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Incentives matter


Much of what we see in the business and political worlds can be explained by incentives. When companies, politicians, and governments create the wrong incentives, bad things happen. Consider the following example at Uber as reported in Tuesday’s Wall Street Journal:

Unlike taxis, ride-hauling services like Uber charge fixed fares to passengers based primarily on the projected distance they will travel, not the actual distance they ride. Uber encourages drivers to take the most direct route, but they are compensated based on actual mileage, incentivizing them to take longer routes at company expense. Out-of-town passengers usually have no incentive to pay attention. The practice, known as longhauling, is clearly unethical. Nonetheless, company policy encourages it, creating what economists call a “perverse incentive.” We should not be surprised when this happens.

Of course, there is a logical reason for compensating drivers based on actual mileage. They know the conditions on the ground and should be free to select the best routes for their customers even if it means deviating from the route recommended by navigation. But this post is not about Uber’s policy; it’s about the role of incentives.

This type of incentive problem is not unique to Uber. When a company reimburses travel expenses without tight controls, employees are more likely to stay at expensive hotels and eat well while on the road. When a government employs a voluntary income tax, individuals are more likely to fudge on the numbers. When EMPTALA guarantees emergency room treatment regardless of one’s ability to pay, some Americans will not pass on health insurance, take their chances, and just ignore the bills if they get sick. The list of examples in business and government is endless. Empirical evidence helps us understand the scope of these problems after the fact, but many of them could have been minimized or avoided altogether by considering the incentives in advance.

Many of these incentive problems occur because policymakers assume that people will overlook a perverse incentive and “do the right thing.” I’m not a cynical person, but this is usually folly. Consider the 2008 financial crisis. Politicians blamed lenders for issuing questionable loans—which some did—but they were simply gaming the system government created.

When it comes to economic policy, bad incentives usually come from government intervention. Free markets promote their own incentives, usually healthy ones, with limited or no government oversight. Companies that deliver better products at lower prices are more likely to succeed, while those that do not serve their customers well will eventually fail. Well-intentioned government schemes designed to aid the poor, clean up the environment, or promote other social objectives usually limit customer choice and favor large companies that can afford the compliance costs.

Incentives matter.


Resolving Trade Disputes: Policy vs. Strategy


I’ve lost track of the number of times a likeminded free-marketer has chastised me for failing to oppose President Trump’s approach to trade and tariffs. The exchange usually goes something like this:

Other person: Trump says we should “put workers first” and raise tariffs to reduce the trade deficit. How can you possibly support that as economic policy?

Me: I don’t.

Other person: Then why do you support his tariffs? Remember Smoot-Hawley? Don’t you know they will start a trade war and nobody will win?

Me: So, what should we do about unfair trade practices like higher tariffs from our trading partners, China’s requirement that many US firms partner with Chinese companies in order to compete there, or China’s inability to enforce intellectual property rights?

Other person: We should resolve these issues at the negotiating table.

Me: We have been trying to do so for years, but it’s not working.

Other person: Perhaps, but we should still negotiate. We shouldn’t start a trade war over it.

I’ve been searching for a simple way to explain my position in conversations such as these. I think it can be summed up by policy vs. strategy. Free trade is the best friend of workers, consumers, businesses, and even politicians. I do not support tariffs as economic policy, but that doesn’t mean I can’t support them as political strategy.

It should be obvious that “free trade” isn’t currently a two-way street. Many of our trading partners employ restrictive trade policies that they would find unacceptable from the US. China is the most obvious example. US action can evoke retaliation and ramp up a trade war, but the battle has already started.

Some business leaders and economists correctly note that the current arrangement is still a net benefit to the US and should be allowed to fix itself slowly over time. Others agree that “something should be done” but seem afraid to take any action. The first group is engaged in wishful thinking, while the second group does not appreciate the difference between policy and strategy.

Most of our trading partners benefit from the current system and will not change course unless they are forced to do so. The existing rules have been accepted for years, so why change now? The only way to make real progress at the negotiating table is to impose tariffs and other restrictions as bargaining chips on the US side. It will require some short-term pain, but it’s the only option that works. What are the alternatives?

The US is in a strong economic bargaining position now relative to countries like China, so I believe the odds of getting an acceptable deal soon are good. If not now, when?


Dads, Paternity Leave, and Government Mandates


The Family Medical Leave Act (FMLA) passed in 1993 provides (among other things) 12 weeks of unpaid leaves to moms and dads to care for their newborns. During the last quarter century, companies such as Facebook, Twitter and American Express have added paid leave as a job benefit. Nonetheless, men hesitate to take the leave, fearing that time off the job would hurt their careers and be seen as a lack of commitment to the company. Women are more likely to take leave but many struggle with the same concerns, according to a recent Deloitte survey (

The survey provides several additional interesting findings. Not surprisingly, 54% of the respondents said that their coworkers would judge males more harshly than females for taking the leave. Half of the respondents said they would prefer more parental leave to a pay raise. This is another way of saying that they would rather work less for less money.

So, is paid paternity leave a good idea? Perhaps, but it depends on who gets to decide. Those on the political left use surveys like this one to justify their calls for more government regulation. To be clear, governments should NOT mandate any form of paid leave, as doing so inflicts costs on businesses that should be managed by the owners. But this doesn’t mean that providing paid leave is a bad idea. Many companies offer leave and other benefits to retain top employees. Indeed, 77% of respondents in the survey said that paid parental leave is a factor in employment decisions. Companies offering paid leave tout “corporate social responsibility” as the impetus for doing so, but it’s often just good business.

The beauty of the free market is that companies can try different approaches—new products, lower prices, pay more or less, and so on—and stick with what is most effective. Best practices are usually adopted by other companies, all by choice. For example, McDonald’s is using kiosks to take orders in many of its restaurants instead of hiring more workers. This is probably a good idea long term, but the results will speak for themselves and competitors will follow suit when doing so makes economic sense for them. The same is true for paternity leave. Like the minimum wage and health care, we will be better off if governments leave business decisions to investors who are risking their own funds in the marketplace. The market already provides incentives for them to do the right thing.


President Trump: “End all tariffs.”


I don’t understand everything President Trump says or does, but a lot of insight can be found in The Art of the Deal. He is not afraid to leverage strengths, call bluffs, and remain unpredictable. Many in the mainstream media see this as chaotic and a lack of preparation, but they continue to miss the point. While there are times when the President and some in his administration stray off message, there are other times when he hits the nail on the head. Consider his recent trade comments at the G7 summit.

Trump’s detractors have decried his calls for tariffs. They are correct in terms of long-term policy, but not necessarily from a positioning standpoint. When some of our Europeans railed against his calls for protectionism, the President turned the tables and took them at their word, calling for an end to all tariffs. If our trading partners really believe that tariffs are detrimental, then why don’t they join him and demand a summit to negotiate the expeditious removal of all trade barriers. They haven’t and probably won’t because the facts aren’t on their side. The Europeans spend a smaller percentage of their GDPs on NATO and have instituted their own tariffs on US goods and services. President Trump called their bluff.

Those who argue against the President’s proposed trade restrictions claim that he is igniting a trade war, but this argument ignores the reality of unfair trade restrictions in China, Europe and elsewhere. It also suggests that the US would be “starting a trade war” by instituting policies that resemble the ones already in existence in other nations. In essence, Trump is not really arguing that tariffs benefit anyone, but that they are necessary to prod our partners to level the playing field. Imposing tariffs gives him leverage at the negotiating table. While some of his statements seem to contradict this overall position, I believe it’s all about positioning for a better deal.

Agree or disagree with Trump on other trade issues, let’s get behind him on his call for a world without tariffs, barriers and subsidies. Free trade has spurned massive wealth across the world and will continue to be the engine of economic growth. Without a doubt, it’s the ideal.


Update on Venezuela


One Sunday, Nicolás Maduro was “reelected” president of Venezuela for a second six-year term. But most Venezuelans who oppose Maduro knew the process was rigged and refused to participate. Legitimate opposition parties were not allowed to field candidates and outside observers were not permitted in polling places. Although the nation has a population of about 32 million, Maduro was credited with only 5.8 million votes.

The current situation in Venezuela can be traced to Marxist Hugo Chávez’ ascendency to power in 1999. The corruption, redistribution, press control and industry nationalizations that followed have crippled the country. Inflation is currently estimated at 13,000% annually and 5000 migrants are fleeing the country daily, most to Columbia. There are hunger and healthcare crises as well. According to one study, the average Venezuelan actually lost 24 pounds in body weight last year. Even so, Maduro continues to blame evil capitalists and the US for the nation’s ills.

You might say that Venezuela’s demise is happening before our eyes, but for most Americans it’s not. CNN, CNBC, and other major media outlets have little or no interest in what’s going on there. Venezuela continues to be the most underreported economic story of the last two decades.

The truth is that Venezuela is an inconvenient truth for a mainstream media afraid to consider the cause. Before Chávez took power, Venezuela was a prosperous nation with the world’s largest proven oil reserves. The list of early Chávez admirers includes the likes of politicians Jesse Jackson and Jeremy Corbyn, Hollywood elites Michael Moore and Sean Penn, and even leftist economists like Joseph Stiglitz. The only rational explanation for the current tragedy is socialism but acknowledging this raises more questions. Bernie Sanders is a self-avowed socialist and Democrats from Obama to Clinton to Warren lean heavily in that direction. If socialism is responsible for the disaster in Venezuela, then why would it possibly work in the US?

As former British Prime Minister Margaret Thatcher warned, “The problem with socialism is that you eventually run out of other people’s money.” There is little left to confiscate in Venezuela and Maduro’s rigged reelection suggests that a peaceful end to the madness in the near future is unlikely. This is disturbing enough. But the lessons from Venezuela should serve as a wake-up call for all Americans. The economics of a welfare state, a “living” minimum wage, single-payer healthcare and free college for everyone don’t add up. If we venture down the same road, we will arrive at the same place.


Real Diversity on Campus


A recent study of faculty at 51 of the nation’s top 60 liberal arts colleges reveals that 39% of employ no Republicans as professors. While many colleges and universities in the US claim to be the foremost defenders of diversity, the concept is foreign in campus life.

The findings reported here are not unusual. To be fair, studies like this often assume political affiliation to reflect worldview or ideology, which is not always or completely accurate. Self-proclaimed political “independents” could be Republicans in hiding, Democrats claiming to be openminded, affiliates of another party (e.g., Libertarians, Socialists, etc.), or genuine middle-of-the-roaders; we don’t know for sure. In addition, ideological balance—or lack thereof—varies across institutions and disciplines. Private colleges and flagship state universities typically lean more sharply to the left, as do professors in the arts and humanities. Of course, a professor’s political ideology does not necessarily translate into the classroom. I know progressives who are inherently fair and balanced.

These caveats aside, this study points to a reality few academics seriously challenge: Most college campuses in the US are ideologically progressive. A lack of genuine intellectual diversity shapes campus discussions in ways that promote certain views and discredit others. Many academic conversations consider only left-leaning views of a given issue. There are many examples, but let’s consider two.

(1) The U.S. Constitution: Two general schools of thought are originalism (it means what it says) and non-originalism (it should be flexible). Most professors seem to accept the latter “living and breathing” position as intuitively obvious and dispute how the Constitution should be stretched or whether it is even useful at all. Originalists are presumed to be ill-informed by default.

(2) Markets and Liberty: The two general views here are capitalism (individuals make their own economic decisions) and socialism (the state determines what is best). Most self-proclaimed advocates of capitalism on campus concede its “obvious flaws” and propose some sort of middle ground between liberty and statism. Like the Constitution, the notion of free markets is simply outdated.

On these and other topics, colleges and universities should welcome internal discourse and external speakers who present and challenge all sides. Speech on campus should be free and students should be taught to respect the ideas of those with whom they disagree. Politically incorrect views should be encouraged, including skepticism about the role of government, the current state of the press, the pros and cons of free enterprise, health care, and much more. A college education can be life-changing if it promotes real diversity and critical thinking. Whatever your point of influence—educator, student, taxpayer, or someone who hires college grads—I encourage you to insist on nothing less. Our future depends on it.


Takeaways from the Zuckerberg Testimony


I decided to wait a few days after Zuckerberg’s testimony to Congress before posting my comments to see if it had any staying power. I don’t think it did. This is unfortunate because there are several important takeaways.

First, I was miffed at how little Zuckerberg professed to know about the underlying issues. His response to the hotel question was baffling ( He struggled to define hate speech and actually suggested that an algorithm should make the determination ( He was evasive, but most Senators gave him a pass.

Second, I was also astonished at how little those questioning Zuckerberg seemed to understand about Facebook’s business model. It’s really simple: Facebook gives you a platform, while advertisers pay the costs in exchange for the right to target you with their content. Effective targeting requires that marketers know who you are, which is why your personal data is so important. How can you engage Zuckerberg in a serious discussion if you don’t understand why Facebook’s success in the first place?

Finally, Zuckerberg seems okay with the inevitability of regulation. Of course, “government oversight” gives him cover and creates compliance costs that potential competitors would be less able to afford. His willingness to “work with Washington” has nothing to do with solving Facebook’s problems and everything to do about protecting Facebook’s control of the industry. He should be smart enough to do that on his own. There’s no reason why he can’t accept safeguard the data he captures or develop a customer agreement that a reasonable individual can understand.

Mark Zuckerberg is not my favorite person, but he’s a smart guy. I think he has little respect for privacy and I am concerned about the data breaches, but it’s time for consumers to accept some responsibility. If you are willing to post personal information on Facebook for hundreds of your “friends” to see, don’t be appalled when you discover that advertisers act on it as well. It should be obvious that public formats like Facebook will be full of fake news as well. While some industry oversight regarding the clarity of user agreements and data security is necessary, the federal government should largely stay on the sidelines. Government regulation usually makes things worse, this would not be an exception.


The problem with the trade war argument


I’ve heard many free-traders question the wisdom of President Trump’s tariffs against China. They argue that free trade benefits everyone and that tariffs elicit responses that can trigger a trade war. I don’t need to be convinced that their arguments are 100% correct as far as they go, but they make 3 questionable assumptions.

  1. They assume that US tariffs would be the “first salvo” in a trade war, but this is not the case. I don’t agree entirely with President Trump’s public assessment of the trade situation, but trade salvos have been launched at the US for some time. Currency manipulation, intellectual property rights, requirements that US firms must secure joint ventures with domestic firms to enter the market, and competition from state-owned enterprises are but 4 examples from China. In this respect, the tariffs announced today could be viewed as a much-delayed response to unfair practices instituted years ago.
  2. They assume that all nations share an equal commitment to free trade. In an ideal world, leaders in each country would be equally committed to open exchange, not just in talk, but also in practice. While we should work to reach this ideal, we must equally recognize that it’s not reality. Like it or not, governments don’t just get out of the way and let companies trade.
  3. They assume that a “somewhat free” trade arrangement is acceptable, and certainly better than tariffs and other government restrictions. But the US has overlooked real trade problems for years in the interest of short-term corporate gains. This assumption is not valid in the long run. It’s akin to appeasing a brutal dictator. You get might get “peace” for a while, but your long-term position is compromised.

All nations benefit from free trade, and it’s my hope that all nations will come to the table to discuss the removal of barriers that protect their firms and punish outsiders. But we need action. I expect my leaders to be open to compromise, but insistent on results. I’m willing to accept some international blowback from other nations if that’s what it takes to get real progress.


The Delta-NRA Debacle


Last week, Delta Airlines buckled to gun control pressure and began disassociating with the National Rifle Association. In response, the Georgia House and Senate just voted overwhelmingly to eliminate an amendment that would have renewed a $50 million jet fuel tax exemption for the Atlanta-based carrier. Lt. Gov. Casey Cagle summarized the sentiment this way: “Businesses have every legal right to make their own decisions, but the Republican majority in our state legislature also has every right to govern guided by our principles.” Many conservatives are cheering the response, but there are problems on both sides of the issue.

First, the NRA discount was available to members flying Delta to attend the NRA convention. These discounts are not uncommon and are simply offered to attract group business. They don’t reflect any kind of endorsement between airline and organization, but Delta cited “neutrality” in the gun debate when announcing its pullback. It’s obvious that Delta was caving to activist pressure. If Delta is taken at its word, then ALL discounts reflect a social position, and ALL are now subject to scrutiny. The company clearly doesn’t want to go there. Georgia politicians called out the company on this hypocrisy.

Moreover, Lt. Gov. Cagle is right. He is not challenging Delta’s legal right to pull the NRA discount. What the government gives, it can take away. But I’m uncomfortable with the entire process. Several questions are being overlooked.

Why was Georgia pondering the transfer of $50 million in tax dollars to Delta in the first place? Is it a proper role of government to subsidize certain companies because they “create jobs” or are savvy enough to lobby for the support? These are complicated questions, but the simple answer is no.

Why must Delta have a policy on social issues unrelated to its business activity? Should we expect airlines to negotiate group discounts only with organizations that meet the approval of political activists? This has gone too far. Delta should not have to pull group discounts in order to remain neutral on social issues.

Should we expect (or even want) politicians to reward or punish companies on either side of this debate? Absolutely not. Those cheering Georgia lawmakers at the moment have no basis to complain when left-wing politicians in California and New York harass companies in their states.

I don’t like what Delta did, but the response should be left to the market.


Trumponomics and the Stock Market


President Trump has lauded strength in the stock market as evidence for his economic policy. It’s not surprising that has hasn’t comment much during the recent correction and volatility. So how much influence does he have on the market anyway?

The answer is some, but the situation is complicated. In theory, stock values mirror expected returns over the long term, adjusted for risk. In practice, they are also influenced other factors, including:

  1. The Economy: There are exceptions, but most companies expect to do better when the economy grows, so economic expectations drive stock values.
  2. Regulations: In the long run, consumers pay for regulations through higher prices. But companies also suffer, as higher costs reduce demand for their products. Less production means less profit and drives stock prices lower.
  3. Interest rates: When interest rates are low, savers (especially retirees) who would rather invest in safer instruments are often pushed into stocks to achieve a reasonable return. The Fed has kept interest rates artificially low for years, priming the stock market with investors less able to manage the risk (the bubble this creates is another concern altogether). When rates rise, these investors are likely to move money from stocks to bonds, CDs, treasury notes, and other “safer” alternatives.
  4. Emotions: When investors feel good, they tend to buy more stocks, pushing prices higher. Keynes called this “animal spirits” and although he probably overstated their long-term influence, he made a valid point.

All of these factors have promoted record highs in the stock market. President Trump’s calls for tax reform and reductions in regulations raised economic expectations before he ever took office. Interest rates also remained low during his first year as president. After 8 years of Obama stagnation, investors were itching to take money off the sidelines and put it to work.

But the Fed controls interest rates and doesn’t like much inflation. It will likely raise rates in the coming months, making non-stock investments relatively more attractive. Add to this the reality that even quality stocks can become overpriced, and the market correction we’ve seen is no surprise. Of course, determining when this will occur is not easy, but market fluctuation is normal.

As for President Trump, he can rightfully take credit for much the market’s rise. Part of the Trump effect on the market is the simple fact that Hillary Clinton did not win the election. But there are other factors involved as well. Trumponomics is far from perfect, but it’s a far cry from Obama-Clinton.

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