(Leverage: amount of debt that a company uses in its capital structure.  This is called leverage because it effectively multiplies, or leverages, the equity owners’ gains or losses.)  Over the last few years we have seen firsthand how over-levered companies can create an unstable environment.  Heavily levered firms such as investment banks, AIG, General Motors, and a number or other smaller companies have either declared bankruptcy or created serious risk for equity owners and others after the downturn in the economy.  So why are these companies so heavily levered?  Don’t the equity owners have an incentive to keep leverage lower to protect their positions?

The tax code in the United States calls for high corporate and personal tax rates, but partially offsets these high rates with deductions that corporations are allowed to take to lower their tax exposure.  Whether taxed at the corporate level (C-Corporations, think of most publicly traded companies) or only the personal level (S-Corporation, LLCs, LPs, et cetera, think of most small companies), the United States tax code allows companies to deduct interest expense from loans to the company from their earnings to lower their tax-basis.  As such, the more interest companies pay, the less they pay in income taxes.  This strategy, to offset the interest expense of debt with tax savings, is referred to as the debt-tax-shield (DTS).

For example, if a company borrows money at a 10% interest rate in a nation with no income taxes, the cost of the debt is 10%.  However, if the company borrows money in the United States with marginal income tax levels at 35%, the effective cost of debt is 6.5%.  The lower effective interest rate is a result of the income tax.  This lower effective interest rate inspires companies to borrow more money than they otherwise would because the cost of borrowing that money is lower, in relative terms, than it should be.  Furthermore, the higher the tax rate, the more incentive companies have to take on debt.  Consider a 50% marginal tax rate, under which out 10% debt would effectively cost 5%.  This artificially increased debt load encumbers companies and the entire economy with more risk.

This is just another instance where the government serves to distort markets.  This is by no means a call to remove interest expense from taxable deductions, as that will do nothing since companies will find other creative ways to reduce their cost of capital under whatever tax structure may be in place.  Instead we should be rid of income taxes, or at least lower the income tax rates.

Remember how everyone told us that investment banks were trading securities, more specifically derivatives, which are so complex that not even Warren Buffet or Alan Greenspan understood them and this led to the downfall of the economy?  Well, there is no longer any need to concern yourself with any of that.  You see, even though Warren Buffet doesn’t understand derivatives trading our friends in Congress understand it perfectly.  In fact, they understand it so well that they have produced and passed a 2000+ page bill outlining new regulations on derivatives trading among other massive financial regulation.

The three most visible minds behind the new financial regulation were Chris Dodd (D – Connecticut Senator), Barney Frank (D – Massachusetts Representative), and Harry Reid (D – Nevada Senator and Majority Leader).  To say that these men are completely inexperienced and uneducated with regard to the world of finance would be a gross underestimation.  Dodd did his undergrad in English literature, Frank in history, and Reid went above and beyond with a degree in political science.  All three men went on to achieve law degrees.  Chris Dodd has the impressive distinction of holding a complete monopoly on the threesome’s private sector work experience with two years under his belt as a lawyer at a private firm.  Neither Barney Frank nor Harry Reid worked one day in the private sector in their professional careers.  What’s more, none of these men has spent one day in the financial sector and not one studied finance in school.

This is not an atypical cross-section of the people that are governing us today.  “Politician” has become a profession in this nation – no longer a service.  If, for a minute, we even assumed that the world does need protection from financial risks (which I would strongly argue it does not), this is like the blind leading the blind.  Dodd, Frank, and Reid would have us believe that they are somehow protecting you and me from the evils of Goldman Sachs and John Paulson.  However, they do not even know what they are protecting us from.  What Dodd, Frank, and Reid do know is how to win votes (though they seem to be losing their touch).  They can stand at a podium and tell the world that they are protecting them from the evil robber barons on Wall Street.  Because most of the populous does not understand financial derivatives any better than their congressmen, people are duped into buying ill-advised protection rather than face the free market head on.

How many of you got burned on your derivative investments over the past two years?  If you did get burned, how much of that was attributed to fraud or some other criminal act versus a bad investment decision?  Even though most people (particularly congressmen) do not understand derivatives, they are not beyond the human realm of understanding.  Mr. Buffet, though he claims derivatives can be harmful, trades in derivatives every day in his insurance concerns.  You own a derivative on your automobile called insurance.

A lack of understanding in Washington DC is making the financial system into a mass of molasses where nothing can be done without jumping through the hoops of regulation.  This serves to make finance more expensive and a game that only the behemoths can play in because of the exorbitant expense of jumping through said regulatory hoops.  The consumers and the small business people will end up paying for this.  It is already reported that banks will do away with free checking and many branches, instead charging $10 per month for a checking account and requiring you to deposit checks at ATMs instead of bank branches.  Loans will become more expensive as the costs of administering those loans within the government’s guidelines increase.  Lending to small businesses and consumers will become less frequent as financiers are unable to hedge their risks with derivatives.  Food production will become more expensive as farmers are unable to sell derivatives on their crops at the same prices.

Government has grown too large and it is stifling the people of this once great nation.  We no longer believe in free enterprise and efficiency, but rather rules and safety nets.  The only way this nation or any nation will prosper is to afford its citizens liberty – something that is lost on our politicians.  This election season take this nation back from the career politicians and those that would rather security (in all forms, not just militarily) than liberty and let’s start on the path to rebuilding the prosperous, free society that made this nation so great.

“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.” -Ben Franklin

This is in addition to an article titled “How the left was won”

We are presented with visions of big government beating down big business and helping the small businessman and laborer.  Government tells us that it will protect us by putting reins on Wall Street, requiring expensive drug testing, and regulating hedge funds.  Why then did Barack Obama and the Democratic Party reel in $89 million from Wall Street, over $14 million from big pharma companies, and the support of legendary hedge fund manager, George Soros, during the Presidential campaign in 2008?

What most of us misunderstand is that the regulation that is imposed by big government typically helps big business and hurts small business.  It does so by eliminating the possibility of competition for big companies.  For example, on the surface it would seem that Pfizer, a large pharmaceutical company, would be opposed to the uber-expensive drug testing that is required of the FDA.  After all, this will cost them a great deal when developing new drugs and will harm their bottom line.  However, that is only partially correct.  By having extremely expensive and time-consuming testing measures be required by the government, Pfizer is able to escape any pesky competition that may come from startup drug companies.  That is, a small drug company will not have the capital available to invest millions of dollars and years of time testing a new drug it hopes to sell.  However, Pfizer will have such resources, so it can eliminate the threat of competition and its drugs (along with those of a handful of other large pharmas) will be the only new drugs to hit the market in the future.  Likewise, big Wall Street firms and George Soros benefit from financial regulation because such regulation makes it very difficult for new, innovative firms to afford the costs of such regulation.  As such, the established Wall Street firms and hedge funds do not need to be worried about future competition from new market entrants.  An additional (and more apparent) bonus for Wall Street and Mr. Soros has been the amount of government (read: taxpayer) money that is used to buy worthless assets and prop up failed financial institutions.  Such government investments directly improve the investments of Wall Street firms and Mr. Soros.

By big government I do not necessarily mean democrats – I am referring to all big government.  It is simply the case that democrats promote even bigger government than republicans (remarkably).  The only way to truly keep big business honest and force them to compete fairly with the rest of the market is to sustain a truly free market.  Regulation, taxation, and subsidization will only serve to grow big business and make growth more difficult for small businesses that will innovate and provide more competition.

I, like many of you, have always wondered why it is that liberal economics dominate the ranks of well-educated, intelligent, financially well-off people.  Why people that would benefit from welfare and other transfers of wealth would vote democrat is self-explanatory.  However, the reasoning behind a wealthy businessman, an educated and well paid college professor, or a young person in college or recently removed from college to vote democrat can be perplexing.  These people would generally benefit from free markets and are likely to be well educated enough to understand the negative consequences of government control.  So why do they consistently vote for the left?

In 2005 the Washington Post reported a story entitled, “College Faculties A Most Liberal Lot, Study Finds.” The study points out that 72% of all college professors polled identified themselves as liberal.  Not shockingly, of those professors teaching at “elite” schools, 87% identified themselves as liberal.  If you follow politics and the world of economics you will be well accustomed to hearing of liberal policy and politicians coming out of Yale, Harvard, etc.  Most of the professors at these elite institutions are incredibly accomplished academics and have few real monetary concerns.  Most of them must be well informed on the benefits of free markets and the pitfalls of government, so why do they lean so far left?  This incongruity baffled me for some time, but I believe I have the answer: they are more intelligent than most other people, and they know it.  Because they are so smart, they feel that they are better equipped to make decisions than people with less intellectual ability.  To some degree, they are right; I would rather a Yale economics professor manage my investment portfolio than Jim-Bob from West Virginia (no offense, Jim-Bob).  Regardless, the problem arises when they believe that they can design macro decisions that replace the countless micro decisions that are made in a free market.  No one person, or group of people, is more intelligent or can dictate a more efficient system than the market.  Despite all the brain-power that is held by this select group of people at these elite education institutions, the market’s knowledge, intelligence, and efficiency dwarfs the intellect at Yale, Harvard, and the rest of the Ivy League combined.

Why are college students, typically from well-off families or at a very minimum intelligent enough to make their own way in the world without the help of the government, so rampantly left-leaning?  Here I think there are a few reasons.  The obvious reason stemming from the paragraph above: college campuses are typically more liberal because of the ideals that are taught by more liberal college professors.  But, it goes deeper than that.  Most college students have yet to see the real world.  They have yet to rely completely on their own paycheck and see a huge percentage of it taken away by Uncle Sam.  They have yet to see firsthand the demise of the entrepreneur at the hands of the government.  Perhaps most importantly, they are generally accustomed to having a safety net.  Most college students live in relative squalor, but they still know that if push came to shove they could depend on help from their parents or other family members.  This leads to a fear of not having a safety net and a belief that everyone should be entitled to a safety net of their own.  This is not to say that every college student has a safety net, but most do and I believe a lot of the liberal beliefs of college students stem from said safety net.  One last piece of influence on college students is social issues.  That is, college students generally have more liberal social ideals and believe that gay people should be able to be married and women should be able to have abortions should they choose to do so.  I was in a boat similar to this in my earlier college years.  Like many college students, I was not terribly concerned with the economy because the economy didn’t have any impact on my college student life, so I focused on the social issues.  One nice thing about college “lefties” is that many of them change their opinions.  In fact, as more and more of them learn about economics and the importance of the topic, they tend to shift more toward libertarianism, which satiates their desire for free societies while ensuring free markets.

Now for the real challenge: why does big business love democrats?  We are always told by the media that democrats are trying to reign in big business; the picture is painted of big business going head to head with liberals.  This is one of the greatest misrepresentations in our world today.  As a sort of cliff-hanger, I am going to address this issue in my next article, “Why big business loves big government,” so check back often!

My reasoning behind this article is indeed exploratory, but there is also an ulterior motive.  We should not base our political ideologies or votes on what is believed or said by people that seem more intelligent, knowledgeable, and successful than we are.  Develop your ideologies based on what you think is right and what you are able to reason.  With the rise of reason we will have an increasingly great society.

It sounds like such an ugly term, “Robber Baron.”  The phrase brings to mind thoughts of abuse and theft.  But who and what exactly did these so called Robber Barons rob?

The most famous Robber Barons were John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt.  Each of these men built up remarkable wealth – each would be worth hundreds of billions of dollars in today’s currency.  Remarkable feats, so they must have stolen from somebody to get there, right?

Henry Ford, founder of Ford Motor Company who also built up hundreds of billions of dollars (in today’s currency) in wealth, has a famous quote that goes something like, “The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed.”  This is a creed that every robber baron has followed, including Rockefeller, Carnegie, and Vanderbilt.  In a capitalistic free market, as was seen in the time of the Robber Barons, the only way to build true, long-lasting wealth is to offer a product of greater quality and/or lower price than one’s competitors to as many people as possible.  As such, a capitalist is only able to amass wealth by providing his fellow man with something that he would otherwise not be able to enjoy or afford.  Rockefeller did it primarily with oil.  He was able to drill and extract oil and sell it to his customers at lower prices than his competitors could.  This allowed people to operate machinery, grow industry, heat their homes, cook their food, and perform a number of tasks that would have otherwise been too expensive.  By offering people cheaper, more accessible energy products, Mr. Rockefeller was able to amass huge amounts of wealth.  Carnegie did the same thing with Steel and Vanderbilt provided the nation’s people with cheaper, more effective shipping and railroads.  It is impossible, in a free market, to amass the huge amounts of wealth these men did without dramatically improving the lives of a vast number of people – and that is exactly what each man did.

Not only did these Robber Barons improve the lives of their customers, but they provided countless jobs and created growth in the economy.  Carnegie not only provided jobs to his steel workers and administrators, but he also made it possible for men to have jobs laying his steel along Vanderbilt’s railways, building Rockefeller’s oil derricks, manufacturing Ford’s automobiles, or building skyscrapers in Manhattan.  Furthermore, each of the men created huge amounts of wealth for other people that either invested in their respective concerns or purchased their goods and used them to build up companies of their own.  Each Robber Baron created many times the wealth and income that he, himself, took home.

So, it seems that Robber Barons did not really rob anybody – in fact they seemed to have improved the lives of most of the people in this nation.  So why the nasty name?  It must be their unrelenting selfish greed that brought on this negative perception of these magnates.  After all, a man such as John D. Rockefeller cannot build up $320 billion in wealth without greedily hoarding everything he can get his hands on like Ebenezer Scrooge, right?  Wrong.  The Robber Barons, despite their name, were notorious for actually giving away their money.  Never has there been a series of philanthropists such as these.  Each man puts Bill Gates, Warren Buffett, and Bono of U2 to shame.

John D. Rockefeller

•    Throughout his life, he gave a minimum of ten percent of his earnings to education and public health services.
•    Rockefeller funded the University of Chicago with an $80 million grant (1900 money), making it one of the preeminent American universities today.
•    He provided much of the funding for Spelman College (named after his in-laws, who were ardent abolitionists before the Civil War), which was a college in Atlanta for black women.
•    He established what he called his General Education Board, which promoted education at all levels everywhere in the U.S. and was especially active in promoting the education of black children in the South.
•    His donations led to a revolution in medicine with the Flexner Report, which essentially established the medical profession as we know it today.
•    He gave extensively to Yale, Harvard, Columbia, Brown, Bryn Mawr, Wellesley, Vassar and other universities.
•    He became one of the greatest benefactors of medical science, founding the Rockefeller Institute for Medical Research, which later became Rockefeller University.
•    He founded the Rockefeller Sanitary Commission, which eradicated the hookworm disease, which had plagued the Southern United States.
•    He gave $250 million to his own Rockefeller Foundation, which in turn endowed the Johns Hopkins School of Hygiene and Public Health, founded the Peking Union Medical College, helped in the World War I war relief, and other great feats.
•    He founded the Laura Spelman Rockefeller Memorial foundation, which supported work in social studies.
•    Later in his life, he was known for walking around town with pockets full of money and would hand it out to children and adults as he went from place to place.

Andrew Carnegie

•    He established public libraries throughout the United States, United Kingdom, and other English-speaking countries.  In all, he funded approximately 3,000 libraries in 47 U.S. States, Canada, the UK, Ireland, Australia, New Zealand, the West Indies, and Fiji.
•    He helped fund the University of Birmingham.
•    He founded the Carnegie Institute of Technology in Pittsburgh, which became part of Carnegie Mellon University.
•    He founded the Carnegie Institution in Washington, DC, which was setup to support scientific research and is still advancing science today.
•    He served on the board of Cornell University.
•    He funded the construction of the Hooker telescope, which was the largest telescope in the world for three decades.
•    He founded the Carnegie Trust for the Universities of Scotland to assist education at Scottish universities.
•    He notoriously established large pension funds for his former employees and later established TIAA-CREF, a pension fund for college professors.
•    He built Carnegie Hall in New York City.
•    He was a large benefactor of the Tuskegee Institute for African-American education and he helped Booker T. Washington create the National Negro Business League.
•    He founded the Carnegie Hero Fund in many nations for the recognition of deeds of heroism.

To go on listing each of the Robber Barons’ philanthropy would be a waste; let us just say there was a lot of it.

Not only did these men provide cheap goods and services, countless jobs, and unprecedented wealth, but they also gave more to charity than anyone before or since.  The free market set the sky as the limit for these men and they capitalized on it.  By doing so, they improved this nation and the lives of its citizens.  It is time we stop referring to these men as “Robber Barons” and call them what they are: Capitalists.

I remember being told on sports teams that it was not winning that mattered, but having a good time. Well, damn it, I have a good time winning! Competition is bad. That’s what our nation is teaching children; it is also what the nation’s teachers’ unions are pushing on our public school system.

If there were one thing I would like the government to spend my money on it would be education (don’t mix my words, I’d still rather it be private, but if . . .). However, we are now spending well over $10,000 per public school student per year. Urban areas typically spend much more. Washington DC spends over $14,000 per student per year. This is more than double what we spent (adjusted for inflation) forty years ago. We constantly hear about underfunded schools being the cause for students’ poor education. “If only we could afford a new computer lab and upgraded gym, then our students would finally get the education they deserve.” Well, spending on education has gone up astronomically, while test scores have remained stagnant. How could this be?

There is one thing that rings true in every walk of life: competition improves everything. Yes, everything. The teachers’ unions of the United States disagree with this law, however. They will have you believe that children are too precious to be caught up in competition. This is why the teachers’ unions are the biggest opponents of voucher systems within public schools around the United States.

Voucher systems attach the money spent on each child’s education to that child and allows the child’s parents to choose where he or she attends school. So, you can decide to send your daughter to the school that has a 40% dropout rate or you can choose to send her to the school that sees 80% of its graduates advance to college. You can even have your daughter go to a private school that feeds directly into Harvard and the state will give your tax dollars to that school instead of the school that sees nearly half its students leave school for the local Jack in the Box. The school you decide to send your daughter to is the school that gets the money from the city/state/feds. This creates a competitive environment for schools in that they must offer your daughter the best education, most impressive facilities, and cheapest cost of attendance in an effort to solicit your bid of support. This competition then leads to every school either improving or closing. As the bad schools close the good schools will grow and new, even better schools will open. The main benefactors of this competition are your child (who will get a better education) and the tax-payers (who will save money because there will be less waste and therefore less spending on education). Seems too good to be true, doesn’t it?

Teachers’ unions do not see the voucher system the way sane, rational, freedom-loving Americans do. Teachers’ unions see the voucher system as a threat to job security. As it stands today, most teachers’ unions have negotiated tenure with public school systems. Once a teacher achieves tenure they become virtually impossible to fire and their salaries are fixed to nothing more than seniority and sometimes their level of education. As such, the incentive to log long hours helping to improve the education of students becomes extremely limited. Under a voucher system teachers would be expected to provide the best education possible and would face losing their job if they do not do so. Teachers would also be thrown into a system similar to the world of business where better teaching and results will lead to higher salaries and bonuses, instead of higher pay coming only with seniority. This is scary to someone that has no interest in working hard to improve education and teach younger generations. It is the goal of a teachers’ union to make it so no teacher ever has to worry about his/her job and so they vehemently oppose any system that will create competition amongst schools and teachers (i.e. the voucher system). It takes a special type of organization to accept the duty of educating our nation’s younger generations and block systems that would dramatically improve that education.

Luckily, not all teachers have such little confidence in their ability to teach that they would prefer tenure to the prospect of better instructing students and earning larger salaries. These are the teachers that I want teaching my (eventual) child and these are the teachers that will thrive if we ever do come to our senses and stop listening to the remarkably destructive and malevolent teachers unions.

Private schools do not provide a better education for any other reason than the fact that they must compete with other private schools as well as public schools. In school systems that have instituted voucher systems, the difference in the quality of education between public and private schools becomes increasingly narrow. Competition improves everything.  It is time we make our children’s schools compete. It is time that we see teachers’ unions as the incomprehensible organizations that they are; if a teacher is not confident enough in his abilities to compete with other teachers then he should not be teaching this nation’s children.

Please post your comments slamming my harsh treatment of teachers’ unions below.