Whence Regulation?

By Simon Grey, on November 17th, 2011
Ever heard of Dwolla?

Dwolla was founded by 28-year-old Ben Milne; it’s an innovative online payment system that sidesteps credit cards completely.

Milne has no finance background, yet his little operation is moving between $30 and $50 million per month; it’s on track to move more than $350 million in the next year.

Unlike PayPal, Dwolla doesn’t take a percentage of the transaction. It only asks for $0.25 whether it’s moving $1 or $1,000.

Sounds like a good idea, right? What took it so long?

What did you do for the first two years when Dwolla wasn’t technically legal?

Well it was legal, we just couldn’t operate outside of Iowa. For the first two years we built out the platform. We did a sh*tload of testing on a small scale because legally we couldn’t launch Dwolla nationwide. We spent two years inside of Iowa fine-tuning Dwolla with the financial institutions, building out some of the initial models, and trying to figure out how to legally do what we do. [Emphasis added.]

How’d you find a legal loophole?

Moving money is an exceptionally regulated business. We’re in Iowa, which is sort of conservative — I don’t know if that helped us or hurt us, but in the long term I think it helped us. We figured to do this legally, we had two options: we could take in a tremendous amount of money and go out and get licenses, which is how most people do it. But we didn’t have access to that kind of capital here.

It’s easy to see why the government would, say, ban smoking: it isn’t beneficial to anyone, at least in terms of health. It’s more difficult to understand why the government would ban something like Dwolla, which doesn’t appear to have any downside. Well, except for its competitors (large banks, e.g.).

Some regulation is born out apparent concern for people. But some is born out of bribery. Specifically, big businesses support a host of anti-market legislation because it gives them a market advantage. Conservatives need to learn this, because big business is no one’s friend. As Adam Smith once observed, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This usually means petitioning the government to set policies in place that hamper or prevent competition.

Just because the market is more trustworthy than the government doesn’t mean that businessmen are more trustworthy than politicians.



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Entrepreneurs and Democracy

By Doug Gentry, on March 14th, 2011

This column in the March 7, 2011 edition of The New Yorker has an interesting perspective on economic development – particularly in the Middle East. In the language of my University Seminar class, here’s the claim presented by James Surowiecki

The autocracies of the Arab world have been as economically destructive as they’ve been politically repressive. That’s no coincidence. Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies.

In my Principles of Macroeconomics class we work on prioritizing investment options to improve long run economic development in the African  country of Sudan. And in the first week of class we talk about scarce resources in countries – sometimes including a culture of entrepreneurship as one of the key ingredients of economic health. Surowiecki’s analysis makes but it also relies heavily on western, classical assumptions about individual incentives for innovation and risk taking. Are we missing a perspective here?



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Pittsburgh Past. Pittsburgh Future?

By Christopher Briem, on November 16th, 2010

Required reading in itself is Harvard’s Ed Glaeser latest in City Journal: Start-Up City Entrepreneurs are the heroes of New York’s past and the key to its future.

What I caught first was the reference to former Pitt Economist, the late Ben Chinitz, and his thoughts direct from his seminal work. Contrasts in Agglomeration: New York and Pittsburgh, American Economic Review, Papers and Proceedings, Vol. 51, 1961, pp. 279-289.   Read Glaeser on the crux of Chinitz’s argument desribing where Pittsburgh was 50 years ago:

Fifty years ago, the economist Benjamin Chinitz used the apparel industry to compare New York City, which then seemed like a model of small-scale entrepreneurship, with Pittsburgh, a city of massive steel companies. “My feeling is that you do not breed as many entrepreneurs per capita in families allied with steel as you do in families allied with apparel,” Chinitz wrote. “The son of a salaried executive is less likely to be sensitive to opportunities wholly unrelated to his father’s field than the son of an independent entrepreneur.” Few economists would use the word “breed” today, but Chinitz’s hypothesis remains legitimate: a vast industry of small-scale entrepreneurs leads to the development of entrepreneurial skills, which are used in other industries and also passed along to children.

Measuring entrepreneurship is one of those nearly mythical metrics we talk about far far more than we can really generate meaningful numbers for.  When it comes to Pittsburgh people seem to talk as if the entrepreneurial climate in Pittsburgh has improved in the half century since Chinitz wrote the article referenced above. Yet most measurements of entrepreneurial activity in Pittsburgh have never shown much improvement at any time since when Chinitz wrote. If you accept that observation as a premise it begs a big question?  Are our perceptions correct?



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Delta Airlines Sucks And Teaches Scottevest Some Austrian Economics

By Trace Mayer, on October 6th, 2010

What is absolutely required during an interaction with Customs? … Like muscles as you flex your rights they become stronger; so use them or lose them.

This article is mainly just some very helpful hints with some slight economic analysis. Being an entrepreneur who enjoys creating wealth and building from scratch I have a special empathy for those engaged in similar work. One entrepreneur that has added value to my life is Scott Jordan, CEO and Founder of Scottevest. As I traveled almost 100,000 miles in 2010 I found my Scottevest incredibly helpful and it has saved me plenty of money from the evil airline’s ridiculous fees. Of course, when there are lucrative profit pools the entrenched interests will almost always by hook or by crook attempt to stifle innovation and advancement but in this case there some helpful travel tips we can apply to save time and money.

It’s still true: Delta Airlines sucks.

SCOTTEVEST ADVERTISEMENT DENIED

Years ago I decided to never fly Delta again. Then somehow I ended up with a free Delta ticket so I used it. It’s still true: Delta Airlines sucks. So when I received an email from Scott Jordan on 2 October 2010 I figured I should lend the fellow entrepreneur a friendly voice.

The New York Times reported that “the fee frenzy, which generated nearly $8 billion for American carriers last year.” Scott’s awesome travel clothing help owners ‘Beat The System’ so when he attempted to advertise in the airlines magazines the advertisement was canceled at the last moment. Seriously, what did Scott Jordan expect would happen when he advertises a value-adding product that attacks an extremely lucrative profit pool? Even worse Scott’s media agent pleaded with him to not press the issue. I am not sure the media agent gets it.

But it seems Hap Klopp, founder of North Face and chief adviser to Scott, gets it because he hit the nail on the head with an excellent economic analysis. “Scott, this is classic David vs. Goliath. Their reaction shows how touchy of a subject baggage fees are for them. You’ve found a way for everyday people to get around their crazy policies, and you just put a fork in their cash cow.” Forutantely, Scott took Klopp’s advice and remarked, “Hap’s comments solidified it for me: this was a big story, and the cat was out of the bag.”

If you have a quality product that adds value to the customer then in the Information Age with social media, blogs, YouTube, etc. the story will get out. The economic concept of creative destruction was first introduced by the Austrian School economist Joseph Schumpeter in his 1942 book Capitalism, Socialism and Democracy. For those that have not noticed, the newspapers evaporated through creative destruction so the era of screwing your customers and getting away with it because the media gatekeepers will protect you is over. And when it is a David vs. Goliath story then almost everyone roots for David, especially when David is engaged in creative destruction in an attempt to save them money on baggage fees!

Time is the most valuable commodity.

THRIFTY RENT-A-CAR’S SLEAZINESS

Another thing the airlines are often doing is bundling products and making it difficult to discern what fees actually apply and which goods or services are actually mandatory. Airlines love to privatize the gains and socialize the losses to their customers which are often incurred by wasting your time through delays, cancellations, bumps, etc. The rental car companies seem to play a similar game.

For example, I was recently in Dallas, Texas meeting with a few friends who run various hedge funds. At the airport I went to rent a car and they wanted to charge $150 for what I had earlier researched on the Internet to cost about $50. Not being able to book at the counter at $50 I booked through my iPhone and then had to wait about 20 minutes, which was worth it to starve the vampire squid, for the reservation to get into their system. When I went to pick up the keys the desk agent asked me, “And which type of insurance do you want, minimal, medium or comprehensive?”

Because she did not mention none and because it is reasonable to assume that insurance may be required in Texas and because ‘minimal’ implies the least amount required therefore I replied, “Minimal.” She then said the total would be $120. This was surprising because the Internet reservation was for about $50 and said all I needed to provide was a driver’s license and the reservation.

So I responded, “Is the insurance required?” At first she dodged the issue by trying to explain probabilities, risk and reward. Seriously, as an investor who calculates probabilities of risk and reward for a living do I really need that advice from a desk agent who has probably never taken a statistics class and has a conflict of interest? So I responded with a little sterner tone of voice, “Is it required?” She said, “No.” and I responded, “Then no insurance, please.”

I get annoyed when people, institutions and organizations waste my time pitching me products I do not need and add no value to my life. After all, time is the most valuable commodity. Vacations are great when you take the airlines, car rental companies and hotels with their $8 bottled water and $15 potato chips out of the equation. Guess what the car company’s lucrative profit pool must be? Yep, insurance! So keep that in mind next time you rent a car and Thrifty’s was very clean and ran well.

SCOTTEVEST REVIEW AND HELPFUL TRAVEL TIPS

Many people have asked how I pack so light and efficiently. Nothing is worse than going on a trip and having your airline suck your luggage into the engine. On one trip to Guatemala one of my travel companion’s luggage was lost and seemed to always be a day behind us as we traveled around the country. Very annoying for them! I no longer check luggage and it has made an tremendous difference. Eliminate all but the essentials and you will have a lot less stress on your trips.

After doing a ton of research and getting plenty of products which were a waste I have winnowed down my travel infrastructure to: (1) Rick Steve’s Convertible Carry-On, (2) Scottevest Essential Travel Jacket, (3) Eagle Creek Pack-It Garment Sleeve and (4) a few Eagle Creek cubes of varying sizes. With this infrastructure I have ample space for either a weekend or a six weeks to either Europe or Argentina.

There are a few other reasons I really like my Scottevest. In the morning I like to take a walk in the brisk air. The Scottevest has pockets for both my iPhone and iPad which keeps them out of my hands as I search for a place to read. It is a great tool for my morning routine. So from one entrepreneur to another; I hope Scott Jordan appreciates this free review.

Like muscles as you flex your rights they become stronger; so use them or lose them.

HELPFUL TRAVEL TIPS FOR CUSTOMS

Casey Research is having another investment conference at La Estancia de Cafayate on 20-24 October 2010 and I hope to see you there. What that means is another international trip and another interaction with Customs which seems like just another case of government sending ‘hither swarms of officers to harass our people, and eat out their substance.’ Responsible law abiding citizens need to be wasting neither their nor customs official’s time by even talking to them or answering their questions because this results in increased spending and drives up the federal debt.

Thus, when I came across Paul Karl’s extremely popular article, even being discussed on The Economist, about being detained by Customs for refusing to answer their questions my interest was immediately sparked and I even began to formulate the question: What is absolutely required during an interaction with Customs?

So my co-author of How To Vanish, CA attorney Bill Rounds, and I began to research the issue. The result of our work is this handy tab which fits right in your passport with the applicable binding law outlining your rights and tips on how to politely apply them. I hope you find it helpful. To help save the customs officer’s time feel free to print this PDF and distribute it widely, perhaps to everyone on your plane. Remember, like muscles as you flex your rights they become stronger; so use them or lose them.

For data I find Dropbox and Truecrypt a very effective combination.

It is always about the money.

CONCLUSION

The Internet is changing the way news, products and information is distributed. Gatekeepers can no longer protect the lucrative profit pools by refusing to discuss the issues or actively trying to prevent the market from learning about value adding products. As a result, entrepreneurs with good products that add value to the customer have a greater chance of penetrating the marketplace and this leads to David having more leverage against Goliath.

As the greater depression continues and intensifies coupled with the evolution of the Information Age it will be even more critical for companies to truly add value to their customers. Those that do not will encounter swift and powerful damage to their brands as sleazy business and governmental practices are quickly brought under scrutiny. Individuals are getting extremely tired of this crap, the depression is making disposable income tighter and some are even intentionally fighting back with the misumer movement to silently and peacefully starve the vampire squid. After all, with the civil rights movement it was not the protests but the boycotts that caused massive social change. It is always about the money.

For example, Dollar Thrifty Automotive Group made $45M in 2009 compared to their $340M loss in 2010. Delta lost $8.9B in 2008 and $1.2B in 2009 for a reason. Perhaps these sleazy companies and governments should try adding more value to the customers? Better yet they can go bankrupt or cease to exist and be replaced by fresher companies that to add value to their customers and have a good culture. No one will miss them.

So please, tell me how you feel about the airlines, car rental companies, customs and please contribute any helpful travel tips!



Leave a comment   Opinion   , , , ,  

The Mind Conspirators

By Bron Suchecki, on September 9th, 2010

Worthwhile read for libertarians – The Mind Conspirators by Nelson Hultberg. A quote:

Philosophical fallacies and socialist falsifications of economics and history have gained sway in the school system to poison our citizens’ minds against the American concept of freedom. Such fallacies have created a grossly distorted image for the man in the street about the way the world works. Freedom is now seen as inimical to human dignity. Creative entrepreneurship is portrayed as exploitation of the poor instead of their only hope. Gold is termed a “barbarous relic” instead of history’s proven store of value. …
We are being conditioned to accept sloth as normalcy, servility as dignity, weakness of will as compassion, and government conveyed privilege as justice. The world of sanity and rationality gives way to regimental nightmares of Orwellian “newspeak” and “political correctness” in order for legions of middle-class sluggards to feel good about themselves while they live out their spiritually squalid lives queuing up to the entitlement troughs of the mega-state.

My response to the article agrees very much with the comments of MetaCynic:

Accepting Hultberg’s argument that ideas are the engine of not only entire civilizations but of every individual, begs the question why do some ideas gain traction and not others. Why did the ultimately unworkable collectivist ideologies of the big picture intellectuals, Rousseau, Hegel, Comte and Marx, find acceptance in the midst of the wondrous prosperity produced by the Enlightenment’s Industrial Revolution? Why does the siren call of unaccountable collectivism to this day continue to outsell individual liberty with all its attendant responsibilities?
Despite its clashes with reality, do collectivist intellectuals really have to work very hard to find widespread acceptance for their ideas? Maybe there has always been a ready market for their disabling poison. In politicians and bureaucrats they have, of course, an enthusiastic audience eager to legitimize their own drive for wealth and power. In the envious masses they have deluded voters proudly participating in the process to redistribute the wealth of others into their own pockets. And in the captains of industry they have “capitalists” in need of protected markets and guaranteed profits. The great majority of humans are conformists and clock watchers interested only in comfort and entertainment.



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Quibble, I Shall

By Thomas Knapp, on January 11th, 2010

Quoth Thomas Frank in The Wall Street Journal last week:

This was once a familiar line of criticism: Big business’s sin was that it wasn’t entrepreneurial enough. If given the opportunity, business would use government to form cartels and suppress competition. Free markets must thus be protected from the grasp of the corporate monster. The way to bring big business down is by deregulating even more.

If this sounds twisted and counter-intuitive, that’s because it is. This is an argument that might have sounded good in 1979 but for it to make sense today one has to disregard the wreckage all around us courtesy of three decades of regulatory rollback.

Figures from the Law Librarians’ Society of Washington, DC:

Total number of pages in the Federal Register as of 1979: 77,498
Total number of pages in the Federal Register as of 2004: 78,851

Yes, that number has gone down (to as low as 47,418 pages) and up (to as high as 87,012 pages) in the intervening years, but while there are multi-year trends within the narrative, there’s no clear overall trend — and the bottom line is that there were 1.7% more pages of federal regulations in 2004 (the last number LLS offers figures for) than in 1979. How do you get “three decades of regulatory rollback” from that?

Quantity versus quality of regulation is an obvious factor, but frankly (pun intended) I never see any argument or evidence attached to claims of overall “regulatory rollback.”

For me, those claims always bring to mind California’s great turn-of-the-century electricity “deregulation,” which eliminated all sorts of controls … but which was accompanied by one eensy-teensy little bit of new regulation. That one little item — requiring utilities to buy their out-of-state power at the highest possible price in last-minute spot auctions instead of grabbing it cheap a month in advance — drove prices through the roof and resulted in rolling blackouts/brownouts. Which, of course, were promptly blamed not on the idiotic regulation, but on the deregulation.

Anyway, that’s my quibble with Thomas Frank. The rest of the piece is actually quite instructive and well worth reading. He smells a rat in the Republican Party’s faux-populist marketing strategy. So do I.



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