Real Role of Regulation in a Corporate State?

[don]

by Charles Hugh Smith from Of Two Minds

The Perfection Of Crony Capitalism: Use Regulation To Destroy Competitors

Crony capitalism uses its wealth to impose government regulations designed to hinder, cripple and destroy small business competitors.

In the U.S. we now have the perfection of cloaked crony capitalism:

corporate cartels use their vast concentrations of capital and revenue to buy the political leverage needed to write regulations specifically designed to eliminate competition.

Recall that the most profitable business model is a monopoly or cartel protected from competition by the coercive Central State.

Imposing complex regulations on small business competitors effectively cripples an entire class competitors, but does so in "stealth mode"--after all, more regulations are a "good thing" (especially to credulous Liberals) which "protect the public" (and every politico loves claiming his/her new raft of regulations will "protect the public.")

This masks the key dynamic of crony capitalism: gaming the government is the most profitable business model.

Where else can you "invest" a few hundred thousand dollars (to buy political "access" and lobbying) and "earn" a return in the millions of dollars, and eliminate potential competitors, too? No other "investment" even comes close.

The ever-expanding galaxy of regulations that business owners have to meet is a function of the corruption of government, i.e. corporations lobbying the government to pass laws and regulations (usually written by industry lobbyists to the specifications of their clients) specifically designed to eliminate competition by raising the costs of compliance amd imposing heavy fines via enforcement.

As an example, let's take a slice of American mythology, the family farm, that is under increasing pressure from just this sort of Corporate-State crony capitalism.

Consider the family-owned small to medium size farmer who understands that the farm is a nature-based system that requires certain practices to maintain the health of the farm and the quality of your produce/meat/milk.

Suddenly a number of corporate agribusiness farms (i.e. concentrated animal feeding operations--CAFO) spring up nearby where thousands of pigs/cows are crammed into huge barns and the operation is run like a factory, enabling the CAFO to produce meat or milk at a significantly cheaper cost or production.

What's left out of the equation is the pollution to the environment and any associated health costs and damages to the values of the neighboring properties (Of course, these CAFOs are never sited near an affluent neighborhood).

In addition, the quality of the meat is suspect, as all the potential disease outbreaks that come with monoculture practices and crowded conditions can only be suppressed with constant, massive quantities of antibiotics. This is the perfect condition--animals packed together, plentiful manure, constant use of antibiotics--to create super-bugs that are resistant to antibiotics. Life being what it is, opportunistic and adaptive, eventually these resistant bacteria find a new and unprotected host, human beings.

A small family farm cannot duplicate these risk factors; only CAFOs can generate this kind of bacteriological danger to the populace.

These kinds of systemic costs created by the CAFOs are transferred to the taxpayer, including the local farmer who has to compete with the CAFO.

Since government in the U.S. is always for sale, and since the revolving door between the legislative and regulatory agencies and the lobbying industry is always spinning, it's straightforward to hire "the right people" and "express your concerns" to the corrupt politicos.

Here are some examples of the crony-capitalist favors corporate lobbying and campaign contributions can buy:
1) The government may give massive direct subsidies to the CAFO, depending how effective the "farm" lobby is (most farm subsidies go to large agribusinesses and not to small farmers).

2) The government will pass regulations that apply to the farmer's operations but require an entire new layer of compliance, reporting etc. that is beyond the financial capability of small operations.

3) The government may initiate enforcement actions against the farmer for non-compliance and if he's not rich, he will get steamrolled by the government regulators because he can't hire adequate legal representation.

4) The government often will not penalize the CAFO on the same relative basis, if it is part of a large corporation which have the resources to fight the government in the courts (i.e. the enforcement personnel don't have the necessary resources to do long protracted battles with Panzer divisions of corporate lawyers);

5) When there's an incident of blatant government over-reach or corporate favoritism that gets press coverage, the government agency will say they will "revamp the system" which is a code-phrase for passing even more regulations that secures them even more power.

In other cases, the regulatory agency was hampered from doing its job due to corruption/lobbying/political pressure from powerful corporate players.

As the regulatory thicket expands in complexity and scope, many of the regulations will not be adequately enforced because enforcement is now beyond the capability of the agency tasked with enforcement and monitoring. But the small/medium farmer will have to comply with them anyway, and if they don't, then that leaves a door open for corporate-directed regulators to take them down later with heavy fines for non-compliance.

6) The government gets complaint tips from a CAFO about the independent farmer, so he's subjected to a rigorous compliance inspection, whether or not the complaint is legitimate. It's like the vehicle inspections you get if you're caught "driving while black"-- with enough effort, some violation somewhere can be trumped up into a fat fine.

7) The regulations become so complex that prosecutors are reluctant to bring then to court because they're worried that a jury may not understand them. As a result, criminal cases are rarely brought against CAFOs and other corporate cartels.

After a few cycles of crony capitalism, competition has been destroyed, and you end up with something like America's "sickcare" system:

no matter where you go, there's only two health insurance providers and their pricing is (surprise!) always about the same (it's called price fixing; that's the way cartels work).

Regulations don't arise unbidden; they arise to accomplish two tasks:

1. Enforce crony capitalism by eliminating or crippling competitors and establishing highly profitable cartels or quasi-monopolies protected by a bought-and-paid-for Central State.

2. They justify the budgets and payrolls of government agencies at all levels of government. A few years ago I mentioned a town that was trying to add a commuter train stop to an existing rail line. The process involved something like nine agencies, and as a result it has yet to be approved, a decade later. But the application did create a decade of justification-for-our-budget for agencies that might have been revealed as wasteful friction without the make-work application to diddle over for a decade.

http://www.zerohedge.com/news/guest-...oy-competitors

[Shakespear]

Re: Real Role of Regulation in a Corporate State?

Don your posts are always VERY RELEVANT and eye opening

I am now reading Sir James Goldsmith's "The Trap". What is amazing is that EVERYTHING he says has happened. He wrote the book in 1994.

[goodrich4bk]

Re: Real Role of Regulation in a Corporate State?

Yes, Don, I always read your posts for the same reason. I very much appreciate your contributions here.

[don]

Re: Real Role of Regulation in a Corporate State?

iTulip gives me much more than I can contribute. Thank you guys and the always enlightening vetting that meets these posts.

[dcarrigg]

Re: Real Role of Regulation in a Corporate State?

Why is it that whenever I read one of these "regulation is bad" articles, nobody ever cites a specific regulation or set of regulations? They talk in general terms about the difficulties in compliance and how difficult it is for small business. Of course, regulations apply to more than just businesses. They are just rules. They cover a lot more than just business. The media will always say "regulations are bad for business," but they never say something like:

The expanded definition of small business in SBA-2012-0003-0001 is harmful to small business because it extends their health care exemption to entities that are too large to be traditionally considered small business, and therefore drives the cost of providing health care exemptions up so high as to put the entire exemption scheme in jeopardy.

I never see reporting like that.

When talking about law, one rarely sees the media discuss something so generally. Nobody says "laws are bad for business." But when talking about rules (which laws set up and allow for), one gets this broad-brush approach.

Why?

[DSpencer]

Re: Real Role of Regulation in a Corporate State?

Why is it that whenever I read one of these "regulation is bad" articles, nobody ever cites a specific regulation or set of regulations? They talk in general terms about the difficulties in compliance and how difficult it is for small business.

A few possibilities:

1. For the same reason that people don't give names to the individual termites eating their house.
2. To convey the sense that this is not a problem with a specific regulation, but instead is the common way of doing things.
3. Because journalists are lazy and don't want to do the research.
4. Because people are lazy and won't read the details anyway.

Of course, regulations apply to more than just businesses. They are just rules. They cover a lot more than just business. The media will always say "regulations are bad for business," but they never say something like:

...
I never see reporting like that.

When talking about law, one rarely sees the media discuss something so generally. Nobody says "laws are bad for business." But when talking about rules (which laws set up and allow for), one gets this broad-brush approach.

Why?

At least in part because of the point of the article: because regulations are typically designed to help or hurt a specific industry and are therefore aimed at businesses rather than individuals. Think of how many regulations exist that are invisible to the average person but someone in a particular industry would be aware of? At times laws specifically exempt individuals as opposed to businesses.

For example, household exemptions on disposing of hazardous materials:
http://www.epa.gov/region9/waste/solid/house.html

Households often generate solid wastes that could technically be hazardous wastes (e.g., old solvents, paints, pesticides, fertilizer, poisons). However, it would be impossible to regulate every house in the United States that occasionally threw away a can of paint thinner or a bottle of rat poison. Therefore, EPA developed the household waste exemption. Under this exemption, wastes generated by normal household activities (e.g., routine house and yard maintenance) are exempt from the definition of hazardous waste.

So I think people come to associate regulations with business, while laws seem to apply to everyone. I would also say that people consider "laws" more important than "regulation" whether it makes sense or not.

[doom&gloom]

Re: Real Role of Regulation in a Corporate State?

Why is it that whenever I read one of these "regulation is bad" articles, nobody ever cites a specific regulation or set of regulations? They talk in general terms about the difficulties in compliance and how difficult it is for small business. Of course, regulations apply to more than just businesses. They are just rules. They cover a lot more than just business. The media will always say "regulations are bad for business," but they never say something like:

I never see reporting like that.

When talking about law, one rarely sees the media discuss something so generally. Nobody says "laws are bad for business." But when talking about rules (which laws set up and allow for), one gets this broad-brush approach.

Why?

I owned a small business. there were specific laws that applied to my business that did not apply to others, and vice versa. The over-regulation of business in the US is astounding.

I recall one time when the local "liberal" radio talk host had on a gas station/mini-mart combo owner. The guy was paying something like 22 different permit and license fees every two years, most annually, many overlapping, and few that had the same inspector coming to review more than one at a time. This was costing him many thousands of dollars annually. It made no sense whatsoever. Some of these were simply nuisance inspections like checking his compressor every year to the tune of like $250 or something like that. But his problems were not my problems when I was in business. They were unique to what he did in business.

So you can ask where are the examples, but the examples are too numerous to cite in too many areas to even begin to make sense.


BTW, John Stossel had a show on the other night called illegal America that covered some instances that were abhorrant to liberty and freedom. But until it happens to you, you don;t pay attention and you do not care.

I was in the temp- and perm-help business. One year the legislature painted a bullseye on my inductry because they wated to use WA state as a model to go for the rest of the ation. This was when everyone was after Microsoft. They decided that if you were a "temp" you should get the exact same bennies and healthcare as any employee at whatever business you were working for. How does that work of you shift temps around every few weeks or months? How amy HC plans could a business run to cover all these chages from site to site? The answer was NONE, and the goal was to shut down th idustry. Luckily it failed in the state senate by one vote, or I would have been out of business.

[dcarrigg]

Re: Real Role of Regulation in a Corporate State?

I recall one time when the local "liberal" radio talk host had on a gas station/mini-mart combo owner. The guy was paying something like 22 different permit and license fees every two years, most annually, many overlapping, and few that had the same inspector coming to review more than one at a time. This was costing him many thousands of dollars annually. It made no sense whatsoever. Some of these were simply nuisance inspections like checking his compressor every year to the tune of like $250 or something like that. But his problems were not my problems when I was in business. They were unique to what he did in business.

So you can ask where are the examples, but the examples are too numerous to cite in too many areas to even begin to make sense.

If the examples are too numerous to cite, then employ a phrase such as:

"Among the worst regulations are ..."

Because your talk radio host sounds like he's talking about state licenses and permits.

These may very well be state laws, not federal regulations. If so, the way to go about having the system "make sense" is completely different. The complaints should be pointed at different people (in this case, the state legislature, not the federal executive).

You may say, "as a business owner, I don't care whether the hassles come as laws or regulations, or whether they are federal, state or local." But it does make a difference.

Calling it all "regulation" and assuming it's all federal means that when a President says he'll "cut regulation," a gas station owner might think that these licenses and fees will go away. Since they are not federal regulation, but state law, the President can do precisely squat about them.

[dcarrigg]

Re: Real Role of Regulation in a Corporate State?

A few possibilities:

1. For the same reason that people don't give names to the individual termites eating their house.
2. To convey the sense that this is not a problem with a specific regulation, but instead is the common way of doing things.
3. Because journalists are lazy and don't want to do the research.
4. Because people are lazy and won't read the details anyway.

Since I assume that not all journalists are rabid libertarians, I assume only numbers 3 and 4 apply.

At least in part because of the point of the article: because regulations are typically designed to help or hurt a specific industry and are therefore aimed at businesses rather than individuals.

Wikipedia would call 'typically' here a 'weasel word.' I just want citations. "But we know it's bad!" isn't a citation.

Think of how many regulations exist that are invisible to the average person but someone in a particular industry would be aware of? At times laws specifically exempt individuals as opposed to businesses.

Yes, at times this happens. But businesses are not persecuted by regulation as you say. Most of the titles in the federal code of regulations deal with things businesses generally don't have to. Like judicial administration [Title 28], public education, public health centers etc. etc. Businesses don't get charged with crimes. etc. etc.

Plus, with the EPA example, there is a mixing up of laws and regulations again.

So I think people come to associate regulations with business, while laws seem to apply to everyone. I would also say that people consider "laws" more important than "regulation" whether it makes sense or not.

Well, laws have the force of an elected legislature, while rules only have the force of a bureaucracy, albeit one under an elected leader. Laws generally are more important and harder to change for that reason.

Some federal regulations do apply to businesses and not individuals. But plenty of regulations have precisely nothing to do with business. Journalists write as if the only reason federal regulations exist is to slow down business and ruin the economy. But they set up the rules for simple transactions. Such as which bandwidth to use for emergency calls on the water. Or the rules by which first class mail is delivered. They also set up the rules for basic business protections like trademarks, patents, and copyrights. How unpopular could that be?

I'd go so far as to say that when people read "federal regulations" they think "permits and fees as required by state law." Since nobody corrects this perception, regulations are now the boogie-man. We are dumber as a nation for it.

[goodrich4bk]

Re: Real Role of Regulation in a Corporate State?

My sense is that the "we are over-regulated" meme is used by those who run for Federal office when, in fact, most of the burdensome regulations affecting small and individually owned businesses are local (either state or muni). The burdened business owners may vote Republican in both national and state elections, expecting fewer regulations from their Republican leaders. Instead, only larger industries are "deregulated" because Republican leaders are not as interested in making things easier for the small business competitors of their large corporate sponsors.

[thriftyandboringinohio]

Re: Real Role of Regulation in a Corporate State?

The push and pull over regulations is a natural outcome; we're imperfect, and sometimes over-react with over regulation.

It was only four months ago that central Ohio made the national news when an unstable nut released about 50 large predators then shot himself.
We now have some shiny new state and local regulations about exotic animals.

A few similar nuts will be infuriated that the gubament is violatin' their constitooshunal right to keep Bengal tigers, African lions, and grizzly bears in makeshift cages in the Appalachian hills. A larger number of good and rational people will rightly grumble about the trouble and expense of permits and inspections, when they are simply keeping a few lamas or peacocks or a camel on their place.

[doom&gloom]

Re: Real Role of Regulation in a Corporate State?

If the examples are too numerous to cite, then employ a phrase such as:

"Among the worst regulations are ..."

Because your talk radio host sounds like he's talking about state licenses and permits.

These may very well be state laws, not federal regulations. If so, the way to go about having the system "make sense" is completely different. The complaints should be pointed at different people (in this case, the state legislature, not the federal executive).

You may say, "as a business owner, I don't care whether the hassles come as laws or regulations, or whether they are federal, state or local." But it does make a difference.

Calling it all "regulation" and assuming it's all federal means that when a President says he'll "cut regulation," a gas station owner might think that these licenses and fees will go away. Since they are not federal regulation, but state law, the President can do precisely squat about them.

I cannot begin to tell you who the worst regulators are because, as I previously mentioned, I only knew MY business. And does it REALLY matter if the regulations are local, state, or federal if they still adversely impact business in ways that are far more detrimental than beneficial? Let me give you yet another state regulation I ran into, one that said I HAD to buy a "site license" for every nurse I placed on a temp assignment. That meant filling out some bullshyte paperwork, mailing in $35 to the state, and waiting some couple of weeks until they responded and sent the license. By that time, often the client had no need for the temp anymore. Was anything being accomplished besides collecting the $35 to process a sheet of paper? I say no. My response to this? I never filed a single site license, and just ignored the law. never got caught either. It was ridiculous make money, make work bull that got in the way of everyone's productivity.

I won't even get into workmen's comp insurance laws, etc.

My sense is that the "we are over-regulated" meme is used by those who run for Federal office when, in fact, most of the burdensome regulations affecting small and individually owned businesses are local (either state or muni). The burdened business owners may vote Republican in both national and state elections, expecting fewer regulations from their Republican leaders. Instead, only larger industries are "deregulated" because Republican leaders are not as interested in making things easier for the small business competitors of their large corporate sponsors.

why do you believe only republican legislators have anythig to do with all this?

[don]

Re: Real Role of Regulation in a Corporate State?

By IAN MOUNT

For the past 23 years, Chuck Benjamin has been working as a turnaround consultant, primarily for troubled private companies with annual revenues of $25 million to $250 million. During that time, his company — Benjamin Capital Advisors of Rye Brook, N.Y., and Boca Raton, Fla. — has handled some 70 cases. “My endgame is to save companies,” said Mr. Benjamin, 71, “hopefully for their owners.”

That has become much more difficult in recent years, he says, as changes in bankruptcy law have given unsecured creditors more power and made bankruptcy more expensive. These legal changes and increased costs have in turn pushed troubled companies to liquidate their assets instead of reorganizing, Mr. Benjamin said, which ends up eliminating the original owners — and many jobs — in the process. The following is a condensed version of a recent conversation.

Q. You say the bankruptcy process is broken. How so?

A. When bankruptcy evolved, it was to protect debtors, the owners. The whole concept was forgiving debts or restructuring so the business would survive in the hands of the owners. But the rules have changed over the years. Today, if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?

Q. What changed?

A. First, the Supreme Court’s 1999 LaSalle decision basically meant that any company that entered bankruptcy was on the market and could be bought either whole or piecemeal. And then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, and that changed the face of Chapter 11 for privately held businesses. No. 1, B.A.P.C.P.A. changed the landlord’s position. It limits the time to just seven months for debtors to decide whether to accept or reject the lease in bankruptcy. It used to be you could get extended almost forever the time you could accept or reject a lease. Now they have seven months. That’s not a long time to decide which locations to close while you’re in trouble and you’re trying to work through all kinds of other issues.

The second change is exclusivity, that is, the debtor’s exclusive right to file a plan of reorganization. It used to be you had all kinds of extensions. Sometimes bankruptcies used to take two, three, four, five years. I had one that was in Chapter 11 for seven years. But it survived. Now you have 18 months where the owner has the exclusive right to file plans for reorganization. Unsecured creditors know that after 18 months they can file a plan excluding the debtor. After you’re in Chapter 11 for eight or 10 months, creditors say, “I’m just going to hang on. I’ll file my own plan and take over the company. Or after 18 months we’ll just liquidate it.”

Q. It’s hard to see anything positive about a bankruptcy that takes seven years.

A. Sometimes staying in bankruptcy a longer time was better, because it gave a debtor time to catch its breath.

Q. Who wins from this change?

A. The LaSalle decision and B.A.P.C.P.A. have given unsecured creditors a huge advantage, and the result is the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero. I understand the plight of unsecured creditors, but everyone who sells on unsecured account understands the risk. Every businessman understands this when he sells and makes a credit decision.

Q. Really? Small-business owners offer credit like this routinely. You don’t think they expect to get paid?

A. You know that old saying, “Let the buyer beware”? I think it’s every businessman’s responsibility to know to whom he sells and offers credit. If I sell to you and you begin to pay very slowly — which often happens before a bankruptcy — I should stop selling to you on credit. But if I continue to sell to you to make a buck, it’s not your fault, it’s mine.

Q. So what happens instead of reorganization these days?

A. Companies are liquidated. Back in 1983, the Lionel case allowed companies the freedom to sell off assets as opposed to filing a plan of reorganization. It expanded what could be sold in a “363 sale.” The 363 component was originally designed to allow companies to sell off spoilable product, like fruit. If you were in the grocery business and you filed bankruptcy, it allowed you to sell off assets. The Lionel case expanded that so you could sell major assets, virtually including the whole company. That’s a quick way to avoid a plan of reorganization.

Q. How does a 363 sale work?

A. The 363 sale requires nothing more than saying, “I’m going to sell you my equipment,” and I publish that, and for 30 or 40 days people have a right to object to it and the judge can decide, O.K., sell it, or if there’s a higher or better bid, it goes to the highest or best bidder. That happened in the Brunschwig & Fils bankruptcy where I was the chief restructuring officer. I sold the company’s assets for $10 million, very successful, but the original owners lost control and 116 employees lost their jobs. In the old days we would have been able to reorganize the company.

Q. How do these changes affect a troubled company’s ability to get financing during reorganization?

A. All of these changes say to the world that the chance of a company surviving bankruptcy is much lower. And if it’s much lower, the banks aren’t going to give debtor-in-possession financing — and rightfully so. The D.I.P. financer gets a priority lien. Last in, first out. But the company has to survive to have the money to pay that super-priority lien.

Q. Does this change how troubled companies act?

A. Debtors are delaying seeking help longer and longer and longer. They’re very frustrated. They’re walking in molasses. They figure if they wait another week the economy is going to turn.

Q. What should business owners do instead of filing for Chapter 11?

A. People need to seek help quicker, change their business plan quicker, and avoid Chapter 11. It’s just an absolute last resort. It’s virtually nonsurvivable. One of the things we do as consultants is take two weak companies that are facing annihilation and we merge them and we get one survivable company — without a bankruptcy. We also try to make out-of-court settlements with creditors, as opposed to Chapter 11 proceedings. In Chapter 11, the debtor pays for attorneys, accountants and consultants of the creditors’ committee. They even pay for the investment bankers. The owner is paying the other side to oppose him. It’s tilted to the unsecured creditor side.

Q. But doesn’t this law fix some biases toward debtors that allowed them to drag out the process, hurting their creditors as they did so?

A. The law probably does fix some problems, but you have to look at the nuances. There are some cases with the tighter rules where the creditors get a little more but the company fails. The other option is the bankruptcy lingers and the creditors get a little less but the company survives, and that way the creditors continue to have a customer.

Q. You’re a small-business owner yourself. How is your business doing?

A. Business right now is kind of quiet. I think this is the calm before the storm.

http://www.nytimes.com/2012/03/01/business/smallbusiness/bankruptcy-becomes-unaffordable-for-small-businesses.html?_r=1&scp=1&sq=turnaround specialist&st=Search

[flintlock]

Re: Real Role of Regulation in a Corporate State?

That is basically it in a nutshell. Ignore the lifetime employee types defending over regulation. They never have and never will be subject to trying to comply with all these regulations. So no skin off their noses.

It's not about any particular regulation. Its about trying to muck up the whole process so much that additional help in the form of lawyers and additional staff are required. Resources the average small business cannot afford. Only the economies of scale available to the large business can afford to comply. The whole trend is to have us all working for either the government or a large corporation. Once that goal is accomplished, we will all be in effect, slaves. It will be like the 60s era Soviet Union, where you have almost no choice in who you work for, and will only get whatever they decide you get. The government has gotten into the business of picking winners and losers. And who do you think they pick? Clue. Not the guy with no money to pay a lobbyist.

Give it a few years. This is nothing more than old fashioned crony capitalism, as long practiced in Banana Republics and third world shit holes throughout the world. It has nothing to do with political ideologies. Both sides of the aisle do it. Its about money, and how American businesses feel they must do this now that they are no longer competitive in the global economy otherwise. They feel they must stake out a share of the ever shrinking American dream before it all collapses. And others are probably just plain greedy. But I'm afraid its getting to the point where businesses feel they must play this game or be left out in the cold.

History shows that corrupt regimes do not bode well for the masses. I think people who see themselves now as secure and beyond damage from this will end up with the short end of the stick in time. Fence sitters will get washed away with the tide. Only a small elite wins in this scenario. So if you are not an "elite", watch out.

[flintlock]

Re: Real Role of Regulation in a Corporate State?

Wow, that last line is chilling, but I have to agree.