Franz Kafka

In my three or more decades of business experience and relationships I have only encountered a very small portion of the business owners. Yet it is striking how many I have encountered that had an encounter with the government that could best be described as Kafkaesque.

For those unfamiliar with the author, Franz Kafka, the term refers to his novels and generally means a situation having a nightmarishly complex, bizarre, or illogical quality, often involving a bureaucracy. Most business owners I know are honest, moral and ethical .  Their success is marked by sacrifice, hard work, and responsibility.  They are very charitable and generous with their employees, colleagues and their church and community.

Yet they too often crossed a government bureaucrat or are held accountable to a regulation that the regulators themselves seem to have trouble understanding. Their experience is often very expensive and can be threatening to their enterprise.  Trying their best to do the right thing, these business owners are treated as criminals without the benefit of trial. They spend a fortune on lawyers trying to resolve a problem where they have no leverage and the problem is anything but clear.

This harsh reality is not limited to any single Federal agency; the story is the same with just about any of them.  In this world, laws can be applied retroactively, you can be held liable for parties you never met, and you are guilty until proven innocent.  Regulations that are impossible to comprehend are enforced by zealous bureaucrats with impunity.  When you hear these stories you wonder why the unemployment rate isn’t triple what it is.  Who would risk capital and a lifetime of work to the whims of a bureaucrat?

If you want laws to be respected you must make the laws respectable.

The First blow to the Democratic majority was the election to fill the Senate seat of Ted Kennedy which was surprisingly won by Republican Scott Brown.  In the regular election the Democrats are trying to retake the seat with the candidacy of Harvard law professor Elizabeth Warren.  Much has been said about Elizabeth Warren’s claim of Indian ancestry and what impact it had on her academic career.

Professor Warren claimed minority status as a Cherokee Indian when applying to her academic position as a law professor at Harvard.  Her claim was based on family ‘lore’ and her belief in her Indian heritage because of the predominance of high cheek bones in her family.  Investigators, however found there was practically no documented ancestry to validate her claim.  One investigator determined that she may have been 1/32 Cherokee. But Guy Benson noted in Townhall, Surprise: Genealogist Who “Confirmed” Warren’s 1/32 Cherokee Heritage Admits Error, that even this claim was in error and undocumented.

Ms. Warren claimed that she did not use the false heritage to gain advantage falsely, but that she just wanted to meet interesting people. Yet she was listed on the University of Pennsylvania’s and Harvard’s faculty directory as a minority.  Furthermore she asserted that her success was not due to her minority claim but due to her work and accomplishments.

She graduated from low ranked undergraduate (University of Houston) and law school (University of Syracuse). Her research has been  poorly rated by peer reviews .

Investor’s Business Daily noted in Cherokee Liz’s Shoddy Scholarship:

A Northwestern University peer review of her 2005 paper on the subject, for example, ripped it apart, arguing “the methods were so poor they gave cover to those who want to dismiss the problems of the uninsured — they can say the only paper out there uses a suspect method.”

ABC News suggested she was exercising a hidden agenda to promote a government-run health system. Sure enough, President Obama in 2009 seized on her findings to argue for socialized medicine: “The cost of health care now causes a bankruptcy in America every 30 seconds.”

In fact, as ABC pointed out, the claim cannot be supported by empirical evidence. Asked where he got the flawed data, the White House cited the 2005 study by “Professor Warren.”

In 2010, as Obama was floating Warren’s name as someone to run his new Consumer Financial Protection Bureau, “The Atlantic” magazine reviewed her academic work and found a disturbing “pattern” of using bogus metrics to inflate the case for left-wing causes. “Deeply, deeply flawed,” it said of her research. “This isn’t Harvard (Law) caliber material — not even Harvard undergraduate.”

Her curriculum vitae shows she bounced from college to college, working as a lecturer or researcher, for a full decade after graduating from Rutgers Law, ranked 82nd by Top-Law-Schools.com. (She got her bachelor’s degree from the University of Houston, one of the least competitive colleges in the country).

She was offered a full professorship after she started listing herself as a minority. Harvard hired her in the mid-1990s, when the school was under fire for not having enough minority professors.

Yet with this inauspicious academic background she earns $429,981 as a law professor plus hundreds of thousands more in consulting and royalty fees.

What is a terrible embarrassment for her, should be an even greater embarrassment for a University with the stature of Harvard.  It is also a humiliation for those who want to keep affirmative action from becoming an avenue of fraud and mediocrity.

Jamie Dimon

The J.P. Morgan loss is a non story.  It is not illegal to lose money. The loss was born by the shareholders, as it should be and they – not the regulators - should hold Morgan and Jamie Dimon accountable. Robert Samuelson noted as much in Investors Business Daily in JPMorgan Chase Loss Is No Reason For New Regulation. It is worth noting that it is in the section of IBD called “From the Left.”

On a similar note Tom Frost writes The Danger with Big Banks in the 5/15/12 Wall Street Journal.

Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don’t deserve protection either by the FDIC’s explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes.

This seems incredibly obvious to me.

The president’s campaign assault on Bain Capital because Romney had to close some plants and lay off workers obviously chose to ignore the far greater number of  companies and jobs that were created by the capital he raised. (Newt Gingrich lost all credibility when he took the same course during the primary). Obama seems to prefer failure in ‘noble’ efforts like Solyndra and other failed solar companies.  The critical difference is the accountability Romney had to his shareholders risking their own money and the total lack of accountability Obama had using taxpayers’ money.

Thomas Sargent gives an interesting perspective in An American History Lesson for Europe, in the Wall Street Journal 2/3/12.

Excerpt:

To finance canals and railroads, many state governments incurred large debts in the 1820s and 1830s. A financial crisis in the late 1830s pushed many of those state debts into default.

Appealing to the precedent set by the 1789 bailout, state creditors asked the federal government to bail out the states once again. After an enlightening debate, in the early 1840s Congress declined, so many states repudiated their debts.

In the aftermath of those repudiations, many states rewrote their constitutions to require year-by-year balanced budgets, something they had never done before. As noted, fiscal crises, like the one in Europe today, often produce political rearrangements—at best peaceful ones like these.

Did the federal government do the right thing in refusing to bail out the states in the early 1840s? By doing so, the federal government reset its reputation vis-a-vis the states, telling them in effect not to expect it to underwrite their profligacy. In the short run, that cost the federal government substantially in terms of its reputation with its own creditors. Federal credit abroad suffered along with state credit. But in the long run, the decision exposed state governments to continuing market discipline, making future crises and requests for federal bailouts less likely.

If the federal government had chosen to bail out the states a second time, it probably would have taken greater control over state taxes and revenues in order to prevent yet another bailout situation. Refusal to bail out the states was thus a pivot point in sustaining a federal system in the United States. It led the states to discipline themselves by rearranging their constitutions in ways designed to allow them to retain freedom and responsibility for taxing and spending within their borders.

HKO Comments:

Part of the bargain to ratify the constitution was for the federal government to assume the debts of the states, largely incurred to win the war.  But under careful consideration the Congress did not let that become a precedent.  They looked beyond the immediate crisis, and its very real costs,  and felt this position was in the long term best interest of the nation.

While Sargent wrote this as a lesson to Europe, it is also a lesson to us to look beyond short term problems. It has been our unwillingness to face short term pain that has led to solutions that only magnify the problem later on.

The Editors of National Review responds to the President’s call for fairness in Buffetted by Taxes, 4/11/12

Excerpt:

The Buffett Rule would function as a secondary alternative-minimum tax, putatively to accomplish what the primary alternative-minimum tax has failed to do: sock it to billionaires (“billionaires” here being defined in some instances as “individuals making $250,000 a year,” which is mathematically suspect). The case for the Buffett Rule is built upon a myth cultivated by President Obama, by Warren Buffett, and by many of their supporters and admirers: that high-income Americans pay lower tax rates than middle-class Americans. This is a falsehood, one that has been amply documented with data from the tax experts at the IRS and by the nonpartisan Congressional Research Service.

Legend has it that Mr. Buffett, most of whose income is taxed at the 15-percent long-term capital-gains rate, pays a lower percentage of his income in taxes than does his modestly paid secretary. This is almost certainly untrue. Even if Mr. Buffett were paying half that 15-percent rate — 7.5 percent — he still would be paying a higher rate than does the typical family in the $40,000-$50,000 range, whose effective rate is just 3.2 percent, according to the Tax Policy Center. Wealthy investors such as Mitt Romney and private-equity managers typically pay a rate of about 15 percent, since most or all of their income is derived from investments, which are treated preferentially. But even so, 80 percent of U.S. households pay a rate that is less than 15 percent, and about half of U.S. households pay no federal income tax at all.

In absolute terms, high-income Americans pay practically all of the federal income taxes, and they pay a higher percentage of their incomes than do typical middle-class Americans. These facts are indisputable.

HKO Comments:

Like so many bad policies this is also based on unsound assumptions.  Anecdotal extremes are not the basis for good policy decisions.

Besides, the math does not add up.  Trying to cover this record deficit with increased taxes on a small group of rich people is like rearranging the deck chairs on the Titanic.  It is a ruse to avoid confronting the real problem.

The editors appropriately noted that call for fairness is:

a non-solution to a non-problem intended mainly to distract from the administration’s non-solutions to real problems.