Monday, February 28, 2011

Economics: Crony Capitalism pt 1 - Regulation

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Crony Capitalism is when the government works with businesses to create unfair advantages. You can think lobbyists, backroom deals that bring special projects to private contractors (such as Military Industrial Compex corporations like Haliburton), but another common form of Crony Capitalism comes by way of regulation.

Imagine I have a successful business making 5 year old Scotch. Now imagine you want to start a 1 year old Scotch company. I see you're starting work to build your factory and see you as a threat to my market, so I decide to ring up the governor (perhaps my years of success has me in political influence already, or maybe I hire a lobbyist, either way..) and tell him my problem. He has a solution. I'll increase my campaign funding (there's many ways to break the threshold of contribution limits) and he'll pass legislation that requires Scotch to be at least 5 years old to be sold. Claiming that it's in the public interest to maintain safety of a consummable good. With this new regulation your business can no longer afford to start production, because your plan did not include waiting 5 years before your first sale. Unless of course you're already rich, which is pretty much where we're living right now.

I'm aware that there are actual regulations that actually are meant to be a public safety. Continuing in the food analogy, there are regulations that require restaurants to have health inspections and that their food be cooked to certain temperatures, blah blah. Why? It's for our health of course. Yet, what if there were none of these requirements? Would McDonald's suddenly stop cooking their burgers all the way through? And if they did, would we be forced to purchase them?? Probably not, and certainly not. For one, that's bad for business, and in a free market the customer is the only vote who counts. Also, a regulation does not guarantee a chef is going to do anything properly, but it does ensure that the government gets paid, at the minimum. At the maximum? It squelches competition.

Exhibit A. In Austin, we've had a nice growth of food trucks, very creative mobile food vendors who serve their own unique foods ranging from chicken tacos in a cone to shishkebabs. They found that being mobile cuts back on operating costs and it also is popular with the Austin demographic. Austin went from about 650 food trucks in 2006 to over an estimated 1,600 by the end of 2011. However, someone didn't like that the barrier to entry was so low, anyone can scrape $20k together and open a business (or however much it costs), and this is no good. Who liked this the least? Tom Ramsey, owner of Snappy Snacks. ALSO a mobile food vendor. What action did he take? Well, he initiated a look into the regulations of food trucks and submitted 42 pages of new regulations. Well, he's a mobile vendor too, wouldn't this hurt him equally? Well, he owns *70* trucks, I think he can afford to keep up with new permits, licenses and "safety standards". However, this would greatly hamper upstarts and the small businesses who are only just getting on the ground. Of course, his real concern is the safety of our citizens, NOT that his business is down 65% from the previous year. WINK WINK. Never mind that only 5 of 699 food complaints from '06 - '10 involved mobile food vendors.

OH, but is Ramsey the only one? Of course not. Traditional restaurants don't like it either, these food trucks don't have to pay rent, or city development fees, property taxes, or provide parking, restrooms and meet compliance with the Americans with Disabilities Act. So restaurants just want "fair competition". In other words, "tax them more to make up for the way we get taxed". I can feel for brick and mortar spots, but what they're exercising is crony capitalism, and it only drives up costs for the consumer by choking out businesses. Competition drives down price, and ultimately everyone wins this way, because the businesses left standing are the ones who are most efficient with the best product and service. Those things don't really matter in crony capitalism though, not if you can get access to the lawmakers.

Oh, the result? Regulations were passed, yet somehow these were the words that overrode these wonderful new taxes ERRR safety precautions: "With about 2,000 mobile food vendors in Austin, it is impossible to keep track of all of them,” said Mark Avalos, owner of Sugar Shack BBQ. “So it is the responsibility of the customer to look for the vendor’s sticker to see if it’s a real business.” So, on the one hand we need these regulations, but on the other he admits they don't guarantee quality and so the only real way to ensure anything is for the customer to be the regulator. He's right, but luckily there's these wonderful new constraints that help limit competition, because we consumers are far too stupid to figure out such complexities of life like "Should I eat here? Well, there's cockroaches in my salt shaker, but they do have a valid health sticker so I guess it's okay."

Ridiculous. The customer is the only true regulator, if the food is undercooked they'll either sue or never return to your business. That's the only thing that should be driving out competition.

There's tons of other seriously ridiculous regs, barber's need a license because I'm too dumb to decide if someone can cut my hair right. Guess what, that doesn't stop stylists from butchering my wig, but it does stop new salon's from opening. And these taxes on businesses are never ever passed on to the consumer, no sir, not on my watch. They're for our good and we never subsidize the cost in higher prices. /sarcasm

The crux of any business is their reputation, that comes from their customers, not a stamp from an entity that gets paid to put it there. The reality is that the more regulations and laws there are, the more difficult it becomes to monitor the few that actually matter. By making the market more inefficient, the government magically also becomes less efficient. Oh, but hey, "our capitalistic system is our real problem", psh, not in the last century it isn't, we haven't really had one.
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Week 11: Crony Capitalism pt 1 - Regulation
Week 12: Crony Capitalism pt 2 - Military Industrial Complex