“Vested interests are universal”

Every once in a while, we experience moments of clarity. I experienced one while listening to this EconTalk podcast.

In it, Terry Moe discusses the special case where the power of vested interests in the New Orleans school district was wiped out after Hurricane Katrina and the effects that had on the re-emergence of the public school system there. It was a very interesting episode and well worth a listen.

The moment of clarity is here, with Moe speaking:

Let me just take a step back and say: Vested interests are universal. Every institution in every policy area generates vested interests. And these are interests of people who get the services of those institutions but also who get the jobs that those institutions generate or the business contracts that those institutions generate. And, this is true in agriculture; it’s true in defense; it’s true in the environment–you name it. And it’s not just true in this country: it’s true in every country; and it’s been true throughout time. This is a universal thing. All institutions generate vested interests, and those vested interests have a stake in protecting their institutions from change because those institutions are the source of their benefits. And in many cases, those benefits, like jobs and profits, have absolutely nothing to do with whether the institutions are performing well.

And so these vested interests, which have a stake in investing in political power, will use their political power in order to stop reforms even when the institutions are performing very badly. And that is the problem that all societies face, and that our society faces, in trying to have a healthy democracy in which our institutions actually work. When we have institutions that are failing, the vested interests will still protect them and make it virtually impossible for us to reform them.

This is true in state, federal and local government, U.S. Soccer, business, non-profits, school districts, universities, unions, tenure and so on.

All these things can be good.

But, a question rarely asked is what happens when they aren’t performing well?

What brings about change that might improve performance?

Do those changes threaten vested interests benefiting from the current system?

In my opinion, competition is a more preferable option to limiting the power of vested interests than natural disasters. It acts is the same manner on vested interests without all the collateral death and destruction.

Here’s a political movement I can support

More than 62 percent of California residents vote YES to have Daylight Savings Time year-round

It just makes a lot sense. I’ll take my daylight in the day, please.

All the world’s a stage

From Instapundit blog:

IF CORPORATE TAX CUTS ARE SO BAD, WHY ARE THE BLUE STATES SLASHING THEIRS?

Lifezette’s Brendan Kirby, who points out that: “Even as prominent Democrats such as Senate Minority Leader Chuck Schumer (D-N.Y.) and Sens. Sheldon Whitehouse (D-R.I.) and Richard Durbin (D-Ill.) trashed the idea, their extremely blue home states have been cutting corporate tax rates.”

It makes more sense once you understand that just about all public personas are an act.

Because ‘basic corporate finance’

On the Today show, this morning, I saw Savannah interviewing Rep. Paul Ryan about the tax bill.

She pushed hard on the cut in corporate tax rate in the plan.

His response was valid.

We have the highest corporate tax rate in the industrialized world. It will be good for the economy to be more competitive, so companies stay here and invest more here.

She pushed again…but Michael Bloomberg, CEO of a large company, says he won’t invest more here. He’ll buy back more stock.

Ryan’s response was valid. That’s one anecdote against studies that show otherwise.

But I think he missed a golden opportunity.

Here’s what my response would have been:

It’s great that Bloomberg supports our position.

I envision Guthrie getting confused look at this point and responding with, But he said he would not invest more. How does that support your position?

He said he’d buy back stock. Basic corporate finance tells us that stock buybacks is one way to return money to owners. Paying dividends is the other. Ask any first year B-school student.

What do investors do with money they receive from their investments?

Often, they invest it elsewhere. 

While Bloomberg’s company might not have good projects to invest in (which may be a problem for Bloomberg), other companies might.

With more money in their pockets, the folks who sold shares to Bloomberg will be able to invest more in companies that have better investment prospects, like Google or Facebook or start-ups building better solar panels, curing cancer or the company that might disrupt Bloomberg’s own business model.

So, the economy still gets the benefit of the reduced corporate tax rate, even if companies, like Bloomberg’s, don’t directly invest their extra cash. Others will be more than happy to.

Speaking of political rights

I happened to come across a well-said remark from President Harry S. Truman’s radio remarks on election eve in 1948:

I hope that all of you who are entitled to vote will exercise that great privilege. When you vote, you are in control of your Government.

Signals v Causes: The American Nightmare?

An effective political and election strategy has been to identify the signal of the American dream (e.g. home ownership, college education, preschool) as a cause of the American dream — or the American dream itself, and then promise to make it easier for people to achieve it.

Hopefully, we are learning that this actually undermines the incentives and feedbacks that made those things signals of the American dream in the first place, turning them into nightmares.

It turns out that getting a college degree doesn’t cause the American dream. Rather, all the hard work and gumption that use to go into getting the relatively more scarce and useful college degrees of the past was truly what set those kids apart and put them on the path to prosperity and independence.

Change the college degree from a sorting out mechanism to an easy path and the college degree no longer is a reliable signal of those hard workers to employers. Then the nightmare ensues.

As this Wall Street Journal editorial describes:

A lot of these borrowers can’t generate the income to service this debt, especially when so many of them can’t get decent jobs. The left-leaning Center for Economic and Policy Research recently noted that among recent college graduates age 22-27, a full 45% were underemployed in 2013, meaning they were either unemployed or doing jobs that typically don’t require a four-year college degree.

Of course, it doesn’t help that politicians have also mucked with the incentives of the innovation economy, reducing its capacity to create job opportunities for these folks.

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I think we’re on the second envelope

Ever hear the story of the new CEO that was given three envelopes by the previous CEO to open in case he ran into a problem?

The note inside the first envelope said, “Blame your predecessor.”

The note in the second said, “Reorganize”.

The last said, “Prepare three envelopes.”

I think the President must get three similar envelopes. He already used the first one. But the second one must say, “If everything that has your name on it is turning into unmitigated disasters, then say you are going to raise the minimum wage.”

But, the good news is that we are getting close to the third envelope.