The Church of Kharma Futures

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Archive for November, 2010

There is hope for the future

Posted by brotherkharma on November 3, 2010

Once again I will pop out of nowhere, fire off a post and return to normal life.  This time I am cheating a bit.  The following is an essay written by a student in a public high school.  There is hope that despite all efforts to indoctrinate, some students can see the truth.  Let’s call the author…….nephewkharma?  It is long but it was an assignment and I think you too will be a bit more hopeful for the next generation.

Why Deregulation Works Better Than Regulation

In his book, Arguing with Idiots, Glenn Beck writes as if he is having an ongoing conversation with a friend whom he has dubbed an idiot. One particularly amusing passage comes in his chapter about Capitalism where the idiot makes the argument, “We need a new kind of capitalism, one where the government has more control.” To which Beck responds, “Thanks for buying the book, Stalin.” While the exchange was intended for humor, it also makes a point. With that statement Beck says that there is no room for government in private enterprises and business, and he is right. While government regulation is generally harmful to the economy, deregulation provides for a much more profitable economy. There are several proofs of this. One is how regulation is harmful to the economy by restricting a company’s ability to adapt and placing hardships and financial burdens on the working class. Another proof is that deregulation brings more profits and companies to the market and is beneficial to consumers and the working class. Finally, there is proof in the fact that while the New Deal and other government programs were failures, private sectors achieved far greater success. When the facts are examined, it is hard to believe that anyone still believes in regulation of business.

The first fact to be examined is how regulation restricts a company’s ability to adapt to a changing market and to consumer needs. The airline industry is a prime example of regulatory harm to companies. This is because it has experienced complete regulation until 1978, when it was partially deregulated (Hamrin 245). While it was regulated the government controlled prices. The result was that airports couldn’t adjust prices, and the prices set by the government were too low to cover some basic maintenance costs. They had to close a few gates, which limited the number of carriers they could bring in, which cut their profits even more (“Airline Deregulation: The Concise”). Conditions would have been better if the government had allowed them to set their own prices, as will be shown. Yet the prices would not have been too high, because competition in the market would have driven them down. They would have started off initially higher than government prices, just so that the airports could cover the maintenance cost of the gates. After they had a steady income, they would have been able to open more gates. The additional gates would bring in additional carriers, bringing in more profit. Competition in the market would make them lower their prices so that consumers would choose them over their competitors, and the increased profit from the additional gates would allow them to. As previously stated, the airline industry is a great example of how regulation hurts businesses, but it is not the only example. Another prime example would be the United States housing market and the crash.

Many people say the collapse of the housing market was caused by a deregulated, free-market economy, but when the facts are examined the opposite holds true. The United States housing market was far from deregulated. The government wanted to increase home ownership to paint a better picture of the economy and the American dream, and so they began to regulate and set interest rates. (“Price”) According to economist Walter E. Williams in his paper, “The House that Uncle Sam Built,” interest rates provide potential investors with clues and signals as to whether or not to invest. When the investors saw the low-interest rates, they believed this was because the public was becoming more interested in the housing market, when in reality the rates were artificial and manufactured by the government to entice people to buy homes. Investors then made mistakes in investing in the market when public interest was not as high as they were led to believe, and these investing mistakes led to the housing crash. So it is quite apparent that if the government had left the housing market alone and allowed the economy to run the way it should, the housing market crash, which many cite as the cause of the global recession, would never have happened. Interest rates would have been based properly off of market factors, and that many investors would not have made bad investments in the market at the same time, which is what caused the crash. Rather, any poor investments would have been spread out, not doing as much damage to the market. Regulation hurts business in more ways than this, however. It also causes numerous other problems.

Among these problems is a decreased competitiveness between companies, which is essential to operating a business in a free-market economy. Once again, the airline industry is a prime example. As previously stated, airlines were very heavily regulated up to 1978. When deregulation finally came, some of the larger companies that had existed under regulations were hurt by their lack of competitiveness. Up until this point, these companies were not used to having to handle competition. The government had regulated almost everything in the industry, including prices, flight times, and carriers providing which flights. When competition came, large companies such as Braniff had no idea how to change their business plans to be competitive with smaller, more localized airlines. They had plans built around the fact that they flew at these prices at these times, and they were the only ones who flew at those times. So when smaller companies came and offered flights to the same destinations at the same time, but with lower prices or quicker routes or both, Braniff did not know how to properly adapt. Reliance upon government regulation caused Braniff and several other companies to collapse when smaller carriers entered the market (“Airline Deregulation: Lessons”). Without government regulation, these companies would not have become dependent on the government for support. They would have been able to properly adjust their plan and cost structure to compete with the smaller companies. With previous regulation taking away all competition, they had no idea how to do this, nor would they have been able to because of their business structure and cost structure. Because of this, their companies collapsed, costing many American jobs. Regulation does more than just decrease a company’s competitiveness; it also places hardships on many people.

The group most affected by government regulation is the consumers. For this example, the automobile industry is a good reference. From 1967 up to 2001, there were government regulations in the industry that mandated certain safety features, among other things. In that period of time, average cost of a vehicle rose about twenty-two thousand dollars. The mandated safety equipment was expensive, and the only way companies could compensate for costs was to raise the price of their vehicles. Now if the government hadn’t stepped in, the prices would not have gone up that high. Some argue that prices would still have risen, and although that may be true, we’ll never know for sure, but it is true that government regulations and requirements contributed to about a third of vehicle cost increases. (“Price”) So while the regulations maybe made cars a bit safer, it also placed an economic burden on the consumers. If the market had been deregulated, but people wanted safer cars, they could have opted to pay the higher price for the more expensive car. Instead, the government mandated the safety regulations and therefore indirectly took that choice away from the public. The automakers had to raise the prices, placing a burden on the consumers. Another example of how regulation places a burden on the working class can be found in the electricity industry in Texas. In 2001, the electric industry was regulated in Texas. The government deregulated the industries, and prices plunged. The average price of an electric plan in 2009 after deregulation was substantially lower than the average in 2001. Across the board in all companies and in all companies’ plans, every single rate for every plan went down (“The Success”). Obviously, the deregulation helped the market immensely. It is important to deregulate fully, as the Texas electric industry was. If an industry is only partially deregulated, there will only be partial success. Full deregulation has many benefits, as does even partial deregulation, though there is less success there.

One of these main benefits is a generally more profitable business environment, characterized by higher profits and more companies. For example, railroads were partially deregulated in 1981. As previously stated, partial deregulation will bring only partial success, but even this partial success brought a profit increase of forty-four per cent by 1984 (Hamrin, 246). After the airline industry was partially deregulated, fares have fallen twenty-five per cent. Economists say that if they continued under regulation, the fares would have fallen only three per cent. (“Airline Deregulation: Lessons”) Also, while regulated, no interstate carriers were granted permission to open, but after deregulation twenty-six new carriers opened from 1978-1988 (Hamrin, 246). The change in the railroad industry was drastic. A profit increase of forty-four per cent in only three years, and that is only under partial deregulation. Based on those numbers, the profits under full deregulation would be incredibly high. Some argue that full deregulation would mean an increase in control of the top companies, and a growth in “Big Business” but the airline industry proves quite the opposite. Rather than smaller companies being forced into bankruptcy, twenty-six new carriers were formed. Now it is apparent that deregulation is beneficial to companies, but many people are mistrustful of business in general. Deregulation does not only benefit companies, however.

Deregulation also benefits consumer and the working class. With an increased freedom for competitiveness, deregulated airlines resulted in more choices and even more services offered to consumers. Among these choices were city-pairs, which are flight direct from one city to another with no stops or connecting flights. After deregulation, there was a fifty-five per cent increase in city-pairs, which are quicker and more convenient for flyers (Hamrin 245). Obviously, quicker service and more convenience are positive aspects for consumers, and what is positive for the customer is positive also for the provider, as the customer will be more likely to return and do business again.  Many supporters of regulation say that regulation protects small business and keeps Big Business in check. This is a common misconception. In fact, the opposite holds true. In an article “Big Business and Big Government” published on the CATO institute’s website, Timothy P. Carney points out this flaw in thinking. He writes, “The facts point in an entirely different direction . . . Enron was a tireless advocate of strict global energy regulations supported by environmentalists. Enron also used its influence in Washington to keep laissez-faire bureaucrats off the federal commissions that regulate the energy industry.” Enron would not try to keep laissez-faire politicians off of federal commissions if deregulation increased its control over the business. So clearly, it must be that deregulation threatens its power. Carney goes on to explain that newer, smaller business cannot keep up financially with all the government regulations, whereas big businesses have the resources to easily afford whatever regulations the government puts in place. They use government regulations to keep their smaller competitors one step behind and struggling financially under the burden of the regulations, which usually are not quite big enough to do any real damage to big business (“Big Business”). It is not good for consumers or for an economy to have the majority of the financial power residing with a group of large corporations. It reduces customer choices, and prices are more likely to rise, placing a burden on the people. With less competition, business can and will slowly raise their prices. This is the point of business; to make a profit. A free-market economy ensures that these prices do not go out of control. Simply put, if two companies offer the same service or good with similar quality, but one offers it a lower price, consumers will go to the company with the lower prices, forcing companies to have fair, competitive rates. With regulations and restrictions, companies are either forced to raise these prices to cover the cost of these regulations, or they have the freedom to raise them with less competition, as proved above. So it is clear that regulation ultimately ends in failure.

There is no better way to show just how and why these regulations end in failure than to examine government run economic programs such as the New Deal and other programs that amounted to nothing. According to Glenn Beck in his book Arguing with Idiots, the reason that government is ineffective in areas involving economics and business is simple. He writes:

Their motives are completely different. Private companies exist to create wealth, the          government exists (at least in theory to provide protections critical to life, liberty, and the        pursuit of happiness. Private companies closely manage expenses and ensure every dollar      has a return; the government attempts to spend every dollar it’s given and measures     returns in campaign donations and polling data.

If one disagrees that government is incompetent in the business and economics field, he or she need only look over previous regulations and programs and find the proof. During the New Deal, Roosevelt thought it would be a good idea to seize all the banks and make them close during a national “banking holiday” as it was called. After the so-called holiday, five thousand of the banks did not re-open. The majority of failed banks were in states with unit banking laws, which forbade a bank from opening new branches to lessen risk. Now this could be circumstantial, but further evidence proves otherwise. In Canada, there were no such laws, and banks could feel free to open new branches wherever and whenever they like. The number of bank failures in Canada at this time was a grand total of zero (“Great Myths” 8). The logical conclusion is that the unit banking laws caused the banks to fail. The banks were not allowed to open new branches, so when there was an opportunity to make more profits in another area, they were unable to seize that opportunity. Obviously, these banks needed the extra profit badly, or they would not have failed. In Canada these banks could open new branches when they got into financial troubles, and the new revenue could save their company. So it is clearly established that government regulation and government programs ultimately end in little or no success.

In contrast, private sectors have achieved far greater success. When hurricane Katrina hit New Orleans, both government agencies and private charities rushed to help. The government also put forth numerous recovery plans. The majority of these failed miserably. For example, Ray Nagin, the mayor of New Orleans, put forth over three hundred public projects and rebuilding efforts. Almost three years later, only six were complete. Conversely, Wal-Mart was having incredible success. One hundred and twenty-six of Walmart’s stores had been severely damaged in the hurricane. Within ten days, one hundred and ten of them were up and running (Arguing). It is hard to believe those numbers. In less than two weeks, Wal-Mart had completed recovering eighty-seven per cent of its stores, while in over three years less than two percent of the government programs were completed. Obviously the private company had much better success than the government; the facts do not leave room for any interpretation. New Orleans recovery is not the only example of the government versus private companies though.

For an additional example of how private sectors achieve greater success than government-run operations, the National Center for Educational Statistics offers this interesting report. Private school students in the fourth grade outscored public school students by 14.7 points in reading, and 7.8 points in math. By the eighth grade, private school students were outperforming their public school counterparts by 18.1 points in reading and 12.3 points in math (“Comparing Private Schools”). As the students in the private school advanced through the grades, their scores over the public school students increased by 3.4 points in reading and 4.5 points in math. The longer the student remains in a private school, the more his or her scores improve. Clearly, the private-run schools provide a better education than the government-run schools. Financially, the private schools were better also. Competition in the private, less regulated sector drives efficiency and lower cost. According to that same report, the average annual cost per public school student in 1996 was $6,857. The average tuition in private schools that same year was about half that, at $3,116. Obviously, the government is doing something to raise costs that the private sectors are not. This same basic effect occurs whenever the government attempts to regulate private industries that it should not be involved in.

So it is obvious that government regulation hurts the economy, while deregulation provides for a more profitable business climate. This can be seen in the way regulation restricts companies and places financial burdens on consumers. It can be seen in how higher profits accompany deregulation and the effects of deregulation on the working class. It can be seen when government is directly compared with the private sector. The Founding Fathers drafted our Constitution with distinct goals in mind. Among these goals was the decentralization of power, keeping the federal government as far detached from citizen’s day to day lives as possible. Through regulations and restrictions, however, the federal government has inserted itself into areas it does not belong, with complete disregard for the Constitution. It is time for a change; it is time for the government to realize that the welfare of the economy is more important than its own power. Deregulation can bring many benefits to the economy where regulation can only cause more harm. It is time to deregulate, before it is too late.

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