Intentional Politics

Transparency...

I've been thinking about the current financial situation and what I think should be done to prevent this from happening in the future.  The libertarian wing of my brain doesn't like extra regulation, especially since I think the root cause of our problem is a decline in US competitiveness and regulation isn't going to help that.

I think the answer is unprecedented transparency in both government and business.

• Financial institutions were able to delude themselves into thinking that their investments weren't risky. 
• Large institutions, e.g. pension funds, did the same thing by investing money into hedge funds with little/no transparency.
• The Government "stimulus" package is really just a bunch of pork with the excuse of pumping some money into the economy.

I don't think we can stop these sorts of things from happening through laws or regulation.  However, I think it is feasible to make sure that the actions of the organizations are quickly and transparently made available.

For example, I think we need a "legislation markup language" so that we can track legislation at each stage, know who made changes to the legislation and when, and most importantly do some automated analysis.

The latest news is that a lobbying firm closely linked to Murtha managed to get pork for 100 legislators into a single bill.

I can imagine an exemption for national security, but other than that there is NO reason that our elected representatives should be able to do our business secretly or in private.

A similar argument can be used for the semi-private institutions like pensions that have been investing so much money into these hedge funds.  The public really needs to know where these institutions have their money, and if there is a lot of money there then we need public information on those hedge funds as well.

Stimulus, recovery, or just treading water...

Don Boudreaux over at Cafe Hayek has an excellent post (quoting Bill Shughart) about government "stimulus":

http://www.cafehayek.com/hayek/2009/01/government-does-not-know-better-or-even-as-well.html

However, I think he missed they key quote:

There is also no such thing as "free" growth.

Letting our elected officials pick winners, and artificially supporting industries is just delaying the inevitable.

Our country needs to allocate resources towards innovation and productivity.  Government spending can certainly help sustain us during this crisis, but the crisis won't really end until we get back to creating real value.

Not(for-profit)

An area that I’ve been thinking about is the differences between for-profit and not-for-profit organizations, amongst which I’ll include the government.

For-profit is easy – two (or more) parties engage in a transaction where resources of value are exchanged and all parties believe the value received exceeds the value given away.  If the for-profit organization confuses this principle it goes bankrupt.  The feedback loop is very simple and very direct.

Not-for-profit is a different beast, the organization gets resources somehow and then decides how to distribute those resources to other parties.  This difference leads to a couple of potential issues:

1)      Effectiveness – both because of the types of endeavors that NFPs are involved in, and the tenuousness of their feedback loop, it is very difficult to figure out if the organization is effective.  One way is a measurement of what percentage of resources to go “overhead” versus the actual recipients.  Organizations like Charity Navigator rate charities for this reason.

2)      Conflicts of Interest – Because it is difficult to measure effectiveness, and because the people running the NFP are making decisions about how to use other people’s money, there is a huge potential for a conflict of interest.

 

Rangel ethics inquiries vex House leaders: Democrat chairs committee writing key rescue, tax bills

A renewed ethics probe of Rep. Charles B. Rangel of New York poses an embarrassing distraction for House Democrats, as the Ways and Means Committee http://washingtontimes.com/news/2009/jan/26/rangel-probe-a-distraction-in-busy-house/

 

3)      Crowding Out – It is very difficult for a FP to compete with a NFP since the FP must make a profit while the NFP is giving resources away. http://depts.washington.edu/haiuw/files/presentations/economy_foreign_aid_ngos_profit.pdf

 

NFPs are valuable.  There are definitely some areas where they are preferable.  For example: police and fire services.  The people who, uh, participate most with police forces are those least likely to want to pay for them, or have the ability to do so.  Having an effective fire department helps everyone.  I think the federally financed road systems were definitely worth the investment.

I have my doubts about government financed transportation systems.  Here in the Puget Sound area bus fares pay about 20% of the cost.  Does it really cost $15-20 per trip for a bus!!?!? http://seattletimes.nwsource.com/html/localnews/2008086267_webbuses02m.html

As a counter example, let’s say you had the power to choose between two NFPs that provided food aid.  The first one can serve a meal for $1, and the second one for $10.  Which one would you choose?  That’s obvious, the one that can feed for 10 people for $10.  What if you are sending that money to an organization in some impoverished nation?  How do you deal with the fact that this aid will make it HARDER for the local people to create their own economy when these foreign sources can undercut their businesses? 

I don’t have any real solutions here other than to say that I think that transparency at all levels for any public organization is absolutely vital.  We can’t directly change how they do business, but if the information is available then we can do it indirectly.

Zombies in the Mill Town

Zombies & Mill Towns

You know about the mill towns – could have been lumber, paper, or steel – where the entire economy is based on the mill, every job can be traced back to that entity.  Economists would call that a “rent-yielding asset”.  And if that mill went out of business, that town disappears since it is the source of money coming into the local economy.

You can’t base an economy on everyone selling services to everyone else.  The American economy has been coasting upwards the last couple of years based on a bit of momentum and a lot of financial “innovation”.  Here's a similar view from Britain: There's no new motor to drive the economy

There certainly have been lots of real financial innovations – we wouldn’t be here now in the US without the concept of a limited corporation.  Also, we need a sound banking system for a sound economy.

Unfortunately we’ve placed ourselves in a situation where the US just isn’t as creative as it used to be.  There are a couple of reasons, but a key one is that the country does not encourage innovation.  Sarbanes-Oxley made it much more costly for companies to go public, and the decrease in IPOs in the last couple of years shows that.  Venture Capitalists have always had to rely on 1-in-10 investments reaching liquidity, but that isn’t happening anymore without those IPOs.

We need to do something to encourage that innovation.

Otherwise, we are that town with the closed mill.  The government and the bankers can shuffle an ever decreasing supply of value – inflation will make the numbers look busier, but they’ll mask the true message.

Government will attempt to create some winners through some incredibly expensive bailouts, but they’ll really be zombies, wandering around artificially, half alive.  Eventually they will need another bailout.

There are some things that not-for-profit organizations, and I’m including the government, can do better.  But, the big problem is the huge potential for conflicts of interest.  A for-profit organization has a simple job, sell things for a profit.  If they do it wrong it is obvious and fixed one way or another.  Not-for-profit organizations get value from one source and distribute it elsewhere.  There isn’t a quick, efficient feedback loop, and sometimes there is no way to really tell how effective the spending is.

My prescription:

•  Roll back Sarbanes-Oxley
•  Migrate from the FASB’s model of restriction to a policy of complete transparency
•  Public organizations, like pension plans, can only invest in non-public entities, like hedge funds, if there is transparency.
•  Reduce the corporate tax rates – this will encourage companies and will keep the dollar at reasonable rates.