Browsing the blog archives for July, 2013.

The Folly of Giving Back


Few politicians, pundits, and educators seem to be able to defend capitalism effectively without apologizing for the prosperity is creates. I like to point out pithy, concise, and cogent articles that do so whenever I see them. Here’s a great one in a recent issue of Forbes.

Authors Yaron Brook and Don Watkins attack the prevailing notion that successful firms should “give back” to society. This little quip has become so common in mainstream business and academic parlance that its illegitimacy is rarely noticed. Even CEOs use the phrase, lest they be charged with greed and insensitivity to society.

A person or organization can only “give back” to another if that person was given something in the first place. So what does society give companies that obligates them to give back at some future time? Indeed, customers purchase their products but they only do so voluntarily–when the purchase makes them better off. Employees provide labor, but only voluntarily and when they agree to the working conditions and compensation. In fact, because a firm must trade value for everything it receives, so it only acquires resources when it makes other parties better off in the process. Firms can give whatever their shareholders (through through their boards and managers) deem appropriate, but they are not giving anything back.

This is an important distinction because so many in our society have been conditioned to believe that business firms–by definition–are privileged and are constantly taking from society. As such, governments and the general public have a right to a share of the profits when they are succeed. This view rejects the fundamental notion of liberty. Individuals and firms are free to make investments, purchases, and sell their labor as they wish; society has no right to a piece of the pie when a firm succeeds any more than a firm has a right to a public bailout if it fails.

I challenge you to have this conversation the next time someone applauds a company for giving back.


The Obamacare Fallout


The dominoes have been falling since the passage of Obamacare. Acknowledging impending chaos in both the “health care exchanges” and the labor market, the President decided to delay enforcement on businesses until 2015. When asked about business compliance problems, a White House spokesman simply stated, “they’ll adjust.” I agree, but I’m sure my idea of adjustment is different from that of the administration.

Obamacare requires employers with the equivalent of 50 or more full-time workers to offer health insurance to employees working 30 or more hours, or pay a fine. The average annual premium for employer-sponsored plans in 2012 was $5615 (see Employers that do not offer acceptable plans must pay a fine of $2,000 per worker in excess of 30. For example, a firm with 55 employees would pay $50,000 ($2,000 x 25 employees in excess of 30).

Although large firms hire the most workers in the U.S., the vast majority of employers are small businesses. Those below or close to the 50-worker threshold will have a sizeable incentive to stay under it by outsourcing some of their work, splitting their businesses into smaller entities, or foregoing growth opportunities altogether. None of these options is good for the economy.

Medium-sized and large firms cannot realistically downsize to below 50 full-time equivalent employees, but they can shift to hiring more part-time workers. Many already offer health insurance because it helps them attract and retain high quality employees. Some—particularly those that hire mostly low-skilled workers—don’t offer health benefits because they don’t have to. One option for these employers is to hire more part-timers (below 30 hours per week). Another option is to offer insurance or pay the fine, and adjust by hiring fewer workers and/or raising prices.

Put another way, a business hires a worker only when the value of the work he or she performs exceeds the additional wages, benefits, and other related costs. If hiring costs are increased for full-time workers, employers will cutback on workers, hire more part-timers, or raise prices to meet the new regulatory demands. Although it is difficult to forecast the numbers with precision, we know that employers will take action to minimize costs over the long run. The predictable result is some combination of fewer full-time employees and higher prices. Neither of these outcomes is good for the economy.

Obamacare has always been and will always be a wealth redistribution scheme. Government simply cannot cajole employees without repercussions; somebody has to pay the piper. The pushback we’re seeing now is only the tip of the iceberg, but have no fear. The left will promote more costly and ineffective regulations to “fix” these problems long enough to get through the next election cycle.


The Tesla Battle


I’ve enjoyed watching premium electric carmaker Tesla’s ongoing political battles. According to Consumer Reports and others, Tesla’s cars perform well, but dealers that sell other makes are trying to ban sales of the product at the state level because the carmaker has bucked the traditional franchise dealer system in favor of selling direct to the consumer.

A number of states are involved in this fight, but one example is close to my home. The North Carolina House of Representatives struck down a bill that would have kept Tesla from selling vehicles in the state, but the NC Auto Dealers Association has vowed to continue fighting.

So what precisely is the NCADA’s argument? While Tesla’s argument is transparent (see, a search for any news or commentary containing “Tesla” at the trade association website ( came up empty.

I’ve heard the tired Marxist “job loss” argument—that sales reps would lose their jobs if consumers purchased their cars directly from manufacturers. Of course, horse-and-buggy makers tried the same argument when cars came along.  I’ve heard the “lost government revenue” argument, which presumes that Tesla buyers would willingly pay more for another vehicle from a dealer located in the state if Tesla was banned. I’ve heard the territory argument, which suggests that dealers have rights to various geographical areas. This is certainly true for dealers that have been granted those rights by manufacturers, but Tesla hasn’t done so.

None of these arguments hold water, leaving cronyism as the only rational explanation. Apparently, some carmakers don’t want to outcompete Tesla with a superior vehicle or a better business model, but just want to keep Tesla out of the game altogether. They need willing legislators to make this happen. Fortunately, they haven’t found enough support yet in North Carolina.

This is an easy issue to analyze. Whether or not you like Tesla, green cars, or companies bypassing retailers and selling directly to consumers, this is about liberty—the freedom a company has to decide how to design, market and distribute its products, AND the freedom an individual has to make a purchase decision without government interference.  As Dell discovered with computers, there are both pros and cons to the direct-sales model, but the marketplace—not the government—should determine the ultimate success or failure of Tesla’s cars and the company’s approach to doing business.

Our economy advances when companies innovate. Some succeed while others fail, but surviving firms always get stronger and meet customer demand more effectively when they learn the lessons from experimentation that occurs within the industry. Consider that several decades ago consumers had no choice but to purchase gasoline from full-service stations. Today, we swipe our cards and pump our own gas. The current, more efficient system evolved as businesses experimented with new technology and consumer preferences. Many displaced workers found jobs in the convenience stores that emerged. While Oregon and New Jersey still require that gas be distributed the old way, this hasn’t halted progress in the other 48 states.

As defenders of free enterprise, we should be the first to support companies like Tesla that seek to compete without government interference. A petition requesting that the Obama Administration weigh in on the issue hit 100,000 signatures, which should prompt an official response soon. Let the chips fall where they may.