Thomas Hemphill and Mark Perry write The Myth of ‘Cowboy Capitalism’ in The American, 3/3/13.

Excerpts:

The Code of Federal Regulations (established in 1938) is where all the administrative rules of U.S. federal agencies are compiled; American businesses, employees, and consumers must comply with these rules. To provide perspective on the growth of the U.S. regulatory state, the Federal Register, in its first volume, published in 1936, contained 2,620 pages. In 2012, in its 77th volume, the Federal Register contained 77,249 pages – an increase of 2,848 percent. The past decade was the Federal Register’s most prolific, with an annual average volume of 75,413 pages.

While most of that decade encompasses the George W. Bush era of “cowboy capitalism,” President Obama holds the record for the most plentiful consecutive two years (2010 and 2011) of pages published in Federal Register history, with 81,405 pages and 81,247 pages during these years, respectively.

The historical trends of the last decade show that when it comes to the regulation of American business operations, the direct involvement of government in providing subsidies to specific industries, and the level of federal taxation of corporate income, the “cowboy capitalism” moniker applied to the U.S. political economy is more myth than fact. To the extent that America may have deserved the distinction of being a “cowboy capitalist” nation in the 1980s, that distinction has clearly changed in recent years as economic freedom in the United States has suffered a steep decline since the turn of the millennium.

And what would it take for the United States to regain its ranking among the world’s most “free” economies? According to Heritage, it “will require significant policy reforms, particularly in reducing the size of government, overhauling the tax system, transforming costly entitlement programs, and streamlining regulations.” Those are serious fiscal and institutional challenges that realistically could take several decades to successfully address, suggesting that any significant shift in the direction of a “freer” market economy and “cowboy capitalism” would be generations away.

- See more at: http://www.american.com/archive/2013/march/myths-of-american-cowboy-capitalism#sthash.wYp0TmHO.dpuf

HKO

A common question among my business associates is what business one would start today.  The most common refrain is one that is dependent on the government in some way.  The number of new business start ups is at an all time low.  Regulations are often a ruse to protect existing industries from competition.  The more complex the regulations the more effective they are in restraining startups.

David Stockman

David Stockman writes Sundown in America: How Crony Capitalism has Left Us State Wrecked in the 4/1/13 New York Times.

Excerpts:

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster.

But even Mr. Obama’s hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour. Fast-money speculators have been “purchasing” giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.

for contrary opinions and comments on Stockman’s article: Economic Villains and Heroes  

“Variations also act as purges. Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place “to be safe” makes the big one much worse. For similar reasons, stability is not good for the economy: firms become very weak during long periods of steady prosperity devoid of setbacks, and hidden vulnerabilities accumulate silently under the surface—so delaying crises is not a very good idea. Likewise, absence of fluctuations in the market causes hidden risks to accumulate with impunity. The longer one goes without a market trauma, the worse the damage when commotion occurs.”

Excerpt From: Nassim Nicholas Taleb. “Antifragile: Things That Gain from Disorder.” Random House, 2012-11-27. iBooks.

This material may be protected by copyright.

Check out this book on the iBookstore: https://itunes.apple.com/us/book/antifragile-things-that-gain/id522380506?mt=11

I meet every couple of months with a couple of small groups of diversified small businesses in the Southeast.

Here is what I am hearing.

Few are making any significant capital expenses.  Taxes are too high and conditions are too uncertain. These small businesses run with the purpose of minimizing a profit.  This means that they may rent a fancier office space than they would normally, furnish it nicer and buy more expensive company cars.  Why? Because this maximizes their benefit AFTER TAX.  They would rather spend $10,000 more on a company car than show the $10,000 on the bottom line and then give half of it to the government.

This is how small private companies think.  This is the opposite of the way public companies think.

This same thinking is exhibited in estate planning.  Consider a successful businessman in his fifties.  He has accumulated a net worth of roughly ten million dollars.  He is clearly well off but not private jet, Bentley driving, mansion occupying wealthy.  In fact most of these people drive their cars for several years , go to their children’s ball games and generally lived relatively modestly in order to grow their business.  They are generally not conspicuous consumers.

But looking at their position and thinking they may live another 30 years they realize that this comfortable cushion will double and triple with just modest investment returns, and that this will put them in a very high estate tax bracket.

They will set up trusts for their kids and their preferred charities, but they will still likely face significant estate taxes.  They are thinking that if they leave the financial assets to grow the government will benefit, not their family.  So they start to think like conspicuous consumers.  They will buy the expensive boat and tangible items like jewelry and collectibles that they can just hand to their children or family members.

At first they feel guilty, because they are not used to this way of thinking.  They have been used to postponing consumption and sacrificing to grow their business.  But when they realize that the alternative is to lose that money to government confiscation they quickly adapt.

Some think this is a good thing- that forcing them to spend their money is immediately stimulative to the economy, but that is very short sighted.  We benefit far more when they invest those funds in businesses that increase the GDP.  This not only creates jobs that are sorely needed, but it also creates the revenue stream that the government so desperately seeks.

During the 1970s inflation drove financial returns into higher tax brackets. Investors sought inflation protection in tangible assets.  When inflation was tamed in the 1980s this money flowed heavily back into financial assets and fueled the stock market boom and growth in the GDP for the next 25 years.

Today the problem is not inflation; it is the fear and reality of increasing taxes and stifling regulation.  Investment capital is going to less productive uses, driven by tax avoidance.

One businessman commented that the penalty for not buying health insurance is higher than the profit he currently generates per employee.  Alternatives in his competitive industry are few. His competitors with fewer than 50 employees, who do not have to comply with the health insurance requirement, will have a distinct advantage.  What an anti-growth policy!

Another commented that what was once a mistake in running a business is now a crime.  Whether it is immigration, environmental, health care compliance, or infinite state and federal regulations,  a business owner is assumed to be malicious in his intent and actions.  Fewer owners will want to take the risk of deploying their capital in illiquid small companies, only to be branded a criminal.

Larger businesses with big administrative staffs are better able to manage the regulatory maze.  Very small businesses with only a few employees can manage to stay off the grid.  But the businesses starting to require significant capital investment with 50 or more employees is bearing the brunt of the regulatory damage.  This has always been true to some extent but the increased regulatory burden has made this worse.  This is the economic sector that provides next year’s Apples, Dells and Fords- and most of the new jobs.

This has been the picture for four years, and even I get tired of small business people including myself whining about it.  Since the last election we have had to accept a realty that we wish was different. These small but successful business people will change their behavior even if they are not professional golfers from California.  The greater good, which the dominant leaders so promote, will suffer from the actions these small business people will take to minimize the damage from the policies of this administration.

John Allison

When the Federal Reserve steps in and uses monetary policy to stop the downside correction process, all it achieves is to defer problems to the future and make them worse. Its action delays and distorts the natural market correction process, thereby reducing the long-term productivity of the economic system by encouraging a misuse of capital and labor. One of the best ways to view free markets is as a great number of experiments that are being conducted simultaneously. Most of the experiments are failures. However, every failure contributes to the learning process. Thomas Edison noted that the 1,000 apparently failed experiments that led to the lightbulb were, in fact, absolutely necessary. For every Google or Microsoft, there are 1,000 failures, all of which are in a certain sense necessary.

from The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope by John A. Allison

HKO

The true cost of regulations in that in the effort to avoid the pain of small failures we also stop the construction of firewalls that would avoid large failures.  Secondly, we miss the value of failures in ultimately achieving success and innovation and thus inadvertently miss out on opportunities and new discoveries. This combination of outcomes increases the downside and restrains the upside.