Striking the proper balance between government regulation and the free market can be nearly impossible, as the finance and banking sectors are proving. In fact, there are few instances where we seem to have gotten the formula correct to promote growth while preventing loss. Yet they do exist.

Take for example patents. It is the government’s willingness and ability to enforce patents that not only allows, but gives incentives for companies to innovate, secure in the knowledge that the time and effort they put into researching will not leave them at a competitive disadvantage. They are free to advertise that patent to help prevent infringement until the day comes when the patent expires and competition is opened up to all.

In the U.S., a company that leaves a patent label on a product after the patent has expired – known as a false mark – may face legal liabilities for dissuading competition. However, the interpretation of what such liabilities exist radically changed this past year. On December 28, 2009, a decision was reached on the false mark case of Forrest Group v. Bon Tool Co. In this case, the phrase, “for each offense” listed under 35 U.S.C. §292 of the Patent Act was reinterpreted from its original understanding of a $500 fee per type of product to mean a fee of up to $500 per individual object with the expired patent label. Thus, instead of being fined $500 for retaining an expired patent mark on your line of, say close-shave shaving cream, you could be fined $500 for each can of shaving cream on all of the shelves on all of the stores you sell to.

This was meant to be a “qui tam” law, from the Latin for “who as much.” What this does is to give a reward to any individual who can prove a false mark case by giving them a share of the penalty. The theory behind qui tam laws is that they encourage private individuals to hold businesses accountable for their actions so that the government does not have to pay to uphold the law, but rather shares the benefits of the fines with the hard-working proponents of free markets and justice. Win-win.

That, anyway, is the theory. And in the theory, everything is nice and neat. The good guys are rewarded and the bad ones penalized. We shall detour from theory for a moment to check up on how reality is doing. Now that the courts have reinterpreted the penalties, they have also reinterpreted the stakes for the people who may bring the suits on behalf of the market. This dramatic increase in potential prize money is doing just what theory would suggest. It is encouraging attorneys to seek out the expired patent labels on the shelves of their local grocery, retail, and sporting goods stores, and file claims in the name of free market integrity. In the nearly six months since the reinterpretation:

“…more than 120 false marking cases have been filed nationwide, according to Justin Gray, an attorney at Foley & Lardner LLP, Milwaukee. Gray Counted 20 false marking cases filed in all of 2009.”

In fact, some attorneys have even formed businesses around these lawsuits, filing as many as 10 suits in a single day. Many such businesses are located in Texas, in districts where the judge pool tends to favor the private property and free market values that the attorneys claim they are upholding on behalf of the U.S. government. S.C. Johnson, Kimberly-Clark, and A.O. Smith are among the Wisconsin-based companies who have seen notices of lawsuits delivered to their doors over false marking.

For them, there is hope. Last week, on June 10th, a decision was reached in the case of Pequignot v. Solo Cup Co. Ultimately, Solo Cup Co. was not held liable for false marking because Mr. Pequignot could not prove an important part of the statute: the intent to deceive the public. In fact, Solo Cup had previously sought legal counsel over the fact that their cup molds, which imprinted the patent number, were long-lasting and expensive to replace. Additionally, in a case of Stauffer v. Brooks Brothers, held earlier this year,

“Here, Judge Stein found that Stauffer’s ‘conclusory statements’ on harm to the economy and the market in his 41-page complaint were ‘insufficient to establish anything more than the sort of “conjectural or hypothetical” harm that the Supreme Court instructs is insufficient.’”

But this does not mean that the many companies who have been delivered lawsuits have not felt harm themselves. While the larger firms may not pay quite as much attention to all of the litigation going on around them, the small businesses whose products sit next to theirs on the shelves have had to spend a greater portion of their revenue on attorneys’ fees just to answer the legal rhetoric they are being dealt. Should any firm, large or small, be found liable for false mark damages, it would be a severe blow to its ability to remain competitive, or even stay in business.

There is no doubt that companies need to be responsible about their patent labeling, and keep their products up-to-date. However, when promoting free markets and open competition, the goal is to have more viable businesses, not less. Though the reinterpretation of false mark liabilities may have intended to aid the quest for these values, it has instead inspired a series of attacks on many businesses whose expired patent labels have yet to be proven harmful in any real way.

As an economics student, I often live in a world of theory. In this world, everything is in equilibrium, incentives drive people in the correct directions, and the freest, most unhampered markets are always the most efficient. However, there are occasions such as this when I am forced to leave this world, reminding myself as I go that in theory, regulation sometimes actually works.

Last weekend, I took some time out from teaching my kids how to make daddy a martini long enough to let them watch the movie “Cloudy With a Chance of Meatballs.“  As I’m certain you recall, the movie features a young inventor, Flint Lockwood, who devises a machine that makes it rain cheeseburgers, pizza, and, yes, meatballs.  (The movie also features the much-awaited voiceover return of Mr. T, who was robbed when the Oscar nominations were announced.)

Spoiler alert: As the movie goes on, Lockwood’s machine goes on the fritz from overuse.  The city government of Swallow Falls, sensing a huge impending windfall from tourists wanting to see food fall from the sky, forces him to overextend the machine’s capabilities, leading to unanticipated consequences.  Those consequences come when the food gets larger and larger, leading to giant pancakes falling from the sky and crushing buildings underneath.  The island of Swallow Falls is buried under giant donuts, hamburgers, and steaks.

At the end of the movie, Flint flies a homemade spaceship into the middle of a giant meatball and manages to disarm his invention.  When he gets back to the town, they treat him like a hero – even though it was his invention that caused all the problems to begin with.

Now shift ahead to today, where an even more implausible event took place: Governor Jim Doyle thinks he created some jobs.

Yesterday, Doyle announced a $1.5 million loan to the Marquis Yacht Company in Pulaski, in order to save 315 jobs.  Marquis’ parent company filed for bankruptcy last year, and now Doyle’s Department of Commerce is ready to swoop in and aid the yacht maker.

But in the spirit of Flint Lockwood, we don’t need to guess how this all started:

1.  Wisconsin’s high taxes and anti-business climate cost companies millions of dollars;

2.  Additionally, high taxes prevent individuals from buying big-ticket items, like yachts;

3.  Business owner says he or she can’t afford to pay their workers, as profits are tanking;

4.  Jim Doyle swoops in to help only those businesses he deems worthy of block grant money, thereby “saving” jobs.

Sure, it’s not as dramatic as saving humanity from destruction by 50-foot bananas, but it’s the same concept.  Doyle expects us to give him credit for saving jobs that he, in effect, forced from the state.  And the only way for a business to be deemed worthy of a bailout is to drive down to Madison, pucker up, and smooch the posterior of of the outgoing executive.

So just like the movie, maybe we should send Mr. T to the Capitol to smack some people around.  Clearly, he does not pity the fool who costs Wisconsin jobs.

It’s the oldest political trick in the book: If you’re a lawmaker, you figure out what a piece of your legislation does, and give it a name that conveys the exact opposite of the bill’s intent.  If you’re a Republican that wants to preserve the right to smoke in Wisconsin restaurants, you introduce a bill and call it the “Smoke Free Dining Act.”  For Democrats, taxpayer funding of campaigns becomes the “Clean Elections Bill,” and censorship of conservative talk radio becomes “The Fairness Doctrine.” (If Barack Obama were President during Hurricane Katrina, he would have called it the “Bayou Modernization Act.”)

In recent months, Democrats have been taking a beating at the polls – despite spending hundreds of billions of dollars on “stimulus” spending, U.S. unemployment continues to hover in the double digits.  Recent reports show that all this spending hasn’t actually created any jobs – and voters appear to be fed up, seeing as how they are now electing Republicans to statewide office in Massachusetts. (Which is a bit like Tim Tebow being elected president of Planned Parenthood.)

(Democrats argue that had the stimulus not passed, things would have been much worse – a fact that can’t be proven.  They might as well say that the stimulus saved the Earth from being encased in lime jello.  What we can prove is that their supposed “jobs” bill actually had nothing to do with creating jobs.)

Which brings us to this week, where both President Obama and Wisconsin Governor Jim Doyle spent a substantial portion of their “States of” speeches to discuss the new fad in mis-naming bills: “Green Jobs.”

Democrats have figured out that in order to counter the perception that they are responsible for dramatic job loss, they have to throw the word “jobs” in front of every bill they offer.  When they introduce a bill that will raise energy costs on everyone on the state, they call it a “green jobs” bill.  Doyle insists his “green jobs” bill will create 15,000 new positions – about the attendance of a Wednesday night Milwaukee Bucks game – by 2025.  It appears many of these new jobs will be the result of funneling money to politically connected lobbyists, whose businesses stand to profit directly from the legislation. (In some cases, they even get to write the bills themselves.)

In the meantime, our study here at the Wisconsin Policy Research Institute has demonstrated how higher energy costs will force current employers to cut nearly 43,000 jobs – and that estimate is as conservative as possible.

If a bill written by special interests to pad their own wallets at the expense of utility rate payers statewide is a “jobs” bill, then literally anything is a jobs bill.  Spending a billion on new trains to run all over the state?  It’s a JOBS bill.

Democrats are currently pushing a medical marijuana bill – how is that not a jobs bill under their definition?  (And a true “green” jobs bill at that.) Marijuana users get hungry and buy a lot of Cheetos – won’t their bill keep Chester the Cheetah employed here in the state?  (Last week, Chester was indicted on three counts of providing kickbacks to federal judges.)

This whole “jobs” crazy among Democrats is simply naked image rehabilitation – no different than John Edwards’ trip to Haiti with a personal videographer.  It’s a verbal sleight of hand that has no basis in reality, and only serves to confuse the public.

To gauge the true effect of the bill, one needs only to listen to the businesses that actually create the jobs here in Wisconsin – who are nearly universally opposed to the climate change plan (except for those who State Rep. Cory Mason allows to write the bill to line their own pockets.)  They argue, persuasively, that by jacking up energy costs, businesses will have less money to hire workers and re-invest in their communities.

On the other hand, the bill’s proponents want you to believe them because they…well… they belong to the Sierra Club.  And their newsletter has a quote from Leonardo DiCaprio, saying climate change is bad.

(Incidentally, environmental groups are the best at mis-naming bills for their benefit.  For instance, take the “Independent DNR Secretary Bill,” which eliminates the governor’s ability to choose the Department of Natural Resources Secretary.  Because nothing says “independent” more than a cabinet secretary chosen by an unelected board of environmental activists.)

Asking liberal politicians to grow jobs in a bad economy is like trusting a doctor who amputated the wrong leg to get it right the next time.  This climate change bill is nothing more than throwing good money after bad – giving Democrats an escape hatch from their disastrous job creation efforts of 2009.

In the last issue of WI Magazine, my end column explained how the traditional stereotype of union workers has become obsolete.  While the idea of the typical union worker had always been a fat, mustachioed guy with work boots and a hard hat, union membership has fallen off significantly in the private sector.  Thus the new typical union worker tends to be a high-earning, college educated female working in government – namely, teachers and librarians.  Even more surprising is how fiscally conservative these new union members tend to be.

From my column:

Even more intriguing, the typical union household is much more fiscally conservative than traditional stereotypes would suggest. Among union members, 52% listed either “holding the line on taxes and government spending” or “improving the state’s economy and protecting jobs” as the top priority of the Legislature. Traditional union priorities, such as making health care and prescription drugs more affordable (12%), scored much lower than expected.

Among union households, President Obama is still popular, with a 64% approval rating. Yet Gov. Jim Doyle, who is to Wisconsin unions what Hugh Hefner is to teenage boys, actually has a high unfavorability rating, with 49.7% rating him “somewhat” or “very” unfavorably. This is even higher than the 47.4% unfavorable rating Doyle received from the public at large.

On Monday, the New York Times ran an article that also noted the shift in union workers to the public sector:

For the first time in American history, a majority of union members are government workers rather than private-sector employees, the Bureau of Labor Statistics announced on Friday.

In its annual report on union membership, the bureau undercut the longstanding notion that union members are overwhelmingly blue-collar factory workers. It found that membership fell so fast in the private sector in 2009 that the 7.9 million unionized public-sector workers easily outnumbered those in the private sector, where labor’s ranks shrank to 7.4 million, from 8.2 million in 2008.

The article also notes what we already knew: that despite the recession, the total number government employment grew last year, inching up 16,000, to 22,516,000.

Among Hayek’s many skills: An ill flow.

Long time followers of WPRI know that we are keenly interested in issues relating to jobs and economic development. (See this recent study by George Lightbourn and Sammis White for several suggestions on how to get Milwaukee’s economy moving again.)

Naturally, this is always an issue of interest at our sister think tanks, as well as national organizations interested in reducing the regulatory burden on employers.  Such is the case with the Institute for Justice, which is researching different ways cities can free up small businesses to provide more employment and better jobs.  (See this example of a report they issued describing some of Chicago’s heavy handed, job-killing tactics.)

As it turns out, one of the Institute for Justice’s researchers will be here in Milwaukee, and is looking to meet with local people with suggestions on how to move the city’s economy along.  He asked me to pass this along:

Are you a small business owner or entrepreneur in the City of Milwaukee struggling to free yourself from regulatory red tape and burdensome fees? Do you know someone in that position? If so, Jason Adkins, staff attorney at the Institute for Justice, would like to meet you.

The Institute for Justice is a libertarian public-interest law firm that is the nation’s leading legal advocate for the rights of entrepreneurs and small businesses. It is conducting a nationwide study of regulatory barriers to entrepreneurship, and Mr. Adkins is in charge of putting together the Milwaukee report.

Mr. Adkins will be in Milwaukee from August 24-28 conducting research and reaching out to small businesses in the community. He would like to meet you while he is there if you are an entrepreneur that has struggled with overcoming burdensome laws and regulations, or know someone who has.

Please give send him an email: jadkins at ij[dot] org. Or, you can give him a call at 612-435-3451.

Earlier this week, I linked to a column by Steve Malanga that detailed the history of the U.S. government’s attempts to expand homeownership to those who may not be ready to afford it.

Today, Malanga is back with an outstanding article in the Wall Street Journal that recaps the growth in union influence within government:

Call it a tale of two economies. Private-sector workers — unionized and nonunion alike — can largely see that without compromises they may be forced to join unemployment lines. Not so in the public sector.

Government unions used their influence this winter in Washington to ensure that a healthy chunk of the federal stimulus package was sent to states and cities to preserve public jobs. Now they are fighting tenacious and largely successful local battles to safeguard salaries and benefits. Their gains, of course, can only come at the expense of taxpayers, which is one reason why states and cities are approving tens of billions of dollars in tax increases.

[...]

The results of such efforts are evident in the rich rewards that public-sector employees now enjoy. A study in 2005 by the nonpartisan Employee Benefit Research Institute estimated that the average public-sector worker earned 46% more in salary and benefits than comparable private-sector workers. The gap has only continued to grow. For example, state and local worker pay and benefits rose 3.1% in the last year, compared to 1.9% in the private sector, according to the Bureau of Labor Statistics (BLS).

But the real power of the public sector is showing through in this economic crisis. Some five million private-sector workers have lost their jobs in the last year alone, and their unemployment rate is above 9% according to the BLS. By contrast, public-sector employment has grown in virtually every month of the recession, and the jobless rate for government workers is a mere 2.8%. For anyone who thinks such low unemployment numbers are good news, remember that the bulging public sector must be paid for with revenues that most governments don’t currently have. This is one reason for a spate of state and local tax increases, such as $5 billion in tax increases New York state passed in April, and $12 billion in tax increases California’s legislature agreed to in February that will only become law if voters pass a series of ballot initiatives next week.

The whole article is certainly worth the read.

Ahhhh, yes.  The Summer of 2008.  I remember it so well.  Michael Phelps was spending more time in the water than he was pouring bongwater.  The Milwaukee Brewers were on their way to their first playoff appearance in 26 years.  Brett Favre was in the midst of the second of what would become his six retirements from football.  George W. Bush was still president, but Republican candidates at all levels were pretending that his name was as obscure as the leader of the German Bundestag.*  (“George Bush?  Never heard of him.  Is this some kind of trick question?”)

You may also recall the one issue that had America in the grips of panic, as the economy chugged along at a weaker, but still resonable pace. Gas prices hovered at over $4.00 per gallon, causing riots in the streets. Elected officials broke into tears when telling the story of “price gouging” by big oil.  Congress planned on rewriting the U.S. tax code to stick it to gas companies.  Local television stations routinely broke into their prime time lineup to announce that an area gas station had lowered their cost of gas per gallon by a nickel. The public couldn’t believe that Big Oil would have the onions to charge them what they would gladly pay for a gallon of gas.  America was in the grips of mass hysteria.

But a strange thing has happened since that national nightmare.  Gas prices have been cut nearly in half.  At one point, they were down to about $1.50 a gallon.  And suddenly, nobody really cares about gas prices anymore.  Nobody makes any effort at all to understand why the price of gas has dropped – we only care when the dog is barking, and gas prices are high.  Clearly, Big Oil is only useful to our elected officials when they are there to be the subject of demagoguery. 

Back in the Summer of 2008, we saw article upon article about why gas prices were up.  Has anyone seen a single article trying to explain why prices are now down?  Do we even care, as long as we’re paying less?

As I see it, oil companies did one of two things:

1.  Dropped prices in response to global demand and world economic conditions, or;

2.  They decided to stop being greedy d-bags.

Which is your guess? 

So while we blame oil companies for gouging us when they increase gas prices, I would like to take a moment to thank Big Oil for keeping gas prices down.  Here’s a big atta-boy.  Your willingness to forgo record profits over the past nine months has kept money in the pockets of working class people, allowing them to buy more groceries and lottery tickets.  Your perfectly reasonable and rational response to a bad economy (lowering prices) has saved regular folks the headache of learning how supply and demand works, and allowed them to store up their energy to start complaining again when the market forces prices back up.

Now we can all get back to watching American Idol.

*Answer: Dr. Norbert Lammert

Steven Malanga has written a must-read piece in this month’s City Journal Magazine that provides some historical background to the current housing crisis and how it has affected the American economy.  Malanga goes back and demonstrates that each and every time the government has gotten involved in attempting to expand home ownership, the economy has suffered badly:

In December, the New York Times published a 5,100-word article charging that the Bush administration’s housing policies had “stoked” the foreclosure crisis-and thus the financial meltdown. By pushing for lax lending standards, encouraging government enterprises to make mortgages more available, and leaning on private lenders to come up with innovative ways to lend to ever more Americans-using “the mighty muscle of the federal government,” as the president himself put it-Bush had lured millions of people into bad mortgages that they ultimately couldn’t afford, the Times said.

Yet almost everything that the Times accused the Bush administration of doing has been pursued many times by earlier administrations, both Democratic and Republican-and often with calamitous results. The Times’s analysis exemplified our collective amnesia about Washington’s repeated attempts to expand homeownership and the disasters they’ve caused. The ideal of homeownership has become so sacrosanct, it seems, that we never learn from these disasters. Instead, we clean them up and then-as if under some strange compulsion-set in motion the mechanisms of the next housing catastrophe.

After detailing each housing collapse and how our lawmakers caused them, Malanga points out that we’re headed down the same road again:

Yet before we’ve even worked our way through this crisis, elected officials and policymakers are busy readying the next. Barney Frank, the Massachusetts congressman who serves as chair of the House Financial Services Committee, has balked at proposals to privatize Fannie Mae and Freddie Mac, which would eliminate their risk to taxpayers and their susceptibility to political machinations. Why? Simple: the government uses them to subsidize the affordable-housing programs that Frank supports. California congressman Joe Baca, head of the Congressional Hispanic Caucus, also opposes reining in affordable housing lending. “We need to keep credit easily accessible to our minority communities,” he asserts. Republicans and Democrats, meanwhile, have scrambled to reignite the housing market through ill-conceived tax credits and renewed federal subsidies for mortgages, including the Obama administration’s mortgage bailout plan, which recalls the New Deal’s HOLC. As Harvard economist and City Journal contributing editor Edward Glaeser has observed, mortgage lenders have finally “recovered their sanity”-only to have government dangling subsidized low interest rates and tax credits in front of them and their potential customers all over again. Behind these efforts is a fundamental misconception among politicians that housing drives the American economy and therefore demands subsidy at virtually any cost.

Changing notions of fairness and equity also cloud policymakers’ minds. Our praiseworthy initial efforts-to eliminate housing discrimination and provide all Americans an equal opportunity to buy a home-were eventually turned on their heads by advocates and politicians, who instead tried to ensure equality of outcomes.

It’s a lengthy article, but well worth your time.

Most large special interest groups have their “Capitol days,” in which they bus their members to Madison, arm them with printed talking points, flood legislative offices, and attempt to get their legislator to support their cause.  (Or as the Democratic Party of Wisconsin calls it, engage in “grassroots activism.”)

Today was AFL-CIO day at the Wisconsin Capitol, as evidenced by the hundreds of union members milling about the statehouse and the legislative press releases sucking up to those union members.

In fairness to the union members, most of them are good, hard-working people that think they’re bettering their situation by allowing themselves to be herded down to Madison.  Most aren’t particularly well versed in the issues floating around the Capitol these days, but they recognize that showing up in large numbers lends their cause credibility.

On the other hand, there are the union leaders who speak out openly without knowing what they’re talking about.  And after some of the meetings today, I heard from several staffers that wanted to pass on some of the discussions they had with their AFL-CIO members.

Take this one:

Me: We’re against tax increases. We should just spend less. This budget has $5 billion in new spending.

AFL-CIO representative: Well there is a deficit, so obviously there is obviously a need for the extra spending.

Or this one:

A GUY WHO REPRESENTS HARLEY WORKERS was talking about how “bad actor” corporations (WalMart, et al) dodge taxes with the “Las Vegas loophole.” I didn’t want to extend the meeting by asking if Harley was a bad actor. But I would’ve asked if he was talking about the same Harley Davidson that is losing profit and laying off workers BECAUSE OF THE @#%ING “TAX LOOPHOLE CLOSURE” HE IS SUPPORTING!”

(Quoting a news article detailing the Harley layoffs)
“Thursday’s announcement came after Harley reported a 37% drop in first-quarter profit because of a sluggish motorcycle market, restructuring costs and a change in Wisconsin tax laws.“

Then there’s this one:

The union leaders were complaining about “undermarket wages” and the need for prevailing wage to be on any local project. I chose not to suggest that (probably non-union) Employee X willing to work for Wage Y from Employer Z was precisely a market wage because that’s exactly how the market works. Employee X may want more money (who doesn’t?), but if he accepts an offered wage, guess what – that’s the market wage.

Not to mention the fact that requiring higher wages on building projects may simply deter builders from taking on projects.  So jobs that may have been created to build a new condo won’t exist, and unemployment will remain high.  Vacant lots will remain vacant, but union members won’t blame their own actions for their lack of jobs.

Also on the talking points was the “American Jobs Act,” which would prevent the State of Wisconsin from contracting with any business that contracts with overseas businesses.  This, of course, could vastly increase the cost of government, and force higher taxes to pay for these services.  Taking more taxes from businesses (via things like combined reporting) actually cost us jobs, as businesses have to cut costs. (I have argued that given the state’s dire economic situation, we should be looking for even more ways to cut costs, including expanding outsourcing.)  As one staffer told me, the response to his skepticism over the American Jobs Act was simply “HOW COULD ANYONE OPPOSE AMERICAN JOBS FOR AMERICANS?”

In normal years, these groups come and go without leaving much of a dent.  But now, their favored politicians run every aspect of state government – and with an equal level of sophistication and economic wherewithal.  If all of the tax changes they’re pushing actually pass, you can bet their entourage for Capitol Day 2010 will be a lot smaller – since a lot more of them will be out of work.  They should be a little more careful what they ask for.