nonprofit ≠ not profitable

without a doubt, the biggest scam in america is the entire concept of “nonprofit” organizations. and these guys are making a mint.

this quote is from a baltimore sun article:

Seven of the state's 501(c)(3) organizations - charities, the most common nonprofits - paid more than $1 million in salary and benefits to at least one official during their 2003 fiscal year, according to the most recent Internal Revenue Service data consistently available. Thirty shelled out more than $500,000, a Sun analysis found.

granted, the number and complexity of these monstrosities are expanding at an alarming rate, so we should expect to see higher salaries.

but you need to understand that the biggest secret of all about these “nonprofits” is that the only difference between them and a regular company is that they don’t have shareholders. (there are other restrictions, but they amount to little more regulation than any for-profit company is subject to.)

but if shareholders aren’t keeping an eye on the board as it sets executive compensation, who is?

effectively, no one.

non-profits are subject only to pressure from decreased donations, be they government aid or private donors.

but with non-profits reporting – rather conservatively, and according to generally lax rules – millions of dollars spent lobbying every year, why spoil the party? if you think for one second that a politician would say “no” to spending your tax money on a non-profit in exchange for campaign money, you should have your children and small animals taken from you.

and then there’s you, the donor. how are you supposed to know that when you donate the national federation for the blind, only 20% of your donation will go directly to helping the blind?

so what is there to do?

remove the politicians and make charities compete.

myth & property

last summer, i went to hawai’i to visit my girlfriend, who was there to study law and surfing (but not the law of surfing). to kill time before her meeting with a state senator, we took a tour of the state capitol.

usually i hate tours, but a hawai’i boasts one of the most interesting public buildings i’ve ever seen. also making it easier was the fact that our guide was a very nice local woman who served double-duty as some sort of secretary. she told us all about the island and the building, and local customs and culture.

not surprisingly, the locals are still a bit peeved that the doles and various other dead, white people came and brought with them their western concept of “property.” now, without delving into the history and politics of the bayonet constitution, i will say that somewhere along the line, someone got a raw deal.

but what amazed me was her concept of hawai’ian society before westernization. “you see,” she explained, “before the europeans came, no one ‘owned’ the land. the islanders were custodians of the land, and it belonged to the gods. we just took care of it.”

and all i could think was, whoever came up with that lie was effing brilliant.

so, to commemorate this shining moment in history, i composed this one-act play.

i’m now proud to present :

“talk to the gods”
by: afuturehead

hawai’i, circa a really long time ago. a peon farmer cowers before his mighty king.

“hey, king?”

“yes, peon farmer?”

“let’s say there’s this guy, right? we’ll call him… leon. yeah, leon farmer. and he – for some crazy reason that i literally cannot even grasp with my tiny, not-royal mind – he questions your legitimacy and doesn’t see why all the land should be yours and why we can’t own it. what would you say to this person who is obviously insane and definitely not me?”

“ummm… lemme think. because… uh… oh wait, i know! you see, peon farmer, we all know that you don't own the land. you're much too stupid and smelly for that. but you see, neither do i -- this land belongs to the gods! we’re just taking care of it for them. and in order for us to take care of it, i have to tell you what to do, and you have to give me half of your food in return.”

“ahhhh! ok. good to know. i thought that was all just because your dedication to violence afforded you the most power. gosh, thanks for clearing all that up! well, i better get back to doing what you tell me to, then giving you half of my stuff. thanks, king!”

“no problem.”

[exit peon]

(king, to guard) “have that peon farmer burned alive. also, find leon farmer and have him burned alive.”

and then, the monarch sold everyone’s land to the europeans and got really, really rich.

fin.

water, water everywhere

early last summer, i was lucky enough to spend two weeks in southern california. but i was unlucky because its blisteringly hot days found me in the shade and, for the most part, alone thanks to my pasty, east-coast complexion, inapposite among the bronzed locals.

to maintain my dignity, i had to make lemonade from an otherwise sour situation. so, i took it upon myself to ponder the divide between our nation’s coasts (aside from the swath of red states lying between them). but the thought of lemonade made me thirsty, and being surrounded by flowing water made it so much worse.

funny, i thought, how in the heat of summer and in the dry air of the california desert, people would just let water run. it gushed from sprinklers and fountains everywhere, joining streams in the streets and emptying into storm drains. it made islands in the road literally so as it poured out of haphazard pipes, for no apparent reason other than flooding tiny patches of soil (i can only assume that the grass died from over-watering).

this made me think that with a little elbow grease, i could turn a tidy profit collecting all this water and selling it. but no, surely someone would already have thought to do that. and moreover, why wouldn’t everyone do what amounts to the same thing by reducing their water consumption and saving on their water bill?

later that day i erupted in archimedean euphoria at the sight of a banner for water conservation. when i was finished, i found my friends – who had stolen away – and explained my euphoria. if the city were really concerned about conservation, they would just raise prices. but here’s the genius part: they could give what’s saved to those who value it more – even in other areas – and then return that value to the consumer as a discount on his bill. that way, no one would lose.

the problem is that california, like most places, lacks an efficient water property system and allocates water rights by use. this means that if the city stops using the water, it can’t direct who gets it, and there cannot be a mutual gain. what’s worse, there is actually incentive to waste water, just to preserve one’s rights therein.

this system of political control does not incorporate the opportunity cost of the water, which is how much outsiders would value it and, hence, what they would pay for it. the key to efficient use – or “conservation” – is to let people capitalize on the situation through a free market.

of course, the slightest hint of commoditization raises alarms (alienation!!!!!), especially in california. but there need not be an evil water conglomerate; all that is needed is a central authority to enforce a few simple rules, monitor “accounts,” and keep track of private bargains – in other words, a bank. the rest could be left to competition. furthermore, there could, and should, be competition between those banks.

and those who fear unbridled consumption must be blind to the fact that people are currently wasting water precisely because they are not paying for it. the best way to conserve is to let people save money by reducing consumption, and the best way to preserve is to let owners invest to protect these resources for the future.

to each according to his need is a great idea. but when allocating a scarce resource – which is any resource – pricing by a valid market provides the best way to include others in their consumption choices and, thus, balance competing interests. with the state of today’s science, an open market can preserve and conserve better than any government.

a new anarcho-capitalist paradigm

this is something i posted in the anarcho-capitalist forum. check out the wikipedia page if you need a primer.

---------------------------------------------------------------------

i was thinking hard about intellectual property a few days ago and as my mind wandered onto grander things, i had a small ephiphany and saw a new agenda for anarcho-capitalists. i'll try to convey my thought process as best i can.

i began by trying to answer this question: what is the value of i.p. law? i know we usually talk about incentives, etc., but i was trying to look at it another way: from a perfect contracting perspective (since laws can properly be considered pre-fab contracts).

putting aside higher-order issues such as simultaneous invention and authorship, i focused on copyright and piracy. the question i had was, when and why would one consent to laws such as the d.m.c.a.?

the answer i struck upon was this: given our potential for opportunistic behavior, it could very well be pareto-optimal to consent to some sort of punishment regime and thereby lend credibility to your side of the bargain. that way, rather than force the musician to hire an encryption expert, you can just say: "look, if i'm caught by this auditing agency [the government, in this case], i'll get punished and you know i don't want that."

in an anarcho-capitalist society, i believe things would work out roughly the same, but as a more efficient manifestation. for example, i could choose the auditing agency i want, and musicians could choose their consumers, rather than have them allocated by geography and inheritance. also, chances are that my auditing agency would do some due diligence and adjust my punishment according to the tenets of marginalism.

if the potential for opportunistic behavior can pave the way for pareto-optimal consent to punishment (now known as law), this has some surprisingly broad implications. first, in an anarcho-capitalist society, people would voluntarily choose to join groups that invade their privacy in the name of full disclosure. what's more, people would even volunteer to be part of a punishment regime.

importantly, i believe that this latter point supports the anarcho-capitalist critique of classic anarchism. classic anarchists are likely to say that withdrawing consent at any time violates our "free will" or "natural rights," or somesuch nonsense. thus, one could change one's mind at any time, paving the way for opportunistic behavior. crucially, i believe that this forms the basis of their mistaken belief that capitalism requires the state. the more accurate thesis is that it is not "the state" which is necessary for capitalism to benefit a society, it is merely enforcement, which can be provided in the absence of the usual statist voting regimes, geographical fixation, and nationalism.

i also believe that fully incorporating the utility of credibility can help make ours a positivist philosophy, rather than have us come off as simply nihilistic anarchists. to me, the most important question is always, "well, then what?" so we get rid of government, how do we build a better society? i submit that the study of how people would choose credibility-providers in the absence of the state helps fill this theoretical void, while remaining within the bounds of economic theory.

additionally, i think it may help to counter statist critiques of anarcho-capitalism. namely, if efficiency and its analogues are based on choice, and (assuming) people chose governments, how can they be inefficient? furthermore, how do you explain the indisputable success of capitalist nations?

with all this in mind, i think we might help refine anarcho-capitalism and put some distance between it and classic anarchism (and its failings) by focusing our critique on populism, geography, and the nationalist mythology.

"consumer protection"

so the better business bureau of greater maryland issued a consumer protection bulletin regarding psychics, called "Psychics and Clairvoyant Counselors Are You a Believer?"

you might think it would contain warnings such as "don't be a fuckwit," or "if you're even considering it while sober, please sterilize yourself."

sadly, you'd be wrong.

my favorite tips are:

"Get a referral. Ask a friend or contact a reputable organization, such as a psychic research center or alternative bookstore."

and,

"Be cautious if an advisor indicates that you have a curse, hex, etc. which will require frequent returns in order to remove."

all roads lead to home

when i delve into the forgotten depths of my memory and recall my grade school days, i'm assaulted by waves of youthful elation and bitter disappointment. and every so often i stumble across a golden nugget of wisdom gained in my youth.

i can still recall the first time that i learned something in class and had a "eureka" moment. i believe it was in third grade, when we were learning our first lessons in roman history. i remember struggling a bit as i read stories of epic battles and bloodsport, the great circuses and deadly chariot races.

we would later come to learn that while these distractions occupied the masses, the rich pursued an orgiastic existence of opulence and excess. and i can remember thinking, "hm. that sounds familiar."

those stories stuck with me throughout my youth, alongside that uncanny feeling.

i was brought immediately to that place in my mind when i read a commentary piece written by john tierney and featured in the june 11th ny times, entitled "the circus maximus syndrome." he described its pathology as follows:

"The victims of this urban-planning syndrome believe, like some Roman emperors, that a leader's prime civic responsibility is to build entertainment palaces for the masses....

They imagine drawing hordes of out-of-towners to the new convention center, and when the visitors don't materialize, the mayors' solution is to build an even bigger convention center with a subsidized hotel next door."

witness, oriole park at camden yards, the m&t bank stadium, and the baltimore convention center. we'll see how our neighbors in washington do with their $400mil home for the washington nationals.

mayors promise billions upon billions of dollars in revenue, based on feats of accounting that would earn a seat on the board at enron. a classic economic example highlights their fallacious thinking. a vandal smashes a shop window; the shop gets insurance money; the insurance money pays a contractor to fix the window. thus, his employment adds to productivity. but this reasoning ignores the opportunity cost of the labor. the contractor could have been fixing something else, or learning, or teaching -- anything more productive than needlessly fixing a broken window.

the government doesn't answer any questions by adding up how much money will be spent on a project. what truly counts is what could have been done with all those resources.

also, it might help your political comprehension if you conceptualize the relationship between politicians and consultants: picture marlon brando hiring michael moore as his fitness consultant. see, if the consultant doesn't write a jackpot report, the project stalls. if the project stalls, the mayor doesn't get cash from the usual suspects --"real estate developers, construction workers, bond traders, [and] owners of hotels and sports teams." and if the mayor doesn't get the campaign contributions, the consultant doesn't get paid.

what's more,

"aside from the thanks of these groups, politicians also get a pleasant distraction from their mundane duties. It's more fun to pose next to a model of a model of a new stadium than a new water main."

again, we can take baltimore as an example. i have a lot of time to think as i'm trotting along in my car over the undulating asphalt and endless minefields of potholes. these "roads" take me through what i'm told was once a vibrant city, before the new-new-deal of the 1960's.

now, i'm surrounded by heroin addicts and new, low-rise public housing just waiting to be abused and abandoned. these faux-suburban townhomes stand in stark contrast to their high-rise surroundings, but their design should come as no surprise. d.c.-metro area "planners" and developers funded and staffed the previous state administration.

and they had the nerve to complain about urban sprawl. amazing.*

having momentarily swept things under the a rug of new, aluminum siding, baltimore has been able to capitalize by handing out special-interest tax-breaks and condemning properties for transfer to the baltimore development corporation.**

it's sad to think that perhaps the only upshot of all this is our abundant supply of failed athletes and racecar drivers, who make great soldiers and mechanics.

---------------------------------------------------------------------
*if you're wondering what members of the former administration are doing now, they're helping developers get the zoning they want by making the right donations and "consulting," i.e. telling them how to navigate the "smart growth" laws they pushed through the legislature.

** the b.d.c. is itself an interesting case, and it may have backed itself into a corner recently. it loves its status as a private corporation because it's sheltered from the public information act. but its status may raise some interesting complications if the supreme court disallows eminent domain transfers to private corporations.

bubble.gov

this post relates to an op-ed i wrote, which appeared in the baltimore sun on may 9th. fortunately, i think it snuck in right before the recent bubble in bubble articles. (the word "bubble" just lost all meaning to me.) the piece is sort of anecdotal, and while i'd prefer to have written something objective, i think it works, nonetheless.

my only regret is having missed the opportunity to illuminate the dangerous (and, i suspect, ultimately disastrous) role of the federal government in creating and sustaining this bubble.

the main driving force of this bubble is too much credit. not too much in terms of raw borrower numbers and amounts, but too much by way of interest-rate only and adjustable mortgages that have precariously shifted interest-rate risk to unsophisticated homeowners and/or speculators.

in a natural setting, no sane lender would make these kinds of loans. the risk would either scare off the lender or drive up rates to accurately reflect default risk. but in the real world, the federal government underwrites every mortgage, unwittingly insured by the taxpaying population. so, when the baltimore sun asked one banker why anyone would make such loans, he gave them the typical response:

"'The customers are demanding it,' he says. 'We do them because the market is driving them. That's what the competition is doing.'"

that covers the demand, but what's left out of his response is the supply, and that no one would be competing in the first place if not for the fact that fannie mae and the federal government will purchase any mortgage up to around $300,000 (and, therefore, accept its default risk) with naught but a bare-bones credit check.

no one is actually sitting down to figure out whether or how borrowers will be able to pay.

quasi-governmental bankers will tell you that the loan is securitized, and that in the event of default, they can seize the house and sell it. sensibly, then, the amount of the loan is limited by the house's value, and all is well and good as long as the creditor can sell it off and minimize losses. but if everyone gets hit at the same time and the market dries up, the mortgage-backed securities will turn to junk bonds - utterly worthless.

meanwhile, fannie and freddie have worked out deals and created new and complicated derivative instruments that have them leveraged into the trillion-dollar range. given their due-diligence track record, i have some serious doubts about their ability to manage risk. my guess is that their worst-case financial scenarios, which they would use to paint a picture for government "insurers," assume rather generous salvage prices for properties in default.

the most pressing question is, how can those of us who survived the burst make money on the other side?

------------------------------------------
here's an update: as part of the "reform" legislation that was originally conceived to reign in fannie mae, it now has permission to purchase mortgages up to $500,000. if that won't help the poor afford housing, i don't know what will.

west side story

originally published in the u.m.d. law student newspaper, "the raven."
-----------------------------------------------------------

So over winter break, a 7-11 opened up as part of the “Westside Development,” and from all the hype, you’d think O’Malley tripped on his way down Eutaw and found the biggest gold vein this side of the Mississip’.

City officials have trumpeted the success of their revitalization plans. And I must say that I appreciate the effort, if only out of respect for their masterful command of buzzwords and catchphrases.

“The West Side vision is to create a dynamic, predominantly residential, urban [sic] mixed-use neighborhood that connects adjacent neighborhoods and sub-districts.”

Wow.

“The West Side strategic plan details sustainable benefits for the City of Baltimore and the State of Maryland.”

Hello, state and federal funds.

“Complete implementation of the strategic plan will yield approximately 7,000 permanent direct jobs and 4,000 spin-off jobs.”

The question is, “Who wouldn’t vote for this?” – and the answer is “no one.”

And just when I thought I was impressed, I had what could only be described as a religious experience. Or, maybe it was an aneurism. (Whichever it was, everything smelled like flowers and I had a hell of a hangover.)

Before I explain what triggered my revelation, let’s take a quick look at the history and modern mechanics of government plans for “economic redevelopment.”

Eminent Domain gives our government the power to commandeer private land, with an important caveat: the land-grab must be for “public use.” Historically, this power was used as an absolute last resort, and the “public uses” were governmental endeavors that garnered overwhelming political support, such as mass transit, public schools, and functional government buildings.

Condemnation used to be referred to as “governmental taking,” but the concept goes down much better if our politburo frames its plan as “governmental giving” – breathing new economic life into areas that are currently “under-utilized.”

Jeff Finkle is president of the International Economic Development Council. His organization is a trade association representing development and redevelopment organizations and agencies. They are proponents of Eminent Domain – weird. They, and others, would argue that it is an essential tool because costs of negotiating with myriad landowners will often be too high (in their minds, too high even for experienced developers like Baltimore's Angelos or Paterakis) and because landowners will be tempted to hold-out for an unreasonably high price, ruining the opportunity for collective gain. So, they argue, the government should be able to act as a final arbiter to make sure that our economic engine runs smoothly.

Leaving aside arguments against government enterprise in general and game-theory research that casts serious doubt on the prevalence of hold-outs, there is almost universal support for condemning buildings that are “blighted” or present a danger to public health.

But even Eminent Domain’s advocates cannot defend its recent incarnation. In Reason magazine, Finkle said that its exercise “should be the last possible tool. If negotiations fail, if the bully pulpit fails, then you go to a takings case.”

Instead, local governments around the country are acting more and more like small real-estate venture-capital firms. Recent abuses of eminent domain include:
--New London, Connecticut – removing an entire neighborhood and condemning homes for a privately owned and operated office park and other, unspecified uses to complement a nearby Pfizer facility.
--Riviera Beach, Florida – approving the condemnation of more than 1,700 buildings and the dislocation of more than 5,000 residents for private commercial and industrial development.
--Merriam, Kansas – replacing a less-expensive car dealership with a BMW dealership.
--Canton, Mississippi – seizing the homes of elderly homeowners for transfer to Nissan for a car manufacturing plant, despite the fact that Nissan is willing to build even without these 28 acres on the south end of 1,400.

The knee-jerk political response dismisses these takings as no different from the pillaging that goes on in the private sector, and this misconception is precisely what the geniuses at City Hall have tried to take advantage of.

Here’s where I fainted:

“The West Side Strategic plan will… represent over eight hundred million dollars ($800,000,000) of private sector investment, leveraged by one hundred million dollars ($100,000,000) of public sector investment, over a six year build-out period.” [Emphasis added.]

Why the epiphany, you ask? Let me explain.

You see, normally, “leverage” refers to a business deal where an investor borrows money in order to increase his or her return on an investment. For those of you who haven’t yet covered the concept, here’s an example. If I can get my hands on a Ripken (Cal, obviously) rookie card for, say, $20 and then resell it for $60, I’ll have forty new bucks from my twenty – a 200% return. That’s a pretty durn good return. But what if I borrow $10 from Dino the loan shark? Even if I repay him with 50% interest – an awfully steep $5 – I’ll still make $35 out of $60 ($60 - $10 - $10 - $5 = $35). That’s a 350% return on my $10. What’s more, I can use that extra $10 burning a hole in my pocket to buy another card and make another profit, then treat a lady friend to a nice steak dinner. Note, however, that leverage implies that I will pay Dino back, lest he break my thumbs.

Leverage requires that the debtor put cash back into the pocket of his investors. The debt is secure, and there will be consequences if he defaults. The creditor investigates the debtor’s finances and knows that he is solvent, or at least he is willing to gamble that is so. In this way, should the investments go completely south, the creditor can still recover from the debtor’s other assets.

On the other side of the investment coin, a real, live businessman that goes to get a loan presents his case to a group of investors. These professionals scrutinize the market data and the probable returns, and they deal with things like future interest rates and discounted valuation. They want to be as certain as possible that their investment will pay off. Why would anyone go through all that trouble? – Because they’re putting money on it. If their gamble doesn’t pay off, they’re probably out of a job.

Securitization and leverage, like Dino’s thumb-breaking clause, combine to create accountability, both on the part of the investor and the debtor.

“Ack-own-tuh-bill-ee-tee?” Our simple, down-home politician scratches his head. He doesn’t know how to make fancy business talk like the bankers.

Fortunately, our boy doesn’t have to deal with the trifling details of business and finance when handing out free money. Their idea of leverage is to dole out a hundred mil in subsidies, sit back and relax while the taxes come rollin’ in. (At this point, you should picture a cartoon character smoking a cigar while his get-rich-quick scheme goes horribly awry.) Ask them and they’ll guarantee you that their investment will pay off a hundred-fold in taxes alone, not to mention money in local pockets.

If politicians inhabited a world that in any way resembled reality, they would be totally screwed and utterly unemployed. Fortunately, time smiles on our city officials. By the time anyone figures out what a bust the project was, they can blame it on any sort of exogenous variable they want (most likely the lack of state support) and continue their drive to the White House.

Even better, their buddies are in a win-win situation. They get government subsidies poured into their projects and tax breaks on their returns. But we haven’t even gotten to the best part.

Young Cho is a Korean immigrant who saved for 15 years just so that she could have her own business. Her successful beauty salon has been condemned by our omniscient city council. She will now have to go before an elected judge and fight a developer that has real-estate appraisers out the wazoo, just to show why she should get the price she’d ask for, instead of what the developer wants to offer.

And this is where the plan really gets brilliant – because the subsidies that developers gain from governmental takings don’t even show up on balance sheets at all. The $100,000,000 that the city admits is a direct subsidy doesn’t even include the discounts that developers are getting with the strong-arm of the government. Every dollar per square-foot below what the developer would have to pay without condemnation is a dollar in the developer’s pocket.

Now, some of you might ask why I’m so down on the government’s chances. I’d invite you to do one of two things: 1) go to the library windows and check out the crack-heads dancing (sans music) up and down Paca Street; or 2) go to Potsdamer Platz in East Berlin. The urban center was developed by “public-private partnerships” that aimed to create a cultural and economic center. Fifteen years later, the residential vacancy is so high that many builders are contemplating demolition to save maintenance costs, and even heavily subsidized business can’t turn a profit – this, without the social problems that face Baltimore’s Westside. Another eastern district, Mitte, has thrived despite (or because of) having been almost untouched by urban planners.

The 1700 block of North Charles stands in contrast to the West Side in the same way that Mitte compares to Potsdamer Platz. Starting in the 1990’s, entrepreneurs collected the resources to turn the block into a thriving mini-district with a popular art-house theatre and restaurants cropping up all around. They succeeded in the face of blight and crime, and without government subsidy.

All I know is, I’m getting out of Fayette Square. Good thing I didn’t buy.