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.

Coca-Cola | Starbucks | McDonald’s | Google | Microsoft | Intel | U.S. Department of Housing and Urban Development

Which of the listed groups do you think has the highest annual budget?  You probably guessed right because it sticks out like a sore thumb – the United States Department of Housing and Urban Development (“HUD”).  HUD has a higher budget than Coca-Cola and Google combined.  Starbucks takes care of over 5 million patrons per day (2006 stat) and sells packaged coffee beans and numerous other goods, and does it for a little over $9 billion per year in operating expenses.  Google handles more internet traffic than any other website on earth (over 4% of the internet’s entire traffic), builds software for computers and mobile phones, and does a slew of other money-making ventures and it spends a little over $16 billion per year, which comes out to about 1/3 of the amount that HUD plans to spend in 2010.  HUD spent over $40 billion in 2009 and plans to up that by a modest $3 billion to over $43.7 billion in 2010 and was rated the worst landlord in the United States in 2006.  On a per working person basis, that is over $291 that each of us will spend on HUD next year.  I can get a Playstation 3 or a laptop computer for less than that.

There is nothing special about HUD that made me choose it for my example.  They are no more inefficient than any other department of the federal government and they could have easily been replaced by one of the other countless departments and agencies that our government has developed (full list: http://en.wikipedia.org/wiki/List_of_United_States_federal_agencies).

The inherent inefficiencies in government lead to dramatically greater levels of spending.  There is no incentive for a government agency to run efficiently, in fact there is an incentive to run inefficiently.  By bloating their spending, government agencies can secure more funding for the next year.  If, however, they run efficiently and go under budget, that money will be stripped from them the next year and reallocated to an inefficient program.  Furthermore, as an agency grows and hires more people, legislators become afraid to disband the agency because they will then be “killing jobs.”  Conversely, private people and organizations have incentives to spend as little as possible while producing as much as possible.  These capitalistic efficiencies, not government spending, are what have made the United States so prosperous in its brief history.

Would you rather have Shaun Donovan (HUD Secretary most of us have never heard of and has a higher budget than the Microsoft CEO, Steve Ballmer) spend your $291 next year, or would you rather spend it yourself?  Every dollar that the government spends is one less dollar that each of us can invest or use to buy food and clothing.  If the government really wants to improve employment and housing, they would be best suited to get out of the way and let the people of this nation spend their own money in far more efficient manners than the U.S. Government will ever be able to spend our money for us.

Let’s, for the sake of argument, assume that HR 3200 is completely revenue neutral and that no one will be taxed a single extra penny, because, for the purposes of my discussion below, it doesn’t matter whether this is true or not. If you comment on this article and say anything about revenue neutrality or no increased taxes (on people making less than that magical number of $250K/year, of course), I will simply laugh at you for not reading the article and shouting out talking points.

It has been established that insurance companies struck a deal with Washington. The deal: You (Washington) force everyone to buy an insurance plan and we (the big bad insurance companies) will support a plan to insure people with preexisting conditions.

That sounds great, right? I mean, it’s just like auto insurance. The reason auto insurance is so cheap (I pay more for car insurance than I do for health insurance… so figure that one out for me) is that the auto insurance companies have a better risk pool because both good and bad drivers are forced to buy insurance.

You see, what would happen if not everyone were forced to buy auto insurance is that people who are not risk averse and feel that they are great drivers would buy either a watered-down policy or no policy at all. The bad drivers (knowing that they are bad drivers or otherwise accident prone) and the risk averse would pay a higher premium for better insurance. The insurance company would really have very little way to tell who was buying the better packages because he is just a bad driver and who is simply risk averse. This problem is known as adverse selection, which often occurs in situations where there is an asymmetry of information, meaning one or both parties have information that the other does not have.

Because of this problem of adverse selection, the insurance companies would charge a very large premium for the bad drivers (i.e. the policies with more coverage) and a very small premium for the good drivers (i.e. the policies with less coverage).

Now, when the government steps in and forces EVERYONE to buy a certain minimum level of coverage, what happens? Well, now the insurance companies know that some of the drivers are very good drivers who will rarely, if ever, make a claim, while some are the bad drivers who will constantly be making claims, probably in excess of the premiums they pay. But, because of the risk pooling now in effect, the insurance company can charge the bad drivers a smaller premium than before because the good drivers are making up the difference. In other words, the good drivers are subsidizing the bad drivers’ insurance premiums when they are forced to buy a minimum coverage in excess of what they would have without the law forcing the purchase of a minimum coverage policy.

This is great for bad drivers, and terrible for good drivers. Not only is it bad for good drivers because they pay more, but there are more bad drivers on the road because the good drivers are subsidizing their bad driving practices! And, on top of that, some of the good drivers who would have bought less expensive policies and then either not repaired minor cosmetic issues that are pricey to repair, or would have paid out of pocket because their plan didn’t cover it will start getting those repairs done, increasing both demand for and, therefore, cost of auto repairs.

Back to health care:

The health insurance lobby is not entirely stupid. They understand what’s at risk here. Either they cover preexisting conditions, or they face competition against a “public option” which will most certainly cover preexisting conditions at a fraction of the cost, being backed by the seemingly bottomless purse of the United States Treasury (ultimately, this is tax payers’ money… and mostly “rich” tax payers’ money). So, they cut a deal with Washington.

The health insurance companies know that if they can create a better risk pool by forcing young, healthy people into plans with certain “minimum standards”, then they can offer lower insurance premiums to older, sicker people and they can offer to cover preexisting conditions. The solution is clear: get into bed with Washington.

Just like auto insurance, this is great for those who will use their health insurance the most: the sick and the old. This is a terrible deal for those who wouldn’t typically use their health insurance all that much: the young and the healthy.

This is a massive transfer of cost from the sick to the healthy. And, because the healthy will be forced to buy more expensive policies, they will be more apt to use the policy, increasing the demand of and, therefore, the cost of health care.

It all sounds like a good deal to anyone with a heart. However, when you look at the unintended consequences, you have to ask yourself if it’s right. The people who will be disproportionately hurt by this deal are the young, healthy people in our economy. It will become more expensive to ensure low wage earners (who are typically younger, healthier workers), and it will cost those young people who are either unemployed or self-employed a considerable amount more money to buy health insurance, because they will be forced into buying more expensive coverage to meet minimum coverage standards.

Ultimately, this will cost young, healthy people their jobs as they become more expensive to insure. It will keep unemployment rates higher among the very people this bill is aimed to help: the poor (low income earners) and the unemployed.

For those of you who have preexisting conditions and think this is a great thing, I only ask that you say out loud what you are truly asking for: “I want to force healthy people to pay more money so that I can pay less. I want to take from the healthy for my benefit.” Don’t try to make this seem like some nobel purpose you are pursuing – some right to which all Americans are entitled. You are in this for yourself. You are as greedy as Bernie Madoff, but you are trying to use the government to force people to give to you, whereas Bernie Madoff just committed fraud. You both have the same end goal: more for yourself at the expense of others.

Freedom creates optimal efficiencies because it demands the best from people and the best is always the outcome.  However, one of the byproducts of efficiency is creative destruction.

Take, for example, the typewriter.  At the height of the typewriter industry there were two notable typewriter manufacturers (there were more than two, but I am only referring to two in this example).  Both companies grew into large corporations and bought out competitors in an effort to ramp up growth.  Eventually the personal computer was invented and an entirely new degree of competition entered the typewriter industry.  One of these two companies did not have the foresight to adapt to the changing free market – it kept producing mainly typewriters.  The company eventually declared bankruptcy in 1995.  That company is Smith Corona – most of you have probably never heard of them.  The second company in our example decided to diversify and enter the high-tech world of manufacturing computers and computer parts as well as a number of other industries.  That company is still around today and recently it sold its computer manufacturing division in an effort to slowly exit the manufacturing industry and expand itself into the consulting industry.  That company is one of the largest American companies today – International Business Machines Corporation (IBM).  The point of this exercise is to point out that freedom demands the best and creates the best.  IBM boasts revenues of about $100 billion each year because it has provided some spectacular services and products to its customers.  Smith Corona declared bankruptcy and is still struggling producing only two models of type writers because they have failed to adapt to the market and are not providing their customers with the best products for the lowest prices.  Just take a look at the two companies’ websites (www.ibm.com and www.smithcorona.com) to get an idea of what I am referring to when I say “best.”  This example of how freedom fosters the best of all things and weeds out those things that are inefficient and unproductive ends with a happy ending – IBM continues to operate and has probably provided more for Corona Smith’s old customers and employees than they would have ever had if it had not been for IBM.  Most importantly, the government did not get involved.

Other endings are not so happy.  Let’s consider the example of our automobile industry.  Since the beginning of our automobile industry many automobile manufacturers have opened and closed their doors.  Some names include Pierce-Arrow, the American Motor Car Company, Hudson Motor Car Company (acquired by American Motors Corporation), American Motors Corporation (nearly bankrupt and acquired by Chrysler and rebranded as Eagle), and Eagle (defunct since 1998).  Despite all of these companies closing their doors, the American economy continued on and the people that used to manufacture these vehicles found new jobs.  The exits of these companies were at the hands of competitors that offered superior products at lower prices, just as the troubles of GM and Chrysler in today’s day are at the hands of competitors offering superior products at lower prices.  However, because people all have big hearts (or disgustingly crooked intentions, depending on your angle) and look out for their fellow man, the elected officials of the United States Government decided we simply could not put all of the GM and Chrysler employees out of work (even though most of us clearly did not like what they were producing).  As such, the government stepped in and decided to tax us all to “prop-up” these companies.

In the United States, our freedoms have been trampled by people with the very best of intentions.    Most of the United States citizens in favor of “bailing out” GM and Chrysler (excluding congressmen, senators, anyone in the executive branch, any employee of GM and Chrysler, and any UAW member or representative) believed we should spend tax dollars on taking over the companies and redistributing the equity how President Obama saw fit because it would help the employees of these companies.  Some even listened to the politicians’ nonsense and believed that taking over these companies would somehow improve the economy.  Either way, most people believed that it would help their fellow Americans to nationalize two thirds of the United States automobile industry.  They had good intentions; they just did not have the knowledge to foresee that their actions would actually harm most Americans.  Most tragically, it would harm innocent Americans that had previously had no stake in GM or Chrysler and would still pay the price of nationalizing them.

Each dollar you spend is a type of vote.  You are voting that the product or service you acquire is better than its competitors.  When you buy a ticket to The Hangover rather than Paul Blart: Mall Cop, you are voting that more movies be made like The Hangover than Paul Blart.  Similarly, when Americans went out and bought Toyotas, Hondas, and Fords, they were voting that more vehicles be produced like those they bought than those produced by GM and Chrysler.  Now we do not have the freedom to decide.  Now the government decides for us.  We are each taxed (some more than others) and we have all therefore given our money to GM and Chrysler, even though they created inferior products.  Furthermore, this occurrence puts a big vote in from all of us that it doesn’t matter what kind of filth you put out of your factories – if you employ enough people the government of the United States will tax its citizens more to pay for your company’s shortcomings.  What do you suppose this will do to the research and development of these companies?

Because the auto-industry has been the focus this year it is easy to pick on, and I will continue picking.  Consider the subsidies the government gives buyers of hybrid vehicles.  These also come from the best of intentions (for most people).  Generally, the supporters of this subsidy want less vehicle emissions to enter our atmosphere in hopes of keeping the air clean and somehow (this is also bullshit . . .) cool our planet (apparently a cold planet is better than a warm one and I don’t think anybody knows why they feel that way).  No matter your politics, it is clear that most of these people have good intentions.  However, they are stripping the rest of us of our freedom and they are tampering with creative destruction.  They are effectively making each of us pay for part of a hybrid car, whether or not we want one.  Furthermore, they are making people that may not otherwise buy a certain model or brand of car, buy said car.  This creates a situation whereby people are voting for one type of car with their dollar because it is now cheaper (because we are all pitching in) than the car they would have otherwise purchased, even though the other car would otherwise be superior for that given price.  This then tells the automobile manufacturer to make more of the subsidized car and less of the car that is actually superior.  If the hybrid cars truly were superior cars for the price then people would naturally be lining up to buy them.  I can’t be certain because they are already subsidized, but I am confident that if there were not subsidies for hybrids that the Toyota Prius would still sell well because it gets great gas mileage for those people that are concerned with that.  We do not need the government to tell us (or “nudge” us as Cass Sunstein would say) what we should buy, sell, do, or believe.  If a product is better and cheaper then it will prevail.  If it is overpriced and lousy then it will be driven out of the market.  The same can be said for all things, not just automobiles.

These are but a couple small examples, but the lesson holds true to all things.  One of the most beautiful parts of a free society is that it embraces the best and discards the worst.  It is only when the government steps in to press its will upon the citizens of that society that things go wrong.  No matter the intentions of those people that push for new laws and regulations, one thing stands true about them: they feel they can run your life better than you can run it yourself.  I disagree.  I believe we are all capable of making decisions for ourselves.  Sometimes you and I will be wrong and we will pay our own price for being wrong and, likewise, we will reap our own benefits from being right.  But, no matter how often we are personally wrong, with enough people acting freely the world will inevitably improve and each and every one of us will be better off in the long run.

Please Comment: I’d like to hear if any of you can come up with a situation in which creative destruction is more destructive than creative.

A few weeks ago Chrysler declared bankruptcy.  Under normal circumstances the bankruptcy law of this nation would have been upheld and the assets of Chrysler would have been sold off and all proceeds would have been allocated to the bond holders (debt holders) until their principal investment was completely repaid.  After the bond holders’ secured claims (secured by the assets of the company) were repaid, the remaining proceeds from the sale of Chrysler’s assets would trickle down to the unsecured claims and eventually to the equity holders.

Everyone entered into their contracts with this vision of a bankruptcy in mind.  This is how bankruptcy has been handled in this nation for decades.  Every bond holder, union, and equity holder was expected to understand that in the case of liquidation (bankruptcy) secured lenders (bond holders) are paid in full first.  However, when the Chrysler bankruptcy came down the line President Obama and other members of his Administration decided that this was simply not good enough.  They decided that the Bankruptcy Code in the United States was not valid and that contract law was not valid.

After Chrysler declared bankruptcy the Obama Administration set into motion its own vision of how the restructuring and liquidation would work.  Instead of Chrysler’s assets being sold off and having the proceeds go directly to the secured lenders, the Obama Administration decided it had a place in the bankruptcy courts and forced the secured lenders to take a dramatic discount on their debt and rescinded their right to liquidate Chrysler’s assets in order to be repaid.  Instead, the Obama Administration decided that the United Auto Workers Union, an unsecured lender and therefore second in line to the secured lenders in the case of bankruptcy, would receive a 55% stake in all of Chrysler’s assets as well as a $4.5 billion note from the Chrysler company that would emerge from this mess.  Moreover, the Administration granted an 8% ownership stake to the unsecured United States and a 2% stake to Canada.  The remaining 35% stake in the assets would be sold to Fiat, an Italian automobile manufacturer (ironic since the entire goal, according to the Obama Administration, is to help American industry).

The only legitimate part this disarray is that the company’s assets would be sold to Fiat.  In a normal bankruptcy proceeding there is a strong chance that all of the assets would be sold to one company, or group of companies, and normal business operations would continue.  Not wanting to risk this, and — more importantly — not wanting to upset the unions, the Obama Administration broke the law of the United States and has shown clearly that the Executive Branch has adopted complete, autonomous control.  That was, however, until Supreme Court Justice Ruth Bader Ginsburg stepped in yesterday and put a hold on the deal.  This injunction will allow the Supreme Court time to decide if it will hear an Appeal from Indiana Pension companies regarding the restructuring of Chrysler.

My politics and my idea of justice are not always perfectly aligned with Justice Ginsburg, but in this case she is a holy saint.  Always wanting to help out the common man, Justice Ginsburg has realized that the ones that are truly hurt in this are the people that hold Chrysler debt in their retirement funds and other investment vehicles.  Those people include teachers, firemen, policemen and many other middle-class, hard-working individuals.  In this whole mess designed to coddle the United Autoworkers Union (UAW), many people in a far worse financial situation than auto-workers are being told that the money they have lent Chrysler is no good and that the Obama Administration will decide how much of a discount they will take on their debt.  All the while the Obama Administration bows down and kisses the feet of the UAW offering them a majority stake and a huge note.

The course of action taken by the Executive Branch regarding the Chrysler bankruptcy should not go unnoticed.  The laws of the United States – the very laws that have kept our nation’s order for decades – have been disregarded and, instead, a few people have again determined that they are above the law and are more able to decide what is best for each of us than we are able to decide ourselves.  Justice Ginsburg has stepped in to at least temporarily delay this Administration’s attempt to be rid of contract law and bankruptcy law and I applaud her for it.

Sources: The Wall Street Journal 06/09/2009

Just when you thought the arrogance of Congressmen couldn’t get any worse, Alan Grayson (D-FL) is going to introduce a bill to require that employers with more than 100 employees give their employees 1 week of paid vacation time.

According to Erika Lovely of Politico (http://www.politico.com/news/stories/0509/22794.html), Rep. Grayson had this revelation that the government should mandate vacation pay while he, himself, was on vacation at Disney World. I understand that he thinks this would be stimulative. His line of thinking probably went like this: “Look at this sea of people. You know how we could really stimulate the economy – especially here in Florida – we should just pay all these people for the time they’re spending here.” OK, it probably didn’t go quite like that, but I just can’t resist poking fun at someone who is arrogant enough to think he should tell all companies how to run their businesses.

The argument actually is something more like this: Rep. Grayson reportedly claims that people would be more productive if they had more time off. Apparently, companies are too stupid to figure this out for themselves, and need the likes of Rep. Grayson to force them to make their employees more productive. Now, I’m going to grant Rep. Grayson credit where credit is due: He started IDT Corp. and has been a successful businessman in the private sector. So, at least he’s actually held a job that didn’t involve telling other people how to live their lives. However, that doesn’t make his bill any less arrogant.

Why does the government need to tell companies to offer vacation pay? If Rep. Grayson, or anyone else, truly believes that companies offering paid vacation time have more productive employees, here’s a few ideas: 1) start a company and offer paid vacation; 2) start a fund and invest in only companies that offer broad-based paid vacation plans to employees; 3) invest privately in public companies that offer broad-based paid vacation plans to employees; 4) give what is known as “angel money” to start-up companies offering paid vacation; 5) start a private equity fund investing in start-up companies offering paid vacation.

If paid vacation really makes employees more productive, then the market has ways to ensure that paid vacation finds its way into more companies. After all, if paid vacation really makes employees more productive, then companies with paid vacation will sweep the floor with companies that don’t offer paid vacation, and those companies will have to adapt in order to compete and stay in business.

Rep. Grayson would do far more good taking his profits from starting IDT (with annual revenue in excess of $2 billion) and investing in companies offering paid vacation, or using his influence in the numerous companies in which he has significant ownership to force them to offer paid vacation. That way, if he’s right, he’ll make even more money, but, if he’s wrong, he’ll lose his own money instead of forcing all investors to try his experiment with their money.

That’s the American way to do things: go out into the world and kick everyone else’s butt by being better, and change the world when your competitors try to imitate you. Did the government have to tell car companies to use a production line? No! Henry Ford went out into the world and just obliterated his competitors by making cars available to more people using a production line. Henry Ford made cars faster and cheaper, and he built a company that traditional car makers of the day simply couldn’t keep up with – Ford dominated the car market by making cheap cars. His competitors (and soon companies in other industries) copied his mass production process using an assembly line – something that is, today, used around the world. This is how Americans change the world: not through legislation.