The Backwards Morality of Big-Time College Football

Jameis Winston is a great football player. He won the Heisman Trophy last year and is in the running again this year. Before he’s finished, he may be considered one of the greatest college football players ever.

Early this week, reports suggested Winston would be riding the pine this weekend. Florida State officials are concerned that he was paid for autographs by the same sports memorabilia firm that allegedly paid Georgia running back Todd Gurley, who was suspended for last week’s game against Mizzou. The Winston allegations surfaced on Monday. By Tuesday, Florida State’s athletic compliance department had already launched an investigation. By Wednesday, head coach Jimbo Fisher was backing his star, and it appears likely that Winston will play this weekend.

This investigation commenced with blinding speed – in stark contrast to the other “investigation” of Winston at Florida State. In December 2012, Winston was accused of rape. Rather than start an immediate investigation, Florida State and local law enforcement protected their star. Winston was not questioned about the incident until January 2014. When they learned of the allegations, Florida State attorneys helped Winston find a lawyer –then did nothing, despite federal law requiring an internal disciplinary inquiry when sexual assault is alleged.

With ironic timing, Florida State recently announced the university would conduct a hearing where Winston may be charged with violations of the student conduct code for the alleged sexual assault and other acts. On Tuesday, with the autograph investigation already underway, Winston’s lawyer argued that a hearing on the rape allegations at this late date would violate Winston’s rights, under federal law, to a timely hearing.

ESPN reports that a hearing will not take place anytime soon because Winston’s attorney claims he needs several weeks to review evidence in the case. In another irony, Fox News reported last week that Winston’s previous criminal defense lawyer received the police report and other evidence before the state prosecutor responsible for filing criminal charges. By obtaining the evidence early, Winston’s lawyer was able to discuss the case with two witnesses (Winston’s Florida State teammates) and procure affidavits from them before the prosecuting attorney received the file.

So, let’s clarify a time-line only attorneys could love. FSU receives a report of a sexual assault by their star football player in January 2013. Rather than start an investigation, they help their star lawyer-up. Then they do nothing. Eventually the media pays attention, which yields a police report in November 2013. Florida State receives the police report and shares it with Winston’s attorney before the prosecutor sees it. Under pressure, the university starts an overdue investigation. They advise Winston they’ll hold a hearing – and Winston’s attorneys accuse Florida State of unfair treatment because the investigation took so long.

The Jameis Winston saga is a microcosm of much that is wrong with college sports.

It’s a system that makes millions off the backs of young athletes. Supporters of the status quo argue that a scholarship and some admiration is sufficient. The stars go on to make millions in the pros. The rest receive an education – well, maybe. That’s easy for someone to say whose jersey isn’t selling for $100 in the university gift shop. It’s easier for someone to say who doesn’t have to deal with the rigor of practice and games while ostensibly maintaining a full load of classes, so that, even if they wanted to get a job, they couldn’t. And who are we kidding anyway? Big-time college sports are long removed from the Norman Rockwell era. Today’s stars are far more likely to live like Jameis Winston and Johnny Manziel than Roger Staubach or Gale Sayers.

In any other area of the economy, people in the position of college athletes would be paid. In August, a federal judge in California ruled that NCAA rules prohibiting compensation violated federal anti-trust laws.  The ruling is stayed until 2016. Still, the Gurley and Winston autograph cases suggests that the NCAA missed the memo –universities can no longer treat athletes like indentured servants.

Paying college athletes will likely improve both college and pro sports, as athletes with marginal prospects may choose to stay in school longer rather than take a long-shot at the pros. In addition, when the prospect of a suspension also includes loss in pay, there is further disincentive for criminal behavior or class absences.

While the NCAA devises a system that complies with the court ruling, the crackdown on the victimless violation of getting paid to sign autographs rages while real crimes slide without investigation. The Winston example is not an isolated incident. The New York Times reports a trend in Tallahassee of police protecting football players from arrests for real crimes –including theft, property damage, and domestic violence.

This is justice turned upside down  – penalizing activity that anywhere except the NCAA is considered entrepreneurial while excusing acts that cause real harm. In the Winston example, it’s too late for Florida State to “fix” the problem. Rape accusations require immediate investigation, not two year timeouts.  It’s time for Florida State and the NCAA to reset their moral compasses. 

Ebola and Black Swan Theory

History is filled with “black swan” events. The writer Nassim Taleb, who popularized the Black Swan Theory, says these events share three characteristics. First, they are rare and defy conventional wisdom. Second, their impact is extreme. Third, we concoct reasonable explanations for them, retrospectively, to convince ourselves that they were, in fact, explainable and predictable, even though they weren’t. September 11 was a Black Swan. So were Pearl Harbor and the Great Depression. Beneficial events can be Black Swans as well: for example, the creation of the Internet.

Implicit in these commonalities is another: humans are inadequately prepared for Black Swans precisely because they were so unlikely to happen – before they did. But not all Black Swan events are created equal. Some happen in a flash – 9/11. Others take months or even years to develop – the rise of Hitler.  I reference the Black Swan Theory because we may be in the middle of just such an event.

Since March, more than 7,400 people have contracted Ebola in Africa, nearly half of whom have died. The current outbreak is the worst in the history of a disease that was only discovered in 1979. Just last week, a nurse in Spain fell ill, leading the head of the World Health Organization to warn that Ebola’s spread in Europe is “unavoidable.” Closer to home, it emerged in Dallas with the late Thomas Eric Duncan, who contracted the disease in Liberia before boarding a plane to the United States. Beyond Duncan, Ebola scares have been reported in a handful of cities, including Kansas City.

A year ago, the odds of Ebola in the United States would have been more than 100 to 1. It would require an unprecedented and virtually uncontrolled outbreak in Africa. A perfect storm of events have made that long-shot a reality. Peter Piot, the scientist who discovered Ebola in 1979, explains the countries from which this strain emerged are just recovering from civil wars that chased doctors away. In Liberia, a country with more than 4 million people, there were only 51 doctors in 2010. To compound matters, this outbreak started in a highly populated area near the borders of three countries. Their tradition is to bury the dead where they were born – even if it requires moving their body for the funeral. Consequently, Piot notes that Ebola corpses were traveling across borders in pickups and taxis – spreading the disease far and fast. Then Thomas Duncan boarded a plane to Dallas.

Public health officials still believe our health care system can adequately contain Ebola – with good reason. We have the best health care system in the world. We have a better ability to find potentially impacted people than third-world countries, and there’s a promising treatment in Z-Mapp that has already saved at least three sufferers. The odds against widespread Ebola in the United States remain long, and Americans are thousands of times more likely to die from the flu than Ebola.

Still, it’s vital that government prepares for worst-case scenarios. Words aren’t enough. Plans must be clearly articulated and promptly followed. After reading initial reports from Dallas indicating that the hospital had treated, then released Duncan, I sent a letter to the Missouri Department of Health and Senior Services, requesting information on the Department’s plan to keep Missourians safe and avoid the mistakes of Dallas.

I’m a natural skeptic of government. Rather than trust, particularly in critical situations, I seek to verify. Here, I’m pleased to report it appears DHSS is ahead of other states. The Department has convened meetings with health care providers, law enforcement, and educators to discuss protocols if a person is diagnosed with Ebola. The Department has also identified experts in the treatment of hemorrhagic fevers. The Director has the authority to quarantine. And, while their protocol is to immediately contact and work with the CDC, they are assuming that, if the disease is present in several states at the same time, we may not be able to rely on the CDC.

Public health workers save lives with quiet preparation and execution of boring protocols. They don’t star in Hollywood movies, and are rarely credited for their work because the public never learns of the disasters they inoculate. They’re like running water. You never fully appreciate the importance of their role in society – unless they fail.

The Department’s response stands in stark contrast to recent decisions by the Obama administration. The standard protocol for containing hemorrhagic disease requires establishing a quarantine, creating a barrier between the healthy and the infected. Yet, with thousands already dead and predictions from the CDC that as many as 1.4 million people could be infected by January, the Obama administration has refused to stop commercial airline travel from the affected areas. Instead, it announced “screening” procedures to isolate passengers with any symptoms of the disease.

The Obama administration argues that banning travel from west Africa would impair efforts to stop the disease by restricting movement of health care professionals to and from the impacted areas. This argument strains logic. Flights limited to health care professionals or other humanitarian workers, if they agree to comprehensive screening on return, could and should be arranged. Organizing those flights wouldn’t be any more complicated than the logistics of getting hundreds of thousands of troops to and from Afghanistan or Iraq. Further, though it’s possible a person with Ebola could work their way around a ban on direct flights, it would be much more difficult, and the increased time required for the workaround would make it more likely that their illness is detected.

Experts outside the Obama bubble are warning that Ebola may spread easier than initially suggested. For example, though conventional wisdom is that it only spreads through physical contact, some strains of Ebola have shown an ability to spread through the air, according to recent published research and as observed in anoutbreak in research monkeys in Virginia in 1989.  Every time this strain of Ebola passes from one human host to another presents an opportunity for mutation that would allow the disease to go airborne. The likelihood seems small, but it doesn’t appear that scientists have a sufficiently large sample set of Ebola experience from which we can infer with much certainty. (This is an element of the Black Swan theory. Small sample sizes skew probability calculations.)

Experts also warn that the screenings are too easily gamed. Before a flight is boarded, travelers in west Africa are screened for fever. Consider the incentives for a would-be flyer whose running a slight fever.

Unless they were vomited on by an infected person, most probably think they’ve escaped Ebola. That’s human nature. A fever could indicate many things. But they know that if they have a fever and it’s caught at the airport, they’ll be barred from the flight and likely detained with other people who have fevers, some of whom likely have Ebola. So if they’re not sick yet, they will be soon. And, because they’re now trapped in west Africa, they will likely die a terrible death.

Now consider the alternative. They could take aspirin to mask the symptoms for the screening. If it turns out that they don’t have Ebola (which most will believe), they will not have missed their flight and disrupted their life. Critically, they avoided Ebola purgatory – trapped in a holding area with people who very likely have the disease. If they do have Ebola, they probably believe that they are not yet contagious, but know that their only chance of survival would be to reach the United States.

What would you do? Most of us prefer to believe we’d act selflessly, and not board the plane. But, as Mike Tyson says, “Everyone has a plan ‘til they get punched in the mouth.”

The Obama administration’s refusal to enact a travel ban defies common sense and needlessly endangers Americans. Their alternative, new screenings at five major airports in the U.S. is a joke. As one expert explained, “At the very most, all we are buying here is some reduction of anxiety.” Reduction in anxiety is important, but doesn’t cut it. Rather than continue this farce, the Obama administration should immediately stop direct flights from west Africa, and keep a close eye on Nigeria and Spain.

In the case of the Missouri Department of Health and Senior Services, however, they have a plan. Let’s hope there’s no punch in the mouth – and that these quiet heroes continue to avoid public notice.

Everyone’s a Loser with Too Big to Fail

The trouble with socialism is socialism. The trouble with capitalism is capitalists. William F. Buckley invoked this adage in 2005 in a column lamenting runaway executive pay that had no relationship to actual company performance. “Every ten years,” Buckley wrote, “I quote the same adage from the late Austrian analyst Willi Schlamm, and I hope that ten years from now someone will remember to quote it in my memory.” 

Since the crash, we’ve seen unprecedented insider trading convictions, traders bragging about selling toxic mortgage investments to ‘widows and orphans,’ and rampant examples of conflicts of interest where Wall Street firms bet against the very financial products that they were selling to their clients. But this bad behavior pales compared to the chutzpah happening now in a New York courtroom.

In Starr v. United States, the largest shareholder of the bailed-out insurance company, AIG, has sued the federal government for saving the company. Led by former AIG CEO, Hank Greenberg, and represented by super-lawyer David Boies, Starr claims the bailout was an unconstitutional taking because the terms of the deal given to the company were too onerous.

Everything about this case reeks.

September 2008 was the nadir of the financial crisis. On September 7, the federal government bailed out Fannie Mae and Freddie Mac, two companies whose existence facilitated the real estate bubble through their purchase of toxic mortgages backed by the federal government’s guarantee. On September 12, the CEOs of major Wall Street firms met to consider how to save Lehman Brothers from impending collapse. Secretary of the Treasury Hank Paulsen informed them that the federal government would not offer a bailout to Lehman Brothers. On September 15, Lehman Brothers filed for bankruptcy.

On September 16, fearful of economic collapse, the Fed announced the bailout for AIG. The Fed agreed to pay up to $85 billion in taxpayer funds to make good on AIG’s busted mortgage bets.  In exchange, the Fed received 80 percent of AIG’s stock. Later decisions increased the Fed’s “investment” in AIG to $182 billion.

The taking was not forced. AIG was desperate to survive, particularly in the wake of Lehman’s demise. Even a four-year old can understand that 20 percent of something is better than 100 percent of nothing. Faced with bankruptcy or bailout, AIG’s Board voluntarily accepted the Fed’s terms. As Norm Scheiber explained, “Arguing that the shareholders deserved even more is like a formerly starving man’s insisting he deserved a filet mignon rather than a rib-eye.” Now, they’re suing.

For Hank Greenberg, the man who marched AIG to the brink of disaster and, with it, our entire financial system, being saved was not enough. Instead, Greenberg essentially argues that Wall Street firms have a constitutional right to bailout bargains.  (As if the bailout wasn’t enough, in 2009, just a year later, AIG paid executives $165 million in bonuses.)

While Greenberg’s suit is absurd because AIG is the wealthiest welfare queen in history, it’s also dangerous. Bailouts and government guarantees have already created a system on Wall Street that privatizes profits and socializes risk. A Greenberg win amplifies this moral hazard. Not only will Wall Street firms bet bigger and more recklessly, knowing a bailout is just around the corner, they’ll also enjoy a constitutional right to favorable terms on the contract.

Still, ridiculous as Greenberg’s argument is, the trial will also likely reveal lamentable behavior by officials at the New York Fed. Tim Geithner, Ben Bernanke, and Hank Paulsen have already been deposed and are all expected to be called as witnesses. Reports on the sealed depositions indicate that the Fed was clueless about AIG’s toxic mortgage insurance contracts. Apparently neither Geithner, head of the New York Fed at the time, nor Bernanke, knew that Wall Street’s biggest investment banks had so much riding on AIG.

This shouldn’t be that surprising. Big government bureaucracy fails because it’s so big. Its size exceeds the grasp of any single human being. The “fatal conceit” of big government is that government officials are capable of omniscience which allows them to “shape the world according to wish.” 

Far worse than ignorance, the trial may also reveal special treatment for the Wall Street firms whose insurance contracts with AIG were rescued. In previous bailouts, creditors were forced to accept less than face value of what they were owed. For example, in the auto bailout, bond-holding creditors of Chrysler were forced in 2009 to take 29 cents on the dollar as repayment for their loans. (Proof it pays to have friends in high places, the unions received 40 cents on the dollar.)

AIG’s creditors, including Goldman Sachs, Merrill Lynch, and Bank of America received 100 cents on the dollar. Greenberg’s lawsuit may reveal why. Would these Wall Street firms have failed if they didn’t receive 100 cents on the dollar? Did they receive special treatment? Was the Fed just too overwhelmed to care about protecting taxpayer dollars?

Greenberg’s lawsuit clearly reveals that Wall Street is no longer a bastion of capitalism and risk-taking. Washington’s generosity has shattered that ideal. Just as welfare for the poor has caused unintended consequences of dependency and generational poverty, so too does welfare for the wealthy generate a sense of entitlement and reliance on the federal government as a backstop to save them from the negative results of their own poor decisions. This Wall Street dependency repulses Americans who live in the real world, and who neither expect nor would want the federal government to save them, and it threatens economic freedom in the long-term.

Greenberg’s lawsuit exposes the contagion of Too Big to Fail. In this lawsuit, regardless of the nominal outcome, everyone is a loser. And the American taxpayer is the biggest loser of all.

Requesting Missouri’s Plan for Ebola

The following is a link to a letter I sent to the Missouri Department of Health and Senior Services this morning regarding the state plan for Ebola, and the text of that letter copied-and-pasted in this post.

10.2.14 Barnes Letter to DHSS re State Ebola Plan


Re: State Plan for Ebola

Dear Director:

Health officials confirmed the first case of Ebola diagnosed in the United States yesterday. Reports from Dallas, Texas indicate that the patient had traveled to Liberia and had presented at a hospital with symptoms, but was allowed to return home. After his illness grew worse, he returned to the hospital. NBC News reports that the patient did not receive appropriate treatment until his nephew contacted the Centers for Disease Control. There are further reports this morning of a potential Ebola diagnosis in Hawaii. 

Public experts believe that, if Ebola comes to the United States in serious numbers, it can be effectively contained because of our health care infrastructure. Nevertheless, containment requires both a plan and execution. To that end, I write this morning seeking information on the Department’s plans related to Ebola. Specifically: 

  1. Does the Department have a written protocol for actions to take in the event a person in Missouri is diagnosed with Ebola other than the “Methods of control” section of the Control of Communicable Diseases Manual referenced in Section 4.0 of the Division of Community and Public Health manual? 
  2. What steps has the Department taken or will it take to help ensure that a Missouri hospital does not make the same mistake that the hospital in Texas made – and inadvertently send a patient with Ebola home?
  3. What steps will the Department take to notify the general public?
  4. What steps will the Department take to identify, contact, and monitor persons with whom a person infected with Ebola had recent contact?
  5. How will the Department coordinate efforts with the Centers for Disease Control?
  6. How will the Department coordinate efforts with local health officials and statewide healthcare organizations?
  7. The Department’s existing Communicable Disease Investigation Manual indicates that “U.S. hospitals are well equipped to isolate cases and control spread of the virus.” Are there designated hospitals in Missouri which are better equipped to handle a potential Ebola patient? Has the Department identified those hospitals? 

As concerns grow over the spread of this disease, I believe it is vitally important for the Department to actively assure Missourians that state government is prepared to move quickly in the event of an Ebola diagnosis in our state. 

Thank you for your attention to this matter. 

                                                                        Yours in service, 

                                                                        Rep. Jay Barnes

War and the Constitution in the Age of Twitter

George Orwell wrote that political language is designed “to give an appearance of solidity to pure wind.” That was 1946. If only he could witness the deterioration of political discourse in the age of the 24-hour news cycle.

Sixty-eight years after Orwell lamented the decline of political writing, it is clear that the area where it applies most is war. As George Will noted last week, the last time Congress and an American President declared war was 1942 – when the declaration clarified that Hungary, Romania, and Bulgaria were Axis countries aligned with Hitler.

Article I, Section 8, clause 11 of the Constitution specifies that only Congress shall have the power “to declare war.” As James Madison explained, “The constitution supposes, what the History of all Governments demonstrates, that the Executive is the branch of power most interested in war, and most prone to it. It has accordingly with studied care vested the question of war to the Legislature.”

Yet, in our history, Congress has declared only five “wars” – the War of 1812, the Mexican-American War, the Spanish-American War, and World Wars I and II.

Korea? Not a war.

Vietnam? Not a war.

Grenada and Panama? Definitely not wars.

Iraq I, Afghanistan, and Iraq II? Not wars either.

And so it apparently will be with what President Obama has called our “campaign to degrade and destroy the terrorist group known as ISIL.” To date, this “campaign to degrade and destroy” has consisted  of daily airstrikes, support for Kurdish and Iraqi troops fighting on the ground, and despite President Obama’s statements to the contrary, it may eventually lead to American troops in the region.

In the Orwellian era, government avoids calling things what they really are, so instead of “declarations of war,” we get “authorizations for use of military force” consistent with the War Power Resolution. This constitutionally-controversial law permits a president to engage military actions overseas in the event of a national emergency, and, more importantly, if Congress does not ratify the action within sixty days, the President must wind-down the action within thirty days.

This “campaign” started in earnest on August 7 when President Obama authorized airstrikes in response to attempted genocide of the Yazidis in northern Iraq. Under the War Powers Resolution, the sixty day clock for Congressional authorization runs out on October 6 and all military actions must cease by November 5.

In a letter to Congress, President Obama claims he does not need a new authorization because he’s acting within the scope of authorized actions against al-Qaeda and Saddam Hussein’s Iraq. The first, Public Law 107-40, passed shortly after the terrorist attacks of 9/11 authorizes action against “those nations, organizations, or persons” who “planned, authorized, committed, or aided the terrorist attacks” on September 11, 2001, or those who “harbored such organizations or persons.” The second, Public Law 107-243, authorized action to “defend the national security of the United States against the continued threat posed by Iraq.”

Obama’s claims are farcical and resemble the “War with Oceania” from Orwell’s 1984 more than truth. ISIL is not al-Qaeda. Nor did ISIL exist in 2001 to plan, authorize, commit, aid, or harbor those involved in the terrorist attacks. And, unlike Iraq, ISIL is not  a state – more like a savage cult –  its goal is to dismantle Iraq, en route to establishing a global caliphate.

Obama’s invocation of the Iraq war authorization is worse. As ISIL stormed across the middle of Iraq in June and July of this year, the Obama administration sought to repeal the Iraq authorization. On July 25, more than a month after ISIL had captured Mosul, Iraq’s second largest city, and taken Saddam Hussein’s hometown of Tikrit, Obama’s National Security Adviser Susan Rice wrote a letter to House Speaker John Boehner informing him that the president continued to “take the fight to terrorists who threaten the Iraqi people, the region, and American interests,” but that the Iraq authorization was “no longer used for any U.S. government activities and the Administration fully supports its repeal.”

But inconsistency and shocking lack of foresight by President Obama aside, the more profound long-term problem caused by the lack of congressional authority lies as much with Congress as it does the president. As Madison wrote, it’s expected that “the Executive is the branch of power most interested in war,” and that presidents will push the boundaries of war-making power. That’s why we have checks-and-balances. Just as we expect that presidents will push, so too do we count on Congress to defend its own constitutional powers. But just the opposite is happening now.

Congress has a choice: it can either meet its constitutional mandate and vote on whether to authorize continued action against ISIL; or, it can accede to President Obama and claims to “forever war” from future presidents.

Congress has made its choice clear. It will punt. Why? Because Senate Democrats fear that a war vote will dampen liberal enthusiasm in the November elections. Instead of taking responsibility and acting swiftly to an emerging threat, Senate Democrats disclosed last week that they will wait until after the election. That’s not to suggest Republican leaders are clamoring for constitutional responsibility. When asked whether Congress should return to Washington to vote a new authorization, Speaker John Boehner’s office deferred to the White House. With a few notable exceptions (Sen. Tim Kaine D-Va, Sen. John Cornyn R-Tx, Rep. Justin Amash, R-Mich., and Rep. Chris Van Hollen, D-Md), Congress instead seems content to merely fund the training of Syrian rebels. This half-measure is constitutionally insufficient for action to continue. Not even close.

Congress, in these twisted political times, won’t call it what it is – and vote to authorize war. But the American people and the Constitution deserve better than the “Politics of the Next Six Weeks” mindset that paralyzes Washington. The responsible, constitutional action would be to immediately authorize further military strikes for a specified period of time.

If we do not act now, ISIL will further expand and threaten genocide against Kurds, Christians, and moderate Muslims in the surrounding region. At the very least, continued airstrikes and robust support, weapons, and training for Kurdish, Iraqi, and non-terrorist Syrian rebels (if such exists) should be authorized. 

“Boots on the ground” is a more difficult question – the answer to which depends on facts and military options on what may work. Make no mistake, we’re dealing with evil incarnate. War to decimate ISIL is just – even Pope Francis seems to agree. But ISIL apparently wants American troops fighting on their turf. Is it smart to put American boots on the ground? Is there any other realistic chance that the Kurds, Iraqis, and non-terrorist Syrians can retake captured areas? If not, is the American public ready for staged beheadings of captured American soldiers in uniform? Because that’s one of the likely consequences of committing significant ground troops to fight ISIL.

Unfortunately, that debate may never happen in Congress. In place of duty and guts, Congress has given the American people politics as usual. We can only hope that this is a one-time aberration, but in the era of Twitter and the 24 hour news cycle, it’s more likely just a sign of things to come. 

No to Noranda

Is it reasonable for you to pay more on your electric bill so that an aluminum smelter 250 miles away can get a reduced rate? That’s the question the legislature may be asked next session if the Public Service Commission doesn’t grant a request from Noranda Aluminum Company’s request to reduce rates.

Noranda operates an aluminum smelter in New Madrid. And it buys power – lots of power, more than the entire city of Springfield. For buying in bulk, Noranda receives a discount. While we pay around seven cents per kilowatt hour to power our homes and businesses, Noranda only pays four. In February, however, Noranda threatened to halt production at its New Madrid plant unless the PSC reduced its rate to three cents. When you buy as much power as Noranda, those pennies add up quickly. In this case, if the PSC granted Noranda’s request, it would pay around $48 million less per year and we would pay that much more.

Noranda claimed a liquidity crisis. But the PSC rejected its claim. As explained in the PSC’s Order, Noranda’s pleas of poverty “differ substantially” from the rosy financials Noranda presented to Moody’s Investor’s Service just two weeks prior to filing its case before the PSC.

Worse, as detailed by the PSC, to the extent there’s any liquidity crisis at Noranda, it’s the result of management decisions. Apollo, a private equity firm, bought Noranda in 2007 for $1.165 billion. It paid $214.2 million in cash with the rest secured by debt. Then, just 25 days later, “Noranda borrowed money to pay Apollo a dividend of $214.2 million.” That’s a quick turn-around on a huge investment.

But, as the PSC Order details, Apollo wasn’t nearly finished taking money out of Noranda. A year later Noranda paid Apollo a dividend of $100.7 million. If you’re keeping score, that’s a 147 percent return on investment in just one year. In 2010, Noranda went public and Apollo received an additional dividend of $107.9 million and another $151.1 million from the secondary sale of Noranda stock. Running ROI after three years? 268 percent. Because of Apollo-related debt, Noranda pays roughly $50 million per year in interest. Since 2007, Noranda has paid Apollo $31 million in management fees for the privilege, and it took another $4.5 million from taxpayers in tax credits.

After the PSC rejected its first request, Noranda took action. It announced it will lay off up to 200 employees unless it gets its way. In a disappointing move, Gov. Nixon announced his support for a proposed “deal” to shift $30 million annually from your wallet to Noranda’s. This shouldn’t be surprising. Gov. Nixon rarely meets a corporate subsidy he doesn’t like.

Noranda’s requested subsidy is shocking when put to scale. The sweetheart subsidy Gov. Nixon proposed for Boeing only amounted to $19,250 per employee per year, and only in the most expensive years of the deal. If Noranda scores its subsidy, it will receive a cost-shift equal to $240,000 per employee per year for every year of the deal. If it secures the “compromise” supported by Gov. Nixon, it would receive $150,000 per employee per year. Even assuming the worst case scenario of a 900 job loss, we’re still talking more than $50,000 per job per year. At this rate, we might as well designate Noranda employees state employees – except, they’d be better paid.

Then, just last week, the Office of Public Counsel (an office that ostensibly represents residential ratepayers) asked the PSC to re-open the case to grant the “deal” supported by Gov. Nixon. In making its request, this alleged public advocate argued that the PSC “must respect and be deferential to” the claims of Noranda’s management regarding the company’s alleged poverty. Never mind that those claims directly contradict statements Noranda management made in its public filings with the SEC.

The OPC’s crack-pot theory is based on the “business judgment rule” which “protects the directors and officers of a corporation from liability” for decisions they make in good faith. But no one is trying to hold Noranda liable for anything in this case. Noranda is essentially the plaintiff. To my knowledge, no court in the history of our country has ever held that the business judgment “benefit of the doubt” rule applied when a corporation was effectively seeking relief as a plaintiff. To hold otherwise would be absurd, and would be a dangerous standard for the PSC to apply to factual claims made by any party seeking ratepayer funds – whether an aluminum smelter in southeast Missouri or a utility company itself.

Whatever happened to this being the Show Me State? Beyond being shockingly inappropriate, the OPC’s timing could not have been worse. At the same time that it was supporting Noranda’s claim of poverty, Goldman Sachs upgraded Noranda’s stock to a “buy” and said it was “bullish” on the company.

In addition to its rate reduction request, Noranda also filed a claim for “overearnings” against Ameren. That’s a fair claim, and, if the PSC had found it true, it should have hammered Ameren. But don’t let Noranda fool you with a street magician’s sleight-of-hand. Even if Noranda is correct about Ameren “over-earnings,” that doesn’t justify a rate shift from your wallet to theirs.

The PSC’s original Order was sound and it should not stray from that decision, regardless of Noranda’s threats and the OPC’s parrot show. If and when the PSC rejects Noranda again, the question will certainly be put to the legislature. I believe the answer is clear. No one should begrudge Apollo for profits. But when those profits are gained through saddling a company with debt and then they turn around and ask Missouri families and small business owners to pick up the tab, the answer should be a resounding NO.

Fast-Food Workers Unite in Effort That Would Fire Themselves

Fast-food workers of the world unite! is the latest rallying cry for the left. In protests around the country, union organizers argue that government should force the fast-food industry to pay workers at least $15 an hour. However well-intentioned, if successful, this movement spells disaster for low-income Americans.

First, some basic economics. Generally, if the price of a product increases, demand for it decreases. If you’re a normal person, what you buy depends on how much it costs. For example, most people are willing to pay $2 for a cup of coffee. But how about $4? What about $6? The higher the price, the less likely you are to purchase the product. Instead, you’ll seek an alternative.

The law of demand is blind — it applies to businesses and individuals, alike. A business owner faced with increasing costs in any area will explore ways to lessen the impact or find a substitute. For example, as the price of oil increases, the market for natural gas booms because companies are pursuing lower-cost alternatives.

This law holds true for labor too. When a government mandate increases the cost of labor, businesses inevitably seek ways to avoid the artificial cost increase. In response, businesses may examine whether they can supply their customers with the same or similar service with fewer employees. They may consider equipment and technology which might be able to replace employees. Or, in some industries, they may ship jobs overseas.

Those employed in the fast-food industry are perhaps the most vulnerable to layoffs from increased government mandates. This stems from a several industry factors.

First, the profit margin for fast-food restaurants is incredibly slim –less than three percent for the industry as a whole, by one estimate.

Second, the demand for fast food is incredibly elastic. Researchers for a 2010 article in the American Journal of Public Health estimated that for every percentage increase in the price of “food away from home,” there’s a corresponding decrease in consumption by 0.81 percent. A study published this year, found a decrease of 0.90 percent.

Third, new technology may provide adequate substitutes for many of the services currently provided by fast food workers. David Nicklaus, a business reporter for the Post-Dispatch, notes that many “restaurants already have self-service kiosks, and smartphone ordering isn’t far away.” And that’s just for workers at the front counter. There’s also at least one company, Momentum Machines, which advertises a machine that can produce a burger every second. Fast food workers are competing against these technologies. And, while a machine cannot substitute for a smiling or helpful human being, businesses faced with spiraling labor costs will inevitably turn to machines to cut costs.

Fourth, turnover in the fast food industry is among the highest of any sector of the economy.  Though industry turnover is decreasing, it is still at least 60 percent and may be as high as 90 percent. This may be attributed to many factors. Obviously, as low-paying jobs, employees are more likely to take the first chance they get at a higher wage. At least 30 percent are teenagers. And many employees who fill these positions do not have the skills or desire necessary to stay employed.

According to the non-partisan Congressional Budget Office, an increase in the minimum wage to just $10.10 an hour would lead to job losses for up to 1 million Americans. And the impact would fall hardest on the least-skilled. According to the CBO, even a modest increase to $9 an hour would likely cause 200,000 lost jobs. Thus, the jump from $9 to $10.10 would hike unemployment. It logically follows then, that an increase to $15 would trigger even more devastating job losses.

The resulting unemployment would harm people well into the future. For the industrious, a minimum wage job is the first step on the ladder to economic viability. According to Ron Haskins of the liberal Brookings Institution, there are three simple rules that low-income teens should follow to avoid a life of poverty. The first is to finish high school. The second is to wait until they are 21 to marry and have children. And the third is to get a full-time job, any job. If they do this, there’s only a two percent chance that they will live in “poverty”oand there’s a 75 percent chance that they will join the middle class.

Despite the good intentions of liberals, government cannot suspend the basic laws of economics.  There’s no magic wand that can turn the economic value of an hour of fast-food labor from $7.25 an hour to $15 an hour. Those who would lose access to a job due to artificial wages set by government fiat would become more dependent on government – in some cases starting, and in other cases, perpetuating a cycle of poverty. The answer to improving the lives of the poor is not for government to ignore basic economic facts, but instead, among other things, to improve access to health care, equal access to justice in our courts, and a quality education

An Ode to Representative Democracy in Action

If you’re a student of the human condition, there aren’t many better laboratories than the General Assembly during veto session. You can observe just about every emotion – and every method of persuasion other than Chinese water-torture. (I will confess, however, that it sure seems like Chinese water-torture to listen to debate on a bill at 2 a.m. when everyone already knows how they’re going to vote on the bill anyway.) 

On tightly-contested bills, there are several, if not dozens, of personal dramas playing out at the same time. When you know the basic plot-lines, it’s fascinating just to watch the body language. Everyone is watching everyone to see who is speaking to whom and whether they’re nodding their head in agreement, politely standing their ground, or preparing to mark off paces for a legislative duel. It’s representative democracy in action. It’s messy, orderly, ugly, and noble all at the same time. As Churchill said, it’s “the worst form of government, except for all those other forms that have been tried from time to time.”   

Record-Setting Veto Session

The legislature overrode 57 separate vetoes in veto session this week. We started a little after 11:00 a.m. Wednesday with 47 overrides of line-item budget vetoes. Most passed by wide bi-partisan margins. An aside – people in the Capitol often refer to “legislative time.” Yesterday was a textbook example. After voting to limit debate to four hours, we proceeded to talk for seven.

Sometime around 6:00 p.m., we moved on to policy bills. In the end (around 3:30 a.m. Thursday), the legislature overrode 10 policy bills. Of the tax bills I wrote about last week, only one was passed into law – the measure on burden of proof in tax disputes. For the reasons I explained last week, I voted no on all of the tax measures which were brought up.  

Income Tax Cuts for All Over Sales Tax Exemptions for Some

Admitting you were wrong isn’t easy – whether at home, work or, especially, in public service. This week’s about owning a mistake I made as your state representative – eight mistakes, to be exact.

Next week, when the legislature re-convenes for veto session, it may consider nine sales or other tax-related bills vetoed by Gov. Nixon. On the last day of regular session, I voted for all nine bills. During veto session, I will only vote to override one.

What changed? Well, it wasn’t Gov. Nixon’s bully-bludgeon tactics, or his sky-is-falling budget projections. Instead, the change can be attributed to two factors: (1) a bigger picture view of taxes and the budget, and (2) difficult to detect but devastating drafting errors in a few bills.

First, the big picture. There is justification for each of the vetoed sales tax bills. Many are attempts to re-set the law after changing interpretations by the Department of Revenue. When I voted for these bills in regular session, I considered the legislation narrowly – asking whether each made sense as isolated policies.

But I was wrong to view these bills in isolation. Each of these will reduce general revenues to the state without stimulating any meaningful economic growth. Worse, each of these bills is competing with the income tax cut we passed this year.

Under Senate Bill 509, your income tax rate will be gradually reduced from 6 to 5.5 percent. The reduction will occur over a series of years with the rate going down 0.1 percent annually – but only if General Revenue increases for the state by at least $150 million in the preceding year. As a result, for every dollar we reduce GR to “fix” a sales tax issue, exempt some new product from sales tax (graphic calculators as one obscure example in these bills), or create a new tax credit, we delay income tax cuts for everyone. Though some of these provisions make sense individually, I’m not going to choose tax cuts for donut shops, graphing calculators, data storage facilities, or any other particular narrow group over an income tax cut for everyone.

In addition to the “bigger picture,” several of the bills contain seemingly small but serious drafting oversights. Here are two for which there is conceptual consensus, but, alas, the devil lurks in the details.

Notice of Tax Change Fails to Define Notice

Senate Bill 662 and a few other bills contain a provision requiring the Department of Revenue to notify “all affected sellers” of goods that are determined taxable through a changed decision of DOR, the Administrative Hearing Commission, or a court. Unfortunately, this new section of law does not define “notify.” Because Missouri law requires tax provisions to be interpreted against the tax collector, a court would likely interpret this provision to require DoR to send notice via certified mail to an indeterminate group of taxpayers.

For example, the Supreme Court recently ruled that DOR had to enforce a sales tax on mobile home sales because they were not specifically exempted from the tax by statute. For this provision, proponents have argued that it defies logic for a Court to insist that DOR enforce the statute as written going forward because it hasn’t previously enforced the statute as it’s actually written. This is dangerous logic – and is the intellectual twin of President Obama’s arguments to re-write federal immigration law via executive action.

Under the new “notice” provision, DOR would be prohibited from enforcing the Supreme Court’s ruling that it must administer tax statutes as they are actually written unless and until it provided the undefined “notice.” While I agree that notice is warranted, ignorance of the law is not bliss. The legislature should re-visit this issue in January and pass a bill that defines “notice” in a way that does not require prohibitively expensive registered mail.

Burden of Proof Provision Goes Beyond Case-in-Chief

Under current law, for taxpayers with a net worth of less than $7 million or fewer than 500 employees, the Department of Revenue has the burden of proof in tax liability disputes to show that the taxpayer owes more money to the state treasury than they paid. Consistent with federal law, House Bill 1455 applies the same rule to all taxpayers. This is a concept with which I believe everyone should agree. In fact, in his veto letter, even Gov. Nixon noted that he agreed with “eliminating” this “arbitrary limitation” in current law.

But HB 1455 also shifts the burden of proof concerning claimed tax exemptions. In other words, it requires the claimant in a tax case (DoR) to prove a negative. This stands traditional legal process on its head. The existence of an “exemption” to a tax statute is an affirmative defense. The essence of an affirmative defense is the burden is on the party claiming the defense – to do otherwise requires a party to prove a negative.  I am not aware of any other substantive area of the law in which the burden is placed on a claimant to prove the non-existence of an affirmative defense. Therefore, though this provision is well-intentioned and the rest of the bill would be good law, I believe the legislature should revisit this issue in January and pass a slimmed-down version of the same bill.

Actions for Next Week

The sales tax bill for which I will vote to override Gov. Nixon’s veto is Senate Bill 727, which exempts purchases from farmer’s market vendors with annual sales of less than $25,000 from sales tax. For the other eight bills, if they come up for a vote, I will vote no. Looking to next session, I believe the legislature should take a serious look at replacing many tax credits and sales tax exemptions for narrow groups with income tax cuts for all.