Thank Heaven for Mistakes

Thank heaven for failure.

Last night, I had my students do something unusual. I assigned them to teams of 3-5 people and had them do an "overnight" business. They were to take an investment of $25 and turn it into $50 within 24 hours. The only restrictions were that the business had to be legal and safe (no discount bungee-jumping).

The looks on their faces ranged between puzzlement and loathing. Almost all groups had trouble coming up with ideas, and most of them were fairly run-of-the-mill--not much creativity. Many expressed frustration at not knowing "what to do" or "what I (the professor) wanted."

Of course, I could not have cared less how much money they made, as long as they honestly tried to double their money. I wanted them to experience firsthand the terror of entrepreneurship and the sting of failure (only a couple of groups made their goal,though most all of them made at least some money).

This morning in class, I talked about how most of us are raised with the implicit message that mistakes are bad. And they are, in a certain sense. Some mistakes, like driving drunk, are bad no matter how you dress them up. These are to be avoided at all costs. For the most part, though, not making enough mistakes is deadly. It probably means you are sitting on the couch watching TV when you could be making life better for you and the ones you love. It is safe, but is it living? Then one day your "safe" world comes apart around you and you have neither the smarts or the stamina to survive.

As we debriefed in class on the experience, I asked everyone to look around the room. Was anyone dead? Were there any serious injuries? None. "So," I prodded, "What was the big deal? Now you know you can make money on your own without a job. Isn't that a step forward?"

Too bad that as a country we have forgotten what my students just learned. We are pulling out every stop to make sure GM and other big companies don't fail. Companies fail for one of two reasons: 1) they are not allowed to compete effectively because of antitrust laws and excessive regulation or 2) they are simply not providing what the customer wants as well as someone else can.

In case #1, the answer is for government to get out of the way. In case #2, it is to let them fail so that other people can provide what the customer wants more effectively. What's so hard to understand about that? Is it disruptive? Yes. I feel for dislocated workers as much as anyone. But what happens to a society that sits on its collective couch wasting away, playing it "safe?"

Like our couch potato above, we become ill-prepared to meet even the mildest crisis. Instead of seeing mistakes as a routine and necessary part of growth, we scurry around pointing fingers at each other and ask "someone" to bail us out. One day, probably soon, there will be no one to bail us out. What then?

I don't know about you, but I have to go. There are some serious mistakes to be made today, and I don't want to get behind.

Killing the Goose

We all remember the story of the Goose and the Golden Egg. Anxious to become wealthy without working for it, the farmer eventually kills the goose because one golden egg a day just isn't enough.

California voters just sent a message to their politicians that they will not become the second goose to die at the hands of the shiftless and lazy. By an astonishing margin, the general populace told Sacramento that increased taxes and smoke-and-mirrors borrowing will not fly. Let us pause to celebrate a victory.

Most Americans still believe that we each own what we create. To politicians, this is a novel idea. They prefer instead to think of wealth creators as being at their disposal. Not content with only maintaining essential services like police protection, they find in taxpayers a never-ending source of wealth to confiscate and distribute according to their notions of "fairness." Of course, "fairness" is usually linked to re-election.

Fellow citizens, we are the geese and the farmer is trying to kill us. Like California, let's send the message loud and clear that enough is enough.

Whose Money Is It Anyway?

Most of us work until sometime in May to pay our taxes. The rest of what we earn is ours. Hey, wait a minute. Isn't that first five months ours too?

Not according to the government. In fact, they take it before we ever get our hands on it. Those of us with jobs have taxes withheld. Take a look at your next pay stub and remind yourself how much money you DON'T get each pay period.

Here's the kicker. Far and away, it is the middle class that gets whacked for taxes. Why? Because it is easier to collect from us. The poor don't have any money to confiscate; the rich have enough money to hire people who can protect what they earn.

Is that fair? I leave that to you. But, if you decide that paying less in taxes is a good thing, read on.

Owning a side business has numerous advantages. You control it, and if you manage it properly, you can build up a solid retirement to supplement or replace your "traditional" retirement. Better yet, you can protect more of your "regular" income from taxation.

Tax laws allow numerous deductions for business. Many expenses can be used to reduce your taxable income. So, in addition to having more income, you get to keep more of your money. Be sure to use a good tax advisor, because the laws must be followed closely.

The Boston Tea Party was prompted by a 3% tax. Many of us pay over ten times that amount now. I doubt that pouring tea into the harbor will do much good these days, so throw your own little tea party. Start a side business and keep more of what was yours to begin with.

Truth or Consequences: Holding Big Business Accountable

When you or I start a business, we do not usually have the luxury of picking up the phone and calling our Congressman. Imagine actually getting through to your representative and having this conversation:

Noel: "Congressman Smith, this is Terry Noel."
(Smith motions to his Executive Assistant, shrugs his shoulders, and writes a note asking who the hell this guy is.")
Congressman: "Larry! Great to hear from you! You know, I am doing everything I can to stop global warming, guard against the swine flu, and get steroids out of baseball."
Noel: "Well, Congressman, that's not really why I called."
(Smith motions again. Writes a note asking for the caller's record of campaign contributions.)
Congressman: "Nothing?"
Noel: "Huh?"
Congressman: "What? I mean, nothing is more important than my constituents."
Noel: "Well, you see, I have a big problem. My business is coming up short this quarter. To tell you the truth, I could use a bailout."
Congressman: "I see..."
(Circles his finger at the side of his head in a cuckoo motion.)
Noel: "Not much. I mean nothing compared to the big banks."
Congressman: "Well, Harry, it's been nice talking to you and I appreciate your vote."
Noel: "Wait! The bailout?"
Congressman: "Yes, I am making sure that all these companies are held accountable. I am glad you support me. American jobs for American workers. That's what I say. We can't let our businesses suffer because of low wages in Fiji. Call again. Anytime."
Noel: "But...(click)...

When government injects itself into the economy, its actions are arbitrary, capricious, and usually based on campaign contributions. As long as politicians are given the power to reduce competition through regulation or provide subsidies outright to their contributors, businesses can grow. In fact, they can grow rapidly because they no longer have to work as hard to satisfy their customers. When things get rough, they ask their political friends to change the rules instead of competing fairly. Businesses don't get winnowed out for failure to perform.

The winnowing process of a truly free market is supremely neutral. If you or I do not provide a better product or service than our competitors, we lose money. If we lose enough, we go out of business. The only way to stop the current insanity of propping up businesses that are "too big to fail" is to take away politicians' power to interfere.

Too Big To Succeed

When I first read about being "too big to fail," I started eating like Henry VIII. Why not? If businesses can get too big to fail, I figured I could too. Fortunately, I discovered the error in my logic before I had to get a new wardrobe and went back to building my businesses the old-fashioned way--hard work and perseverance.

Let's think about this. How can a business get too big, much less too big to fail? The answer lies in competition. Specifically, businesses in a free market are constantly subjected to competitive pressure. If I open a business and fail to provide my customers a satisfactory product or service, they will soon find another provider. If enough of them flee to the other guy, I am out of business. That is bad for me (boo hoo) but great for customers, who now get better stuff (hurrah).

What is the best size for a business? The answer is, "Whatever works best." There is no "right" size other than that determined by the market. Let's take the example of WalMart. WalMart started out in the early 60's as a barely-known retail discounter. Sam Walton set his sites on K-Mart and set out to do a better job. It worked. Over a period of years, Walton built stores in places that everyone said were much too small for a big store. He also incorporated computer technology and built an ultra-efficient distribution system.

In the end, Walton was able to offer cheaper goods to more people and K-Mart crumbled. But what about all those small local stores, the so-called Mom and Pops? The truth is, they could not (or perhaps would not) do what was necessary to satisfy their customers. In this case, WalMart's size was an advantage. Small stores could not bargain as effectively with wholesalers or the people who delivered goods to the store. Size matters, and in this case, it was an advantage.

In some cases, size is a disadvantage. Large companies tend to become stodgy and bureaucratic, which in turn makes them less competitive. They often innovate less and respond more slowly to changes in technology and markets. Eventually, whatever advantages they enjoy from sheer size are outweighed by the disadvantages of being slow and cumbersome. They will be eliminated if the market is allowed to work.

The most obvious example of being sheltered from the market is a government agency. Governmental agencies grow large because their funds come from taxes. Taxes are not voluntary--they are confiscated and then used to pay for whatever it is that agency does. There is no reason for an agency to be reduced in size or eliminated because by law they are the only ones that can do what they do.

Less obvious are the large business entities that are shielded from competition through regulation and licensing laws. Take insurance. A person in State A may have to pay double the amount for health insurance than a person in State B. Current laws prevent some types of insurance companies from competing across state lines. As long as the company in State A does not have to worry about its customers going to the company in State B, it can charge a higher premium.

So why does such an insane system remain in place? Because politicians make sure it does. Their campaigns are funded largely by businesses that do not want to compete fairly in the marketplace. Businesses become "too large to fail" precisely because they were not allowed to fail before they got that big. Now we have financial institutions whose failure could bring down the whole system, insurance companies that can charge exorbitant premiums, and car manufacturers that make impossible promises to union members, knowing taxpayers will bail them out.

What is the solution? No restrictions whatsoever on markets. Outside preventing the initiation of violence or fraud, government should remain completely out of the economy. The companies we love to hate because they are too big to fail only got that way because our government is too big to work.