The Anti-State Blog

I own a small apartment building in large city. The building has 4 units and while the building is old, the units are in decent condition. I cater to the middle-market. Since buying the building a year ago I have made numerous safety improvements: I had the stairway lights (front and back indoor stairs) hardwired on (previously there had been a switch in each unit for those lights. I also replaced the front door light and installed a dusk to dawn light at the back door. These upgrades have the effect of reducing the possibility of trip and fall accidents and reducing the risk of someone being assaulted in the common areas or outside the building. I replaced the supports on the stairs going down to the basement. They had been rotting and could have collapsed at some point. I also replaced the batteries in a number of smoke alarms and replaced some aging smoke alarms.

Why did I do all these things? The main reason is that I am scared of lawsuits, and doing these things reduces the probability of someone getting hurt and suing me. If someone does get hurt, I can point to all the fixes and improvements to show that I am a responsible landlord. So there is no need for government inspections or enforced building codes to encourage me to keep my building in good shape.

This is all well and good. But in this city where my apartment is, there is a requirement to have all apartments inspected once a year or when a new tenant comes in. The inspection costs $40 per apartment and the inspector checks to make sure there are smoke alarms. He doesn’t check to make sure they are working nor does he check anything else. The problem with this (besides the cost and uselessness of the inspection) is that the inspection gives tenants a false sense of security. If there were no city inspections (and the city advertised that), prospective tenants would be more likely to check things themselves (or bring along someone who would no how to do so). Landlords would also be more likely to compete based on safety and having the building up to code. And, rents would go down because landlords would have one less expense.

When I was looking for an apartment building to buy, I found one that was priced right and was in good structural condition. But when I had it inspected (by an ASHI certified inspector–I should point out that ASHI is a private group and there is no public regulation of inspectors), my inspector found dangerous wiring, a major gas leak, and other serious safety problems. There had been a city inspector there within the previous month. If my inspector had not noticed the gas leak, it is quite possible the building could have exploded, perhaps killing a tenant. Eliminating the city inspector could possibly have avoided a false sense of security and encouraged the landlord to be more conscientious.

Have you ever tried to understand even one area of federal legislation? It is impossible. The rules are often vague and contradictory. For example, consider the regulation of investment advisors. If you want to learn about it, visit John Stark’s website–he is a top guy at the SEC (securities and exchange  commission).

The laws are complicated and it is often difficult to understand when a certain person is covered as an ‘investment advisor’. But the key question is why we need these laws in the first place? I propose that almost every single person or corporation prosecuted by the SEC under these laws could have been successfully prosecuted under much simpler laws. The others did nothing unethical or harmful and should not have been prosecuted.

For some concrete examples, I point you to the website of the Missouri State equivalent of the SEC.  Peruse their successful consent orders. In the vast majority of the cases, whether or not securities laws were violated, outright fraud was committed, with the tortfeasors (wrong-doers, in legal speak) lying about what they would do with the money, lying about their credentials, or lying about the risks or the likelihood of gains of their investment proposals. In some cases the wrong-doing involved simple theft of a client’s assets. In all of these cases (probably 70% of all enforcement actions by the SEC and its state equivalents), the wrong-doers could have easily been punished in a libertarian society with only one law: “do not harm another’s property”. Theft violates this, as does fraud, because it is implicit theft.

What about the other cases? 20% seem to involve investment advisors or brokers having violated the requirement that (in the case of brokers) they act in a suitable manner with clients’ funds, or that (in the case of investment advisors) they act in a fiduciary manner with clients funds (acting in the best interest of the client). In a libertarian world these would also be illegal. Why? They break the contract between a client and investment advisor or broker. Even if no actual contract is signed, there is an implied contract–no one would entrust their money with someone if they did not want that person to act in their own best interest. So there exists an implied fiduciary duty, for a broker or advisor to act in the client’s best interest. Because current law does not require brokers to act as fiduciaries, repeal of the law would actually result in  greater protection for investors.

Perhaps you have a problem with an implied contract? It can be difficult for people who are not familiar with the law, but implied contracts are quite prevalent in the common law. For example, if I own an apartment building and rent out an apartment, even if the lease says nothing (or if there is no lease), there is an implied guarantee of habitability and an implied guarantee of peace and quiet enjoyment. This is because no one would logically enter a contract without such guarantees, so they are presumed in all such contracts. This same logic should apply to investment advisors.

And what of the last 10% of SEC and state security regulators’ enforcement actions? Simply put, they are bogus and unethical. In these cases ‘investment advisors’ are prosecuted solely for failing to ‘register’ or follow a variety of other picky regulations. In other words, there are no investors harmed. The SEC has even gone so far as to try to impinge upon the 1st amendment right to free speech with respect to stocks–luckily the Supreme Court has not yet given in to the SEC in all respects (see, for example, Lowe v. SEC).

The part of government I will address today is government safety regulations and inspections. Where would we be without government regulation? Some say the world would be a lot more dangerous. Perhaps such proponents would argue in favor of government safety regulation of cars or electrical appliances and electrical wiring, saying how much safer those have gotten over the last few decades. And cars and electrical things have gotten safer.

The one problem for this argument is that the government had nothing to do with that. Take cars, for example. Think of a number of important safety features such as airbags, traction control, anti-lock brakes, and daytime running lights. All of these were initially introduced and became popular in the free market. The insurance companies have pushed hard for a number of these features because they work in saving lives and reducing injuries (saving the insurance companies money). While airbags did become mandatory here in the USA, by the time that happened they were already ubiquitous. Furthermore, side-impact airbags have become common even without a government mandate. Government regulation has had no effect on improving car safety. Oh, and the safety ratings you see on cars? Those come from two sources: a group of insurance companies (they need to know which vehicles are safe so they can charge less to insure them) and the government. Guess which performs the more rigorous tests? The insurance companies. Strike two for government.

Now onto electricity. Have you ever looked at the bottom of any electrical appliance and seen a circle with “UL” in it? If so, you have witnessed the joys of free-market regulation. Back in the early days of electricity, many appliances caused fires. The manufacturers of the faulty products wanted to improve their products so as to sell more. The fire insurers wanted to reduce fires. So an entrepreneur founded Underwriters Laboratories to inspect and certify products that met certain safety standards. The UL symbol remains a mark of distinction today. In the case of electricity, just as with automobiles, the government has been slow to do anything and has accomplished little. While OSHA technically oversees UL and its competitors, it serves no useful purpose because UL is motivated enough by greed to do its job well. A company such as UL could be bankrupted with just one high-publicity failure of a UL-certified product. OSHA, however, is has no such intrinsic motivation to do a good job.

Oh, and your city’s electrical code? Those are all taken verbatim from the national electric code written by the national fire prevention association, composed of insurance companies (damn corporations! always looking out for our safety . . .). It was the insurance companies who developed such great ideas as grounded wiring, romex wiring, ground-fault circuit interrupters (GFCI), and arc-fault circuit interrupters (AFCI). Local cities, when they depart from the actual NEC, insert stupid provisions such as Chicago’s requirement that all wiring be in steel conduits–the sole reason for this requirement is to provide extra work for the union electricians who donate money to the city’s politicians. So people spending money on electrical work are forced by the government to waste it on conduit and labor when the extra money could have paid for such great (and new and non-government mandated) safety features such as AFCI.

It is the same with plumbing codes and other building codes. The government does nothing but enforce them (spottily). In the absense of government the most important parts of the codes would be enforced by the insurers and by independent building inspectors (such as the ASHI-certified inspector who inspected my house before I bought it).

I am considering leaving my current home in the Saint Louis area to move to the Pacific Northwest. My wife and I both love the climate in Oregon and Washington and we are both nature lovers. Oregon is somewhat more temperate than Washington and for that reason it would be a better choice to us. But Oregon, besides having a dumb law preventing people from filling their own gas tanks, has a high income tax. Washington does not have an income tax. So it would make sense for us to prefer Washington, most likely southern Washington near the border with Oregon.

This will probably strike most of you as sensible. But think about it–I am considering changing where I may spend the rest of my life, where I will raise my kids, not based on job considerations, or the location of family, or the location of our ‘dream house’, but based largely on taxes! This is absurd that taxes have such a large impact. Just think of all the other decisions in peoples’ lives that taxes distort.

I am the proud owner of a small apartment building. Why did I buy it? Because it was economic for me to do so. But apartments in Saint Louis are priced in such a way that if it were not for the tax code it would not make sense for me to waste my time fixing toilets. I would be much better off investing in stocks or in P2P loans on Prosper.com. But the tax code offers a loophole whereby a small property owner like myself can cut a couple thousand dollars off of his tax bill each year by owning property (this is largely due to the depreciation deduction). Also, any sizeable capital gain when I sell can be indefinitely deferred with a 1031 exchange. So I manage a property even though my talents are better suited to analyze stocks or invest in loans. Solely because of the tax consequences.

Speaking of 1031 exchanges–they cost money, usually a couple thousand dollars. If capital gains were never taxed then these would not exist and those who spend time on them would do something productive. The same is true for IRAs and 401(k)s and HSAs and 529 plans. All these tax deferral schemes have significant administrative costs. Eliminate the taxes on investment income and the economy as a whole would have a lot more money to invest elsewhere. Imagine the cost savings to investors who could invest in any mutual fund rather than the typically high-fee fund found in 401(k) plans. Imagine all the time that would not be spent setting up these accounts and what people could do with that time (for example, I spent over 12 hours trying to find the best HSA plan–I like either hsabank.com or shawneehsa.com).

Even more importantly, think of the savings in time and energy to investors in the stock market of not having to worry about whether gains are short- or long-term capital gains. Think of the savings in costs to brokerages and banks of not having to send out 1099 forms.

Let me leave you with one piece of information: the Tax Foundation estimates that in 2007 the cost of tax code compliance in the US will be $300 BILLION. That is a high cost, and it doesn\’t even include the cost of uneconomic decisions made by taxpayers like myself simply to lessen their taxes.

There are many other areas where taxes distort incentives. I will return to this topic in future posts.

 There is no reason why insider trading should be illegal. It should be prohibited, but outside of government regulation it would be adequately restricted. All securities firms (such as brokerages and investment banks) have policies forbidding their employees from insider trading. All large public companies also have such policies.

One could argue that the reason those policies exist is because of the government regulation, and that would be correct. But the regulation is no longer necessary (if ever it was necessary) to prevent insider trading. Who is harmed in insider trading? Anonymous traders who sell to those with insider knowledge, certainly. Also, the companies involved, such as investment banks, suffer a loss of reputation when their employees trade on insider information. That loss of reputation is a definite, if neither concrete nor easily quantifiable, tort. It is a theft. Therefore, firms that discover employees who trade on insider information would fire those employees and then sue them for damages–a reasonable amount would be treble the unjust profits of the insider traders.

What about the firms themselves? What if they made a decision to trade on insider information? A small consultant on a large acquisition could easily justify the cost of reputation in light of potentially huge profits. But the trading on inside information also harms anonymous traders in the stock and stock options of the traded companies. So it would be in the best interests of the stock exchanges to prevent insider trading. If they did not do that, their reputation would suffer and traders would use an exchange that banned insider trading. The exchanges (such as NYSE and NASDAQ) would thus formally prohibit insider trading and would be liable if to the outside traders if it happened.

Overall, the market would regulate itself, insider trading would remain infrequent, and those employees of the SEC could go find productive jobs. The world would be a better place.

[originally published 30 May 2007]

If you want to see stupid government regulation, just look at how alcohol is regulated. I have a good knowledge of alcohol regulation because my wife and I are amateur winemakers. And at least the government does not interfere with us with that. But what if we became very good at making wine and wanted to sell a little of it, part time. Winemaking itself is not very capital intensive. With $400 in equipment you can easily enough make hundreds of bottles of wine. Grapes (or other fruits, for fruit wine) are not that expensive.

But what is expensive is regulation. To sell any wine in the USA the federal government has to approve its label. What if you make a lot of different wines or limited edition wines? Well then you will have to wait to sell them or sell them with a previously approved generic label. So rather than saying a wine is a Chardonnay-Semillon mix, the label could only say ‘White Wine’.

Also, a number of state and federal permits are required to make wine. There are the normal local permits for any food/drink establishment, but then there are special alcohol permits as well. Then there is the alcohol permit to be able to serve alcohol on the premises. Then, if you want to ship out of state, you have to know which states you can ship to. Also, depending on where you are located you may be required to not sell on certain days or before certain times or to not sell above a certain number of bottles to any one person.

What if you want to sell through grocery and liquor stores to grow sales? In almost all states, you are required to sell through a licensed distributor. And there are only a few distributors in each state, all with lots of political influence, the prices they charge are high. So even if your winery became big enough so that it could save money by cutting out the middle man, it is forbidden to do so. Luckily, Wal-Mart and Costco are fighting these laws in a number of states.

What if you want to show people how to make their own wine? They would do the work but you would oversee it and deal with all the unpleasant cleaning and maintaining of the equipment. Sound interesting? It is illegal, even if those who make the wine only consume it themselves. Why? They are not licensed.

Is it not wonderful how the government protects us?

And he gives several more good reasons how US interventionism in the middle east has engendered hatred of us.
Article here

[originally posted May 24, 2007]

Excellent interview with CNN regarding blowback for our imperialistic foreign policy.

[originally posted May 23, 2007]

Why are we there? Bush said it was because of WMDs. He lied. He said it was about Al Qaeda. He lied. We are now over in Iraq spending billions, getting our troops and Iraqis killed, and not doing much good at restoring order. All the while, Al Qaeda can call us imperialists and occupiers and increase their ranks. Withdrawing from Iraq is a no brainer.

[originally posted May 20, 2007]

‘You can see his article here. Following is a copy of the email I sent to Byron York (byork@nationalreview.com):

Your article completely dances around Paul\’s point: the rest of the world considers the U.S. to be thuggish and imperialist. I know it is comforting to regard the anti-American terrorists as sub-human lunatics, but what would you do if China had major army outposts in the U.S. and in many surrounding countries and allied itself with repressive regimes throughout the world (as we do with Pakistan, Saudi Arabia, Egypt, and others and as we did with Iraq during the Iran-Iraq war)? I know what I would do in such a situation–I would regard China as an imperialist aggressor and I would take up arms against it. So it does not surprise me that Bin Laden and his followers see us as the enemy and that they have taken up arms against us.

You would do well to remember that this nation was founded by revolutionaries who fought against a government far more benign than our \’ally\’ Saudi Arabia. So to me or to anyone who understands human nature it is perfectly natural that our actions abroad have caused resentment and anger. Of course, attacking civilians is despicable. To insinuate as you and Giuliani do that Paul and others who believe as he does somehow condone the September 11 attacks is churlish and reeks of the most despicable demagoguery