Smiling Daggers

Paul Hsieh has an interesting commentary on President Obama's embrace of something called "libertarian paternalism." Obama appointed Cass Sunstein, who authored this concept, as a senior regulatory official in his administration. The concept says that government should "nudge" us with coercive measures to do "good things" such as eating better foods, saving for retirement, encouraging our children to do their homework, etc.

The nudges involve handing back our tax money to us in the form of credits or deductions, or even paying us for performance, again using the tax money already taken from us. The "nudge" may also be more direct, such as New York City's ban on the use of trans fats in restaurants.

All of this is for our "good." But who determines this good? Answer: Cass Sunstein or sundry other regulatory officials who make it their life's work determining what is good for me, or even President Obama himself. Accepted in this premise is that the judgment of these individuals must forcefully supplant my own judgment about my own life. I am not permitted to make my own decisions on topics that these officials have determined are worthy of their attention.

These nudges come at the expense of my personal liberty. A society where people are nudged about is one where individual rights are absent. That is the society we are being nudged to accept.

As Mr. Sunstein and his cohort of regulators, led by the regulator-in-chief, President Obama, prescribe and proscribe in the minutest detail how we are to live our lives, don't be fooled by confusing phrases such as "libertarian paternalism," or by the broad smile of President Obama as he appoints Mr. Sunstein to take on his duties. "Libertarian" is seemingly based on "liberty"; "paternalism" derives from the Latin word for "father." There is nothing "fatherly" in government ordering adult Americans about; we are not children. Moreover, liberty cannot exist where government is telling us what to do. These terms are meant to confuse. In such confusion, government power is rationalized and expanded. It is a tactic that has been used by dictators throughout history.

In George Orwell's fictional 1984, the dictator "Big Brother" said, "Freedom is slavery." In the same oxymoronic manner, "Liberty is paternalism."

Don't be fooled.

Thoughts on Safety

A friend of mine recently renovated his apartment in New York. It was a gut job; the contractor peeled off the walls and removed the floors. After peeling off the surface layer, what did my friend find underneath? He found improperly braced sub-floors; no fire-stopping had been installed between his apartment and his neighbors; support columns were not covered with flame-resistant material; and insulation wasn’t put in around the windows, to name just a few deficiencies.

In the building he lives in, substandard pipes broke in the winter and flooded his apartment. Exterior wall coatings were improperly applied and leaked. Parapets were reinforced with interior-grade (not exterior-grade) wallboard and rotted.

There is an understandable explanation for how this happened. The developer of his building, a conversion of an existing 100 year old commercial building to residential use, went bankrupt during the recession of the early 1990s. He went bankrupt midway through the work on my friend’s building. So, in the midst of a recession and an awful real estate market, an unwilling bank had to take over and finish the job. They did a lousy job.

In a capitalist marketplace, there are bad actors. This developer clearly wasn’t a top-notch developer. He lacked the financial depth and customer base to survive the recession and went bankrupt. Good riddance. Capitalism continually cleanses out bad actors. He is not building anymore or, if he is, he is operating on the fringes.

But the question remains, where were the city inspectors during all this? Many of the conditions my friend discovered during his renovation and undoubtedly many, many more that are still hidden from view, are subject to the thousands of pages of city, state, and federal rules that govern construction. Many of the conditions my friend discovered are explicitly governed by laws designed to promote fire safety. The installation of fire-retardant material that can slow a fire’s spread between apartments, and fire-proofing support columns so that they don’t buckle under the heat of fire (as the columns of the World Trade Center buckled), are clearly within an inspector’s purview. Inspectors, by law, must regularly visit construction sites. Why didn’t they catch these potentially life-endangering failures?

My friend got a clue as to the answer. City inspectors also regularly visit renovation jobsites in New York. One day, as I happened to be in his apartment, a city electrical inspector showed up. A fat, slovenly, surly, disrespectful, and barely literate thing showed up at the door. As the new floors had just been laid down and polished, the project supervisor politely asked him if he could take off his shoes. “No, I don’t do that,” the inspector said. So, he asked, could he wear “booties” that workers wear so they don’t harm finished floors? Same answer.

So, while the slob thudded his way through the apartment to the nearly finished kitchen, he said, “You need a new outlet there.” That was that. I kept my mouth shut, because I knew that if I said anything, it would only anger the inspector and that would not help my friend who was trying to get his renovation done, on time and under budget. I almost spoke up because when I looked around the kitchen, I saw, literally, dozens of outlets. Underneath the cabinets, my friend had installed strips of outlets, spaced one foot apart. There were dozens of outlets in the kitchen, way more than could be needed to meet the minimal requirements of some construction code.

But I kept my mouth shut. So did my friend, and so did the project supervisor. All of us undoubtedly had the same thought on our minds. Keep our mouths shut, put up with this jerk, and wait for him to leave so that the real work could get done.

Now, when I think about the construction cranes that have recently fallen over in New York, I think of that city inspector. A representative of an industry association on television said that the problem is not that there are an insufficient number of inspections. The problem is that the inspectors need more training. Really? Does more training address the root of the problem?

When the city inspector left my friend’s apartment, I asked the project supervisor if he would ever hire a man like that city inspector to work as an electrician. He said that, as a rule, people who become inspectors are the bottom of the barrel. They are the unemployables that private industry would never hire. They become city inspectors because that is the only place they can get work. In fact, one employee his company had to fire became an inspector. Now he must deal with that fired, disgruntled ex-employee, who has the enforcement apparatus of the state to back up his incomprehensible (and possibly vindictive) demands. (Undoubtedly, there are some good inspectors out there, but the failure to demand good work inherent in government employment ensures that they are few and far between.)

When I think about my friend’s apartment renovation, I ask myself what is it that ensures quality and competent work. Is it the presence of city inspectors, or is it something else?

Then I consider how my friend chose his contractor. He interviewed many contractors, he got recommendations and checked references and, most importantly, he visited their work. The work of the contractor he chose spoke clearly. The way the floor boards were tightly joined together, the walls were perfectly smooth and properly finished off, the way all the details matched in a beautiful whole, and the politeness and quiet competence of the men and women he spoke with gave him the answer he needed. His careful effort in selecting the best contractor for the job paid off. The result is a beautifully renovated apartment.

My friend’s rational self-interest is what led to that good outcome. Because he wanted to live in a nice apartment, he selected a good contractor. Then it was the contractor’s good judgment that created a quality product. The pre-renovation apartment he moved into, built in the early 1990s, had been inspected, like all buildings in the city. Those inspections did not prevent a bankrupt developer and a desperate bank from doing a pitiable job finishing the building.

No, it was the lack of self-interest on the part of the developer who went bankrupt that led to his actions. If he had cared for himself more, he would have run his company better, and would have survived the recession. In contrast, consider the firm that my friend chose for his renovation work. It is over 20 years old. It has survived two recessions and it has never laid off an employee. Work comes to them in good times and bad because they are good at what they do.

Capitalism is the system that rewards contractors like the one my friend chose. It is the system that unleashes self-interest to flourish. By the same token, capitalism is ruthless at weeding out the incompetent and the immoral, like the sloppy developer who went bankrupt after doing such a poor job with the building conversion in the early 1990s.

An entire army of city inspectors will never ensure safety. Yes, it will “gum up the works” by wasting the time and energies of good people like the contractors who did such a marvelous job on my friend’s apartment, but it will never ensure safety.

So what will make sure that we live in safe buildings and those disasters like the cranes toppling over in New York City are rare occurrences? More city inspectors are not the answer. There is only one answer, and no one (at least nearly no one) is talking about it.

A Shotgun Blast for Competition

The chairman of the Federal Communications Commission, Kevin J. Martin, has announced that all contracts between owners of apartment buildings and cable providers for exclusive service in their buildings will be nullified. The chairman's blast of his regulatory shotgun, if upheld by the courts, will shred thousands of contracts across the land.

The justification for this assault on the sanctity of contract and property rights is "competition." Somehow, by denying apartment owners the right to negotiate terms with cable companies for service in their buildings, the chairman will be enhancing competition among cable companies. Exactly how this will transpire is not clearly stated. He doesn't have to explain it, since the real justification for his action becomes clear when he says, "cable prices have risen about 93% in ten years," and adds that high cable prices disproportionately affect low income people, particularly Hispanics and blacks, who more often live in apartment buildings.

So, the real reason for this contract shredding has nothing to do with promoting an undefined "competition," but with a desire to forcefully transfer wealth from apartment owners and cable companies to politically favored pressure groups.

The doctrine of altruism states that the purpose of a man is to live for others. He does not have a right to his own life. The shredding of these cable contracts is altruism enforced by the cruel hand of regulation. To hell with property rights if it means providing HBO for less to poor people. The appeal to "competition" is an afterthought thrown in as a meager attempt to justify this action.

Unsurprisingly, not only is the FCC chairman's action immoral, but it will not "help" the poor or anyone else. The key to understanding this is the observation of the cable industry association that "cable companies were often granted exclusive rights to buildings after agreeing to make major capital investments in upgrading systems." Thus, a principal reason for these exclusive deals is so that apartment owners can negotiate with cable companies to pay for the wiring of their buildings. A wiring upgrade means higher bandwidth, and therefore more channels, faster Internet service, and enhanced telecommunications service. Strike down the exclusive deals and you cut out future wiring upgrades and the enhanced services it brings.

Unfortunately, in a literal sense the FCC chairman is correct. His action will reduce the cost of cable service, but the apartment residents will be getting exactly what they pay for: slow Internet speeds, fewer channels, fewer telecommunications options. In other words, they will get cheap service that is lousy.

In direct opposition to fostering "choice" or "competition," the FCC's action will be taking away the free choices of customers and cable companies to get the level of service that they mutually agree to and want. Instead, the FCC chairman singlehandedly interposes himself between these thousands of voluntary agreements and declares, wittingly or not, that no one shall have relatively expensive and high quality cable service.

Competition is an anti-concept. Used by the FCC chairman, it only refers to competition on price, but in an unfettered market competition exists on more dimensions than just price. There is competition in innovation, competition in quality and variety, and competition in price. The chairman of the FCC, by allegedly promoting price competition, is actually destroying competition, if that term has any meaning at all.

He does all this to hand out the goods, goods that aren't his to hand out. Such is the nature of pressure group warfare and the thinly veneered legalized lawlessness it spawns in a mixed economy.

Goodbye, Toucan Sam

Goodbye, Toucan Sam, Tony the Tiger and Captain Crunch. Goodbye to all the cartoon characters that cereal companies have used over the decades to sell cereal to children. “The policy changes come 16 months after Kellogg and Viacom, the parent company of Nickelodeon, were threatened with a lawsuit over their advertising to children by two advocacy groups, the Center for Science in the Public Interest and the Campaign for a Commercial-Free Childhood, and two Massachusetts parents,” stated the International Herald Tribune. Now that Kellogg has knuckled under, the groups have dropped their lawsuit threats.

Under the coerced non-agreement, Kellogg may still use cartoon characters if the cereals can be reformulated to meet certain nutritional standards, such as zero trans-fats, less than 200 calories per serving, less than 12 grams of sugar per serving, etc. In other words, the cereal has to be bland.

I grew up eating Sugar Frosted Flakes, which were promoted by Tony the Tiger, Frosted Fruit Loops, promoted by Toucan Sam, and Captain Crunch cereal. As far as I am aware, I suffered no ill effects, mental or physical, whatsoever from eating these cereals. Perhaps part of it had to do with my mother, who encouraged me to play outdoors, and who kept firm limits on snacking between meals. I benefited from a responsible mother (thank you, Mom). But the idea of responsibility, parental and individual, is gone. Instead, we are all treated as a collective of children, nursed over by the Nanny State, who applies one-size-fits-all bans on all of us, in order to protect the few who cannot take care of themselves.

I am sick of it. Thankfully, I had Tony the Tiger in my life and tasty, sweet Kellogg’s Frosted Flakes. What about today’s children? What about all of us? The world is made blander by Kellogg being forced to knuckle under to the Mafia-like tactics of busybodies who use the courts to cudgel us all into living in their soul-less, tasteless world.

I say to the Center for Science in the Public Interest, the Campaign for a Commercial-Free Childhood, and the busybody parents who joined the lawsuits: take this spoonful of fruit loops and shove it. Hands off my cereal. Hands off my life.

California to Energy Producers: Not in Our State

Posted by ARI Media at 7:59 PM, 4/23/07. Reprinted with permission.

Irvine, CA—After an intense four-year struggle, Australian energy company BHP Billiton's attempt to build a Liquefied Natural Gas facility off the coast of California has been effectively killed by the state's Lands Commission, which voted 2-1 that its "Environmental Impact Report" was unsatisfactory.

"When we in California experience our next energy crisis—or the next time we complain about our exorbitant gas and electric bills—we should remember the fate of BHP Billiton," said Alex Epstein, a junior fellow at the Ayn Rand Institute. "That company wanted to build a plant that could satisfy up to 15 percent of Californians' energy needs—a plant that did everything possible to maximize safety and minimize pollution. And what did it get in return? Nearly half a decade of obstruction from California's endless constellation of environmental bureaucracies—and seething opposition from environmental groups that oppose every single practical form of energy production, from coal to oil to gas to nuclear power. The message California sends to any would-be producers of plentiful energy is obvious: Not in Our State.

"California and many other states are riddled with laws based on environmentalist hostility toward industrial energy. These laws must be replaced with a respect for property rights and an appreciation for the incomparable value that is industrial energy. Fossil fuels and nuclear power are the lifeblood of our civilization; without them, the average American's food, clothing, shelter, and medical care would be impossible. And, contrary to claims that we must abandon fossil fuels to protect against alleged weather disasters caused by global warming, fossil fuels are vitally necessary to build the buildings and power the technologies that protect us from dangerous weather.

"The anti-industrial mentality of environmentalists must be rejected, in word and in law, by everyone who truly cares about human life."

Copyright © 2007 Ayn Rand® Institute. All rights reserved.

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Galileo Blogs comments:

"NIMBY" which stands for "Not In My Back Yard" has entered the lexicon. In very few places do Americans want the industrial machines that power their houses and fuel their cars, that light up the Internet, that keep them warm in the winter, and cool in the summer. Americans want the consequences of capitalism, but not the means. Americans want all of the abundant, comforting, life enhancing things that capitalism makes, but none of the seemingly dirty, noisy, unsightly machines that do the making. I, for one, find an industrial plant beautiful. I salute its role in supplying me with the things that make my life modern and civilized.

Nevertheless, whether you find an industrial plant beautiful or not, you should have no political authority to tell an industrialist whether he should build it. It is his right; it is his property. Of course, by building the plant, the industrialist benefits our lives, whether we like it or not, whether we approved of it or not.

The California Land Commission and all such similar agencies should be abolished immediately. Our survival, our standard of living depends on it.

Hedge Fund Q&A

Hedge funds are regularly disparaged in the media. Mostly, this is simple envy of the wealthy. Mostly, it is based on misunderstandings about hedge funds. So, here are my answers to basic questions:

What is a hedge fund? A hedge fund is a private investment partnership. A group of people agree to hire an investment manager to invest their funds on a pooled basis. The agreement is private and it is voluntary.

How do hedge funds invest? Hedge funds invest in the manner specified in the contract agreed upon by the partners. There are as many ways of investing as there are private contracts between people.

How risky are hedge funds? All investments have the risk of loss. The degree of risk is determined by the particular investing strategy of the hedge fund manager, which is agreed upon by the partners. The agreement can specify what type of securities can be invested in, such as stocks, bonds, options and/or commodities. The agreement can specify whether the manager can invest in foreign securities, and to what degree. The agreement can specify whether the manager can use leverage (borrowed funds), and to what degree. It is entirely up to the partners and the manager to agree among themselves the limits on the investing strategy of the manager. The level of risk is agreed upon by the partners.

How are hedge fund managers paid? Managers are paid according to the agreement between the manager and the partners. Typically, a manager is paid an annual maintenance fee of 1% or 2%, and a percentage of the fund’s profits, which can range from 10% to as high as 50%. The fee is contractually set and can be anything that the partners and manager find to be mutually beneficial. One typical provision of a hedge fund contract is a “high water mark” provision. This provision means that a manager cannot be paid a percentage of the fund’s current profits until losses from prior periods are made up.

Are hedge funds regulated? Unfortunately, hedge funds are extensively regulated. Federal law states that only accredited investors are permitted to become hedge fund partners. That limit is currently being raised so that only investors with $2.5 million in liquid funds can invest in hedge funds. Someone with less money is legally forbidden from investing in hedge funds.

Hedge funds can accept no more than either 100 or 500 investors, depending on the applicable regulation.

Hedge funds are not permitted to advertise. They cannot publicly advertise their performance or explain their strategies. They cannot even have websites accessible to the public that explain their funds.

Other rules. Special rules prevent hedge funds from easily investing in both commodities and stocks in the same fund. Special tax rules make it impractical for foreigners to invest in domestic U.S. hedge funds, so hedge fund managers are forced to set up offshore funds for foreigners. Hedge fund managers are required to disclose their positions in securities periodically when those positions are sufficiently large. Hedge fund managers must set up as many as three legal entities in jurisdictions such as New York because of special taxes that target limited liability partnerships. Hedge fund managers cannot accept more than a certain amount of money from pensions and other retirement plans regulated by the federal government.

These are just a few of the rules hedge funds operate under. Hedge funds are private agreements between willing investors and the manager they hire to invest their funds. Nevertheless, they are highly regulated, and the regulations grow every day. Large legal and accounting costs must be borne by any hedge fund to comply with these changing and growing rules.

Are hedge funds less regulated than other business enterprises? How many business enterprises are legally forbidden to advertise? Even tobacco companies still have some legal advertising avenues open to them. Hedge funds cannot even legally advertise with a public website. How many businesses must legally turn away customers who aren’t wealthy enough? How many businesses must stop accepting customers when the number of customers reaches a legal limit? Hedge funds are more regulated than most other businesses.

Despite these rules, investors keep putting money into hedge funds. Globally, investment in hedge funds grew 30% last year to $2.1 trillion dollars under management, $1.4 trillion managed in the United States. This is a faster rate of growth than mutual funds and most other investment classes. Over 9,000 hedge funds operate in the United States today.

Why do investors keep putting their money into hedge funds? One reason is because the other investment alternative, mutual funds, faces different regulations that make them less attractive as investment vehicles for many investors. The differences affect the incentives that mutual fund managers face, and their freedom to invest. In both areas, mutual funds suffer disadvantages relative to hedge funds.

Incentives: Hedge fund investors can pay their manager in whatever manner they mutually agree upon. The method typically used, where the manager gets a percentage of the fund’s profits, provides an enormous incentive for the hedge fund manager to work hard and generate profits. Both he and the fund’s investors share in the fund’s profits proportionately.

Mutual funds are not allowed to pay their managers in the same manner. Under the Investment Company Act of 1940, which regulates mutual funds, mutual fund managers cannot be paid a straight percentage of the fund’s profits. That is why mutual fund managers are typically paid a salary plus a variable bonus that is more loosely connected to the fund’s profitability. A weakened connection to profitability means a weakened incentive to work hard to find profits. Mutual funds are also not allowed to have a “high water mark” provision where they agree to forgo their fee until a prior loss is made up. This also reduces their incentive to achieve profits.

Freedom to invest: Hedge fund managers have few legal limits on what they can invest in. Their limits are those agreed upon by the partners and the manager. A particularly important advantage is that hedge fund managers have the legal ability to take short positions in securities. A short position in a security is one where the investor makes money when the security price goes down, instead of up. Short positions are very advantageous when the stock market is declining, as it did for much of 2000, 2001 and 2002. Because of their ability to invest in short positions, hedge funds as a whole outperformed most other investment categories, such as mutual funds, during those years. If risk of loss is a concern, hedge funds as a whole were less risky than mutual funds during those years. Such a reduction in risk was possible because hedge funds could take short positions.

Mutual funds face regulations that make it very difficult to invest in short positions. Although those rules have been loosened recently, as a practical matter most mutual funds find they can only invest in long positions. Long positions go up in a rising market and decline in value in a falling market. Hedge funds can blunt the loss of value in a falling market through short positions; mutual funds are largely legally precluded from taking the same steps to protect the value of their portfolios.

Advantages of mutual funds. Mutual funds have some advantages that hedge funds do not have. The biggest are that they can legally advertise and they can accept money from anyone. There are also no limits on the number of investors they can have. So, their role in the financial world is assured. While only rich people (those with more than $2.5 million in liquid assets) are allowed to invest in “secretive” hedge funds (which are secretive largely because they are forbidden by law from discussing their performance), the so-called little guy can invest in mutual funds which he can study and learn about from advertisements, websites, etc.

There are other investment vehicles that are alternatives to hedge funds, such as exchange traded funds and closed-end funds. Each of them is a product of the peculiar regulations that govern it. Each has advantages and disadvantages, many of which are solely a consequence of differences in regulation.

Conclusion. In a world where everyone had the freedom to invest his money as he saw fit, without facing Depression-era rules designed to “help” the so-called little guy (but really just close off certain investment opportunities from him), there would be no legal distinction among investment pools. The distinction between hedge funds and mutual funds is a creature of regulation. To escape from the rules limiting mutual funds, hedge funds agreed to operate under a different set of rules that limit who they can accept as investors. By accepting one set of rules, they are freed from others, including those that limit investing in short securities, and how managers are paid.

Quite often, the history of financial innovation is a history of creatively finding ways around government edicts. The rise of the hedge fund industry is an example of that phenomenon. I look forward to the day when all those rules are repealed, when everyone’s inherent property right to contract with whom they please on whatever terms they choose is acknowledged in the law. When that happens, the creativity of investment managers, lawyers and accountants will be spent solely on developing the best investment vehicles for their willing clients, instead of having to destroy a portion of their time complying with the growing, changing and arbitrary rules emanating from Washington.

The larger issue is that all individuals can manage their own lives and should have complete freedom to do so. This includes the freedom to manage all aspects of their financial affairs. The only role for government is as protector of property rights. Governments exist to enforce the terms of contracts and punish those who commit fraud. The current hostility against hedge funds is of similar ilk as the hostility toward the “robber baron” industrialists of the late 1800s and early 1900s, and the junk bond and other financial innovators of the 1980s and 1990s. It is envy of the successful for being the successful, and resentment of the rich. The current hedge fund rules do nothing other than close off that investment vehicle from the masses, keeping them with their faces pressed to the glass looking in on a world that they enviously want and can’t have. Therefore, they will use the power of government to throttle and destroy that world.

Antitrust Smackdown

In today's New York Times:

Internet and media rivals to Google Inc. (GOOG.O), fearing an unprecedented consolidation of power in the online advertising market, are expected to urge regulators to closely scrutinize the Web search leader's $3.1 billion deal to buy DoubleClick Inc.

Google on Friday beat out Microsoft Corp. (MSFT.O) and Yahoo Inc. (YHOO.O) to buy Web ad supplier DoubleClick, securing a leadership position as the Internet's top advertising business.

Microsoft, the world's largest software maker, said the deal would allow Google to corner the online advertising market and provide them access to a huge amount of information on consumer behavior on the Internet.

``This proposed acquisition raises serious competition and privacy concerns,'' said Brad Smith, Microsoft senior vice president and general counsel in an e-mail statement.

``We think this merger deserves close scrutiny from regulatory authorities to ensure a competitive online advertising market.''

Microsoft does not see the irony in pursuing antitrust to throttle its competitors, when it is one of the greatest victims in the history of antitrust, and remains a victim to this day.

Microsoft has pandered to the level of its less successful competitors in attacking Google. Like Sun Microsystems, Oracle, Novell, Netscape and sundry others who hamstrung Microsoft at every turn with harassing antitrust lawsuits over the past 15 years, Microsoft now does the same to Google.

Microsoft failed fair and square in trying to buy DoubleClick. Microsoft wanted it and it was outbid. Now Microsoft wants to use the antitrust hammer to forcefully gain what it wants, which it failed to do in the market.

Long ago, Microsoft undercut its own moral rightness in its antitrust battles. The company did this by never challenging the premise of antitrust. Bill Gates went on record repeatedly saying he thought antitrust laws were fine, just that they shouldn't be used this time against Microsoft.

Now Microsoft uses the same weapon against a competitor. Its action must put a spring in the step of Ms. Neelie Kroes as she continues to square off against Microsoft in the European antitrust courts. The director of the European Community's Directorate General for Competition (Orwellian sounding, huh?) knows that Microsoft barely stands before her, having already gnawed off most of the moral leg it stood on.

My advice to Microsoft's accountant is: beef up your reserve against an adverse judgment in the European antitrust case against you.

Regulatory Braggadocio

Today's morning news report breathlessly announced that the U.S. Department of Transportation is mandating the installation of a life-saving new technology in cars. The new technology allows computers to individually control the brakes on each car tire in order to prevent roll-overs and out-of-control skids.

I could feel myself momentarily feeling gratitude toward the wise regulatory mother who protected us with this life-saving rule. Then I thought about it for a moment. Wait a second; the television report went on to parenthetically mention that this technology has already been deployed in half of all new cars. The new regulation will mandate its installation in all new cars in five years. By that time, car manufacturers would have already voluntarily chosen to put it in all new cars anyway.

What is going on here is regulatory braggadocio. The regulator claims credit for a product she did not invent, one which private automobile manufacturers were going to implement anyway. The regulator stole the spotlight from the engineers and automobile executives who, acting out of self-interest, were making their product better by making it safer.

All regulations work this way. The technology behind a safety innovation is always created in the market by profit-seeking businessmen. They implement it, sooner or later, depending on the market demand for such a safety innovation. All technologies are costly and the market will determine whether and when it pays to implement a particular technology. It is estimated that this particular braking technology would add $110 to the price of a car. Would it be worth it if it cost $5,000 per car? Only a car maker and its customers can determine that, which is why costly safety improvements are typically installed in luxury vehicles first before they are mass-produced for cheaper cars.

The regulator co-opts this natural market process that makes products safer over time. In some cases, such as this one, the regulator merely steals the limelight from a safety enhancement that was being instituted anyway. In other cases, he forces on an unwilling manufacturer and customer a safety mechanism that is too expensive. Either way, the public gets a clear message. The regulator is beneficent and is the only reason products are safe. You can't trust profit-making corporations to make safe products. Because of regulation, those greedy businessmen are forced to make safer products.

As I thought through this, that fleeting feeling of thankfulness to the beneficent regulator was replaced by another feeling: contempt. And in my mind I thanked those who do get the credit: the engineers and software designers and executives who developed this life-saving technology at the world's automobile companies.

The Antitrust Hammer

This week Europe announced yet another antitrust action against an American company. Regulators are investigating Apple's iTunes for violation of European antitrust laws. They are claiming that because Apple offers music downloading on a country-by-country basis, they are violating rules against territorial restrictions on sales. Apple, for its part, says that it originally wanted to sell its songs Europe-wide, but found that copyrights were handled nationally and continental distribution was not feasible. Apple is being squeezed between one set of laws (copyrights) and another (antitrust). Although it is a problem of conflicting laws, the regulators do not seek to eliminate the legal contradiction. Instead, they punish the American company caught in the middle.

Apple has done nothing wrong here. As an exercise of their commercial freedom, they can sell to whomever they want on whatever terms they seek. To restrict that in any way is to violate the property rights of Apple's owners.

Why are the Europeans so concerned about such a bizarre, picayune issue? The answer is that they seek to bring down Apple because it is a successful American corporation. Observe the European regulators' continuing crusade against Microsoft, America's leading computer software company. To this day, even after Microsoft painfully settled American antitrust actions and lawsuits, the Europeans continue to punish Microsoft with ever-changing and constantly-growing demands. Lilliputian style, Microsoft is tied down under threat of more fines (after paying a record $613 million fine several years ago), and is forced to change its software, turn over programming code to competitors, adhere to government-set marketing rules and product specifications, etc.

Not so long ago, the Europeans were quiescent in antitrust enforcement. In fact, in countries such as Germany private cartels were legal (as they should be). Governments often encouraged cartelization (which they should not do; it is a private matter). However, about 15 years ago, the Europeans got antitrust fervor. They appointed a Europe-wide antitrust enforcer and set to work. A partial list of companies attacked by the European antitrust enforcers since then reads like a who's who roster of American business success stories:

• Apple
• America Online
• Boeing
• General Electric
• Honeywell
• McDonnell-Douglas
• MCI
• Microsoft
• TimeWarner
• Sprint
• WorldCom

Many of these companies who wanted to merge primarily to achieve efficiencies in the United States could not do so because the European regulators would not allow the companies to combine their European subsidiaries. Two examples were the intended General Electric/Honeywell and WorldCom/Sprint mergers. Both of these mergers of American companies were thwarted by the European antitrust regulators. In other cases, mergers between American companies were permitted only after costly concessions were extracted that favored local, European competitors. Two examples were the TimeWarner/AmericaOnline and Boeing/McDonnell-Douglas mergers.

Interestingly, Europe's antitrust fervor began around the same time as the American government's antitrust assault on Microsoft began in the early 1990s. Now, after nearly two decades of America barely uttering a word in protest, the Europeans believe it is open season on American corporations. With regard to Apple, France actually tried to pass a law a year ago that would have forced Apple to allow iPods to accept music downloads from services other than iTunes. Eventually, France backed down after Apple threatened to pull its popular iTunes service out of France.

The Europeans are not just being anti-American. They target plenty of European companies with antitrust enforcement. Their reach across the Atlantic into the boardrooms of American companies has more to do with punishing the successful to protect the mediocre and politically-connected local companies in Europe. Many of the world's most successful companies are American. Therefore, the Europeans hammer them with antitrust.

Protection Racket

The Wall Street Journal today reports that U.S. shrimpers are using so-called "anti-dumping" laws to extort cash payments from foreign shrimpers. Under the anti-dumping law, U.S. producers request and get tariffs imposed on importers they compete with. They only have to complain that the prices the importers sell their products at are unfairly low. Unfair to whom? Certainly not to the customers of shrimp, steel, paper and sundry other products against which anti-dumping tariffs have been imposed. No, they just have to show that it is unfair to them, the producers. So, American producers who compete for a living with all other producers, foreign and domestic, get to claim that their competitors' prices are too low.

It is a politicized, non-objective process and rewards selected American businesses to the tune of billions of dollars every year. All American consumers of these products pay more money for imported and domestic goods that are "protected" this way. Much of the extra profit that the domestic producers make gets passed around to thousands of lobbyists, lawyers, trade associations, regulators and politicians, all of whom make this racket work.

The most recent anti-dumping tariff, imposed in 2003 by the Bush Administration, raised shrimp tariffs by $100 million. Today, that process has become much more efficient and direct. The foreign producers now make cash payments directly to an association of U.S. shrimpers who, in turn, pass much of that money around to the domestic players that support the racket. The money is paid under threat that the U.S. shrimpers will call their political buddies to slap another punitive tariff on them. It was an offer the foreign shrimpers could not refuse.

When the Mob extorts money from businesses, it has to pay off judges, policemen and sometimes senators and congressmen. Today's legalized mobsters do the same thing, paying off many of the same people. All of us pay. We pay higher prices for goods and we suffer from an impaired division of labor. Less efficient and less successful producers of goods are rewarded at the expense of the more able.

Comments on the Electric Utility “Deregulation” Mess

Recently, I received the following (edited) question regarding the choice of electricity supplier in the state of New Jersey. The question is applicable for anyone who has a “choice” in any of the states that “deregulated” their electric utilities in the 1990s. These include California, Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas. The details of the deregulation plans vary by state, but all of them, to varying degrees, offer or did offer customers a choice of electricity supplier. Most of these states also mandated that utilities in their state had to divest all or a portion of their power plants. My answer is applicable to all of these states and, in important respects, to the entire country. PSEG is Public Service Enterprise Group, which provides electricity to parts of New Jersey.

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Hi GB,

I hope this email finds you well. I've lately become consumed with what I pay PSEG so I requested alternative electric energy supplier options (they pretty much have a monopoly on distribution).

Of the list of 19, just 2 offer residential service to my zip code. My question to you is: does the residential customer really have any choices? It seems all of the options are for businesses. (With the amount of research I've done on this topic today, this may turn out to be an article in the newsletter I publish! But I need to check my facts with you first.)

To their credit, PSEG does offer many comprehensive programs, tips, and arrangements to "help pay", lower, and generally help make paying them less of a burden, however, I can't help feeling like I'm just not getting the choices I'm supposed to get in a dereg'd marketplace.

Any thoughts you can share with me on this will help alleviate my frustrations... thanks!

A Reader

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My answer:

Dear Reader,

As for the question in your email, residential customers don’t really get much of a choice much of the time. I suspect that any deal you are offered probably doesn’t present much savings over PSEG.

As for why, it is quite complicated to answer. The simplest answer is that the electric industry was never really deregulated, so deregulation can’t be blamed for what you are observing with regard to residential choice of electricity supplier.

Consider that “deregulation” in the case of utilities involved something good (allowing entities other than utilities to build more power plants) and quite a lot that was not good and “re-regulatory” in nature. The good thing, allowing others to build power plants, should lower prices over time because newer and more efficient plants will get built. However, that is true only if both utilities and non-utilities are truly free to build plants. Being truly free would mean that they can: (1) charge whatever they want for power produced from those plants, (2) locate them in the best locations, wherever they can buy land, and (3) build the plants using whatever they think is the best technology.

None of those things are true today. I’ll briefly address each of them:

(1) Price Maximums = Expensive Power. Price maximums are set by federal and regional regulators in the wholesale power market. Capped prices mean capped profits and a reduced desire for companies to build power plants. If fewer new power plants get built, prices will remain high because electricity continues to be made with old, inefficient plants.

(2) You Can’t Build It Here. Local zoning rules, land use restrictions, environmental rules, and the “NIMBY” reaction of local politicians to a power plant in their local area make it extremely difficult to locate new plants in the areas where they are most urgently needed, such as near urban areas where the customers are. “NIMBY” stands for “Not In My Back Yard.”

(3) Using the Best Technology Is Forbidden. The cheapest technology for a new “base-load” power plant, i.e., one that is designed to run 24/7, 365 days a year, is nuclear. Base load plants are the work-horse plants on the grid. They supply most of the electricity that you use. Unfortunately, nuclear energy in America has been made prohibitively expensive through unnecessary safety rules imposed after Three Mile Island. No one has died from exposure to nuclear radiation in that accident or any other accident anywhere in the modern, Western industrialized world (which the Communist government responsible for Chernobyl was not; no Western engineer would have built a nuclear power plant without a containment vessel, which the Soviets did). Despite nuclear energy's exemplary safety record, arbitrary safety regulations have made nuclear energy almost prohibitively expensive.

So, faced with the rules & regulations embodied in points 1-3, the electric industry remains very highly regulated in a manner that results in high electricity prices.

The other part of the answer is the re-regulation that was part of “deregulation”. Sound confusing? What makes it confusing is that when the “deregulators” thought they were deregulating, they were actually re-regulating the industry by imposing an artificial industrial structure on the utilities. The “deregulators” developed the mistaken belief that they knew better than the utilities what business structure they should have. So, they broke apart the utilities, much in the same way AT&T was broken up by deregulators in 1984 (that action was also a mixed bag of “re-regulation” and partial deregulation, but that is another discussion). They forced the utilities to sell their power plants, and then they forced the utilities to allow others to use their distribution wires to deliver electricity to customers. That is why someone other than PSEG can “sell” you power even though they do not own the wire that delivers it to your house. Instead, PSEG owns the wire and you pay PSEG to have that other company’s power delivered over PSEG’s wire to your house. It is similar to how competing long distance companies would use Verizon’s local phone lines to provide you with long distance service.

The result of the artificial manipulation of the utilities’ corporate structures and business practices is that they operate in a manner less friendly to customers. Until the pseudo-deregulation of the 1990s, utilities were vertically integrated. They owned their power plants. That enabled them to offer power at predictable prices. However, by artificially separating utilities from their power plants, they were forced to buy power partially or completely in the wholesale power markets. In itself, that might have worked out okay, but regulators also forced the utilities to buy power under relatively short-term contracts. As a result, short-term price fluctuations get transmitted to customers.

To summarize the point about re-regulation, the artificially broken-up structure of utilities makes them less economically efficient, with the result that power prices are both higher and more volatile to customers.

Sound complicated? It is. Is it deregulation? No. Is it an unholy mess? Indeed, it is.

I will give a hint of what a proper government policy toward utilities should be: hands-off or laissez faire. In particular, utilities should get no legal monopoly protection, which they still have. Anyone should be free to start up a business selling electricity to customers. If this were permitted, we would likely see a lot of technological and business structural innovation, such that utilities would look a lot different than they do today. For example, real estate developers may build “mini-utilities” with small power plants to provide power to residential sub-divisions. Large commercial buildings may find it is economical to self-generate using gas-fired generators in their basement. It is even conceivable that individual homes may be powered by micro-generators the size of air conditioners. Large utilities are likely to still exist, but they will compete with each other, with the customer benefiting from lower rates. Or, large utilities may function largely as back-up sources of power to whom electricity customers would pay a fee for that service.

All of this innovation (and other types that remain to be conceived by a future entrepreneur) could happen if utilities were truly deregulated and politicians stayed away from the business of providing electricity. None of it will happen under the current structure, which mixes a few, tentative measures of market freedom with a whole lot of contradictory government control. Utilities today are arguably the most regulated private industry in the country, with a welter of overlapping local, state and federal authorities all having a hand in how they are run. With that many cooks in the kitchen, is it any wonder that the pies they make taste so awful and cost so much?

Bottom line for you personally: without knowing the details of the offers from other electricity suppliers, I suspect you are better off, in terms of hassle and probably even money, by staying with PSEG!

Bottom line for the country: we all pay too much for power and will continue to do so until true deregulation occurs. But, before that can happen, people need to draw true conclusions about the ersatz-deregulation that has been attempted already.

Sincerely yours,
GB

P.S. – There are other aspects to this complicated problem. One of them (to be discussed) is the price and profit controls on electric transmission lines that prevent enough new transmission lines from being built. The result is that the electric grid is ossified and subject to blackouts, and power is too expensive.

Nuclear Power: Hated by Environmentalists

The environmentalists' hatred for man and his technology is revealed by the reluctance of most environmentalists to embrace nuclear energy as a solution to the alleged global warming problem. Nuclear plants emit no carbon dioxide. Yet, environmentalists will rant and rave against nuclear power for all of its alleged harms, despite the fact that in the West not a single person has died from an emission of radiation into the environment by a nuclear power plant.

If the Nuclear Regulatory Commission were shut down, and all federal and state regulations were eliminated on nuclear power plants (and all other forms of electricity generation), I suspect that we would generate the majority of our electricity from nuclear power plants. Nuclear power has an inherent economy of scale because a very tiny amount of material can produce a huge amount of energy. Nuclear energy is very concentrated. This means that the cost of handling uranium and disposing of waste is very small in comparison to the amount of energy produced.

Contrast this with coal, where many 100-car-long trainloads of coal are needed to produce the amount of electricity that could be produced in a couple softballs' worth of uranium. Even with nuclear waste being radioactive, it is far easier and more environmentally "friendly" to dispose of nuclear waste than it is to dispose of coal waste, some of which inevitably gets disposed of in our lungs.

Only a wealthy, technologically advanced society can cheaply deploy a technology as advanced and beneficial as nuclear energy. Nuclear energy is clean and would be very cheap if it were not regulated. Yet all of the regulations on power generation -- including the pollution rules on fossil power -- just make our economy that much poorer, and less able to afford something as magnificent as nuclear power. So, ironically, by attempting to regulate in order to prevent pollution, such regulations have the opposite effect of making us poorer and therefore more likely to use polluting technologies, such as fossil fuels.

This point may not seem obvious, but observe that the worst polluting societies are the emerging Third World countries that are far poorer than ours. China, the former Soviet Union, developing parts of Africa and Asia, all have far more polluted air than we have in the West. Poverty and pollution go hand-in-hand.

As a final tidbit on nuclear power, I remember reading about an Alaskan village that wanted to install a tiny underground nuclear reactor for electricity. They believed it would be far cheaper to generate electricity through nuclear fission than it was to burn fuel oil that had to be arduously transported at great expense to their small village. I spoke to a nuclear engineer who told me that it was feasible to make such small nuclear reactors, but you would have to wait for "hell to freeze over" before the regulators would permit it. Given how much those Alaskan villagers have to pay for electricity, and how low they probably set their thermostats to save money, I imagine that they are already living in their frozen little hell.

Señor, Where's My Tortilla?

At the risk of sounding drunk on the ethanol story, here is another unintended consequence of that boondoggle. The excellent Latin American editorial columnist Mary Anastasia O'Grady describes in today’s Wall Street Journal a scenario south of the border whereby Mexicans may soon discover they have run out of tortillas.

This unlikely of scenarios requires a "perfect storm" of government intervention on both sides of the border. It hasn’t happened yet, but warning signs of the coming storm are visible. The first of these, the U.S. ethanol subsidy, is already underway. As a result, global corn prices are rapidly rising. Corn futures are at record levels.

Tortillas, made from corn, are a ubiquitous and tasty staple of Mexican cuisine. Spanish conquest, wars, revolutions, and socialist economic policies could not dislodge the tortilla from its central place in Mexican cooking. However, a perfect storm combination of artificially high corn prices caused by the U.S. ethanol subsidy, Mexican quotas on imported corn, and impending price controls has the potential to do so.

How could this happen? Mexico has long imposed a quota limiting imports of corn. The ostensive purpose of this policy is to ensure a sufficiently high price of corn domestically so that the many thousands of Mexican subsistence farmers could keep operating. Farming small plots of land high in the mountains in a style that has barely changed since the days of the Aztec Empire cannot compete with the economies of scale of modern, industrial farming.

However, Mexican corn farmers are free to export their corn if the global price is high enough. Guess where the big new demand for corn is pushing global corn prices to record levels? The new demand for corn is coming from the U.S. ethanol plants that are converting corn into ethanol.

Now, there can still be enough tortillas on the street corner, albeit at much higher prices, if the price mechanism is not interfered with. Tortilla prices will simply rise to reflect the higher prices of corn.

But in Mexico, tortilla prices are a political issue. So, the government there is considering imposing price controls on tortillas. If that happens, in accordance with the economic law of supply and demand, a shortage of tortillas will develop. Too many people will want tortillas because the price is held artificially low, and not enough tortilla makers will want to make tortillas because they cannot make a profit when corn prices are so high. So, don’t be surprised if next time you are in Mexico, you overhear one hungry Mexican asking another: ¿Señor, dondé está mi tortilla?

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Note: Edited last paragraph for clarification and style on 1/30/06.

Drunk on Ethanol

In economics, there is the principle that capital will flow to its highest use. In other words, if you can make a profit doing something, you will find backers for your idea.

That principle is forgotten in what is shaping up to be a monumental boondoggle. I am referring to the government's massive program to promote the production of ethanol as a substitute for gasoline. The motives for this program are several. The stated one is that it will improve our security by reducing our dependence on Middle Eastern oil. That is unlikely. But the less frequently mentioned reason is that it is a sop to farmers. It is seen as yet another in the long, 75-year history of government programs that subsidize farmers: most ethanol is made from corn.

Already, corn farmers are feeling the money-rush of Bush's 2005 expansion of government support for ethanol production. Prior to 2005, ethanol producers benefited from favorable tax treatment, in particular an exemption from the 51 cents-per-gallon federal tax on gasoline. Despite that relative advantage, ethanol production for fuel had grown modestly. The Bush-sponsored Energy Policy Act of 2005 went much further. That Act made the tax break permanent, imposed a tariff on imported ethanol, and called for the first-ever requirement that gasoline producers incorporate a quantitative target of ethanol into a gasoline-ethanol blend to be used by cars.

The effect of the triple-punch of favored tax status, tariffs and production quotas has been huge. In just the past two years, the number of ethanol plants in operation has doubled to 110. Half of these are owned and financed by farmers. In 2006, 5.4 billion gallons of ethanol were produced as producers labored to meet the quota.

Today, President Bush proposed more than quadrupling the bet on ethanol by raising the mandatory production target for gasoline substitutes, primarily ethanol, to 35 billion gallons from the current 7.5 billion target. That represents more than 20% of current gasoline consumption.

Such a massive increase in ethanol production, because it largely depends on corn, will predictably raise the price of corn. It is already happening. Higher corn prices mean higher prices for everything that is made from corn, including livestock feed and high fructose corn syrup. (High fructose corn syrup is itself a market that was largely created by government intervention, in this case the near-prohibition of sugar imports.) This means higher prices for meat and the large number of food products that are sweetened with high fructose corn syrup such as soft drinks. American corn exports will also suffer as they are slowly priced out of the international market.

All of this will have a sad and predictable end. Eventually, the subsidies will be curtailed and/or the price of oil will fall to such a level that ethanol will become unprofitable even with the subsidies. A majority of the plants that produce ethanol will be shut down. Farmers who invested in the ethanol plants will lose their investments. Farmers who plowed under their soybeans and grain fields to plant more corn will get hammered. And, at the end of the day, we will discover that the entire effort did not make a dent in our imports of oil, which will be greater than ever. (The latter acknowledges that production of ethanol may actually consume more energy than it produces. If that is true, increasing ethanol production may result in greater imports of oil. Even if it is not true, it is unlikely that ethanol production will result in any significant energy savings. See the first link above.)

A lot of investment, both direct investment through venture capital and government subsidies, and indirect investment through the diversion of resources from other uses, will be wiped out.

All of this is easy to predict because the government's sponsorship of an ethanol program violates a basic principle of capitalism. That principle is that capital flows to its highest and best uses, if it is left free. If ethanol were practical, no subsidies would be necessary. Because subsidies are necessary, it is not practical. Once the impracticality of ethanol is revealed in the marketplace and the subsidies end, the entire pseudo-industry crashes down.

Government management of the economy never works. There are no examples of legitimate industries requiring subsidies, and no examples of subsidized industries that are legitimate, to the extent they are subsidized. All subsidies destroy wealth. Today, everyone -- farmers, politicians and international security "experts" -- is drunk on ethanol. Tomorrow, all of them -- and all of us who were forced to pay for this boondoggle through higher taxes and prices for corn -- will wake up with a hell of a hangover.

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UPDATE 1/25/07: The good times at the ethanol punch bowl may end sooner than a lot of soon-to-be-unhappy investors and farmers may realize. The Dow Jones Newswire reports:

"Speaking... at the World Economic Forum, [U.S. Energy Secretary] Bodman also said he does not see a 51-cent-a-gallon subsidy to U.S. farmers remaining in place beyond 2010 or an import tariff of 54 cents a gallon on ethanol beyond 2008. 'The idea is that at some point in the future all these technologies need to stand the test of the free market,' Bodman said."

Perhaps Bodman has been reading up a little on how ethanol may consume more energy than it saves, corrodes automobile engines, raises the price of corn products... Well, you know the story. All subsidies end. But before they do, they cause a lot of damage. That is why Bodman is wrong on one key point. All technologies should stand the test of the free market all of the time, not just at some point in the future.

Apartment Booty in New York

I submitted this letter to the editor regarding Mayor Bloomberg's plan to use the lever of taxes to force landlords to house low and moderate income people in buildings in higher income neighborhoods. It is called the "421-a" plan referring to the tax "break" landlords won't get if they don't comply.

"Dear Editor:

Liberty is usually lost not in a big leap, but in many small steps. Well, New York is taking a medium-sized step with Mayor Bloomberg’s plan to subsidize a new round of housing for low and moderate income people. The plan will use the lever of taxes to force landlords to house the recipients of this booty cheek-by-jowl in the same buildings or neighborhoods as those of us who earn the money to pay for it. It is not enough that New Yorkers who earn their wealth pay the highest taxes in the country. Now we are also being forced to share our homes and neighborhoods with the objects of our oppression.

The liberty of Americans will not be lost in a grand revolution, like that of Russia nearly 100 years ago. Rather, it is being lost in many smaller steps like the current one to forcefully house those of lesser means in the neighborhoods of the wealthy. Unlike Dr. Zhivago, who came home to find his home suddenly occupied by the gloating, envious rabble of the city, we find our homes and neighborhoods invaded one building and one paycheck at a time. "

Regulation Destroys

As an investment professional focused on the electric utility industry, the most regulated industry in the United States, I have accumulated numerous examples over the past 12 years of the inanity of regulation.

My experience, based on frequent personal interaction with both the regulators and the regulated, is that regulators, nearly to the person, are less competent than the people they regulate.

Imagine a 50-something highly educated and accomplished CEO of a $25 billion market capitalization company kowtowing to a 30-something attorney and political hack who happens to hold life-and-death regulatory power over his business. I've seen it, and variations of it, many times.

Executives of regulated companies have to flatter the regulators at conferences and meetings, spend countless hours educating the regulators on the simple basics of how their industry operates (so as to reduce the destructiveness of new regulations), and regularly second-guess their own actions for fear that a regulator or his political boss will be offended by them.

The results are several, the least of which is the many man-years of wasted time and unproductive employment at large corporations (e.g.: the full-time regulatory affairs teams at utilities and every other large corporation).

More ominously, innovations are delayed many years or never implemented at all. For example, in the utility world, numerous innovative technologies that could be deployed on the electric transmission infrastructure, such as high-speed Internet access, are never deployed because they require regulatory approval, and to get that the utilities must agree to "share" profits because, under the principle of regulation, the transmission lines really belong to the "utility ratepayers."

Even if the regulator is well-meaning (many of them actually are) and accomplished/intelligent (a rarity), by virtue of existing at the behest of politicians, they end up being destructive (which is why the only honest regulator would have to immediately quit his job). As an example, during the height of the California power crisis, a federal regulator appointed by Bush who publicly denounced price controls, imposed them anyway when he got a personal phone call from Bush. He knew the price controls would cause blackouts, and they did. He implemented them anyway.

A whole body of economic and philosophical literature provides good reasons why regulation is bad. Regulators are disinterested or "mis-interested" (corrupt), they are risk-averse, they cannot hold all the relevant information in their heads to regulate properly, etc.

I agree with all that, and add to it the image of a highly successful chief executive clapping with eager obsequiousness at the conclusion of a meaningless speech by a well-meaning but ignorant regulator who would never be hired by the utility she is regulating.

I hate to end on such a negative note, so I will add that quite a lot of innovation still gets pushed through eventually despite such regulation (even in the utility industry, thankfully). But the cost of the lost innovation and waste is enormous and growing.