Innovation requires freedom

From the Wall Street Journal, July 22, 2016, p. A13:

The Closing of the American Mind
There are dangerous signs that the U.S. is turning its back on the principles of a free and open society that fostered the nation’s rise.

I was born in the midst of the Great Depression, when no one could imagine the revolutionary technological advances that we now take for granted. Innovations in countless fields have transformed society and radically improved individual well-being, especially for the least fortunate. Every American’s life is now immeasurably better than it was 80 years ago.
…
When I attended the Massachusetts Institute of Technology in the 1950s, I quickly came to appreciate that scientific and technological progress requires the free and open exchange of ideas. The same holds true for moral and social progress. I have spent more than a half-century trying to apply this lesson in business and my personal life.

It was once widely accepted that progress depends on people challenging and testing each other’s hypotheses. This leads to the creation of knowledge that, when shared, inspires others and spurs the innovation that moves society forward and improves lives. … Recall Sir Isaac Newton’s statement that he achieved so much by “standing on the shoulders of giants.”
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Despite our enormous potential for further progress, a clear majority of Americans see a darker future. Some 56% believe their children’s lives will be worse off than their own … I empathize with this fear. The U.S. is already far down the path to becoming a less open and free society, and the current cultural and political atmosphere threatens to make the situation worse …

Education in America, and particularly higher education, has become increasingly hostile to the free exchange of ideas. On many campuses, a climate of intellectual conformity has replaced open debate and inquiry, stifling discussion on a host of topics ranging from history to science to economics. Dissenters are demonized, ostracized or otherwise treated with scorn and derision. This disrupts the process of discovery and challenge that is at the root of human progress. …

Similarly, in business the proliferation of corporate welfare wastes resources and closes off opportunity for newcomers. It takes many forms—direct subsidies, anticompetitive regulations, mandates, tax credits and carve-outs—all of which tip the scales in favor of established businesses and industries. The losers are invariably the new, disruptive and innovative entrepreneurs who drive progress, along with everyone who stands to benefit from their work. …

Government, which often has strong incentives to stifle the revolutionary advances that could transform lives, may be the most dangerous. The state often claims to keep its citizens safe, when it is actually inhibiting increased individual well-being. See, for example, the FDA’s astronomically expensive and time-consuming drug-approval process, which University of Chicago professor Sam Peltzman argues has caused “more sickness and death than it prevented.” …

Unleashing innovation, no matter what form it takes, is the essential component of truly helping people improve their lives. The material and social transformations in my own days have been nothing short of astonishing, with a marked improvement in well-being for all Americans. If the country can unite around a vision for a tolerant, free and open society, it can achieve even greater advances, and a brighter future for everyone, in the years ahead.

Mr. [Charles] Koch is chairman and CEO of Koch Industries and the author of “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies” (Crown Business, 2015).

When the Elites become tone deaf

Source: Daily Telegraph

The #Brexit vote will have a major impact on Britain, EU, NATO and the West more broadly. The 52-48 majority voting to leave the EU — like many recent US presidential elections — shows a country deeply divided.

The Telegraph’s map shows how London and a few other city centers voted strongly for the EU, while the rest of England voted decisively against the EU. (As the Guardian notes, Labour voters at the edges of London and Liverpool voted against the city center).

Before the results were in (HT: NY Times), pro-EU columnist John Harris wrote Thursday in the Guardian

The UK is now two nations, staring across a political chasm
Leave voters aren’t lemmings jumping off a cliff, and the left urgently needs to understand their choices.
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Two nations, in short, are staring at each other across a political chasm.
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Even those who understand that something seismic is afoot among predominantly working-class voters are still too keen on the idea that they are gullible enough to be led over a cliff by people with whom they would actually disagree, if only they knew the facts. But most people are not really being “led” by anyone. In my experience, Farage, Boris Johnson and Michael Gove et al are viewed by most people with as much cynicism as the people fronting the remain campaign. Moreover, this argument is dangerously redolent of that lousy old Marxist trope of “false consciousness”, whereby people enthusiastically following the supposedly wrong cause are only a speech or poster away from enlightenment, and a sharp left turn.

We need to face up to two things. First, a lot of people want out of the EU because they are worried and angry about the consequences of the free movement of people, and in that sense they have made their choice rationally. Second, even if Farage, Johnson and Gove would doubtless use Brexit as an opportunity to further our journey towards an essentially sink-or-swim society, there are plenty of working-class voters who would probably go along with that.

Meanwhile, pro-Brexit James Bartholomew made a similar point today in the Spectator

Britain’s great divide
The referendum has exposed a huge rift between the metropolitan elite and the rest
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Every election is divisive, but none has pitted rich against poor like this one. The social divide has been far more dramatic than the divide between the two main political parties. In general elections, the professional and managerial classes favour the Tories by a margin of four to three. The difference is nothing like as marked as the social divide in the referendum vote. As a generalisation, the split has been between the educated ‘haves’ on one side and the working class on the other. The Remainers found ways of making this point — casting themselves as cosmopolitan and ‘open’ against the crude and (presumably) closed-minded Leavers.

I came across quite a bit of scornful self-righteousness among the rich Remainers. In one street of private houses, a woman repeatedly shouted at us: ‘You’re all bonkers! Get out! You are not wanted here!’ A prosperous-looking man at the doorway of his private house informed us that immigration was a good thing and was economically necessary: the implication being that those who seek controlled immigration are both anti-immigrant and ignorant of the economics of the matter. His irritated parting shot was: ‘I hope you lose!’

The divide shows how changes brought about by globalisation and large-scale immigration have affected different classes in contrasting ways. For the ‘haves’, it has been a boon. The Notting Hill crowd now has cheap, highly qualified Polish builders, well-educated Polish cleaners and perhaps a Romanian nanny for their children. They go to Caffè Nero and are served by polite Italians. They feel deliciously international and open-minded while enjoying cheaper, better services than they otherwise would.
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At the other end of the spectrum was Gladys, who I met at the door of her council house on Monday. She was reluctant at first to say which way she was voting. She got her council house in 1975 after two years waiting for it. But now she worries for her sons and grandchildren. How are they going to afford somewhere to live? The cost of mortgages just goes up and up, she said.
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Gladys was not xenophobic or racist. What bothers her isn’t immigration, as such, but the government’s inability to respond to immigration and the resulting shortage of housing and school and hospital places. The rich folk across the road could get round these problems. Hector and Harriet could go to a private school if necessary. If there was a two-week wait to see their NHS GP, they could go private. They have already got their own flat or house, which has gone up nicely in value, thank you very much.

Both reminded of whjat Peggy Noonan — a moderate Republican and former Reagan speechwriter — wrote in February:

Trump and the Rise of the Unprotected
Why political professionals are struggling to make sense of the world they created.
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I keep thinking of how Donald Trump got to be the very likely Republican nominee. There are many answers and reasons, but my thoughts keep revolving around the idea of protection. It is a theme that has been something of a preoccupation in this space over the years, but I think I am seeing it now grow into an overall political dynamic throughout the West.

There are the protected and the unprotected. The protected make public policy. The unprotected live in it. The unprotected are starting to push back, powerfully.
The protected are the accomplished, the secure, the successful—those who have power or access to it. They are protected from much of the roughness of the world. More to the point, they are protected from the world they have created. Again, they make public policy and have for some time.

I want to call them the elite to load the rhetorical dice, but let’s stick with the protected.

They are figures in government, politics and media. They live in nice neighborhoods, safe ones. Their families function, their kids go to good schools, they’ve got some money. All of these things tend to isolate them, or provide buffers. Some of them—in Washington it is important officials in the executive branch or on the Hill; in Brussels, significant figures in the European Union—literally have their own security details.

Because they are protected they feel they can do pretty much anything, impose any reality. They’re insulated from many of the effects of their own decisions.

One issue obviously roiling the U.S. and western Europe is immigration. … It is of course the issue that made Donald Trump. Britain will probably leave the European Union over it.
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If you are an unprotected American—one with limited resources and negligible access to power—you have absorbed some lessons from the past 20 years’ experience of illegal immigration. You know the Democrats won’t protect you and the Republicans won’t help you. Both parties refused to control the border.
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Many Americans suffered from illegal immigration—its impact on labor markets, financial costs, crime, the sense that the rule of law was collapsing. But the protected did fine—more workers at lower wages. No effect of illegal immigration was likely to hurt them personally.

It was good for the protected. But the unprotected watched and saw. They realized the protected were not looking out for them, and they inferred that they were not looking out for the country, either.

The unprotected came to think they owed the establishment—another word for the protected—nothing, no particular loyalty, no old allegiance.
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What marks this political moment, in Europe and the U.S., is the rise of the unprotected. It is the rise of people who don’t have all that much against those who’ve been given many blessings and seem to believe they have them not because they’re fortunate but because they’re better.

You see the dynamic in many spheres. In Hollywood, as we still call it, where they make our rough culture, they are careful to protect their own children from its ill effects. In places with failing schools, they choose not to help them through the school liberation movement— charter schools, choice, etc.—because they fear to go up against the most reactionary professional group in America, the teachers unions. They let the public schools flounder. But their children go to the best private schools.

This is a terrible feature of our age—that we are governed by protected people who don’t seem to care that much about their unprotected fellow citizens.

And a country really can’t continue this way.

In wise governments the top is attentive to the realities of the lives of normal people, and careful about their anxieties. That’s more or less how America used to be. There didn’t seem to be so much distance between the top and the bottom.
Now is seems the attitude of the top half is: You’re on your own. Get with the program, little racist.

My European history isn’t very good, but the French Revolution happened in part because the Elites became tone deaf. (IIRC it was also a factor in the Russian and Chinese revolutions, although both involved a well-organized grab for power by one faction against another). In a democracy, we get to have our elections via ballot box — as long as the system isn’t rigged. In that regard, such a vote is a triumph (and not a failure) of the system of democracy that England pioneered in the 2nd millenium.

Source: Financial Times

No accountability without choice

I went swimming this morning with a pro triathlete. It wasn't my intention, but there’s a triathlon in town tomorrow and a number of pro athletes are visiting and working out.

I got talking with her manager/trainer, who said they live in Florida. Because the triathlons are around the country (and the world), they can live anywhere they want. Like many athletes, they (and other triathletes) live in tax-free Florida, while others live in Texas.

The triathlon was invented in San Diego and popularized in Hawaii, and handful of professional triathletes still live here. But — between taxes and housing costs — most find it cheaper to live elsewhere and pay an accountant $5-10K a year to keep track of various state laws that require they pay the nonresident athlete tax for the days they work in high-tax states. The St. Louis Cardinals didn’t care whether the Tigers or Red Sox make the World Series, but clearly the Red Sox are better off playing three games in St. Louis (top rate 6%) than in Los Angeles (top rate 10.3%).

Pro athletes can arbitrage tax rates (for endorsements) and live where they want (off season). San Diego native Phil Mickelson was roundly criticized for the (factual) observation that he pays a 60%+ tax rate living in California and was considering living elsewhere.

Entertainers can also live anywhere also, and this should work well for musicians. However, it appears that actors still tend to cluster in Los Angeles and New York City, two of the highest tax jurisdictions in the country. I’d argue this is because while athletic performance is directly measurable, acting performance is not: do we care which 25-year-old starlet or 45-year-old aging acting star is cast in a big-budget movie? Probably not. Actors have to stay in the network, attending parties etc., so the decision-makers don’t forget them when casting the next movie, TV show or high-visibility stage production.

Still, other types of professionals and business owners lack job mobility. At one extreme, Silicon Valley is largely about access to venture capital (since it has no monopoly on smart people or good universities). At the other extreme, restaurants and dry cleaners can’t move to a low tax state and take their customers with them. With its unfavorable business climate, California will hold these two extremes and has been driving out the average business in the middle (such as manufacturing).

California is now a one-party system and the ruling party assumes it can charge what it wants. I have a fairly low salary for a b-school professor and I’m at the 9.3% marginal tax rate. This used to be the tops until they instituted two millionaire surcharges (bringing the maximum rate to 13.3%), the latest being including a retroactive tax increase passed last year to capture Facebook IPO gains.

Even worse, California taxes capital gains as regular income, and thus the long-term capital gains rate is higher than New York, France, Finland or Sweden (let alone notorious tax havens like Hawai‘i and D.C.) If you are a Google or Facebook founder, it isn’t going to change your standard of living, but trying to sell a $1-2 million business to retire would leave a lot less money to live on in your old age.

In a one-party system, there is no accountability for bad ideas — only for overt corruption. So if people can’t have a choice of economic policies, what remains is the option to vote with their feet ala Hirschman’s Exit, Voice and Loyalty†. Despite increasing centralization to the national government, the US — like Canada and to some degree Germany — has a Federal system that allows policy experimentation and competition of ideas.

New York and Massachusetts paid a price (in terms of employers and job growth) for their high tax policies — but apparently not enough of a price to cause them to rethink their policies. Like California, they have a small cluster of high end jobs (Wall Street and drug companies respectively), the immobile local jobs and have discouraged or driven away the jobs in the middle.

Since Hollywood’s business model is in decline, California’s ability to pay its bills seems tied to what fraction of the global tech economy remains in Silicon Valley. No matter how much you believe in Silicon Valley’s uniqueness, this is a bold (if not foolishly optimistic) bet on a small fraction of the state’s 38 million people. However, with term limits, politicians have a short-term mentality and are betting they will be long gone if something bad happens 5 or 10 years down the road.

† Writing in 1970, Hirschman (p. 84) assumed that a lack of voice would cause people to quit organizations but they cannot exit the “state” (i.e. national government). But this was before intra-EU job mobility and even the flight of jobs from the northeastern to the southeastern regions of the U.S.

Punishing your captive shareholders

Although public companies are not as accountable as they should be, in the long run failure or malfeasance has consequences. Managers who treat shareholders badly get fired, or people dump the shares — depressing them enough to bring in a raider who will shake things up.

Unfortunately, nothing like that happens when it comes to accountability in government agencies, as this week’s semi-shutdown makes clear.

The Office of Personnel Management (an Executive Branch agency) encouraged agencies to shut off their websites when the shutdown came. The Census Department, NASA and Park Service are offline, although the Library of Congress and IRS (despite previous threats) are still functioning. Julian Sanchez of the Cato Institute referred to this as an online “Washington Monument Syndrome.”

For anyone who’s run a business and is IT literate knows that it costs more money to take down a site than to leave it up. How many sites have you seen that haven’t been updated in weeks, months or even years? For many sites, the government could be shut down for 3 or 6 months and the content would still be available and useful if they left the servers running.

At Reason, Brian Doherty notes the irrationality of this approach:

If the “inessential” public-facing Web pages are hosted on the same systems you’ve got to keep up and running for other “essential” back-end purposes—meaning you don’t get to save the security or electricity overhead— then the cost of having IT go through and disable public access to the “inessential” sites could easily be higher than any marginal cost of actually serving the content. But the guidance here seems to require agencies to pull down “inessential” public-facing content even when this requires spending more money than leaving it up would. In the extreme case, you get the bizarre solution implemented on the FTC site: serve the content, then prevent the user from seeing it!

Or, as my local paper quoted one expert:

To many, the website shutdowns have the feel of politics. Public relations expert Erica Holloway of Galvanized Strategies, who works with clients on their websites, said it makes no sense to shut down the sites otherwise.

“To withhold information from the public that the public has a right to have is wrong,” Holloway said. “And if there is no budgetary reason behind it, if it isn’t monetary, then it looks like what it is: A giant temper tantrum.”

But since the tantrum included hiring people to put up barricades at the World War II memorial —“to make life as difficult for people as we can” — I guess we shouldn’t be surprised.

In a parliamentary system such as our European friends enjoy, such tantrums have consequences: it's hard to imagine David Cameron or Andrea Merkel pulling such a stunt. But with a fixed-term (and term limited) executive such as in the US or Mexico, it’s apparently feasible (if not desirable) to punish one’s shareholders.

To overthrow liberty, start with free speech

Excerpted from a post Friday at the Cato Institute blog:

Cato Makes Dick Durbin’s Enemies List
by Ilya Shapiro

As reported on the Wall Street Journal’s editorial page and picked up by the Chicago Tribune among many others, Senator Dick Durbin (D-IL) has been sending out letters to anyone he has determined to have funded the American Legislative Exchange Council since 2005.
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Durbin … is now seeking to shame anyone ever associated with ALEC.

That includes Cato. Earlier this week, we received a letter from Durbin [similar to those received by companies] …

Our president John Allison has responded to Durbin with a letter that I’ll quote in its entirety:

Dear Senator Durbin:

Your letter of August 6, 2013 is an obvious effort to intimidate those organizations and individuals who may have been involved in any way with the American Legislative Exchange Council (ALEC).

While Cato is not intimidated because we are a think tank—whose express mission is to speak publicly to influence the climate of ideas—from my experience as a private-sector CEO, I know that business leaders will now hesitate to exercise their constitutional rights for fear of regulatory retribution.

Your letter thus represents a blatant violation of our First Amendment rights to freedom of speech and to petition the government for a redress of grievances. It is a continuation of the trend of the current administration and congressional leaders, such as yourself, to menace those who do not share your political beliefs—as evidenced by the multiple IRS abuses that have recently been exposed.

Your actions are a subtle but powerful form of government coercion.

We would be glad to provide a Cato scholar to testify at your hearing to discuss the unconstitutional abuse of power that your letter symbolizes.

Sincerely,

John Allison

The article says Sen. Durbin is a graduate of the University of Chicago Law School. It seems like he slept through constitutional law, or at least skipped that part about what the Founders intended when they created the Declaration of Independence, the Constitution and (especially) the Bill of Rights.

There are dozens of quotes available to illustrate the original intent of the Constitution. Here’s one from Ben Franklin (suggested by DaveG) as reported by Sourced Quotes.com:

Without Freedom of Thought, there can be no such Thing as Wisdom; and no such Thing as public Liberty, without Freedom of Speech; which is the Right of every Man, as far as by it, he does not hurt or control the Right of another …

This sacred Privilege is so essential to free Governments, that the Security of Property, and the Freedom of Speech always go together; and in those wretched Countries where a Man cannot call his Tongue his own, he can scarce call any Thing else his own. Whoever would overthrow the Liberty of a Nation, must begin by subduing the Freeness of Speech…

— Benjamin Franklin, July 9, 1722

Note to regular readers: due to the crush of work, I’m behind on blogging on key topics but hope to catch up soon.

Roberts Court: Ends justify the means, Part 3

Gay marriage supporters are celebrating their two big wins Wednesday, after the Supreme Court (in effect) overturned California and Federal laws restricting same-sex marriage.

In the California case, Chief Justice John Roberts again used a clever legal twist to get the result he wanted in the narrowest possible way. The first and most famous example was declaring the Obamacare individual mandate a tax (even though the legislative history emphasized it wasn’t a tax, and supporters had not defended it as a tax).

On Monday, a 7-1 majority limited the ability of universities to use race in affirmative action — not by banning (as some wanted) but by imposing new tests that will have to be interpreted by the courts. The decision left analysts puzzling over what it means, but universities expecting a series of expensive lawsuits challenging their policies until the Supreme Court gives clearer guidance many years from now.

Then in the California Proposition 8 case, a 5-4 majority in effect upheld gay marriage by denying the Prop 8 supporters a right to defend their proposition after the (pro-gay marriage) governor and attorney general declined to do so. In dissent, California-born (Stanford graduate) Anthony Kennedy attacked the decision as gutting the initiative process, installed by California progressives in the early 20th century. As Kennedy wrote:

The Court’s opinion disrespects and disparages both the political process in California and the well-stated opinion of the California Supreme Court in this case. … The California Supreme Court, not this Court, expresses concern for vigorous representation; the California Supreme Court, not this Court, recognizes the necessity to avoid conflicts of interest; the California Supreme Court, not this Court, comprehends the real interest at stake in this litigation and identifies the most proper party to defend that interest.
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In the end, what the Court fails to grasp or accept is the basic premise of the initiative process. And it is this. The essence of democracy is that the right to make law rests in the people and flows to the government, not the other way around. Freedom resides first in the people without need of a grant from government. The California initiative process embodies these principles and has done so for over a century.
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In California and the 26 other States that permit initiatives and popular referendums, the people have exercised their own inherent sovereign right to govern themselves. The Court today frustrates that choice by nullifying [for lack of standing] a State Supreme Court decision holding that state law authorizes an enacted initiative’s proponents to defend the law if and when the State’s usual legal advocates decline to do so.

Conservatives (who wanted Prop 8 upheld) such as WSJ columnist John Fund were predictably upset by the Roberts approach. But then so was Kevin Drum, a blogger who covers  “civil liberties, gay rights” for the left-wing magazine Mother Jones. After quoting Kennedy’s dissent that “gets at the core problem here,” he wrote:

In California, it's routine for the people to pass initiatives that neither the governor nor the legislature supports. In fact, that was the whole point of the initiative process when it was created. In cases like these, of course the governor and legislature are going to decline to defend the law in court. With today's decision, the Supreme Court is basically gutting the people's right to pass initiatives that elected officials don't like and then to defend them all the way to the highest court in the land.

To me, this has neither the flavor of justice nor of democratic governance, regardless of whether I like the outcome.

As Kennedy, Fund and Drum correctly note, the decision has reduced the accountability of politicians, weakening (if not undoing) the ability of voters in 26 states to practice direct democracy.

In all three cases, it appears the Roberts Court (or at least the chief justice) has moved the US legal system away from a key principle articulated by John Adams, one of the revolutionary founders, our first vice president and the principle author of the 1780 Massachusetts Constitution. In 1774 Adams wrote that a key principle of the English legal system was “a government of laws, and not of men.” Using technicalities means that courts, not voters or legislators, will be deciding what is allowed and not allowed in our republic.

Picking a CEO: narcissists need not apply

Narcissism is rampant among high achievers, whether movie starts, business executives or politicians. It seems like the more successful some people get, the more they surround themselves with bootlickers who cater to their ego rather than tell them what they need to hear.

Writing on the HBR blog, executive headhunter Justin Menkes recalls the advice he gave a CEO looking to groom a potential successor from among his high-achieving subordinates.

How do you know when someone can make the leap from high performer to CEO? There is one driving factor that determines the answer: narcissism.

Those selected for development have one universal trait in common: They are by definition high achievers. But there is a difference between those superstar achievers that can make the leap to CEO and those that will implode: To what degree do they feel invigorated by the success and talent of others, and to what degree does the success of others cause an involuntary pinch of insecurity about their own personal inadequacies? Only an individual who feels genuinely invigorated by the growth, development, and success of others can become an effective leader of an enterprise. And it remains the most common obstacle of success for those trying to make that leap.

Menkes has a checklist from the Narcissistic Personality Inventory:

• Are the individual's relationships with others based on honest, intimate exchanges, or are they formed using a dynamic that regularly reinforces the narcissist's role as a "hero"?
• Does the individual often talk about how his star qualities make him distinct from his peers?
• Does he like to be the center of attention?
• Does the remark, "I insist on getting the respect that is due me," resonate with his worldview?

All of these items play to a twisted egocentrism that assumes the world exists for the benefit of the high achiever. But if eliminating narcissists from consideration is necessary, IMHO it is not sufficient.

A related predictor of failure that I’ve seen time and time again is an insular approach to gathering information, getting advice and making decisions. It seems to be the single best predictor of failure among US presidents — where the raw power being wielded causes senior aides to jealously (and zealously) guard their access. (Cases in point: Nixon, Carter).

So yes, the narcissist has a particularly pathological form of reality denial. But if a leader can’t deal with the world as it is — rather than how he or she imagines it to be — the final outcome is going to be the same.

The Tarnished State

While driving last week I heard reporting of the latest annual survey of US CEOs by Chief Executive magazine, which ranked California #50 out of 50 for its unfavorable business climate.

As the San Jose Business Journal reported:

"CEOs tell us that California seems to be doing everything possible to drive business from the state. Texas, by contrast, has been welcoming companies and entrepreneurs, particularly in the high-tech arena," said J.P. Donlon, editor of the magazine, in a prepared statement.

The magazine said that CEOs surveyed said California's poor ranking is because of its hostility to business, high state taxes and overly stringent regulations, which it said is driving investment, companies and jobs to other states. According to Spectrum Locations Consultants, 254 California companies moved some or all of their work and jobs out of state in 2011, an increase of 26 percent over the previous year and five times as many as in 2009.

One company that's leaving is CafePress, the crowdsourcing innovator that was launched in San Mateo. Apple is not leaving, but is adding 3,600 new jobs in Austin Texas (the state that ranked #1 on the business climate survey).

In the CEO scorecard, California earned the worst possible rating for taxation and regulation. It also has a terrible economy, with negative 2.1% growth from 2007-2010 (1.7% worse than the national average), unemployment in Dec. 2011 at 11.1% (2.6% above the national average), and net out-migration from 2000-2009 of 1.49 million (#49 in the country). About 5% of the state’s population are state or local government employees (5% of the whole population, not 5% of the workforce.)

Chief Executive offered these choice quotes:

“California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are “necessary evils” that provide the funds to enable pursuit of their misguided agendas.”

“California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”

When google’ing to find the story, I also found a series of pro-California claims being made by Gov. Brown and the Commerce Secretary Bryson during an April 24 meeting of the “CEO Business Climate Summit 2012”. Gov. Moonbeam (as he called himself) was bragging about being unconventional — and about all the innovative companies being formed in the Bay Area — but not about the performance of the economy under his tenure.

The website reporting on the April 24 event is also advertising a May 11 “California Economic Summit” which — as in Brown’s earlier tenure — will likely be long on symbolism and short on actual results. The summit is sponsored by the Think Long Committee for California, an effort sponsored by the center-left Nicolas Berggruen Institute.

Brown’s plan to help turn around the economy is now to join the American Federation of Teachers to promote a $7-9 billion annual tax increase, to protect government employee jobs at the expense of the private sector. (The tax increases are claimed to be “temporary,” but the “temporary” transit taxes in the state’s major cities seem to have lasted 20-40 years thus far.)

California right now is behaving like New York in the 1970s — assuming that it can jack up taxes and regulations because companies have to be here. Back then, the major NYC-based companies reacted to high costs by either moving the entire company out of state (the airlines) or the bulk of the back office jobs (the retail banks).

Of today’s companies in California, some of the highest value-added jobs — like Apple and Google — are likely to remain in Silicon Valley, just as the top Goldman Sachs and Morgan Stanley jobs stayed in Manhattan. However, no matter how successful they are, Apple and Google are not going to provide jobs for the state’s 37 million population.

The apparent indifference by California’s ruling caste to its destruction of the state’s economy — and its denial of its culpability in this outcome — pains me greatly. I was born here and will die here, as my ties to the Golden State run deep: my paternal grandfather came to California over 100 years ago, while my mother’s side was here 150 years ago. But I can’t recommend that my students start companies here; worse yet, I don’t expect that my daughter will settle here after college, unless she lands one of those elite Silicon Valley jobs.

Facebook as a 'public' forum

A big news item this week in SoCal (if not nationwide) has been the military trial of the Camp Pendleton Marine who publicly criticized the president. A military hearing Friday ruled against Sgt. Gary Stein, 26, of Temecula, self-proclaimed leader of the “Armed Forces Tea Party.”

I wanted to root for Sgt. Stein, given my belief in free speech and my particular revulsion at deliberate efforts in 2000 to invalidate the votes of overseas military. At the same time, a civilian-controlled military (as the US has always had) must have certain lines that are not crossed.

The 2008 regulations for military conduct seem relatively fair. For example,

4.1.1.6. Write a letter to the editor of a newspaper expressing the member’s personal views on public issues or political candidates, if such action is not part of an organized letter- writing campaign or a solicitation of votes for or against a political party or partisan political cause or candidate. If the letter identifies the member as on active duty (or if the member is otherwise reasonably identifiable as a member of the Armed Forces), the letter should clearly state that the views expressed are those of the individual only and not those of the Department of Defense...
4.1.1.7. Make monetary contributions to a political organization, party, or committee favoring a particular candidate or slate of candidates, subject to … applicable law.
4.1.1.8. Display a political bumper sticker on the member’s private vehicle

The restrictions for active duty military mainly ban “partisan” activity. Clearly, arguing for or against a president nominated by a political party would count. (Does that mean it would have been ok to criticize a President Perot? It would have been so easy…)

I don’t know all the facts of the case, including what he did and what warnings he received before the prosecution began. For example, many of the Tea Party organizations were organized as non-profits, advocated for things like reduced taxation and spending, but never endorsed (or attacked) specific candidates. I don’t know if Stein crossed that line, but the penalty — loss of his job, an other-than-honorable discharge, loss of post-separation benefits — seem harsh by civilian standards. (While his attorneys might argue for a “general” discharge, apparently this would not save his GI Bill benefits).

Still, one open question is whether certain forms of online participation count as public advocacy. (Again, I don’t know what Stein did — so this might not apply in his case). The Marine Corps Times — picked up by USA Today — reported that an attorney for the commandant of the Marine Corps is asking the DoD to clarify policies for “social media” in an updated version of the regulations.

Let’s get real here: we’re not talking about “social media” — we’re talking Facebook. An open Twitter stream is the same as posting to a web page or shouting on a rooftop, and today “Google+” remains a negligible portion of the world’s social media traffic (beyond Google employees). So for today, this is really (like so many other things) a Facebook issue.

I have 82 Facebook friends. My rule for Facebook is that I wouldn’t friend someone who I haven’t (or wouldn’t) invite into my home, or vice versa. (I generally add co-authors because these tend to be the most durable friendships that academics make.) My webpage is locked down (like those for the rest of our household) so that you don’t see much on my page unless I’m your friend.

So if I post something on Facebook that is only seen by my Facebook friends, is that really public advocacy? Yes, 82 is more than 5-10 friends on a night out, but it still seems analogous to talking in a bar or a poker party among a limited number of close friends. (Or certainly the annual Christmas letter). And is it right (or realistic) to ask our Armed Forces to give up having opinions or sharing them privately with their friends?

I’m not saying that such a policy would help Sgt. Stein. Although he doesn’t identify himself as a military member, it doesn’t appear that Gary Stein has limited his Facebook thoughts to only close friends, or his political commentary to non-partisan advocacy.

Unfortunately, bad facts make bad law: if we had a less polarizing president, it might be possible to debate the best policy without having the opinions so intimately tied to one controversial serviceman and his political criticisms. However, we haven’t had such a president this century — and maybe not since the 1950s — so that window may not open any time in the foreseeable future.

Qualcomm joins chorus for MNC tax reform

At Tuesday’s Qualcomm shareholder’s meeting, the company’s executives joined the chorus of Fortune 500 leaders who called for reducing taxation of multinational US companies when they repatriate foreign income that’s already been taxed offshore.

The list of proponents is heavily skewed towards high-margin IT companies, including Apple, Google, Microsoft and Oracle, as well as more traditional market leaders like GE and Pfizer. Bloomberg estimated that 70 US companies hold $1.2 trillion offshore.

In response to a shareholder question, CFO William Keitel said that of Qualcomm’s more than $20 billion in cash, about 60% of that is offshore. CEO Paul Jacobs said that 75% of employees are onshore, but that 90% of revenues are generated offshore because that’s where companies build products. That money “has a little note attached to it: don’t spend me in the United States,” Jacobs said. He also said he was leaving Tuesday for a meeting Wednesday by proponents of the change.

As I see it, there are three issues here:

• Economics. Clearly encouraging bringing that money back would encourage more capital investment and hiring in the United States.
• Budget Deficit. Reducing taxes would theoretically widen the deficit. In practical terms, if firms don’t repatriate their money — and thus don’t pay any repatriation tax — then there’s no loss. There’s also the issue of whether economic growth (e.g. increase in jobs) would increase other tax receipts, but that’s hard to measure.
• Politics. In an election year, it will be difficult for either side to openly support big business. Democrats are attacking big business (although in the past they’ve been closely aligned with big NYC Wall Street financiers). Republicans are already wary of being too aligned with business interests: Romney is wary of being seen as more of a plutocrat than he already is, while his two main rivals have more of a Main Street than Wall Street bias.

If either side wins a clear mandate, it’s possible there will be a settlement next year (or during the lame duck session). However, given the recent rhetoric, I can’t see how a Democratic Congress would support such an effort, so to me the only way it would pass is if both houses are decidedly GOP (give or take a few centrist Democrats) to work with whatever initiative next year’s president proposes.

When will the 'temporary' raid on Social Security end?

Another in a series of outsourced political commentary — this time from an unexpected source, Michael Hiltzik of the Los Angeles Times:

[W]ith every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon. And that's bad medicine for Social Security.

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

Yet because of the unique features of the program's financing, tampering with its revenue stream is playing with fire. The payroll tax is currently set at 12.4% of wages, split equally between employer and employee, up to a maximum of $110,100. The tax holiday cuts the employee's 6.2% share to 4.2%.

Sen. Tom Harkin (D-Iowa) put it well when he excoriated President Obama and his fellow congressional Democrats for approving a measure that places Social Security's financial stability on the table. "I never thought I would live to see the day when a Democratic president ... would agree to put Social Security in this kind of jeopardy," he said. "Never did I ever imagine a Democratic president beginning the unraveling of Social Security."

Even conservatives who aren't fans of the program's current structure acknowledge how hard it will be at any point in the foreseeable future to restore the old rate.

"Who is ever going to say, 'Now the economy's so strong that it's the right time to raise taxes'?" Andrew G. Biggs, a former Social Security official who is now a resident scholar at the American Enterprise Institute, told me.
…
But the worst aspect of the payroll tax holiday is that it erodes Social Security's standing as a unique government program with its own revenue stream, a tax dedicated to its upkeep alone. …

The more the program has to rely on general income tax revenue, the shakier becomes its claim to being a special case among government expenditures. When program-slashers sharpen their axes in Washington, the line has always been drawn at Social Security because it's funded by a source distinct from the income tax.
…
"If the holiday doesn't automatically expire," says [social security activist Eric] Kingson, "you're risking long-term economic security for a short-term economic gain, however important that is. We hope people understand that."

Legacy of an OPM addict

Despite bad news after bad news after bad news, California Governor Jerry Brown doubled down this week in his commitment to spend nearly $100 billion to build a permanent legacy to match his father’s: the California High-Speed Rail. Unfortunately for the state, his desired legacy is an unaffordable white elephant — while his father provided water for the state and expanded both the UC and CSU systems.

I heard Brown on the radio Thursday, defending spending the money to build the proposed 520-mile system. Pressed by fiscal conservatives, he argued that state’s growth requires development of the Central Valley to handle the population than won’t fit in existing cities — and linking the Central Valley to these cities.

Once the price ballooned from $30 billion (1999) to $45 billion (2008) to $99 billion (in November), that should have been it. After the latest budget estimate, the project attracted editorial opposition from reliably progressive sites like the San Jose Mercury News and Huffington Post. Or as a Bay Area TV commentator put it:

Here are three things that claim to be living but are still dead:

1. General Francisco Franco (see Chevy Case, Saturday Night Live circa 1975).

2. That dude in "Weekend at Bernie's" who was proppped up, dressed and carried as though he were alive.

3. The California high-speed rail project.

This week saw the latest attempt to breathe new life into high-speed rail. Something similar was done to the high-speed rail plan. The dead body of high-speed rail was propped up and made to look more life-like with a new business plan.

But it's still dead. … [H]igh-speed rail costs billions in a state with persistent budget deficits. Its costs exceed — by about 800% — the amount of money the state and feds have to devote to the project.

Even the California Rail Foundation now opposes the plan, arguing that it assumes ridership that exceeds comparable European bullet trains by an order of magnitude.

If that wasn’t bad enough, earlier this month the independent financial review board recommended that the state not issue the (voter-authorized) rail bonds, because they posed an “immense financial risk” for the state of California. The next week, two key officials of the rail authority resigned. In criticizing the plan, Washington Post columnist Charles Lane wrote:

It’s “more important than ever,” [President Obama] said, to get “recommendations not based on politics, not based on narrow interests, but based on the best evidence, based on what’s going to do the most good for the most people in this country.”

If only the president and his political ally, California Gov. Jerry Brown (D), would follow that advice regarding their pet project for the Golden State: high-speed rail. No matter how many times they tout the mega-project as the job-creating wave of the future, they can’t change the mountain of evidence that high-speed rail is, in fact, a boondoggle.
…
It’s especially odd for a Democratic president and governor to saddle California with the cost of bullet trains when the state is facing chronic deficits, tax increases and social spending cuts. Maybe this is why polls show that a majority of Californians have turned against the project. It’s still not too late to hit the brakes.

Like Jerry Brown I, the latest incarnation of the would-be Jesuit is nothing if not stubborn. Still, his impassioned defense of the project was surprising. One of my former SJSU coworkers put it this way:

"It intrigued me that he put all his marbles behind high-speed rail and that he's willing to spend political capital on it," [Prof. Larry] Gerston said. "These big infrastructure projects do provide a whole bunch of jobs, but it would also put California back on the map. It's almost a status thing as much as it is a transportation thing, a way that Californians can say: Yes, California is back on top."

Brown argued that because other big ideas proved prescient, this one would too:

“During the 1930s, the Central Valley Water Project was called a 'fantastic dream' that 'will not work. … The Master Plan for the Interstate Highway System in 1939 was derided as 'New Deal jitterbug economics.' In 1966, then Mayor Johnson of Berkeley called BART a 'billion-dollar potential fiasco.' Similarly, the Panama Canal was for years thought to be impractical and Benjamin Disraeli himself said of the Suez Canal: 'totally impossible to be carried out.' The critics were wrong then and they’re wrong now.”

The former Governor Moonbeam needs a little reminder about the laws of economics, particularly the importance of substitutes in limiting pricing power.

The Interstate Highway System was the first way for many people to travel across and between states, reducing travel times by as much as 50% over the old windy US highways and serving far more of the country than rails did. The water project was the only way that parts of the state could get water — from any source — fueling growth in both farming and residential development.

By comparison, the proposed bullet train has two entrenched competitors — airplanes and private cars — which challenge both the convenience and pricing assumptions. The “bullet” train will never threaten Southwest for travel time, at least from the Bay Area to L.A. or San Diego. Even assuming that costs will come in as projected — unheard of for a public works project of this magnitude — the claimed revenues assume a pricing power that is unrealistic (absent $200/barrel oil prices).

If it’s like Amtrak — or California’s regional rail transit systems — it will require ongoing operating subsidies. Meanwhile, California would have to spend tens of billions of dollars before the system generates first revenues, and the system wouldn’t be finished until (at least) 2033.

Jerry Brown will be long-retired by then. He’s hoping that generations of Californians will agree to pay for his legacy — perhaps in perpetuity.

It’s easy to build a legacy with Other People’s Money. If Brown really believes in his legacy, he should step down in 2014 after his third term, and raise the billions in private investment needed to build this system.

Old media partners with its conquerers

I was surprised not to find any discussion of the brand/image implications of NBC partnering with Facebook to host this morning’s presidential debate in New Hampshire.

NBC, after all, is a once-reputable international news organization, home of Meet the Press, and former home of Tom Brokaw, Huntley and Brinkley. (It’s now owned by a cable TV conpany). Facebook is an 8-year-old website where people share pictures and post ads for Farmville.

With a little investigation, it turns out the NBC-Facebook pairing is not the only partnership of old and new media. According to a website on “social TV” called LostRemote.com, Fox is partnering with Google, ABC is partnering with Yahoo and the Washington Post is leveraging Twitter. (Apparently CBS, CNN and the New York Times feel they don’t need a social media partner). NBC also has the 15-year-old partnership with Microsoft called “MSNBC.”

NBC doesn’t mention the Facebook partnership on its main Facebook page, but apparently that’s part of the strict separation between news and entertainment (with Facebook.com/NBC reserved for the latter).

The debate is prominently mentioned on the Facebook page for Meet the Press, but not that many people go there. The Meet the Press page is liked by 80,000 members while the main NBC page warrants 215,000. However, this compares to 2.5 million for the Green Bay Packers, 27 million for Starbucks and 37 million for Katy Perry. Even my hapless San Diego Chargers have a million fans.

By partnering with the new social media, the old media are facilitating the shift to the new social media. Does NBC hope that it will legitimate itself with a lost generation by partnering with Facebook? Is there any evidence this has ever worked before?

Of the five major US news networks — ABC, CBS, CNN, Fox and NBC — only CBS is a standalone company (valued at $18 billion). CNN can be bought with its parent Time Warner (TWX) for $37 billion, versus $67 billion for NBC/Comcast and $72 billion for ABC/Disney (DIS).

However, the shift has already taken place. Despite its problems, analysts speculate that Facebook will be worth $100+ billion in its long-rumored 2012 IPO.

The Facebook market cap may reflect an optimistic growth multiple that eventually disappears (ala Netflix, Cisco, Microsoft, etc.) Or the company may continue to chase Google ($210b) in market cap. Either way, it’s hard to see a case where old media will threaten it in public influence (or market capital) any time in the foreseeable future.

Gambling with OPM

From the San Jose Mercury News, Sunday December 18:

If state Treasurer Bill Lockyer, union leaders and the state's largest government employee retirement funds have their way, they'll continue betting against the odds. It's not surprising. It's not their money at risk. They won't have to cover the losses. Taxpayers will.

Last week, a study led by Joe Nation, a Stanford public policy professor and former Democratic assemblyman from Marin County, made explicitly clear the magnitude of the risk. He found that there's a better-than-even chance we're going to lose the wager.
…
The assumption about the investment returns is critical. The higher the expected return, the less money must be contributed now. But here's the kicker: If investments don't meet expectations, the employer -- the taxpayer -- must make up the entire shortfall. The employee has no risk.

So labor groups typically push for high return-rate assumptions. That means less pressure on workers and employers to kick in more now, and that frees up government funds to hire workers and pay for salaries and benefits. But unrealistically high assumptions mean we're shortchanging the system, creating a debt for future taxpayers.

Currently, the UC system uses an annual assumed rate of return of 7.5 percent, while CalPERS and CalSTRS use 7.75 percent. Defenders say those rates are based on past performance. Nation, like many academics, thinks they're irresponsible. Investment guru Warren Buffett has called them "crazy."
…
Nation, using CalPERS' own data going back as far as it would provide, 1982, ran statistical simulations to forecast the odds of meeting several investment targets. He found there was only a 42 percent chance of meeting or exceeding our current wager on the 7.75 percent rate.
…
Here's another way of thinking about it: Assuming future annual returns of 7.75 percent, the three pension systems combined were short $143 billion, or $11,703 for each California household. At a more realistic 6.2 percent investment assumption, they're short $291 billion, or $23,852 per household. Thus, the higher assumptions hide the magnitude of the problem.

The temptation to spend Other People’s Money is irresistible, especially when you can legally bind others to spend the money in the future.

Our system is supposed to provide checks and balances to prevent such problems. But public employees pay more attention to (and contribute more money to) state and local elections than do the average voter. An additional problem in California is that with 8 year term limits, many politicians don’t worry about tomorrow because they expect to be long gone (in Congress, a local mayorship, lobbying or private practice).

California politicians claim imaginary Amazon tax revenues

California Governor Brown promised to end smoke and mirrors budgets that were the hallmark of the Governator’s political weakness and failure to confront the state’s structural budget shortfall.

This year, the Democrat-dominated legislature passed an “Amazon tax” — an attempt to broaden sales taxes to out-of-state e-commerce sites. This tax was in the budget Brown vetoed, but is also in the final budget deal he signed Wednesday. (The Governator vetoed a similar law two years ago.)

Of course, more taxes are favored by politicians who want more money to spend. In this case, they have also been championed by local businesses (and national brick & mortar businesses like Barnes & Noble and Target) who are stuck paying the tax and don’t like giving Amazon a 10% cost advantage.

Being temporarily out of the state, it’s been hard to find a serious discussion of the tax online. The mainstream media seems to be demonstrating willful ignorance while the anti-tax bloggers are using doom-and-gloom hyperbole.

Thus, it was refreshing to find this description in Accounting Today:

The tax would bring in an estimated $200 million a year. The bill would allow California to collect taxes from any online retailer that has nexus with an affiliate site in California. Amazon.com and Overstock.com have been dropping their affiliates in several other states in a bid to fight against such laws.

The bill also includes two other bills that were also passed by the California State Legislature that would require online retailers that have corporate subsidiaries and distribution centers in a state to collect sales tax from customers, along with another bill that clarifies when other kinds of physical presence require a sales tax to be collected. The three bills were combined into one and sent to Brown's desk earlier this month.

There are three problems with the bill.

First, from a technical standpoint, there are questions are whether this is a tax increase that requires a 2/3 vote. Either it is or it isn’t, but this may take a lawsuit (and appeals up to the SCOTUS) to resolve.

The biggest issue is that the belief that Amazon will pay sales tax contains an (un)healthy degree of self-delusion. First, the Supreme Court has held that sales taxes can only be assessed if there is a physical presence in the state, and Amazon has responded to previous such efforts (like in NY) by eliminating any physical presence.

Thus, this story from Thursday’s LA Times predicting swift payment of taxes is either pure propaganda or willful ignorance:

Online retailers must start collecting sales taxes from California customers

Beginning Friday, Amazon.com Inc. and other large out-of-state retailers will be required to collect sales taxes on purchases that their California customers make on the Internet.

The new tax collection requirement — part of budget-related legislation that was signed into law by Gov. Jerry Brown Wednesday — is expected to raise an estimated $317 million a year in new state and local government revenue.
…
Brown's signature on the budget bills is aimed at closing a loophole that freed online retailers, such as Seattle-based Amazon, from collecting sales taxes and sending them to the state when they had no brick-and-mortar stores, warehouses or offices in California.

Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.

"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.

California's new requirement will generate badly needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.

The LAT assumes that Amazon subsidiaries in California make it vulnerable to the tax, but those subsidiaries can be moved or sold. Who thinks Amazon is going to keep IMDB if it forces a 10% price increase for 12% of its US customers?

The other nexus of presence is the affiliates program. In fact, I was alerted to this issue by an e-mail Wednesday from Amazon, that — as predicted — announced their intention to cancel the Amazon Affiliates program for all California residents:

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. …

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here.

No subtlety on that last point, eh? For me it doesn’t matter much, because my revenues from Amazon links are negligible — much less than the rebate from my Amazon credit card.

(Update: At 9:42pm, Amazon sent a follow up email that said: “Governor Brown has signed into law the bill that we emailed you about earlier today.  As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011.”)

And this brings up the final point: as the anti-tax advocates note, terminating these affiliate programs terminates revenues for small businesses that depend on them. Their choice is either to give up the revenue permanently or move to a state (like Nevada) without sales taxes.

To its credit, the LA Times mentions the problem (without suggesting that Amazon’s gambit may prevent it from ever paying the tax):

Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.

That's what Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to do.

"Will it be Las Vegas or Scottsdale or Ensenada?" he said. "It's a question of where, not if."

Personally, I’d pick Flagstaff — a beautiful small town with a relatively mild climate for Arizona — but only if one believes that Arizona politicians won’t go ahead and do the same thing.

The anti-tax site BigGovernment.com notes that the new law may also tax eBay, specifically its online merchants. Since eBay is a San Jose-based company, it can’t (easily) eliminate its presence. Attempts by Bay Area politicians to carve a loophole to help eBay may not be enough — instead, non-California eBay merchants who don’t want to pay sales tax may jump to Amazon.

In the end, the politicians will claim they’ve raised taxes in the name of “fairness,” while (as in NY’s attempts to tax Amazon) failing to collect taxes from Amazon while this spends several years winding its way through the courts.

Perhaps this is the true intention of the legislature in passing the law: millions of dollars in billable hours for their trial lawyer friends as Amazon, Overstock and other out of state retailers sue the state seeking to get it invalidated.

If you build it, they may go

In the past 24 hours I’ve had a chance to spend considerable time at two major US airports — Pittsburgh and Denver — thanks to my once-favorite airline, United Megalith Airlines. (“We try to ream you™”). In fact, UMA gave me multiple chances to enjoy Denver by canceling my flight home.

But both were examples of airports built in a period of boundless optimism by civic boosters hoping that massive government spending would boost the local economy.

Pittsburgh is pretty clear cut: when the new airport opened in 1992, US Airways was using the city as a major hub. However, the airline filed for bankruptcy after 9/11 and ended the hub in 2004. The airport is vastly over-built and under-utilized, just as the Kansas City airport expansion in the 1980s was tied to TWA’s brief experiment with hubbing there.

Denver is less clear-cut. United still has a hub here, and the airport gets considerable traffic from the 2.5 million people in the metropolitan area. However, the big planes are now medium sized plans and the medium sized planes now commuter jets, as United seeks to increase load factors and reduce service as part of its ongoing march toward high-volume, low-quality service.

However, after the merger with Continental, United is reducing its hubs to 10 worldwide, a pilot told me yesterday. Airlines have been eliminating their Western hubs — Delta has pulled back from Salt Lake City and Southwest from Las Vegas — and United no longer has the flights from Denver that it once did.

When (if) I get home, one terminal at San Jose airport was built for American’s hub there, now gone. With airline traffic less than expected, city fathers are wrestling with a range of options to pay what it borrowed for the $1.3 billion expansion.

The best analog I can think of is the sports stadium — worthless if the major league team leaves town. This seems a little different — you have the case of a single individual shopping his team (almost always a he) to the highest bidder. The airlines seem to be more dropping hubs than moving them and thus seem less likely to abandon a facility on a whim.

The fundamental problem is that capital investments like this have a 20-30 year amortization period against a planning horizon that may only be 2-3 years. Betting on local boardings/deplanings is a bet on the local economy — as long as there are local businesses and residents, there will be airline traffic. However, the hub bets are vulnerable to acquisitions, bankruptcies, or merely business incompetence.

I think this falls under the category of the fallacious “will,” as in statements like “this investment will bring $2.4 billion in economic growth over the next 20 years.” Obviously this is not true — the correct form is “is predicted to” or “is expected to” — but economically (or mathematically) challenged reporters seem to play along with this snow job by reporting these political claims unchallenged.

Of course, this ties back to the inherent short term/long term disconnect between our ruling caste and the common citizen. Politicians make promises to get re-elected next year, while taxpayers have to pay the bill s for decades to come.

Sorry, Carly…

…only the best-financed women get to be called “Senator” instead of “Ma’am.”

In a day when the GOP tide swept across the Midwest but failed to reach the Pacific time zone, the former HP CEO appears to have failed in her efforts to dislodge her better financed rival. (Fiorina had noticeably fewer TV ads than her opponent or either gubernatorial candidate.) Longtime incumbent Barbara Boxer won despite (as one otherwise sympathetic reporter put it) having “lower approval ratings than 49ers quarterback Alex Smith.”

What really struck me, however, was an article Monday in the Merc, whose editorials strongly backed Boxer for decades. The front page story offered a surprisingly sympathetic report of a Fiorina unrecognizable in the Boxer attack ads — or even her own:

Several voters who came to see Fiorina in person on the campaign trail last week said they were struck by how different the candidate is in person from how she's depicted on TV. Fiorina warmly recalled her early life, including her amazement at seeing oranges on trees when she moved to California as a girl and her early stumbles finding a career path. With the ease and command of a talk-show host, she went on to describe some of the personal triumphs that eventually brought her to the highest rungs of corporate America.

"She's much more genuine in person than she is on TV," said Raquel Unger, a real estate agent who arrived at a campaign stop in Orange County undecided on the Senate race but left counting herself a Fiorina supporter.

"She wasn't like she's shown on TV -- all the stuff about firing people and sending jobs out of the country," Republican voter Ethel Lover said after a different Fiorina event.

Warm? Genuine? These are not terms I would have used for Fiorina when I moved to Silicon Valley eight year years ago, and had yet to forgive her for destroying the “HP Way” en route to saving the company. But Fiorina demonstrated good humor and even humility in her remarks Tuesday night.

Who knows if Fiorina could have won with a more human strategy? Even in a blue state, Boxer has always been the most vulnerable statewide officeholder (next to Gray Davis), far more so than the widely popular (onetime centrist) Dianne Feinstein. But it’s still a very blue state, as all but one statewide office went to the Democrats Tuesday. And — like all political rookies — we don’t know whether if elected Fiornia would have been effective (like a Bill Frist) or a fiasco (like the Governator.)

With her re-election, Boxer gets to extend her tenure as senator from 18 to 24 years. Sen. Boxer has a few contradictions, such as blasting Fiorina for sending HP jobs offshore while running a campaign event at Cisco, which like HP has also been growing its jobs overseas (something even her hometown paper noticed.) Like most successful politicians, she has successfully managed contradictions before.

A year ago, Boxer famously noted that it’s hard to become a Senator. As AmEx likes to say, Membership Has Its Privileges(™). A six year re-election cycle provides senators a luxury no other elected official in this country enjoys.

Not all innovation is good innovation

A frequent frustration has been the lie perpetuated by con artists (or politicians) that all change is good. For these fraudsters, “change” (or “reform”) becomes a mantra or a cloak to hide any close examination as to whether the proposed change is a good thing or a bad thing.

Clearly, not all change is good. Hitler, Stalin and various ayatollahs come to mind. Different factions like different forms of change: in the US, leftists fight deregulation or tax reduction while rightists fight various forms of social change.

Similarly, in his talk Friday at the Tilburg Conference on Innovation, Prof. Andrew van de Ven of the University of Minnesota noted that “innovation” is also both a good thing and a bad thing. He called on scholars to refuse to be drawn into any definition of “innovation” that it as synonymous with “good thing”.

Alas, such intellectual honesty is in scarce supply among politicians and bureaucrats — as well as some industry trade associations. “Innovation” becomes a mantra of those seeking to wrap themselves in the halo of scientific progress — as with the current White House and its “Strategy for Innovation.”

Van de Ven pointed to a paper 20 years ago by William Baumol entitled “Entrepreneurship: Productive, Unproductive, and Destructive,” which made a similar point about entrepreneurs and the new ventures they create:

[T]here are a variety of roles among which the entrepreneur's efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game-the reward structure in the economy-that happen to prevail.

Baumol argues that if the incentives are right, entrepreneurs grow new profit-making enterprises that provide employment, wealth and other societal benefits. In corrupt, non-transparent, or other hostile environments, entrepreneurs join the gray or black market, or create criminal enterprises.

So perhaps if we’re lucky, a reminder to academics about the accuracy of our constructs will eventually filter into the media and the political caste. But I’m not optimistic.

More and worse government

From Peggy Noonan’s WSJ column Saturday:

We are at a remarkable moment. We have an open, 2,000-mile border to our south, and the entity with the power to enforce the law and impose safety and order will not do it. Wall Street collapsed, taking Main Street’s money with it, and the government can’t really figure out what to do about it because the government itself was deeply implicated in the crash, and both political parties are full of people whose political careers have been made possible by Wall Street contributions.

Meanwhile we pass huge laws, bills so comprehensive, omnibus and transformative that no one knows what’s in them and no one—literally, no one—knows how exactly they will be executed or interpreted. Citizens search for new laws online, pore over them at night, and come away knowing no more than they did before they typed “dot-gov.”

It is not that no one’s in control. Washington is full of people who insist they’re in control and who go to great lengths to display their power. It’s that no one takes responsibility and authority. Washington daily delivers to the people two stark and utterly conflicting messages: “We control everything” and “You’re on your own.”

All this contributes to a deep and growing alienation between the people of America and the government of America in Washington.
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Why does the federal government do this? Because so many within it are stupid and unimaginative and don’t trust the American people. Which of course the American people have noticed.

The latest in outsourced political criticism, as a cost saving measure in these difficult financial times.

Economic lessons from across the pond

Although the US is held out as the most affected by the current recession, apparently many of the same problems apply to the UK as well.

Martin Wolf, the oft-honored dean of British economics correspondents, went straight to the point in his column this morning in the FT (emphasis mine):

How ill is the UK economy? What are the challenges for economic policy? These questions seem to me to be far more urgent than before any general election since 1979, when Margaret Thatcher came to power.

The one point on which everybody agrees is over the depth of the fiscal hole: the government is borrowing a pound for every four it spends. But nobody wants to discuss what might need to be done. This is not surprising: today’s fiscal deficits exceed those of any previous period in peacetime.

The rest of his column is about the need to reign in deficit spending before deficits can no longer be financed, while stimulating trade and investment: he promises answers in his next column.

Wolf is relatively restrained in his criticism of current British deficit spending compared to another FT columnist, entrepreneur-turned-equity-investor Luke Johnson. In the same issue of the dead tree paper, Johnson began his column:

Should entrepreneurs get involved in politics? In general I think not, but last week I added my name to a list of business executives who objected to increased taxes on jobs in Britain – which the Labour government has proposed. The list was compiled by the Conservatives, who are locked in a titanic struggle to win the UK election on May 6. I participated because the stakes could not be higher.

Unquestionably this is no ordinary election. Britain has suffered 13 years of Labour rule, and the country is in a desperate state. It is like a company slithering towards bankruptcy. And, like any business that has to be turned round, there is one absolute rule to fix the mess: change the management. If there is no transformation at the top, then I fear we could become a bigger version of Argentina in 2001.

It is hard to comprehend how much damage Labour has done to our economic prospects, but I suppose that, like a frog in simmering water, if the heat is increased gradually, you almost fail to notice the pain – until it’s too late. The most damning statistic is the following: the state’s percentage of gross domestic product in Britain has risen from about 38 per cent in 1997 to perhaps 52 per cent today. Funding this vast amount of public largesse means the UK borrows 25 per cent of all its state spending. Clearly the country is living beyond its means.

Lest there be any doubt about where he stands, he concludes his column:

In a capitalist economy, investors and entrepreneurs make the entire system function. If the state alienates them to an excessive degree, then they opt out, and jobs and tax revenues evaporate. Labour is an entirely fraudulent organisation that pretends to believe in business, then buries it in bureaucracy and tax. Five more years of Gordon Brown would leave Britain an economic wasteland.

Anyone who even begins to understand enterprise or economics should see that a new government with fresh leadership and a working majority must be given power next month. The alternative of a hung parliament will lead to capital flight, a slumping currency, rising inflation, higher interest rates, higher unemployment, a gilt strike, runs on British banks, and a crisis perhaps as bad as the rolling collapse in Greece.

So although I am neither a donor nor member of the Conservative party, nor do I have any party political ambitions, on this occasion I feel passionately that Labour must be thrown from office and a government formed with an adequate mandate – because more Labour is a form of national suicide.

While this blog does not advocate any specific candidate or party — on either side of the pond — I second Johnson’s indictment of the eventual consequences of indefinite deficit spending and the crowding out (particularly for entrepreneurs) caused by the massive increase in the size and cost of government.

The latest in outsourced economic criticism, instituted as a cost saving measure in these difficult financial times.