Saturday, October 29, 2011

How bureaucracy poisons an economy

We all know government paperwork costs businesses money. But the government can print more money. It's not always the best yardstick by which to measure cost and value. As the government prints more, it becomes less valuable. A more consistent and meaningful approach is to use the measure that gives money its ultimate value. Time.

You may be familiar with the term "opportunity cost" as it's used in economics. If not, in a nutshell, it means that every dollar you spend on something is a dollar that is no longer available for something else. For example if a vendor is selling apples and pears for $1 each, and you only have $1, if you buy the apple, it cost you the opportunity to buy a pear.

It works the same for time. You only have 24 hours in a day. Less than that in a work day. Every hour you spend on one task is an hour that is no longer available for any other task.

According to the US Census Bureau, in 2007 there were 7.7 million firms with employees in the United States. Forcing one employee at each firm to spend 10 minutes on non-productive paperwork or procedures costs the economy 1.28 million man hours. That's 617 man-work years. Put another way, an unproductive 10 minute mandate on business costs the equivalent of hiring a crew of 617 people, full time, for a full year. What could you accomplish with that kind of manpower? And that's 10 minutes a year. Ten minutes a week and you've got a good sized army at your disposal. Ten minutes a day and you're rivaling economies of entire cities.

What is the average number of minutes spent at your business, filling out paperwork that you would not do if it were not mandated by some level of government? Multiply that by 7.7 million. We're already slowing ourselves down enough and some politicians want to add more dead-weight to the system.

When you hear of a new regulation or requirement and it's sold as something that only takes a few minutes, or the cost is negligible, think of it in terms of the cumulative waste of productive activity across the board. The free market is an expression of the cumulative effect of countless individual decisions and the productive moments of millions and millions of individuals. Taking man-hours out of the system removes value from the economy. Who do you think is a better judge of what an employee should be working on from 2pm to 3pm? The employer or the employee, or some a group of government bureaucrats?

Tuesday, October 25, 2011

Catastrophe is vital to a free market system

Greece is broke and owes more than anyone believes it can ever pay back. They got there on sales of bonds to investors, which include nations, banks, businesses, organizations and individuals. These investors fear the consequences of having to actually realize the losses they've incurred. It's a very similar scenario to the pre-TARP days here in the United States. The investors argue that it would not just be a financial loss to them, but a shock to the whole system as a consequence of their failure. They hope the general fear will be equal to their own and everyone will work to cushion the blow. Cushioning the blow means transferring the loss to the general public to the largest extent possible.

This has worked in the sense that large businesses have been spared the calamity of letting nature run its course, and the system is in a long term funk rather than getting a short term wallup. The problem is that the bad ideas don't get the drubbing they deserve. The status quo, which failed, is kept alive. Nothing is learned. Innovation is not incentivized. Proven failures in policy are kept in place and even expanded upon. No pain, no gain.

Physical pain, is in one regard, a warning to the occupant of the body: "Don't do that." or "Don't do that again". It has a purpose. In fact a human, on it's own, without the capacity to feel pain would not likely live very long. Even mental pain and regret serve a purpose. The message is: "That course of action was a mistake. Don't do it again."

Fiscal pain serves a similar purpose in the market place. At the transaction level, if a consumer feels like he or she got less value than he or she anticipated, that's regret and will prevent the consumer from buying the product or service again. Bad value propositions die out over time. Now if the government stepped in and offered to pay half the purchase price for you, you might change your assessment of the value proposition, and the bad model is saved. Incompetence, deception, low quality, bad ideas are kept alive and well.

At the government level, the same dynamic is at work. Their ability to borrow is based on the market's confidence in their ability to make good on the bonds over time. If the bonds are backstopped, guaranteed or insured by a group of other governments, investors need not worry about whether or not the system of government can produce a viable, vibrant economy. Succeed or fail, they're going to get paid. Failed policies live on. Unsustainable governments are sustained. Bad ideas are reinforced.

The marketplace of ideas is directly connected to the actual marketplace. You have to acknowledge and remove the trash periodically or you will simply wallow in trash. Free market forces are very efficient at spotlighting the trash. Committees, elected or otherwise, are not. In fact, many governments prefer to deny the existence of trash to having to actually point it out or acknowledge it. Care free investors enable this approach. Investors are care free when taxpayers absorb their losses.

Imagine if investors actually had to consider whether or not a system of government would produce happy, productive citizens with a desire to excel. The only way to get that back into the equation is to take away the safety nets. Pain hurts. That's why it's effective. Making ourselves numb is not a path to a better future.

Tuesday, October 4, 2011

How taxes regulations and madates kill an economy

You may know intuitively, that taxes and price controls and government mandates are bad for economic growth. But, do you know the mechanics of how they strangle an economy? It's really not that complicated, but experts like to use the lingo of the industry to make themselves sound much smarter than you. Here's an explanation in plain English.

Suppose you have a watchamacallit and I don't. You feel that watchamacallit is worth 20 cents. I believe it's worth 23 cents. There's a potential for a transaction there, created by our slight disagreement over the value of the watchamacallit. I could pay you anywhere from 20 to 23 cents and we'd both feel like it was a fair deal. Now suppose the government imposes a 5 cent tax on watchamacallits. To get the 20 cents you would need to feel good about parting ways with it, I'd have to pay you at least 25 cents. But I only think it's worth 23 cents. Transaction killed. Transactions that don't happen, don't show up in government statistics.

A tax of 1 or 2 cents may not have killed our transaction. There was still enough room in our margin of disagreement to make a deal. But when government gets too big, and demands too much, many transactions die and they get nothing.

Any third party mandate that adds cost to a transaction is a potential deal killer. Value is subjective. The point at which a transaction dies is totally up to the opinion of the buyer and the seller. You can't pass a law that makes me believe a whatchamacallit is worth more than I believe it's worth, and without putting a gun to your head, I can't make you accept less than you're willing to accept. Even if I put the gun to your head, how enthusiastic are you going to be about producing more whatchamacallits from that point forward?

Free markets means free people engaging in free trade in the absence of force. That last bit is why we need government. Yes, it has to be paid for, but the cost has to be low enough and the interference in the marketplace minimal enough that it doesn't kill the deal.

This is why companies go offshore. This is why small businesses don't expand. Third party add-ons make the risk/reward ratio too high. The government is trying to control too much, provide too much, take care of too much. It just costs too much. To add insult to injury, they aren't very good at it either.