Ok, Break My Leg, But then Break Both of My Competitor’s Legs

In a previous post, I argued that government regulation is both unnecessary and harmful. An obvious question is why do companies accept and even endorse government regulation. There are two answers to that question. The first answer is fear. Nothing in the world threatens private business more than government. When companies consider the profitability of entering a new country, one of the biggest risk factors is the political risk. The companies assess the country’s track record on private property, regulations, taxes, and changes in government. Many ventures fail because the political risk is too high. The United States also has political risk. However, because of the size and importance of the US market, the US government has a lot of leverage to push businesses around and get away with it. Companies try to reduce the threat by taking a conciliatory stance. Sometimes, the companies try to stave off the threat by self-imposing regulations, but this tactic does not always appease the government.

The second answer is that a company will try to turn the regulations to its advantage at the expense of it competitors. When government threatens regulations, the company agrees then asks for protection from competition. The company will argue that since the regulation will increase the company’s expenses, the government should pay the company a subsidy, or erect a tariff on foreign competitors. The company will even go so far to request stronger regulation that will prevent smaller companies from entering the market. Eventually, the regulation will be so heavy that the market completely stagnates, but stagnation favors the large established company. In a stagnate market, new companies with new ideas cannot grow and challenge the established companies.

In the end, consumers suffer. With less competition and fewer choices, prices go up and quality of service goes down. Innovations are locked out of the market, so technological progress slows down. Eventually, consumers rebel and demand better service through deregulation and more competition. Once deregulation begins, the older company discovers that it is no longer equipped to compete in an open market. It has become a dinosaur, with high inventories, bloated pay rolls, and poor products. In desperation, the company threatens mass layoffs if the government does not bail it out. However, government bailouts will not correct the underling problem that the reliance on government regulation destroyed the business.

Not all eager to hop pork express

Not all eager to hop pork express by Robert Novak
The White House ''victory'' claim on the transportation bill is audacious. In 2004, Bush drew a $256 billion line in the sand, threatening a veto of either the Senate ($318 billion) or House ($275 billion) version. Just one year later, Bush's line advanced to $284 billion. The bill passed last week was listed at $286.5 billion. But as Flake pointed out, it really is $8.6 billion higher than that because of a budget gimmick.

The package's contents are worse than its label. President Ronald Reagan vetoed the 1986 bill because it contained around 150 items earmarked by individual lawmakers. The 2005 bill to be signed by Bush contains nearly 6,000 such earmarks. Many are pure pork: non-highway, non-rapid transit projects, including some that members of Congress accepted as their own after being sold on them by a professional lobbyist.

A random glance at a few earmarks and their House earmarkers shows that pork is bipartisan: $8 million for a parking facility at Harlem Hospital in New York City (Demo-crat Charles Rangel); $2.6 million for walkway and bikeway improvements along the New York City Greenway System in Coney Island (Democrat Jerrold Nadler); $1.3 million for sidewalk lighting and landscaping at Cedars-Sinai Medical Center in Los Angeles (Democrat Henry A. Waxman); $1.3 million for a day care center and park-and-ride facility in Downstate Champaign. (Republican Tim Johnson); $480,000 to rehabilitate a historic warehouse in Lyons, N.Y. (Republican James T. Walsh); $200,000 for a historic trolley project at Issaquah, Wash. (Republican Dave Reichert).

Robert Novak is not a popular man right now, but he makes some great points here. Both the energy and transportation bills are examples of government at its worst. It amazes me that conservatives support this Congress and this President.

No Prohibition, No Subsidy

Independent Country: No Prohibition, No Subsidy by James Leroy Wilson
This is a tremendous post by James Leroy Wilson at Independent Country. He took some time off, but he is back and on top of his game. Take a moment to read it.

Marketing vs. Regulation

Whenever something goes wrong with a product or service, politicians begin demanding more regulations to prevent future problems. They assume that businesses operate only to make money, therefore businesses are not concerned with consumer well being and will not incur the cost to change unless forced by the government. Well, half of the politicians’ assumption is correct. Businesses exist for the same reason most people work for them, to make money. However, it is this desire to make money that will motivate change when change is necessary. More than anything else, businesses need consumer confidence so customers will return and buy their products. The best tool businesses have to gain consumer confidence is marketing, which can solve all product issues such as safety, cost, and accountability. Government regulation interferes with businesses’ marketing process, raises costs, and destroys opportunity.

Marketing is the process by which companies identify consumer needs and try to address those needs. If performed properly, companies use marketing to answer several important questions. First, they uncover opportunities in the market and choose where to invest their money to get the best return. Second, businesses learn about the target market, which are consumers that are most likely to buy the product. Third, businesses discover the different product features that the target market needs before they will buy the product. These features often include but are not limited to ease of use, comfort, reliability, and safety. Fourth, businesses estimate how much customers are willing to pay for the product. Finally, businesses figure out the best ways to reach the target market through advertising. Once a company finishes its research and brings the product to market, consumers have the choice whether or not to buy the product. If consumers like the product they will show their support by buying it, if they do not, they will vote with their feet by spending their money elsewhere.

In a free market, every company’s success depends on its ability to market its products better than its competitors do. Failures in keeping up with consumer needs create opportunities for new companies to enter the market with improved goods. Therefore, changes in the environment and consumer needs spark changes in products. If oil prices rise sharply, consumers will demand more fuel efficiency, so automakers will produce more fuel-efficient cars. When consumers begin buying hybrid cars to save money at the pump, automakers do not need government to tell them to produce hybrids. In a free market, automakers will engineer and produce more hybrids to stay in business. The same holds true in every industry. Airline travelers will not set foot on a plane unless they are reasonably sure it is safe, so airline companies spend money to ensure the safety of their planes. Investors will not invest in companies if they are not confident in the companies’ accounting practices, so companies change their procedures to attract investment. Parents will not buy a toy if they fear it will harm their children, so toy manufactures spend money on safe materials. In a free market, if one company in any industry refuses to invest in consumer-required improvements, another company will step up and put the first company out of business.

Government regulation is almost the exact opposite of marketing. Government bureaucrats that create regulations do not invest their money into projects and are not responsible for a bottom line. As a result, they do not care what consumers want or how much the regulation will cost. Instead of trying to understand consumer needs, regulators assume they know what is best and do not give the consumers a choice. Without incentive to monitor customer needs, regulations are slow to change and often fail to keep up with the new business environment, generating waste, and slowing down progress. Moreover, many government bureaucrats do a poor job executing the regulations or provide favors to politically connected companies, creating a false sense of security. Consumers blindly trust that the government is protecting them, when it is not. Finally, regulation robs new companies of opportunities in the market by wiping out new niche segments. Even a regulation as simple as the National No Call List, reduced opportunities for new call screening technology, which cost people jobs.

In a free market, I consider marketing to be the purest form of democracy, because it grants the public choice over products without forcing anyone to comply. When a product is successful, only the people that value the product purchase it. If one group of people does not, they do not have to buy it. Other companies will step in to satisfy their needs in other ways. In contrast, government regulation imposes a cost on everyone and reduces our choices. The next time there is a problem with a product or service, trust the marketers over government regulation. After all, if marketers fail they go out of business and new companies replace them with better products. When government regulations fail, the regulators get more money and power. Which is the more productive incentive?