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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Moral hazard and crony capitalism

Written by Peter Twigg | Friday 25 January 2013

Yesterday I argued that we are facing a crisis of government that is leaving its mark on everybody. Today I want to mention some more hoof prints left on society by government.

"Crony Capitalism" is a description of an economy in which success in business depends on close relationships between business people and government. Crony Capitalism occurs when business people seek regulation and the massive cash flows held by government.

This rent seeking occurs through self-seeking behaviour by those competing to receive rents generated by government decision making. Rent-seeking includes lobbying for positions and contracts and campaigning for policies that create rents. Rents are revenues paid to favoured companies or individuals for services rendered. Rent seeking is endemic in crony capitalist systems today. When rent-seeking and payoff become more important to producers than the delivery of goods or services to customers, it causes markets to eventually fail. 

In his seminal 1971 paper, "Theory of economic regulation", Nobel laureate economist George Stigler observed that regulation by the state is a more important source of rents, benefitting incumbent firms and individuals at the expense of potential competitors (this rent is sometimes referred to as gains from "barriers to entry").

Moreover, Stigler suggested that regulation is sought by the regulated industry - and is designed and operated primarily for the industry's benefit. Consumer activists Mark Green and Ralph Nader largely concurred, writing in 1973, "the verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful". 

Remember the recent horror when Ford announced they were closing their Transit production facility and transferring it to Turkey, having just received a £10million handout less than one week before they announced the closure. Explicit subsidies to corporations foster inefficiency and uncompetitiveness in private and public enterprise. 

Often the government does not even have to provide cash. An endorsement of a company is enough to carry massive benefits to the recipient. Some UK banks have 'Too Big To Fail' status bringing them massive implicit subsidies. These same banks reap massive profits because of their TBTF status and the additional risk they carry because management knows government can always bail them out if it all goes wrong. 

Government creates moral hazard when one party to a contract takes advantage of asymmetric information to act in a manner inimical to the interests of the other party. Looking at UK banking again, we see moral hazard created through asymmetric information provided by government passing TBTF status to some banks and excluding others. The government then wonders why distortions in the banking market create a lack of competition and embarks on generating more regulation to fix the problem. Many industries face moral hazard where government involvement means government sponsors excessive risk taking or poor management while taxpayers pick up the tab if things go wrong. That kind of moral hazard is not just harmful, it is wrong.

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The crisis of government

Written by Peter Twigg | Wednesday 23 January 2013

Since the 2007-2009 financial crisis, many calls have been made (often in right-wing newspapers) that capitalism has failed; capitalism has died or that capitalism is in crisis. These claims are weaked by the government’s impact on society and markets,  given the massive growth in government’s size and power. Public spending is estimated at 44.13% of GDP for FY 2012 (Actual FY2011 45.65% of GDP). This chart shows the growth over the last 110 years.

Government has become too big and like a bull in the proverbial china shop its weight and strength end up trampling everything and everyone. Society is a complex mechanism whose nuance is lost on goofy footed government. Bureaucracies don't manage anything well nor do they have an eye for economics. Indeed government cannot manage itself or the society it governs. As a result, government sets up unintended consequences because of its size, influence and power. It is not, as many would claim, a crisis of capitalism but rather a ‘crisis of government’. Society can no longer afford the bull. It is causing too much damage.  

At every level of society, the state through its agency, government, subverts responsibility. For the individual, the group, the corporation; government intercedes at the behest of lobbyists, voters or the unseen dictates of bureaucrats. Bureaucrats and politicians are weighed down by the responsibility of having to be seen to do something - anything so long as they can fulfil their perverse self interest in maintaining perks, position and privilege. Indeed the term public servant has become an oxymoron. 

Heavy hoof prints come in many forms. One big hoof print is the high level of taxation borne by you that brings low satisfaction for your taken money. Another large hoof print is the unintended consequences that occur when actions of government have effects that are unanticipated or unintended. Often cited but rarely defined, the law of unintended consequences illuminate the perverse unanticipated effects of legislation and regulation. In attempting to mend the unintended consequence of one policy, the result brings further consequence. 

At the heart of all the bull lies the problem of economic ignorance by politicians. Our political class never realize the unintended consequences of their legislation and policymaking until it is too late. And having dug themselves and the nation into a giant dung heap, politicians lack the insight that they are the cause of the problem and lack the political will to find a way out. Hubris clouds judgment. 

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Inflation: the ultimate corruption

Written by Peter Twigg | Tuesday 20 November 2012

Inflation, says Peter Twigg, is the ultimate corruption: the trick used by politicians to conceal vast spending and wastefulness. It is nothing less than a full-scale robbery of the people by the state, and it's high time that more of us realized how pernicious it really is.

The ultimate corruption is the single, most cynical, abuse of the people by the State (your government), in perpetrating the myth that inflation is an economic disease that government cannot stop. The truth is that government perpetuates inflation and that it remains in the government's interest to maintain a level of inflation. The truth is that government makes itself out to be the victim of inflation when in fact it benefits from inflation.

"With the exception only of the 200-year period of the gold standard (1714 to 1914 in Britain), practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people." FA Hayek, Choice in Currency

The truth is that government spends a lot of time and resources continuing the facade that they too are the hapless victims of this scourge called inflation. This illusion is maintained by social science academics having created a whole ‘science’ around the myth of inflation.

Read this article.

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A fun game to play

Written by Peter Twigg | Friday 02 November 2012

Harry Teasley* spent his life confronting the behaviors of bureaucrats and defined a list of rules covering their modus operandi. You can see these rules operating in government departments, corporations and with politicians themselves. Using these rules, examine bureaucratic behavior and see if the underlying rules and behavior are driving the situation.

The Rules:

Harry Teasley's Rules of Bureaucratic Behavior:

Rule #1: Maintain the problem at all costs! The problem is the basis of power, perks, privileges, and security.

Rule #2: Use crisis and perceived crisis to increase your power and control.

Rule 2a. Force 11th-hour decisions, threaten the loss of options and opportunities, and limit the opposition's opportunity to review and critique.

Rule #3: If there are not enough crises, manufacture them, even from nature, where none exist.

Rule #4: Control the flow and release of information while feigning openness.

Rule 4a: Deny, delay, obfuscate, spin, and lie.

Rule #5: Maximize public-relations exposure by creating a cover story that appeals to the universal need to help people.

Rule #6: Create vested support groups by distributing concentrated benefits and/or entitlements to these special interests, while distributing the costs broadly to one's political opponents.

Rule #7: Demonize the truth tellers who have the temerity to say, "The emperor has no clothes."

Rule 7a: Accuse the truth teller of one's own defects, deficiencies, crimes, and misdemeanors.

Look at this example with the rules placed in brackets next to the relevant comment:

In mid September European Commission President Jose Manuel Barroso  called for the European Union to be turned into a 'federation of nation states' (2, 5), a vision he said would require an overhaul of the Lisbon Treaty.

Mr Barroso also set out plans for a single supervisory mechanism for all banks in the eurozone. He called the plans a "quantum leap... the stepping stone to the banking union".

The European Central Bank would get much greater powers of oversight and regulation of Europe's 6,000 banks under the plan. Mr Barroso said eurozone countries should not rely on bailouts from the ECB, saying the bank "cannot and will not finance governments" (1, 2, 4, 5).

"But when monetary policy channels are not working properly, the Commission believes that it is within the mandate of the ECB to take the necessary actions - for instance, in the secondary markets of sovereign debt," he added (6).

Chris Morris BBC News, Strasbourg writes “this was a very federalist speech. Mr Barroso made it clear that the creation of a single banking supervisor, and moves towards full banking union, are just a first step. He wants the EU to become a federation of nation states.

No-one will be forced to come in, he said, but the speed should not be dictated by the slowest or the most reluctant. Before the next European elections in 2014, the European
Commission intends to put forward explicit ideas on how to change EU treaties to reflect moves towards closer political union (2, 4).

There will be huge arguments ahead - there are big differences within the Eurozone about the pace of political change. But countries like the UK, which don't want to take part in any further integration, are going to have to work out how best to protect their interests as other EU member states pool more of their sovereignty.

"If Greece banishes all doubt about its commitment to reform, but also if all the other countries banish all doubts about their determination to keep Greece in the euro area, we can do it," he said to applause from MEPs (2A).

Mr Barroso said he was not calling for a "superstate", but rather "a democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty" (4, 4A).

Harry Teasley’s Rules of Bureaucratic Behavior show in this announcement how rules 1, 2, 2A, 4, 4A, 5 and 6 are being used to slowly push the EU bureaucratic agenda. Since this is a major announcement by a major player, many of the behaviors have been engaged.

The Game

Play ‘spot the rule(s)’.

See which rules are being invoked any time a politician or bureaucrat announces something or a report is released.

At a meeting? Observe whether rules are being used by individuals at the meeting. If it’s happening in your business, you know your business has a problem.

Watching television or reading a newspaper? Look for comments used to perpetuate the behavior.

Keep a set of rules on hand as a ready reckoner! 

And finally, have hours of free fun playing this simple but tragic game.

Try spotting the rules in this YouTube video where MEP Nigel Farage names EU bureaucratic behaviors.

* Harry Teasley is retired only as a professional business executive. He is otherwise engaged constantly in thinking, writing pithy letters to the editor, and supporting liberty through his time, advice and philanthropy. It was people like him that I’m convinced Jefferson had in mind when he urged, “Enlighten the people generally, and tyranny and oppressions of body and mind will vanish like evil spirits at the dawn of day.”

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