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 Let People Prosper episode, I discuss the issue of occupational licensing how burdensome it is for many workers while many of the licenses provide little consumer protection from health, safety, and welfare concerns. This issue was in TPPF's daily newsletter "The Cannon," which I recommend that you subscribe.
In fact, licenses often result in being a barrier to entry for many people wanting to join a licensed occupation, creating a situation where there are costs to consumers, workers, and society at large. This makes licenses the most burdensome labor market regulation in spite of the reasoning for them being from a market failure of asymmetric information.
Often, market failures aren't failures at all but rather the resulting costs are from government failures, which another case for this is with occupational licensing. The case of Bastiat's teh seen versus the unssen.
Instead, more information to consumers and lower barriers to entry for workers would provide an efficient market that doesn't misallocate workers and cost consumers and society in the process.
I discuss recommended solutions that I mentioned in my recent testimony before the Texas Senate Business and Commerce Committee (watch my testimony here starting at 37:45 and read my written testimony here). There was a great discussion among the panelists and legislators about occupational licensing and what you should be done about them.
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.
Vance Ginn, Ph.D.