will be plenty of politically powerful elites ready to pay whatever it takes to keep those laws on the books and in force to protect their business interests. That’s not socialism, but it’s not capitalism either. It’s cronyism. Wired has the rest of the story, by the way, and it’s worth a quick read.

The Tea Party Fights The Man

2013-10-08 Rand Paul

The Tea Party does not have a lot of friends in Washington. Conventional wisdom–the sort of thing you hear on NPR, for example–is that the GOP has redistricted itself to death. By creating solid red districts, they’ve turned over power to the loonies on the fringe. Complementary theories include the notion that the Tea Party consists of a bunch of delusional fools who are shoveling their hard earned life-savings to snake oil selling PACs who have no interest in making real changes, but just want to make a buck off of gullible fools.

Both of these narratives tap into deep political stereotypes, but neither actually make much sense. The problem with the gerrymandering explanation is that it’s the opposite of how gerrymandering actually works. Not that I’m defending redistricting games, but the essence of gerrymandering is called “packing and cracking“, and it means you pack your opposition into dense, homogeneous districts but you crack (spread out) your own supporters as much as possible. Think about it for a minute, if you’ve got 5 districts and the overall population is basically 50/50 Democrat and Republican, do you (as a Republican) want to put all of your voters in one dark red district and leave the Democrats to have 4 very slightly blue districts? No: that’s how you lose an election, not how you win it. The idea that the GOP created a bunch of ultra-conservative districts doesn’t make any sense.

Meanwhile, the idea of the huckster political operative taking grandma and grandpa’s money to go off on a doomed crusade to end Obamacare taps nicely into images of televangelist faith healers (i.e. negative stereotypes of the religious right) and the influential What’s the Matter With Kansas?, but all it really does is expose liberal arrogance. The idea is that conservatives are just too darn stupid to know what’s good for them (i.e. liberal policies) when the reality is that conservatives have different values than liberals. For example, conservatives believe that passing on staggering amounts of debt to their children is morally reprehensible and are willing to sacrifice their own interests to stop it.

But is this just spin? Nope, it turns out there are some pretty hard numbers behind this. I got tipped off to that fact when a Facebook friend posted this Washington Times opinion piece: Tea Party Loosens K Street’s Stranglehold on the GOP. The thesis of the article is pretty simple: before the Tea Party, Republican candidates depended on cash from big business and lobbyists to run their campaigns. But a proliferation of ideological PACs provided an alternative source of funds separate from the interests of big business. Carney, who wrote the piece, concludes that Tea Party candidates are therefore getting their money from small business owners and retirees: individuals.

I don’t think the article backs this up solidly, but the same friend who posted it followed it up with this: 

Read moreThe Tea Party Fights The Man