The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

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Tuesday, July 17, 2012

What is seen and what is not seen
Tom Smith

Much could be said about how stupid was President { }'s recent comments about business founders not really having built their businesses by themselves, but rather owing them in large part to things others, especially the government, did for them. You drove on a public road to meet your 457th potential angel investor. Your third grade public school teacher taught you always to say please. And so government gets a lot of the credit for the thing you sweated blood to create. Big surprize. If you build anything, you can absolutely bet people will line up for the credit, like Al Gores for the internet. Failure, you can keep the credit for that.

But here's the question to ask -- how many more successful businesses, inventions, products, services, toys, tools, insights, and just plain fun would there be, if government did not in the first place make it so ridiculously difficult to start a business and keep it going? I don't see our young president taking credit on behalf of the state for all the failures it help cause, all the ideas that never got off the ground because the regulatory hurdles were so high, or all the established companies that never had to face competition because they had managed to get their rents written into law. This is part of the seen and not seen insight of Bastiat. What you see is a successful business when it manages to survive, and then people run up, the same people who taxed and regulated it nearly to death, and say I helped! I helped! What you don't see are all the businesses that perished or never got started because of the heavy hand of the state. And it's a very heavy hand.

Yeah, the state provides public goods we all use, but could they do it any worse? I live in California, where the public schools mostly suck, are incredibly expensive in dollars spent per pupil, and are going broke anyway. Mostly because the teachers' union runs the state legislature. But where there are crown jewel institutions like the UC system, bloated, vast, but still impressive -- it's being gutted partly to pay for a multi-billion dollar high speed train boondoggle that nobody thinks will ever actually get built and if it does will go from somewhere nobody wants to be to somewhere no one wants to go. And if you drive over there in the central valley you will see the 395 is a disgrace of a freeway, narrow, potholed and dangerous. So some entrepreneur manages to build something, run the gauntlet of all the regs and taxes and exposure to liability, and make through it this no man's land, and then the source of much of his torment, his friends in the government, show up for their bite and insist, it's no less than they deserve. What gall!

I started a business, commercially unsuccessful, sadly, but we created some great technology. I was a libertarian before that, but I was really a libertarian afterwards. It's difficult to even explain how pervasive, expensive, frustrating and sometimes just plain insuperable the regulatory and taxation burden of the state is. It's not what did our venture in, but it helped. It's worse in other countries, where we seem to be headed. My engineers were in Italy. Italian counsel advised me that it was simply impossible, impractical, should not even be attempted to pay them in Italy. Even trying to do so would stir up a nest of officials and my guys would end up with pennies on the Euro. Just set up accounts in Switzerland and pay them that way, which he said was technically legal to do.  So that's what we did. It's no wonder innovations by startups in Europe lag so far behind the US. And California? -- don't even think about hiring an employee in California. Read through what's involved in that and you will think it is some kind of joke until you realize it isn't. A whole ecosystem of plaintiffs' law firms exists just to sue employers who run afoul the complicated morrass of employment law requirements. And if you survive to be a public company, they will sue you every time your stock price dips. Some states, such as Texas, are better, but the reason they are better is not what they provide; it's just that they stay more out of the way. 

It's obvious, but still worth saying -- for our young President to suggest that government deserves some large part of the credit for the acheivements of business founders who manage, in spite of it all, to start a business and make of a go of it, is deeply, deeply perverse. What it ought to get credit for are all the unseen businesses, no longer here or never to be, that it is responsible for.

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Part of Greece's fate comes from how it treats businesses.

( )
Greek Stool Samples to Start a Business
02/24/12 - Daniel Mitchell
=== ===
[edited] It took 10 months, a fat bundle of paperwork, countless certificates, and long hours of haggling with bureaucrats for one group of Greek entrepreneurs to open an online store. As part of this, the health department required that all of the shareholders provide chest X-rays and (!) stool samples.
=== ===

Posted by: Andrew_M_Garland | Jul 17, 2012 9:32:05 PM

No, Greece is famous for small businesses. The successful ones cheat on their taxes and that's why Greece can't pay its debts. I would bet money that TSs Italian counsel did not report their income which is why they wanted pay through Swiss bank accounts.

California does not spend that much per pupil, what is busting the California budget are cops and welfare, not teachers.

Speaking of small businesses, every small businessman I worked for screwed me over pay on some level. Our clients were usually small businessmen, and though I admit to some selection bias given my line of work, they were crooks to a man.

Posted by: molly | Jul 17, 2012 10:48:26 PM

No according to the Italian lawyer we did not have a physical site in Italy and therefore did not need to pay Italian taxes.

Posted by: Tom Smith | Jul 18, 2012 8:21:57 AM

Infrastructure is built out based on two use cases. The first is that the state guesses that the infrastructure needs to be built and then borrows and taxes to pay for it. The second is that some business is built up that needs infrastructure and then they end up getting a special assessment to pay for it. Utility hookups don't come for free. Neither do road building and widening so that your factory traffic can be handled on the local road. In the first case, the state built that in order to serve current people in the speculation that your business would come along and use that infrastructure to the benefit of their constituents. That road wasn't built for you and isn't for your benefit. It's for the benefit of your customers. In the second case, you paid for that infrastructure, your fair share at least and the next owner is going to pay a fee to hook up too. There's no free ride there.

President Obama's idea that business owners owe something for those public roads is a crock, even on its own terms.

Posted by: TMLutas | Jul 18, 2012 10:50:50 AM

If you don't like all the stifling government you're stuck with in the terrible socialist United States, there are plenty of other countries with less government and less regulation that would be happy to have you, I'm sure.

Of course most of them do not have the educated workforces, infrastructure, or legal and consumer protections that we enjoy in the U.S. But weren't you just saying that that stuff -- the public goods produced by collective action through government -- was what you wanted less of?

Posted by: JR | Jul 18, 2012 8:04:39 PM

The public good is not the problem, it is the regulation on private enterprise that is the problem. The President wants to take all the credit and none of the risk of private enterprise, if you fail its your fault (unless you are GM) but if you succeed pay your taxes and stfu, because you didn't build that, government did.

Here is the funny thing about the public good, it is dependent upon the success of private individuals and the enterprises they engage in. What Obama is really attacking is the concept of ownership, individual responsibility, and self incentive; He is literally attacking individuality, a core American ideal.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest".
-Adam Smith

Posted by: Paul | Jul 18, 2012 9:38:10 PM

Paul, was George Washington's mandate that all able-bodied men in America own and maintain a firearm for collective defense an "attack on individualism?" Civic responsibility has also been a core American value. The idea that having a common purpose is incompatible with having an individual identity is literally un-American. Why would you consider yourself an American if you're just a rugged individual?

If you want to stop an assault on individual responsibility and self-incentive, how about calling out the idea that anyone who has even a penny less than $250k can't be a "job creator." Success requires many factors - skill, talent, initiative, responsibility, resourcefulness, luck. Outside of Ayn Rand novels where businessmen are treated as masters of the universe, you're right -- failure is an often necessary business.

Anyone who has actually run a business can tell you there are some places in the world where the lack of effective law enforcement makes it damned near impossible for your business to succeed. It is absurdly frustrating to fail because a customer simply walks away from a contract and refuses to pay for a product or service that you've provided. Deadbeats are inevitable and sometimes you just have to suck up a loss, but a world where the only way to collect a debt is to break somebody's kneecap is one where enforcement costs outweigh the benefit of running a business.

It's especially infuriating in the technology sector, where so much of the work is invested in intellectual property. Try selling computer software in, say, the Philipines or Brazil or Hong Kong. IP laws in those countries are so lax that your goods are far more likely to be pirated than sold, and not by a small margin. It's extremely difficult to compete against 90% of potential customers paying zero. Interestingly enough, you find people on both sides of the political aisle who think that piracy is great - on the left because IP benefits corporations, and on the right because it requires government action.

Posted by: Bob | Jul 19, 2012 10:26:59 AM

I'd be curious to hear you expand on exactly what regulatory and tax frameworks were stifling to the business.

Posted by: MRL | Jul 19, 2012 11:17:31 AM

Virtually the entire infrastructure, a mixture of software and hardware, that your product was built upon was on the direct result of risky investment in scientific research and physical implementation supported by the people of the United States as a whole. Whether the patent office recognized it or not, even PageRank concepts that inspired you had their expression even earlier in resources like the Science Citation Index.
You certainly identified a useful application for that an extension of that technology, but you're deluded if you believe your application wasn't the beneficiary of work that no private corporation would have ever financed. These kinds of efforts fail all the time, and we, as a whole pay for it. And that is, as they say, goodness.
By the way, I had dinner with Vint Cerf years who showed me an early draft of his proposal for an Information Superhighway that eventually became the backbone of the Internet.
As you well know, entrepreneurs have to sell their ideas and get financing to make them reality. Well, in the case of this "startup," it was Al Gore who drove that proposal through the Senate and got the money that made it possible. The return that that project generated for the American people dwarfs the combined return of all VC for the past 20 years.
Anybody around computer science for the last 35 years knows this, and you should know it, too.

Posted by: Reginald Gray | Jul 19, 2012 1:28:07 PM

I have a campaign idea. Let's make millions of individualized versions of this sign appear in store windows between now and November.


I release this wording to the public domain, to pre-empt anyone who would claim ownership of it.

Posted by: jdgalt | Jul 19, 2012 3:13:36 PM