Bernanke can’t Help this Bad Economy and Washington only Exasperates our Problems with their Regulatory Zeal

Posted by PITHOCRATES - August 26th, 2011

Congressional Action thus far has Scared the Bejesus out of Households and Businesses

All eyes were on Jackson Hole, Wyoming.  Ben Bernanke was giving a much anticipated speech.  And the markets waited with bated breath.  They’re not bated anymore (see Bernanke pledges Fed support, but notes limits by Chris Isidore posted 8/26/2011 on CNNMoney).

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.

And he warned that when Congress weighs future deficit reduction plans, it should be careful to not hurt the economy in the short-term. They “should not…disregard the fragility of the current economic recovery.”

He said there needs to be a better way of Congress making decisions on taxes and spending. And he said a repeat of the this summer’s contentious debate over raising the debt ceiling would likely hurt the economy.

“It is difficult to judge by how much these developments have affected economic activity thus far,” he said about the threat of default and the downgrade of the U.S. credit rating. “But there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

The economy has big problems.  Problems, though, that will take more than monetary policy to fix.  But when Congress addresses these fiscal issues they should be very careful not to damage the fragile economic recovery.  Because thus far their words and actions have only been scaring the bejesus out of households and businesses.

Businesses Prefer Stability and Responsible Government that doesn’t Govern Against their Interests

Households and businesses are so frightened of what the future holds that they are sitting on their money (see Key Passages From Bernanke’s Jackson Hole Remark by David Wessel posted 8/26/2011 on The Wall Street Journal).

“Financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation…. It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

Uncertainty.  The greatest fear of business.  Because you can’t plan uncertainty.  Because it is uncertain.  Businesses prefer stability.  Households, too.  That, and responsible government.  One that doesn’t govern against their interests.

The Department of Energy is going to raise our Electric Bills by 35%  

And so far government hasn’t been delivering what the households and businesses want (see US breaks ground on first industrial-scale carbon capture project by staff of Business Green, part of the Guardian Environment Network guardian.co.uk, posted 8/26/2011 on the Guardian).

The US government’s carbon capture and storage (CCS) efforts stepped up a gear this week, with the start of construction on the government’s first industrial-scale scheme and funds worth $41m set aside for another 16 research projects.

Work on the plant in Decatur, Illinois, which received $141m of public money and another $66.5m from private sector sources, started just a few weeks after American Electric Power abandoned plans to build its $668m CCS facility.

Is this responsible government?  After record deficits caused the first downgrade of U.S. sovereign debt ever should the government still be spending money on bad green investments?  How do I know this is a bad green investment?  Simple.  The private sector will only invest 32% of its total costs.  The taxpayers are picking up the other 68%.

The DoE said its selection yesterday of 16 projects across 13 states to share $41m funding over three years would further the aim.

Each project will focus on developing technologies capable of capturing at least 90% of CO2 produced, as well as reducing the added costs at power plants to no more than a 35% increase in the cost of electricity produced.

Oh, and the Department of Energy is only going to raise our electric bills by 35%.  So not only do the taxpayers have to pay for the construction of this plant, our electric bills will increase afterwards.  For both households.  And businesses.  Which will be a further drag on the economy.  Which won’t make Ben Bernanke happy.

Killing Businesses with Regulatory Compliance Costs

But it gets worse.  The EPA is causing uncertainty for American businesses.  And killing them with compliance costs.  So much so that John Boehner wrote a letter to President Obama demanding a tally of his punishing regulations (see Five EPA rules that will cost more than $1 billion by Conn Carroll posted 8/26/2011 on The Washington Examiner).

Boehner specifically mentions one regulation that “will cost our economy as much as $90 billion per year. That rule, titled “Reconsideration of the 2008 Ozone Primary and Secondary National Ambient Air Quality Standards” (aka “The Ozone Rule), is the biggest drag on growth that the EPA has formally proposed so far. The EPA is also working on global warming regulations that are sure to cost much more, but those proposals have not been published yet.

The EPA has published at least four other proposed regulations, however, that would inflict costs on the U.S. economy over or near $1 billion a year. These cost estimates are all from the EPA’s own numbers…

Here’s a chart summarizing the 5 regulations in this article:

 

And this is only 5 of them.  Imagine if you add them up in total.  Could it be holding back businesses?  Perhaps.  I mean, would you invest in anything new knowing billions of dollars of compliance costs were coming your way?  I wouldn’t.

Perhaps the Problem with the Bad Economy is the People trying to Fix It

Bernanke is right.  You can’t fix this stuff with monetary policy.  When you’re attacking American households and businesses like this, no one is going to borrow any money to invest.  No matter how cheap it is.

Furthermore, all of these costs are going to be passed onto the American consumer.  They always are.  So this means consumers will have less disposable income.  Which means this will be a further drag on the economy.  And less economic activity means less tax revenue.  Which takes us back to those growing deficits.  They ain’t going away.

Perhaps the problem with the bad economy isn’t due to a lack of demand as the Keynesians say.  Perhaps the problem is with the people trying to fix it.  And there is no quick solution to that problem.  As the 2012 election is still more than a year away.

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Energy Drives both Food Prices and the Economy. And Politics.

Posted by PITHOCRATES - March 16th, 2011

The Left Promotes and Attacks Electrical Power

The Left wants to get rid of the internal combustion engine and make all cars green.  Plug-ins.  Cars with batteries that charge by plugging them into electrical outlets.  They say it will break our dependence on foreign oil.  And stimulate the economy with new green technology.  For the same reason they want to dot the landscape with high-speed electric trains.  They want to make everything electric.  Because electric motors don’t pollute.

At the same time there is an all out assault on electrical generation in this country.  The nuclear power industry (the closest to a ‘green’ useful source of electricity we have) has been stalled since 1979 thanks to The China Syndrome and Three Mile IslandHydroelectric dams (another ‘green’ source of useful electricity) kill fish and alter the ecosystem.  So we can’t build them anymore.  With two down they’re turning their sights onto fossil fuels.  And they’re locked and loaded (see E.P.A. Proposes New Emission Standards for Power Plants by John Broder and John Collins Rudolf posted 3/16/2011 on The New York Times).

The Environmental Protection Agency proposed the first national standard for emissions of mercury and other toxins from coal-burning power plants on Wednesday, a rule that could lead to the early closing of dozens of generating stations and is certain to be challenged by the utility industry and Republicans in Congress…

She estimated the total annual cost of compliance at about $10 billion, in line with some industry estimates (although some are much higher), and the health and environmental benefits at more than $100 billion a year. She said that households could expect to see their electric bills rise by $3 to $4 a month when the regulation is fully in force after 2015.

With the country struggling to come out of the greatest recession since the Great Depression they want to raise the cost of energy?  For what?  Health and environmental benefits they pull out of the air (there are no ledgers anywhere totaling these costs)?  To offset one of the highest regulatory costs to come down the pike in history?  This is insanity.  One has to ask do they want to push the nation into a depression?  Or are they that ignorant in things economic?

She said that installing and maintaining smokestack scrubbers and other control technology would create 31,000 short-term construction jobs and 9,000 permanent utility sector jobs.

Okay, we increase the cost of electricity forever but we get a few temporary construction jobs.  Construction jobs aside, if you do the math, each of those new permanent jobs will end up costing us over $1 million each year.  In addition to their wages and benefits.  All paid for by the electrical consumer.  The fact that they talk about this as a good thing shows their utter ignorance of things economic.  And contempt for the consumer.

The National Association of Manufacturers said the proposed rule would lead to higher electricity prices and significant job losses.

“In addition, electric system reliability could be compromised by coal retirements and new environmental construction projects caused by this proposed rule and other E.P.A. regulations,” said Aric Newhouse, the group’s vice president for government relations. “Stringent, unrealistic regulations such as these will curb the recent economic growth we have seen.”

Manufacturers use a lot of electricity.  The more they have to pay for it the less they can spend elsewhere.  The new utility costs will always be there.  To stay competitive in the market, they will have to offset that permanent increase with cuts in their operating costs.  Translation?  Layoffs.  Or they simply will not hire new people.  Instead they will make capital investments to increase their productivity.  And use fewer people.  This is how they do things when costs go up.  Either that or they will send manufacturing operations out of the country.

What Happens in Vegas isn’t much these Days

Economic activity is driven by disposable income.  That’s the money you have left after paying the things you have to pay for just to subsist.  Food.  Mortgage.  Gasoline.  Property taxes.  Those kind of things.  Once we pay these, we can splurge on economic stimulation with what’s left over.  Dinners out.  Movies.  Vacations.  And gambling (see The Penny Slot Economic Indicator by Douglas French posted 3/16/2011 on Ludwig von Mises Institute).

Those at the Fed and in the financial press are telling us that the economy is turning around. Corporate America is ginning up profits so prosperity on main street can’t be far away…

However, if gaming trends in Nevada are any indication the middle class is hurting. Tourism and gaming peaked in 2007, with middle America making the trek to the gambling city to sit down and play a little blackjack (or 21). Latest figures have blackjack revenue down 31 percent from 2007, the Las Vegas Sun reports.

Last year was the first time baccarat, a game favored by Chinese high-rollers, generated more revenue than blackjack. But the $1.2 billion in baccarat revenue pales next to the $2 billion that penny slot machines generated…

So Las Vegas is limping along dependent on high rollers from China and low rollers playing penny slots. “This is why Vegas got hammered,” Anthony Curtis, publisher of Las Vegas Advisor says. “It needs the middle market.”

Casinos worked in Las Vegas because people went to Las Vegas to lose their money.  It’s a destination city.  All the other cities who opened casinos to cure their budgetary woes saw no magic.  The middle class just spent their money at the casinos instead of at the movies or the restaurants.  And by taking staycations.  We spent the same amount of money in the community.  We just spent it at different locations.

The recession may be over according to Washington, but it’s not over for the middle class.  Because they haven’t returned to vacationing in Las Vegas.  Why?  They don’t have as much money as they used to have.  And prices are going up.  A double whammy.  They have less to spend and subsistence costs are on the rise.

If Energy Costs Rise Food Costs Rise

In the summer of 2010 the Obama administration was touting their summer of recovery.  Declaring that their stimulus spending had ended the recession.  They were a bit premature.  Unemployment is still close to 9%.  Despite all of their quantitative easing.  They printed a lot of money.  Didn’t help.  Worse, on top of stubborn high unemployment, prices are going up on almost everything (see Wholesale prices up 1.6 pct. on steep rise in food by the Associated Press posted 3/16/2011 on Yahoo! Finance).

Wholesale prices jumped last month by the most in nearly two years due to higher energy costs and the steepest rise in food prices in 36 years. Excluding those volatile categories, inflation was tame…

Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.

Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs.

Separately, the Commerce Department said home construction plunged to a seasonally adjusted 479,000 homes last month, down 22.5 percent from the previous month. It was lowest level since April 2009, and the second-lowest on records dating back more than a half-century…

Food costs, meanwhile, are rising. Bad weather in the past year has damaged crops in Australia, Russia, and South America. Demand for corn for ethanol use has also contributed to the increase.

Prices rose 1 percent for apparel, the most in 21 years. Costs also increased for cars, jewelry, and consumer plastics.

Some would love to see $4/gallon gasoline again.  It would push people into electric cars and mass transportation.  But there’s a downside.  A big one.  Higher energy costs make everything more expensive.  Even our vegetables.  Because those vegetable don’t appear by magic in the grocery store.  They travel long ways on trucks that burn diesel fuel to get to the grocery store.

Food and energy are tied at the hip.  If energy costs rise food costs rise.  And when you siphon some food off to make low-energy ethanol that no one wants that just increases food costs more.  We should use food for food.  And oil for fuel.  It’s more cost efficient.  And consumers will have more money left over to stimulate the economy with.

The Left Makes a Very Poor Argument Against Nuclear Power

And speaking of energy, nuclear energy is in the news these days in a big way.  But not in a good way.  Japan has some reactors that were hit with a one-two punch of earthquake and tsunami.  The tsunami took out the cooling systems.  So there’s a little trepidation over these plants right now.  And absolute glee as anti-nuclear people exploit this for all it’s worth.  They’re saying, “See!  That’s what could happen in America right now.  And in Europe.  We need to stop all nuclear power.”  I’m paraphrasing, of course.  But you get the gist.  Why, some are even playing loose with facts.  Even lying.  And some are writing top 10 lists why nuclear power is bad and why solar and wind are good (see Too Cheap to Meter: The Top 10 Myths of Nuclear Power by Michael Rose posted 3/15/2011 on The Huffington Post).

The best way to generate new power for the long term is not to build nukes but to invest in large scale solar and wind, coupled with natural gas as a transition in the short term.

The problem has been coordinating the power produced when the wind blows and the sun shines, distributing the power and storage. There are solutions to all of these. “You need to link up the disparate sources to compensate for when the wind is blowing and the sun isn’t shining,”

Coordinating the wind and the sun?  Really?  That should be our energy policy?  And how will that work during a major blackout?  Like the Northeast Blackout of 2003?  Can solar power really run all our air conditioning systems during the dog days of summer?  Our fossil fuel-fired plants can’t always do that.  Can you imagine a hot summer without those high capacity plants?  The inevitable blackouts won’t be rolling.  They’ll simply be scheduled daily during air conditioning weather.

The nuclear industry has asked for loan guarantees from the Federal government because the banks looked at the risk and took a pass. With the loan guarantees in hand the companies can get financing and if they default, or walk away from the projects (which is what happened before) the taxpayers will be stuck with the bill. “It’s the same as if you defaulted on your mortgage and the Federal government had to step in to pay the banks back,” said Hirsch.

We saw above how new regulations are going to cost the coal-fired plant operators.  The new regulations will probably force some plants to shut down.  This is the fear of regulation.  Uncertainty.  If you change the rules midway through the game there’s a good chance you’re going to end up losing in the end.  Power plants are costly.  They are difficult to build because of the regulatory hoops you have to jump through.  It is a very high-risk game.  And nowhere are the risks and regulatory hoops greater than nuclear power.  These plants take even longer to build.  Are far more costly because of the regulatory compliance costs.  And have by far the greatest uncertainty because of the length of time from drawing board to operating on line because of these regulatory hurdles.  This is why banks don’t want to invest.  Because the government can change the rules and prevent a plant from ever going on line, leaving the bank to eat the construction costs.

It’s true that building the reactors does create jobs, but these disappear when the reactor is complete. And there are staff positions for running the reactors, providing maintenance and security but not enough to warrant the high costs and risks…

Ironically some fear that building new nukes will chase jobs away because electric rates will have to dramatically increase to pay them off. “No state ever created a net increase in jobs by raising electric rates to commercial and industrial customers. Such a policy drives jobs out of many businesses to create relatively few permanent jobs at the new reactor,” said Bradford.

Funny.  The same arguments work for other federal stimulus spending.  Those short-term construction jobs are good when they’re trying to pass a stimulus bill.  But it’s not good if it will stimulate nuclear power.  And they say here that increasing the cost of electricity will kill jobs.  Meanwhile, increasing the cost of electricity by adding new regulations for coal-fired plants will increase jobs.  Costs are funny that way.  Sometimes they’re bad.  Sometimes they’re good.  Sometimes they’re rooted in reality.  Other times, in fantasy.

France is pointed to as demonstrable proof that nuclear power can be affordable and safe. While it’s true France gets about 75% of its electricity from nuclear power and that it has avoided a large scale disaster but we don’t know very much about their accident record since its industry is nationalized and run behind a veil of secrecy…

It also adds to the costs of the producing nuclear power which is one reason French electric rates are 20% above U.S. rates despite subsidies, according to Bradford.

So, yes, France has energy independence.  And they haven’t had a nuclear disaster.  But that doesn’t mean anything.  They could.  Just because they didn’t doesn’t mean they can’t have a China syndrome next week.  Or tomorrow.  So we should proceed as if they will.  Despite their safety record.  And the cost?  Interesting.  Because the source they cite paints a little different picture.

The present situation is due to the French government deciding in 1974, just after the first oil shock, to expand rapidly the country’s nuclear power capacity. This decision was taken in the context of France having substantial heavy engineering expertise but few indigenous energy resources. Nuclear energy, with the fuel cost being a relatively small part of the overall cost, made good sense in minimising imports and achieving greater energy security.

As a result of the 1974 decision, France now claims a substantial level of energy independence and almost the lowest cost electricity in Europe. It also has an extremely low level of CO2 emissions per capita from electricity generation, since over 90% of its electricity is nuclear or hydro.

In mid 2010 a regular energy review of France by the International Energy Agency urged the country increasingly to take a strategic role as provider of low-cost, low-carbon base-load power for the whole of Europe rather than to concentrate on the energy independence which had driven policy since 1973.

Energy independence?  Low fuel costs?  Almost the cheapest electricity in Europe?  Extremely low CO2 emissions?  And the International Energy Agency wants them to be the provider of “low-cost, low-carbon base-load power for the whole of Europe…”  I don’t know.  These sound like good things to me.  Talk about being a bit disingenuous.  And by a bit I mean a lot.  Clearly they are cherry-picking some facts to forward an agenda.  Speaking of which, back to the HuffPo.

All civilian nuclear programs create spent fuel that can be reprocessed into weapons grade plutonium. This is what Iran, North Korea, India and Pakistan have done.

It doesn’t take much. At first you needed a chunk of plutonium about the size of a softball now it’s down to the size of a golf ball. “If a country has done its engineering, it can take about a week to go to a bomb,” said Gillinsky. “Safeguard inspections are too late.”

And here we come to why we use the energy we use.  Because it’s concentrated.  A little bit of nuclear fuel goes a long way.  Just like our fossil fuels.  That’s why our cars run on gasoline.  Because it’s easy to store and it’s highly concentrated.  With a small tank of fuel you can drive a very long way.  While carrying your whole family.  And a lot of your stuff.  That’s why we don’t drive electric cars.  You can’t do any of this in a battery-electric car.  The battery takes up too much space.  And you just can’t go very far on a charge.

Solar farms and wind farms are not concentrated sources of energy.  The very term we use to describe these generating ‘plants’ tells us this.  You need so many of them that we call them ‘farms’.  Not ‘plants’.  And even with a large footprint their electricity output won’t come close to what the power plants using concentrated-fuels can produce.  A couple of reactors on a small site can power a large city.  It would take a very large plantation of solar panels and windmills to produce the same amount of electricity.  And they will only produce when the sun is shining or the wind is blowing.  Our concentrated fuel-fired power plant will be there 24/7, day or night, rain or shine.

Will the Great Recession turn into the Great Depression II?

Never before has our energy policy been in such a mess.  The children have taken control of policy.  They’re promoting fanciful solar panels and windmills no doubt while dreaming of unicorns and sugar plum fairies.  They don’t understand energy.  Or economics. 

Energy costs.  Construction costs.  Fuel costs are recurring.  While construction costs are one-time.  Therefore, the best economic policy would be to minimize fuel costs.  And coal, natural gas, oil, and nuclear do just that.  You get huge amounts of energy from small amounts of fuel.  Especially nuclear.

Yes, sunshine and wind are free.  And you can’t minimize fuel costs more than free (except with nuclear that can use some nuclear waste to produce more fuel).  But the infrastructure cost to make solar and wind provide meaningful amounts of energy are staggering.  A nuclear plant can sit on a small footprint out of the way.  While solar and wind farms will take acres of land.  Or water (for offshore wind generation). 

While they play with energy and economic policies, consumer costs rise everywhere.  And will continue to do so.  As a direct consequence of their policies.  Consumers pay more.  And the greatest recession since the Great Depression drags on.  Perhaps turning recession into depression.  Could the Great Depression II be around the corner?  I hope not.  But one can’t rule it out with the current administration.

www.PITHOCRATES.com

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LESSONS LEARNED #46: “Liberals say ‘do as I say not as I do’ because they can’t point to anything worthwhile they’ve done.” -Old Pithy

Posted by PITHOCRATES - December 30th, 2010

The High Compliance Costs of The American with Disabilities Act of 1990

I have a friend who worked at a company that was renovating one of their buildings.  He was in a foul mood one day.  The renovation included a high-end sales and marketing center.  Some place to impress clients.  Included in the renovation was a media room for multimedia presentations.  It was a competitive business; they were looking to woo some clients away from their competitors.  And to keep their current client base from straying to the competition.

It was an existing building.  Space was tight.  They were trying to do a lot in a small footprint.  And they did.  I saw it one day before the work was completed.  Wow.  It was gorgeous.  Especially the media room.  It looked like something you saw in a 5-star hotel.  They built the control room for the media room on a raised platform.  Equipment racks would sit on the floor.  And the cabling would leave the racks through the raised floor and out into a floor duct wiring system.  The walls and ceiling were some nice architectural finishes.  There was no drop ceiling.  No place to conceal wiring but in the walls.  And in the floor.

Well, there was a problem.  The American with Disabilities Act of 1990 (ADA) was relatively new.  This architectural firm complied with the new law in almost every place.  Drinking fountains were wheelchair accessible.  There were ramps to get up the curb so wheelchairs could enter the building.  And various other compliances.  The building complied.  Everywhere.  Everywhere, that is, but one area.  The control booth for the media room.  On the raised floor.  There was a step to enter this room.  And no space to add a ramp.  They fought the building inspectors.  The various authorities having jurisdiction.  But to no avail.  The spiffy new sales and marketing center would not be as designed.  They had to redesign it.  Rebuild it.  And delay the scheduled completion date.  Hence my friend’s foul mood.

The Government Exempts themselves from the High Compliance Costs of their own Legislation

You’d think the authorities having jurisdiction (AHJ) would have given a waiver.  But they didn’t.  It was a big office building.  And a small control room.  Less than 1% of the company’s total employees would ever enter that room.  Didn’t matter.  Some of the AHJ enjoyed their power.  Others were simply afraid someone would sue them down the road.  So they delayed the project. 

Unfortunately, they had already begun to relocate operations from the old to the new.  They suspended all presentations for a month at this facility so the old conference room could be demolished and rebuilt into something else.  And it was.  Demolished.  Now they had no place to wow their customers.  For another month or two.  That’s a whole quarter they had to reschedule around.  It did not impress their clients.  And may have cost them one or two.  All because of the silly inflexibility of the AHJ.

This is a good example of the unintended consequences of liberals’ best intentions.  It’s a microcosm of the ADA’s affect on business everywhere.  Sure, they had a noble goal.  To make a barrier-free world for all.  But the compliance costs to fully meet the letter of the law were brutal to small and medium sized businesses.  But Congress didn’t care.  It’s ‘do as I say, not as I do’.  Literally.  You see, Congress exempted themselves from the American with Disabilities Act of 1990.  Why?  Wait for it.  Because they said it would be too costly for them to comply.  And they said this publicly to justify their exemption from the act.  Unbelievable.  The height of arrogance and condescension.

The High Compliance Costs of OSHA

Well, Congress was dragged kicking and screaming into the real world.  Thanks to Newt Gingrich and the Republican Revolution of the 1994 midterm elections.  That Congress authored the Congressional Accountability Act of 1995.  Congress would no longer be above the law.  Now they, too, had to comply with the Age Discrimination in Employment Act of 1967, the Civil Rights Act of 1964, the Family and Medical Leave Act of 1993 and the Occupational Safety and Health Act of 1970.  To name a few.

I have a friend who works in construction in a metropolitan area.  He’s a project manager for a construction manager.  And you should hear some of the things he tells me.  Big construction projects often have federal money involved.  And when they do, there are some pretty restrictive rules.  Especially on the big projects.  Why?  Because big projects have deep pockets.

You would not believe some of the Occupational Safety and Health Act (OSHA) requirements on a construction project.  Well, on big projects, because no small contractor could afford the compliance costs.  Or the owner, for that matter.  A couple come to mind.  He said that a worker had to tie himself off when working on a ladder more than 6 feet off the ground (a nylon safety line tied to a body harness attached to something fixed and immovable).   Contractors had to conduct daily safety meetings with their field employees.  They had a safety trailer on site with a couple of safety officers to walk the site and police safety.  They had to get ‘hot work permits’ anytime they used a welding torch or other open flame.  You get the idea.  Workers couldn’t do anything dangerous without an inordinate investment in time and money on part of the contractor.  And yet workers still did stupid things.  Like refuse to wear a hardhat on a hot day.  Of course, when they did and OSHA happened to be on site, they’d write a pretty big fine.  And guess who had to pay it?  Not the employee.  But the employee’s boss.

But when Congress passed the Occupational Safety and Health Act of 1970, they exempted themselves.  Because it would have cost them too much to comply.

The High Compliance Costs of Affirmative Action

But there’s more.  When federal money is involved, there are other hoops to jump through.  You see, the metropolitan area had a large minority population.  And the federal government wanted minority owned businesses to share in some of that construction money.  It was affirmative action.  To help minority owned businesses.  A certain percentage of the work was set aside for these businesses.  The problem was big projects have tight schedules and high-tech building processes.  The kind of work that big and established contractors do all of the time.  And the kind that little contractors starting out who need help (the kind of contractor the government wanted to help) had little to no experience doing.  The idea was for the big guy to mentor the little guy.  Which is not easy to do when competitively bidding work.  Helping these contractors earns no revenue.  It just adds cost.  So you either include the cost up front (and not get the job because you’re not the low bidder).  Or you leave it out and try and recoup it on the back end (I believe the technical term is raping and pillaging on change orders).

Well, there are rules.  And it starts at bid time.  Your bid form asks for the percentage of these minority businesses you’ll be using.  There’s a minimum required.  But you can use more.  And the government weighted things differently.  You counted contractors at their full contract value.  But material suppliers were discounted (I don’t remember, but it might have been 50%).  Suppliers are safer to use because you can use your own highly skilled work force.  So you max these out.  Then you use some small minority contractors on some easier work you can peel off from the rest.  It’s nothing against these guys.  They do well on some of the less exotic stuff.  But some of the other stuff is just over their skill level.  Because they’re new and inexperienced.

Now, because they can use suppliers, there are minority ‘suppliers’ out there looking to exploit this set aside.  They’re not really a supplier, though.  They’re a ‘pass-through’ company.  What they do is offer their services to basically buy from a contractor’s preferred supplier and then resell to the contractor for a small markup.  This basically defeats the whole point of helping minorities, but it helps you stay on schedule.  Construction today uses just-in-time deliveries.  Especially on construction site with no storage area available for material.  And they need their well established working relationships to feed their supply pipeline.  It usual works.  But sometime a contractor’s audit will disallow a previously approved ‘pass-through’ supplier.  And when they do, look out.  If you don’t meet the percentage you included on your bid form you’re looking at some serious fines.  My friend told me the government wrote this one poor contractor of his a fine greater than the value of his contract.

Liberal Legislation:  Compliance Costs, Avoidance Costs and Unintended Consequences

The federal government has no business experience.  At least, the liberal left.  But they’re always trying to make business better.  And fairer.  This results in huge compliance costs.  And avoidance costs.  The federal government has little sympathy for the swath of destruction their legislation causes.  Especially when they were exempting themselves from much of that legislation. 

But it’s ‘do as I say, not as I do’.  Because they feel they’re above the law.  Or, at least, should be.  So they continue to tinker.  Failing more times than not.  And causing a slew of unintended consequences.  Despite their best intentions.

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LESSONS LEARNED #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 23rd, 2010

Detroit – The Motor of the World

Detroit.  Do I need say more? 

If you want to see the ultimate destination of liberalism, go to Detroit.  The Motor City.  The birthplace of the assembly line.  Mass production.  The veritable axle of the Industrial Revolution redux.  Detroit put the nation in motion.  In cars.  And in diesel-electric trains.  If it was big and powerful and moved the world, it came from Detroit.  The Arsenal of Democracy.  Detroit could mass produce trucks and tanks and airplanes to win world wars.  And did.  There was nothing Detroit couldn’t do.

Henry Ford.  Thomas Edison.   Albert Kahn.  Some of the greatest names in science and industry called Detroit home.  That place you can point to on your hand.  With pride.  The city grew and became one of the greatest and grandest cities in the nation.

And look at it now. 

Detroit and Government Grow Big

The population of Detroit grew up to and through the 1950s.  That changed in the 1960s.  When Big Government arrived.

Mayor Jerome P. Cavanaugh started it.  He implemented the city income tax in 1964.  The spirit of government spending was in the air.  The Great Society would follow at the federal level.  Government spending upon government spending.  Translation?  High taxes in the city of Detroit.

Then there was all the social engineering.  Lots of rules and regulations.  Some of it good.  But all of it complex.  And costly to business.  Compliance costs and taxes.  Not things that attract businesses.  Not a big deal when the Big Three rule the automobile world.  But that would change.  In fact, that would change because of the compliance costs and taxes.  The Japanese entered the market.  And they were selling better cars for less.  Add all of this together and you get the 1970s.

The Fall of Detroit

Detroit grew to be business unfriendly.  So business left.  And then the people left, following the jobs out of Detroit.  Then some of the social engineering made others leave the city.  School bussing, for one.  Families choose their houses based on the school district the house is in.  Of course, poor families can’t afford to live in those nice neighborhoods with the nice schools.  And Big Government thinks this is just not fair.    So they bussed the poor kids to the nice schools.  And bussed the kids from the nice schools to the not so nice schools.  Thus encouraging the people from the nice neighborhoods to leave Detroit.

They call it white-flight.  A lot of jobs and affluent people left Detroit.  Leaving behind the less affluent in the not so nice neighborhoods with no jobs.  Not good for any city.  Government services grew to help care for the poor.  The Great Society offered Aid to Dependent Children.  Which, according to noted economist Thomas Sowell, destroyed the black family.  Fathers ran away from their responsibilities.  And the state stepped in to raise their children.

Add all this together and you get a lot of people with no money and a lot of idle time on their hands living in rundown neighborhoods wanting for the basic necessities of life.  And that’s never good.  Detroit became infamous.  Crime and drug problems.  Devil’s night arson.  Street gangs.  Murder capital of America.  Crime and drug infested public housing.  Decrepit schools.  Truancy.  Low graduation rates.  And to solve these problems caused by Big Government, one man turned to Big Government.

Culture of Corruption

Coleman A. Young was mayor forever.  From 1974 to 1993.  And he was a Big Government guy.  He took the city from bad to worse.  And he fixed the racism problem.  By implementing racist policies.  After the white-flight, the city was predominately black.  And so would their police, fire department, public sector employees, etc.  They based hiring on color.  Not merit.  This accelerated the white-flight.  And set up a culture of corruption.  Which usually happens when you hire people based on who they know or who they are rather than on merit.

Young was hostile to the suburbs surrounding the city.  He called them hostile suburbs.  Why?  Well, that’s the problem you have with socialism (Young was an admitted socialist).  It just doesn’t work in an open society.  If the tax and compliance costs are too great in Detroit, people can move out of Detroit.  And they did.  Even the city cops didn’t want to live in the city.  They moved out if they could (by concealing their actual residency).  Or they lived clustered together in the city.  The real estate community called one such cluster Copper Alley.  It was near one of those hostile suburbs.  And it was one of the good areas in Detroit to live in.  Young hated this.  And the suburbs that offered safe sanctuary from oppressive, socialist policies.

Detroit was one of the most corrupt cities during Mayor Young’s tenure.  It was crony capitalism at its worst.  Everyone was corrupt.  Even the authorities were forever investigating the mayor.  (A later mayor was doing a lot of the same.  And he went to jail.)  It was during the Young administration that a couple of humorous slogans started to appear on T-shirts.  “Welcome to Detroit.  Now get the hell out.”  And “Detroit.  Where the weak are killed and eaten.”  High praise indeed for the Murder Capital of America.

Detroit’s Future – Returning to the Plow

So what happens after a city suffers at the hands of Big Government for a few decades?  Well, the population declines.  Because no one wants to live in the city.  About a million people have left Detroit since its peak in the 1950s.  And if that ain’t a repudiation of Big Government, I don’t know what is.

So what is the current mayor doing?  Well, the city is broke.  City services are in shambles.  So they’re going to move people out of sparsely populated neighborhoods.  Pack them closer together.   And abandon large tracts of land.  Just let the land return to nature.  Or plow it into farmland.  If anyone wants to buy it.

Ironic, really.  The city that made the world move forward is moving backward.  A sad ending indeed for the Motor City.

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