In this episode, I explore the following questions: What are claimed market failures? Do they exist? Can government intervention correct them? Is there such thing as government failure? It's important to ask these questions to determine whether or not market failure or government failure are the bigger problem in society. Much of this has do with the differences between Mainline Economics (my preference) and Mainstream Economics.
This enters controversial territory in economics and politics by discussing the myths of "market failure." Supposed market failures usually include problems with markets because of asymmetric information (occupational licensing and healthcare), monopolies (utilities and EpiPen), and externalities (pollutants) that can theoretically be corrected by government intervention.
However, I make the case that these issues in markets are generated by government intervention, not unhampered markets, and the introduction of government intrusion to attempt to correct these potential issues only expand government and make the problem worse.
Moreover, there are no free-market government solutions, which is why toxic pollutants should be dealt with by letting markets sufficiently price them or alternatively, though not recommended, by regulation. Policy solutions such as a carbon tax indirectly price externalities and the price will always be wrong because of the "knowledge problem" taught by economist Friedrich Hayek and the poor modeling that's done by so-called experts (see William Easterly's book The Tyranny of Experts). In general, the institutional structure of an economy should be supported by the government through upholding contracts, protecting people, and providing very few public goods.
Instead of resorting to government intervention to solve supposed market failures, we should first understand that the government is likely the problem and Let People Prosper by promoting institutions with strong private property rights and fewer barriers to entry and exit markets.
In this episode, I have a conversation with Dr. Brandon Logan, who is the Director of the Center for Families & Children at the Texas Public Policy Foundation, about his fantastic work in helping kids and families prosper more throughout their lives.
The most essential institution is the family, and with government crowding out many of a family's basic functions, civil society suffers. By letting people prosper through limited government, whereby parents have the freedom to raise their child as they see fit without abuse, families can have the best opportunities to flourish.
Here's more on Dr. Logan: Before joining the Foundation, Brandon represented hundreds of children as attorney and guardian in child welfare courts throughout Texas. He is certified as a Child Welfare Law Specialist by the National Association of Counsel for Children. Brandon has also represented parents, grandparents, and foster families in custody and adoption cases across the state.
Brandon earned his undergraduate degree from Texas A&M University. He holds a law degree and doctorate in human development and family studies from Texas Tech University, where he also taught courses in child welfare policy and family dynamics. His academic work includes child maltreatment, abuse trauma and treatment, and family and father engagement.
Brandon and his wife, Mindy, were raised in the same small West Texas town and are blessed with five young children – four boys and a baby girl.
Texas ports contribute $650 billion in trade and support 1.6 million Texas jobs. But as goods travel through Texas ports, Texans and all Americans are paying a higher price than necessary from an uncompetitive market of harbor pilots.
Ships entering a U.S. port must be guided by a licensed harbor pilot, which is noted as “compulsory pilotage” in Chapter 61 of the Texas Transportation Code. Pilots are tasked with guiding, not helping steer, ship captains with navigating harbor waters and docking safely. They can provide a valuable service not only to the ship and its cargo, but also to the safety of other ships on the open waters and communities near ports.
However, the harbor pilot market is in need of competition from current barriers of a too restrictive state license and the collusive nature of licensed pilots on commission boards deciding who can get a license.
The Texas State Pilots Association grants a monopoly in most ship traffic coming into Texas ports. Rates and pay are regulated by a commission board, usually the same board that oversees the port. Harbor pilots must receive federal and state licenses, with the federal license allowing them to guide ships under the U.S. flag and the state license allowing them to guide ships under the U.S. and foreign flags—in other words, the state license is more valuable than the federal license.
Licensed harbor pilots dominate these commission boards, contributing to a conflict of interest. They can essentially give themselves a raise, decide which fees to charge shippers, and restrict interested people from obtaining a license.
Because a harbor pilot is compulsory for mariners, the state license restricts the number of pilots, and admittance into the association is limited, annual salaries of harbor pilots are driven arbitrarily higher from monopoly power to more than $400,000, or $192.31 per hour. Pilotage-related fees can add up to 10 percent of U.S. shipping costs.
These monopolistic wages reduce investment, decrease job creation, and encourage shippers and other industries to use ports in other areas, or different modes of transportation. The potential net result is lower economic prosperity. In fact, the American Great Lakes Port Association noted that research shows pilotage costs in Great Lakes-Seaway have contributed to less economic growth, employers moving elsewhere, and fewer jobs created in the region.
Last, but certainly not least, pilot fees paid by shippers are eventually passed on to the consumer. These higher prices reduce consumers’ purchasing power and standard of living.
A step toward breaking up the monopolistic situation in the harbor pilot market would be for commission boards to provide a more competitive, objective environment for those seeking a harbor pilot license. Better yet, the state should issue a license to whomever complies with required criteria instead of a commission board deciding whom can get one.
The American Pilots Association states that pilots would not be able to act independently, in the public interest, or have enough investment if there was competition. However, almost every other industry allows competition, and even those industries with restrictive licensing requirements have specific requirements that help avoid nepotism. In Florida, a study found that opening the harbor pilot system to competition could lower annual port costs by $35 million and create roughly 5,000 jobs in related industries.
As with all occupational licensing, Texas should consider whether licensing harbor pilots protects people from health and safety risks. Specifically, assuming there is a risk and a need for licensing, Texas could simply abide by the federal license or at least reduce the requirements of the state license.
Ultimately, competition in the market of harbor pilots would support improved quality and safety at a lower price as has been the proven result from unhampered markets throughout history. This would not only benefit those who would like to be a harbor pilot but can’t get access to a license but also Texans from a lower cost of living.
Let people prosper by adding competition in the harbor pilots market.
BY VANCE GINN AND DREW WHITE, OPINION CONTRIBUTORS
Original can be found at The Hill
The good news keeps coming. Since the passage of the Tax Cuts and Jobs Act, announcements about increased investment in the U.S. and various companies offering employees bonuses haven’t stopped.
The vast majority of Americans will prosper from the Tax Cuts and Jobs Act. As an economist and policy analyst, we’ve been skeptical of the Trump administration’s direction on some issues, like NAFTA renegotiations, but we’re encouraged by the results of regulatory and tax reforms because they let people prosper, the flipside of what’s been stifling us.
This first major rewrite of the federal tax code in a generation is a historic moment for our republic. The institutional framework that stifled Americans can again work for We the People instead of for bloated governments.
We admit that the bill isn’t perfect and encourage Congress to follow this massive $5.5 trillion gross tax cut with spending restraint. That’s especially important because without spending reductions roughly $500 billion could be added to the national debt in the next decade. Also, doing so will help keep the roughly $112 trillion in federal IOUs from requiring government to further infiltrate our lives.
We’ve experienced government’s overreach during the worst recovery since WWII of about two percent annual growth while the national debt almost doubled under the Obama administration’s high tax and spend policies. This reshaping of institutions increased barriers to prosperity through excessive regulations, like ObamaCare, and higher taxes that redistributed resources among people.
America voted for a new institutional direction in 2016.
Regarding regulations, the Trump administration has already repealed 67 of them while creating only three. Entrepreneurs can now budget lower costs longer which contributes to more investments in workers and capital. The result is faster economic growth with a three percent average annualized growth the last three quarters of 2017 matching GDP’s long-term average, which has lifted consumer sentiment.
The tax bill’s most sweeping changes include cutting the corporate tax rate and individual income tax rates for most Americans. Sixty percent of the gross tax cuts go to families while the rest goes to businesses.
As expected, critics claim these changes benefit the rich. Interestingly, the corporate tax rate cut once had bipartisan support, as President Obama proposed cutting it to 28 percent, and progressives passed and extended much of President Bush’s personal income tax cuts.
Regardless, permanently cutting the corporate tax rate from 35 percent, the highest in the developed world, to 21 percent, slightly below the worldwide average, drastically improves employment prospects.
Often missed in the discussion is that corporations simply submit taxes to the government because people pay them through higher prices, lower wages, and fewer jobs available. Cutting the corporate tax rate means corporations can pass those savings along to people.
Businesses are reporting they will pay bonuses and higher wages, immediate pay increases to let people freely prosper.
On the individual income tax side, most taxpayers will pay less tax until at least 2026. According to good tax policy, the tax bill doesn’t flatten as it leaves seven income tax brackets, but it broadens the base by eliminating many exemptions and deductions and simplifies the code by doubling the standard deduction.
Critics claim that these changes could increase income inequality. But history shows that the tax code is not the place to deal with supposed income inequality as it fluctuates whether taxes are high or low. By changing the institutional incentives through this tax bill, more people can move up the income ladder.
But, do only the rich get a tax cut? No. The Tax Foundation calculated the changes in tax liability for multiple households and found that each of them would pay less tax.
An individual earning $30,000 with no kids could pay $379 less in taxes. An individual earning $50,000 with two kids could pay $1,892 less in taxes. A married couple filing jointly earning $165,000 with two kids could pay $2,224 less in taxes. And a married couple filing jointly earning $2 million could pay $18,904 less in taxes.
All income groups receive a tax cut.
Higher income people pay fewer dollars than those with lower income, but that’s because they pay more in income taxes. For example, the top 10 percent of income earners pay 70 percent of federal income taxes collected. However, the share of income taxes paid could become more progressive under these tax changes.
It’s not just more money in people’s pocket, but doubling the standard deduction lets many people spend less time on their taxes and more time with their families. This is great news for working Americans.
Icing on the cake would be for Congress to restrain government spending, the ultimate burden of government.
Bipartisan welfare reform in the 1990s helped cut spending but more importantly improved the lives of many Americans as they returned to work or received better assistance. The amount of waste, fraud, and abuse in these programs along with too many dollars to bureaucracy and not to people make welfare a good place to start.
Reforms to the major drivers of Medicaid, Medicare, and Social Security must be on the table to restrain spending growth while improving them for the truly needy.
Until then, let’s celebrate the Trump administration’s new institutional direction that has long supported prosperity. Skepticism is healthy to provide proper checks and balances on government. But when pro-growth policies like regulatory and tax reforms improve human flourishing, we’re much more optimistic about the future.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Drew White is senior federal policy analyst, both at the nonprofit Texas Public Policy Foundation.
Federal regulations are often a complex cobweb of repetitive, useless rules determined by federal bureaucrats rather than elected officers. These regulations may have good intentions of providing clean water, increasing public safety, and other benefits, but it’s important to consider the costs of those measures. Far too often, government avoids considering these costs that are detrimental to everyone’s well-being.
It’s no secret that big government restricts the economy, but by how much?
According to a new study by the Mercatus Center, federal regulations that have accumulated from 1980 to 2012 cost Americans approximately $4 trillion!
Figure 1 shows that this huge cost translates into about 25 percent of the U.S economy, $13,000 per American, or the fourth largest economy in the world. Clearly, Americans are being stifled by too much red tape.
Figure 1: Federal regulations have hindered economic progress to the tune of $4 trillion since 1980.
The study’s findings show that federal regulations have reduced average U.S. economic growth by about 0.8 percentage points per year since 1980. While this doesn’t seem like a big deal, it’s important to note that economic growth compounds over time. Therefore, the negative gap between economic growth without regulations compared with actual growth grows larger as it builds on itself each period.
Mercatus has the federal regulation and state enterprise (FRASE) index that ranks the economic impact of federal regulation on states. Texas ranks as having the 6th highest, or the state’s industries are negatively influenced 29 percent more than the national average.
This is a huge cost to Texans as noted in Figure 2 with the tremendous number of federal regulations on businesses.
The cost of federal regulation on Texas is not only burdensome at the federal level. States also plague their businesses with burdensome regulation. Texas' successful economic model is one that other states and federal lawmakers would be wise to follow, but even Texas could do far better when it comes to regulation.
In the Mercatus Center’s Freedom in the 50 States report, Texas ranks only 24th for regulatory freedom. One reason is stringent occupational-licensing requirements; the Institute of Justice ranks Texas as having the 17th most burdensome set of them. These regulations protect existing businesses from new competition and make it harder for low-skilled workers to find employment, making everyone losers in the process.
To have the best economic environment for opportunities to prosper and higher standards of living, regulation at the federal and state levels should be dramatically scaled back. The cost of every regulation must be considered, and those that have a higher cost than benefit should be scrutinized and ultimately not imposed. This is how we can begin to reclaim the American Dream for far too many who feel as though it is out of reach.
Vance Ginn, Ph.D.
Free market economist with leanings towards Chicago/Austrian schools of economics. Hard rock drummer. Classical liberal. First generation college graduate at Texas Tech University. Hometown: Houston. Recovering academic. Work at the Texas Public Policy Foundation in Austin to research ways to #LetPeopleProsper. Live the dad life in Round Rock, TX. Views=mine.