LESSONS LEARNED #65: “The only thing the market is inefficient at is funneling money to anti-business politicians.” -Old Pithy

Posted by PITHOCRATES - May 12th, 2011

Microsoft Learns the hard way about the Costs of Lobbying

Once upon a time Microsoft had no lobbyists.  Microsoft grew to dominate the PC operating system with no help from the government.  Bill Gates became the richest man in the world with no help from the government.  And how did that go over with the government?  Not well.

Because of complaints by Microsoft’s competitors, the U.S. Justice Department began antitrust proceedings against Microsoft.  The complaint?  Microsoft was giving away something for free that others wanted to sell.  A web browser program.  Internet Explorer (IE), to be specific.  The competitors said that Microsoft had an unfair advantage when they bundled IE with their operating system.  Because why would people pay for something that they can get for free?  Consumers never complained about getting something free.  Just other corporations trying to make consumers pay for something that they could get free from Microsoft.  So the Justice Department went after Microsoft so consumers could no longer get something for free.  In other words, the antitrust case against Microsoft was to raise prices.  Which is kind of the opposite reason for an antitrust case.

Government may not know how to create or expand business activity.  But they sure know how to hurt a business.  Microsoft still bundles IE with their operating system.  But they learned a very important lesson.  And, today, Microsoft spends millions of dollars on lobbyists.  To lobby politicians for nothing in particular.  But to pay tribute.

There was no Health Care Cost Crisis before World War II

Once upon a time people paid their doctor’s bill.  Really.  They’d see their doctors.  The doctor would bill them.  And they would pay.  Of course, that was a long time ago in a mystical place.  The United States.  Before World War II.  Yeah, I know.  Crazy talk.  Paying your doctor’s bill.  But some crazy sons of bitches really did. 

Of course, back then, medicine wasn’t socialized yet.  Market forces controlled medical costs.  How, you may ask?  Simple.  The people ‘buying’ the medical services paid the bill.  Medical services were just another service provided by licensed professionals.  Like a plumber.   And though plumbers are expensive, they are affordable.  Because if they weren’t affordable, there wouldn’t be a market for their plumbing services.  As it was for doctors.  Before World War II.  Doctor services were affordable.  Because if they weren’t, there wouldn’t be a market for their medical services.  And it worked like this until World War II.  When health care became a benefit.  And benefit administrators came between buyers and sellers of medical services.

Let’s do a little experiment.  Let’s say you work for a company that is putting together a company picnic.  The company is paying the tab for all 20 employees attending.  And you get a company credit card to buy the food with no restrictions given.  What are you going to buy?  Hotdogs and hamburgers?  Or filet mignon?  Now, later in the summer, you’re having a family BBQ.  There’ll be 20 people in all.  But this time you’re paying the entire bill.  What are you going to buy?  Hotdogs and hamburgers?  Or filet mignon?  Chances are that you’ll be eating different food at these events.

The Price Mechanism doesn’t work if someone else Pays our Bills

Do you see how having someone else pay for your benefits affects your purchasing decisions?  You’ll be enjoying filet mignon on the company’s dime.  But you’ll be satisfied with hotdogs and hamburgers on your dime.  This is the problem in post World War II health care.  There are no market forces anymore in health care.  Someone else is paying for your benefits.  So you don’t care what the costs are.  So you’ll never object to getting the filet mignon of health care benefits.  Even if you’re a single guy.  And your employer is paying for insurance that includes breast and cervix exams.  If you were paying the full cost of your health insurance bill, though, you probably would not pay for breast and cervix exams.  Sure, they’re nice.  But as a guy you would probably never use these benefits.  So you probably wouldn’t pay for them.

This is a big reason why health care costs are so out of control today.  There are no market forces in play to control costs.  Other people pay for our benefits.  So we never ask, “Can I afford this?”  Which everyone does before hiring a plumber.  Dr. Gratzer, a physician and senior fellow at the Manhattan Institute, wrote that Americans pay only twelve cents for every dollar of health care services they receive.  Which means 88% of the American health care is already socialized medicine.  In other words, other people pay for 88% of an American’s health care.  And when other people are paying, how often do you ask, “How much does this cost?”

This is why health care costs are out of control.  Elsewhere in the economy prices serve as a mechanism to adjust supply and demand.  Not in health care.  No one knows the prices in health care.  Because no one asks.  And the further we go in this direction the worse it’s going to get.  Yet that is exactly the direction some in government want to take health care.  Why?

Politicians Matter more than the Cost of Health Care

Because the market is efficient.  It works very well when left alone.  Just ask Bill Gates.  Or anyone who saw a doctor before World War II.  The market works.  But it has one drawback.  It doesn’t need government.  And for those who are looking for a career in politics, that’s a problem.

Microsoft wasn’t harming any consumers.  They were hurting other businesses that couldn’t make consumers spend more money.  So the politicians stepped in.  To show they mattered.  And cared.  Also, Microsoft was obscenely wealthy.  A little lobbying on their part could fill a few campaign war chests.  And provide a nice vacation or two.  They just needed to see the light.  How things worked in Washington.

But becoming a senator or a representative needs more than a fat war chest.  You need people to vote for you.  And a good way to do that is to get as many people dependent on government as possible.  Either as patients in a new national health care system.  Or as employees in a vast new bureaucracy for the new national health care system.  Which is why they’re not turning to the free market to fix the cost problems in their health care system.  Like they are in the UK and Canada.  They don’t want to fix the cost problems.  They want the dependency created by a new national health care system.  They can worry about costs later.  After they’ve taken over one-sixth of the U.S. economy.

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LESSONS LEARNED #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 31st, 2011

Microsoft Learns the hard way to Lobby Congress

Microsoft was a rogue corporation.  A big, profitable, rogue corporation.  And it was in the government’s crosshairs.  With all of their going about their business.  Alone.  Without any federal assistance.  Who did these people think they were?  They didn’t spend a dime lobbying the federal government for anything.  As if they could just go on about their business competing in the free market.  Scoffing at the government’s business resources.  All those things they could bring to the table.  To make an unorganized market organized.  Make Microsoft better.  Make Microsoft’s products better.  All for a nominal fee.  Some campaign contributions.  A vacation junket or two.  A little monkey business with someone you’re not married to.  A Roman indulgence of intoxicating substances and flesh.  You know, lobbying stuff.  But no!  Not Microsoft.  Those holier than thou sons of bitches.  Who did they think they were?

Well, Microsoft went too far.  Pissed off the wrong people.  People with friends in Washington.  People with power.  And a justice department.  Empowered with antitrust legislation.  Big, nasty, legal teeth.  Their crime?  They gave away Internet Explorer free.  And that was unfair to their competitors.  But it was a sweet deal to the consumer.  None of them complained.  They were happy to get IE free.  It saved them money.  It was their competitors that were pissed.  Because they couldn’t sell something that Microsoft was giving away free.  So the Department of Justice (DOJ) sued Microsoft claiming they violated the Sherman Antitrust Act.  Which Congress passed in 1890 to protect consumers.  And here the DOJ was fighting a case.  And if the DOJ won, the consumer lost.  They would have to pay for IE or a web browser from one of Microsoft’s competitors.  Which just goes to prove that it is never a consumer that complains about ‘predatory’ pricing.  It’s always a competitor that can’t compete at the same price that runs to the DOJ crying for antitrust protection.

Microsoft learned a very important lesson.  When you sit on big piles of money you don’t dis the federal government.  You show them the proper respect and give them some of that money. For your own protection.  For if you don’t they will go after you.  Like they did with Microsoft.  Who is smarter now.  Today, Microsoft spends millions on lobbyists.  To pay tribute for the pleasure of being left alone to operate in the free market.

Money Corrupts, Big Piles of Money Corrupt Absolutely

Microsoft is not alone.  There are a lot of honest companies out there.  But, sadly, there are a lot that aren’t.  Especially if they have a friend in Washington.  Because Washington sits on great big piles of money courtesy of the tax payers.  And a select few spend that money.   Put these two together and it’s a recipe for corruption.  Because one person can skim a little off the top of a huge transaction that is all but impossible to see.  Unless you start living like a Rockefeller on a government salary, that is.

The Teapot Dome scandal was the biggest government scandal of its time.  It involved leases to oil reserves transferred from the Navy to the Department of the Interior.  These were strategic reserves for our navy in case we went to war.  Important to have.  Because you don’t want to run out of oil during a war.  Albert Fall was the Secretary of the Interior.  And it was his job to lease those oil reserves.  Which he did.  But they didn’t go to the low bidder.  They went to the one that made it most worth his while.  Ultimately it was all that ‘making it worth his while’ that did him in.  He became a very rich man.  Which was impossible on his salary.  So they caught him.

Congressmen profit as Shareholders in Crédit Mobilier

The Teapot Dome was a big scandal perpetrated by a few players.  The Crédit Mobilier scandal, on the other hand, had far greater tentacles.  And is a good example of how government partnering with business goes wrong.  It involved the Union Pacific Railroad.  A sham company they created called Crédit Mobilier.  And some 30 Congressmen. 

The railroad to the pacific was a risky proposition.  It would take a very long time to build.  It would go through some very difficult terrain and hostile Indian country.  And there were few shippers on the proposed road.  In other words, it would take a long time to earn any revenue on this line.  And it was possible that they would never complete it.  Or ship enough freight to operate it profitably.  So the government stepped in and partnered with the Union Pacific.  And the fraud began.

The trick was how to make this loser a winner.  Railroad profits weren’t the answer.  So how can a railroad company make a profit without running any trains?  Why, from construction, of course.  That’s where Crédit Mobilier came in.  They built the railroad.  Billed Union Pacific.  Who then billed the government.  And, surprise, surprise, construction costs went way over budget.  Because they were overbilling Union Pacific.  Who then overbilled the government.  But the government just kept on paying.  Why?  Because they had shares in the very profitable Crédit Mobilier.  You see, when you share in the obscene profits of a government contractor you have little incentive to see or stop the fraud.

Government Steps into the Mortgage Business and Gives us the Subprime Mortgage Crisis

For years the federal government implemented policies to increase home ownership.  In their models, this was the driver of all economic activity.  A lot of material and labor builds a house.  And a lot of material and labor builds the things that furnish a house.  Ergo, the more people who bought houses the greater the economic activity.  And that meant everyone.  Even the people who couldn’t qualify for a mortgage.  A lot of which were minorities.  So if a bank denied anyone a mortgage, it just reeked of racism.  So lenders had to find a way to make the unqualified qualified before the DOJ charged them with discrimination in lending.  So, in the mid 1990s, they figured out how to make the unqualified qualified.  Along with a little help from the government.

The subprime mortgage was the vehicle.  Adjustable Rate Mortgages (ARMS).  And No Income No Asset (NINA, aka, Ninja) loans.  Of course, these by themselves didn’t solve any problem.  Because no respectable lender would ever approve such risky mortgages.  This is where government came in.  Or, rather, the Government Sponsored Enterprise (GSE).  Better known to you and me as Fannie Mae and Freddie Mac.  Here’s how it worked.  The GSEs bought those risky loans from the lenders.  Then sold them to Wall Street.  Where investment bankers packaged them into Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).  High risk loans became low-risk, high-yield securities.  The risk was transferred from the bank to the taxpayer and then to the investor.  And back to the taxpayers when they had to pay for the bailout of the subprime mortgage crisis.

The enabler for this great financial crisis was the government.  First ‘encouraging’ banks to loan to the unqualified.  And then by their partnership with the GSEs.  Encouraging more and more risky behavior because they were getting a piece of the action.  So they turned a blind eye.  Even when some warned the committees responsible for their oversight.  They laughed.  Said they were just mean racists trying to deny fair and affordable housing to minorities.  And they insisted that these GSEs were financially strong and healthy.  Up until the world learned they weren’t.

Crony Capitalism can be Smart Government if it Saves the Environment

There’s one reason why government partners with business.  Corruption.  Crony capitalism.  Either an unscrupulous business trying to buy favors for personal gain.  Or an unscrupulous politician trying to sell favors for personal gain.  And good luck if you run an honest business.  Because the buying and selling of favors simply becomes paying tribute to be left alone.

Both sides are guilty of this.  Though the Left says it’s the Right that is in the pocket of the corporations.  Which is funny.  Because the Left is just as guilty.  But when they do it, it serves a higher purpose. So it’s smart government.  Such as when one of the world’s largest corporations, GE, doesn’t pay any income taxes.  By using some creative accounting practices.  But they’re very cozy with the current administration.  So they get a pass.  And they’re eager to cash in on all that green legislation.  To help them sell their green products.  You see, that’s good for the environment.  So it’s okay that they don’t pay income taxes.  And, more importantly, they have lobbyists.  They know how to play the game.  And they play it well.

But when the Right wants to cut the corporate income tax to stimulate the economy to create jobs, that’s just corporate welfare.  They’ll fight that every day of the week.  But if a corporation’s lobbyists treat them well, they’ll make the incandescent light bulb illegal.  So that corporation can sell more of their compact fluorescent lamps.  But that’s not crony capitalism.  That’s just smart government.  Because it saves the environment.

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