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April 17, 2014 / 17 Nisan, 5774
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Posts Tagged ‘regulations’

Cyprus: When the Law Prescribes Theft

Sunday, March 31st, 2013

Who will shoulder the pain from the Cyprus bailout deal?

The first-order sufferers will be small businessmen (mostly Russian) and upper-middle Cypriots and foreign residents with their money in Cypriot banks.  But the whole region will take a longer-term blow from the loss of Cyprus as a place for upstart businesses to park capital.  Capital that can’t be parked cheaply in the E.U. won’t be invested in the E.U. – at least not by the smaller, less financially “connected” entrepreneurs who drive economic dynamism and growth.

The big Russian firms that bank with the Russian Commercial Bank in Cyprus have protection in the deal, although they will have more trouble moving capital around under the “capital controls” to be implemented, which hwill keep depositors from draining their accounts.  Russia has been relatively quiet and mild on the terms of the Cyprus deal, largely because the biggest Russian depositors in Cyprus bank with the Russian Commercial Bank and won’t be hit with the 40% “amputation” tax on their accounts.  For the average traditionally-autocratic government, smaller entrepreneurs are always easier to accept as roadkill.  They may create jobs and revenue, but they aren’t in a position to line politicians’ pockets and they’re not easy to marshal as a means of geopolitical leverage – unlike, say, Gazprom.

It will hurt the E.U. for Russians to flee Cyprus; it will hurt equally for only the biggest, most state-connected Russians to remain in Cyprus.  All the Russians won’t necessarily flee,  but if nothing else changes, and the bank deal defines the future, the dynamism of the Russian economic presence in Cyprus will be bled off.  The economy of Cyprus will become more of an elephants’ dance than a coyote squabble, even with the gas eventually coming up from the ocean floor.  Cyprus will go further down the road taken by too much of the E.U., discouraging entrepreneurship and overserving itself on the future obligations.

Italy and Spain are obvious others to bring up, of course, and everyone is doing that.  Besides serious debt and bank-solvency problems, they have already gone further down the controlled-economy road than Cyprus has (which is the main reason for their debt and solvency problems).  Their big-name companies, the international giants, are incapable of growing the economy, because it doesn’t work that way.  The big firms aren’t the future.  Small entrepreneurship is always and everywhere the future, and in Italy and Spain, engaging in it openly is discouraged by regulation and the tax code.

There is a regional aspect to this, of course; a difference among points of the compass, inside both countries, and between city and hinterland.  Such differences are creating fault lines throughout the E.U.  Those gaps aren’t going to narrow any time soon.  Now is a good time for the E.U. to take stock and recognize that the entire Cyprus problem, like the Greece problem, was created by the actions of government.

Left to their own devices, people coming together for economic activity don’t do this to themselves.  Failure is liquidated; it is not enshrined in policy.  But governments do the opposite, propping up and enabling failure for as long as they can, because they insist for political reasons on the policies that make it inevitable.  Government’s perspective is always political, and therefore inimical to economic efficiency.  The more government is chartered to control, the richer a society has to be to afford it.  And unfortunately, there’s a kind of “peak government” rule to this: a society in which government controls too much cannot stay rich.

The U.S. is headed down this path too, but most of the E.U. is already further down it.  The E.U. and its individual nations created this problem through policy.  There’s a political relief-valve aspect to making “the Russians” pay for it (although the FT article linked to above points out that at-risk Russians expect to find ways to get their money away from the amputator’s saw).  But the Cyprus crisis illustrates nicely that the cost of over-regulatory government will lead to outright theft from the people.  Policy as cosmically comprehensive as that in the E.U. model will indebt everyone, until theft seems to be the only option left.

This isn’t a condition for stability.  Moscow hasn’t given up on Cyprus, which still sits enticingly athwart Turkey and Europe.  The Cyprus deal won’t last very long – not while Cyprus and the E.U. remain in the vise of the E.U.’s negative, defensive policies.  (If the Russians sneak enough of their money out, the Cyprus deal won’t last long enough to auction off the office supplies with the Laiki logo).

The Road to Oligarchy

Friday, March 8th, 2013

Regardless of how many wars on poverty are declared and how often calls are issued to make the rich pay their fair share, neither the rich nor the poor will be going anywhere anytime soon. The question is what forces will keep the poor impoverished and where the rich will derive their wealth from.

The founder of Subway recently said that he could not have started up his company today. Similar messages have come from the founders and heads of other major companies. That isn’t to say that companies will cease to exist. What we think of as business has been changing for some time.

In most countries, starting a business does not begin with a great idea. It begins with connections. Knowing the right people is still important, but in most places it’s the most important thing.

Under the current American model, a company becomes successful and then begins to lobby Washington to gain a competitive advantage or to avert hostile lobbying directed at negating its existing competitive advantage. That is a perversion of free enterprise, but in much of the world companies begin lobbying first and then become successful. This is the model that has evolved under Obama. And it’s a familiar model to anyone doing business in Russia or China. Political connections come first and then the business becomes feasible.

Oligarchy is the inevitable outcome of an economic climate where the governments acts as a gatekeeper to the country’s customers. Measures that began as limited safety and fraud regulations have become a comprehensive political economic system that controls every aspect of every economic transaction.

The government creates markets. It creates companies and customers. It sets prices and taxes industries that it does not favor out of business.

Corporate lobbying isn’t just about the proverbial 200 dollar screwdriver. It’s about making it more expensive for some companies to make screwdrivers than others. It’s also about forcing independent screwdriver manufacturers out of business. It’s about government grants to make environmentally friendly screwdrivers and heavy taxes on companies that don’t make environmentally friendly screwdrivers.

Tactics like these aren’t new. The Esch Act eliminated white phosphorus matches through a punitive tax back in 1910. But a century later, the government wiped out the incandescent bulb industry, not for health reasons, but to comply with a trendy ideology. Microsoft, which had hardly bothered to lobby before, was dragged to Washington on monopoly charges that Google, the ultimate dot com insider, today laughs off. And Microsoft learned its lesson, investing in sizable amounts of lobbying capital.

The government is a bigger factor in business models for both large and small businesses than any other. Whether it’s struggling against the mountains of paperwork or looking for ways to profit from the latest regulations, business has come to be defined by government. The tier of governments at every level have accumulated huge amounts of wealth and power. Government power is used to control how business is done while government spending makes political officials into the country’s biggest consumers.

The fusion of business with government leads to oligarchy. The rich are not going anywhere, but wealth becomes a factor of their government connections, rather than skill or even inheritance. Government control over business began under the banner of combating monopolies only to end by creating government monopolies. The war against income inequality will end the same way and with the same results as the oligarchies in Russia, China, Mexico and everywhere else.

The future of Obamerica is a country full of corrupt government officials and tycoons. The future is an aristocracy of union bosses running their own guilds, corporate monopolies that change with each election and government officials with mansions and armed bodyguards.

Income inequality will be huge with oceans of poverty and small islands of wealth locked away behind gated communities. Populists will promise power for the people, only to make the system even more corrupt. One company or one boss will be brought down, only to be replaced with the favorites of another party.

Everyone will despise the tycoons and the government. The government will promise to protect the people from the tycoons, even as it works closely with them, and the tycoons will lavish money on certain areas in exchange for loyalty. Both the government and the tycoons will be closely tied up with organized crime which will launder its drug profits through the tycoons and use its political connections to gain protection and sanctions against rival organizations.

Printed from: http://www.jewishpress.com/indepth/columns/daniel-greenfield/the-road-to-oligarchy/2013/03/08/

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