Tuesday, November 17, 2015

Every Remodel Begins with Demo

You gotta tear down a little before you build up

In his Financial Times column last week, President Obama wrote that the G20 countries can "foster more inclusive growth by lowering barriers to entering the labour force." I wholly agree with this statement. But the President then went on to list a number of new programs and initiatives without first discussing barriers that exist now, put in place by policies of the past. As I've written previously, it's important to get back to basics before moving forward.

A good example of breaking down barriers is the U.S. Small Business Administration's Start Up in a Day initiative. While the focus is on local barriers instead of federal barriers ("... first take the plank out of your own eye ..."), the goal of speeding business formation is worthy.

An example of misguided good intentions is the love of community lending: these advocates hate big banks and hate payday lenders but don't follow through by addressing the business environment(s) that favor big banks and payday lenders. Instead they want to break up big banks and prohibit payday loans. Some even want the U.S. Postal Service to operate as a community bank – implementing a solution without first understanding the policies that ingrained favored treatment.

One area of deafening silence is the buying and selling of residential real estate. This asset class may be most if not all the wealth that a household possesses. Yet because of the way that real estate transactions occur in the United States, up to 10 percent of the value of the asset may be taken by middlemen transaction fees – also known as "commissions" – that amount to $8 billion of "social waste" each year. But because the real estate industry is dominated by one trade association and our states' real estate commissions are dominated by pliers of the trade, nothing happens and household wealth is stripped away.

Though the focus on removing barriers tends to dwell on businesses, the ultimate beneficiary is the consumer. While big businesses have big influence and small businesses have some sway (heck, they have their own federal agency in SBA), consumer power is diffuse and completely reliant on a vibrant free market. That free market is made powerful by robust competition, with businesses coming and going without restraints as they best serve the consumer.

Good bones make a good house.