Tag Archive for: regulation

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

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It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.


Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.

Slate Writer: Freedom to Remove Eyebrow Hair Will Make Texas a “Dangerous” Place by Evan Bernick

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Texas Court rules that regulations have to make some kind of sense; chaos is imminent.

It’s a tremendous victory for individual rights and for the politically powerless. And progressives are terrified of it.

Over at Slate, Mark Joseph Stern warns that a Texas Supreme Court decision invalidating a requirement that commercial eyebrow threaders undergo 750 hours of training — 320 of which were admittedly unrelated to threading — will plunge Texas into a Dickensian nightmare, where judges will have free reign to strike down humane and necessary laws designed to protect workers.

Stern’s histrionics should not be taken seriously. The Texas Supreme Court did its job, insisting upon a rational, evidence-based explanation for restrictions on liberty that is protected by the Fourteenth Amendment as well as by the Texas Constitution.

As Justice Don Willett explains in an erudite and inspiring concurrence, “The Court’s view is simple, and simply stated: Laws that impinge your constitutionally protected right to earn an honest living must not be preposterous.”

Such judicial engagement is required to protect what liberal Justice William O. Douglas once referred to “the most precious liberty man possesses.”

Although eyebrow threading, a traditional South Asian practice, consists only in using cotton thread to remove eyebrow hair, Texas roped the threaders under the same licensing requirements that are applied to conventional cosmetologists who perform a wide variety of services such as waxing, makeup, and chemical peels.

The Texas Department of Licensing and Regulation issued $2,000 penalties to threaders across the state and ordered them to quit their jobs until they completed 750 hours of coursework (not a second of which is devoted to eyebrow threading) in private beauty schools, costing between $7,000 and $22,000, and pass two examinations (neither of which tests eyebrow threading).

In 2009, threaders Ashish Patel, Anverali Satani, Nazira Momin, Minaz Chamadia and Vijay Yogi challenged the requirements under the Due Course of Law Clause of the Texas Constitution. Like the Due Process of Law Clauses of the federal Constitution, Texas’ Due Course of Law Clause prohibits deprivations of liberty that do not serve any legitimate, public-spirited end of government.

The recent decision drew from the history of the state’s Due Course of Law Clause provision, which took its current form in 1875 — at a time when the Supreme Court was examining legislation under the Fourteenth Amendment’s Due Process of Law Clause for a “real or substantial” relationship to public health and safety. From this, the Texas Supreme Court determined that reviewing courts must “consider the whole record, including evidence offered by the parties” in evaluating laws, rather than taking the government’s professions of good intentions at face value.

It went on to evaluate the regulation at issue, emphasizing that, by the state’s own concession, “as many as 320 of the curriculum hours are not related to activities threaders actually perform.” Breaking this down, the Court explained that threaders are required to undergo “the equivalent of eight 40-hour weeks of training unrelated to health and safety as applied to threading.”

Combined with the fact that would-be threaders have to pay for the training and at the same time lose the opportunity to make money threading eyebrows, the court concluded that the regulations imposed an unconstitutionally oppressive burden.

As the court recognized, determining whether the government regulations are constitutionally legitimate, based on record evidence and their real-world effect, can never be a mechanical process. But it is essential to limited government.

Otherwise, there is nothing that would prevent the government from forcing threaders to take, say, 1,500, or 2,500 hours of training unrelated to threading, run marathons, or dig ditches before being certified. Judges would have to rubber-stamp such regulations and tell hardworking entrepreneurs to take it up with their local legislators.

Indeed, that is what happens all too often in cases in which the “rational basis test” is applied in federal courts. So deferential is this “test” in practice that, in the case that ended up before the Supreme Court in Obergefell v. Hodges, the same-sex marriage case, the Sixth Circuit Court of Appeals had held that the government may treat people differently for any plausible reason, even pure favoritism.

Remarkably, Stern seems comfortable with that outcome, and laments that the Texas Supreme Court vindicated the threaders’ rights. He advances two arguments against the decision, both of which are unconvincing; indeed, the second is so unconvincing that it is hard to believe that even Stern is convinced by it.

Stern first argues that the “liberty” protected by the Fourteenth Amendment’s Due Process of Law Clause (and Texas’ Due Course of Law Clause) is properly understood to encompass only a small handful of rights “relating to personal dignity and autonomy,” like “marriage and intimacy.”

This interpretation flies in the face of constitutional text, history, and the logic of the Supreme Court’s most recent decision on the subject.

The Due Process of Law Clause refers only to “liberty” — it does not distinguish between “personal” liberty and “economic” liberty, nor do most people neatly divide their lives between activities that are purely “personal” and those that are purely “economic.” (Which category would a dinner date fall under? Does it matter what happens later on?)

After the ratification of the Reconstruction Amendments, state courts and, later, the Supreme Court interpreted the Fourteenth Amendment to encompass a wide variety of actions that individuals can take without violating the rights of others.

Thus, in Meyer v. Nebraska (1923), the Supreme Court explained that liberty “denotes not merely freedom from bodily restraint, but also the right of the individual to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, establish a home and bring up children, to worship God according to the dictates of his own conscience.”

The logic of the Court’s most recent “substantive due process” decision tracks this comprehensive understanding of liberty. In Obergefell v. Hodges, which Stern invokes, Justice Kennedy begins by stating that “[t]he Constitution promises liberty to all within its reach, a liberty that includes certain specific rights that allow persons, within a lawful realm, to define and express their identity.”

Few things are more central to defining and expressing our identity and, indeed, sustaining our very lives, than our work. As Professor Laurence Tribe has put it, “the determination of one’s vocation” is an “essential aspect of personhood.”

Stern next argues that even if Texas’s oppressive regulatory scheme “may be a problem” for eyebrow threaders, it is a purely “legislative problem” — not one with which the courts should be concerned. He submits that the threaders could easily solve this problem through the democratic process, “by petitioning the legislature to reduce their training hours.”

Stern is apparently unaware that most of the threaders involved in this case were non-citizen immigrants. Is Stern also unaware that American history is rife with examples of entrenched interests — that is, white males — using their political muscle to prevent newly freed blacks, women, and immigrant groups from entering into or effectively competing in the labor market?

In several key cases (including Lochner v. New York (1905), which Stern disparages), the Supreme Court struck down laws designed to keep immigrants (like the threaders in Texas) from competing against native-born whites.

Even today, although the Supreme Court has declared it is unconstitutional to require full citizenship and exclude legal permanent residents, some states still have licensing laws that restrict certain nongovernmental professions to citizens only. A growing body of Public Choice research documents the reality of special-interest lawmaking designed to benefit established firms at the expense of their competitors and the general public.

But of course, Stern knows that regulations passed in the name of public health and safety are sometimes pretextual and that those burdened by them are often in no position to persuade those responsible for them to “fix” them — indeed, he recently criticized the Fifth Circuit Court of Appeals for upholding regulations of abortion providers that are purportedly designed to protect public health and safety. So apparently some vocations are more equal than others, in Stern’s view.

Thanks to the Texas Supreme Court’s decision in the threading case, Texans are, as Justice Willett put it, “doubly blessed.” Two years ago, the Fifth Circuit Court of Appeals, which also has jurisdiction over federal courts in Texas, struck down a regulatory scheme targeting casket sales in Louisiana, rejecting the state’s “nonsensical explanations” for the scheme after finding them to be factually baseless.

Recently, a federal district court (in a case that Stern does not mention but presumably disapproves of), following the Fifth Circuit, struck down a law requiring African hairbraiders like Isis Brantley to spend thousands of hours taking useless classes and thousands of dollars on useless equipment before they would be permitted to teach hairbraiding at their own schools.

Thus, federal courts and state courts in Texas are committed to judicial engagement in economic liberty cases. In his concurrence, Justice Willett quotes Frederick Douglass, whose account of earning his first two dollars as a free man puts a human face on the right to earn a living that those who read it are unlikely to forget.

For all those whose emotions swell at Douglass’ recognition that “my hands were my own, and could earn more of the precious coin,” and value the freedom that he held so precious, this decision is nothing to be afraid of — it is a cause for celebration.

Cross-posted from HuffPo.


Evan Bernick

Evan is the Assistant Director of the Center for Judicial Engagement at the Institute for Justice, a libertarian public interest law firm.

Religious Charities, Gay Marriage, and Adoption: A Case for Pluralism by Walter Olson

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At Reason, Scott Shackford has a valuable piece on where libertarians’ interests are likely to coincide with those of organized gay rights advocates and where they are likely to diverge, following the Supreme Court’s ruling on marriage.

One flashpoint of controversy is likely to be the role of conservative religious agencies in areas of adoption that are commonly assisted with public funds (as with the adoption of older kids from foster care).

It is now legal all across America for gay people to adopt children, and now with same-sex marriage, they can adopt their partner’s child as well. This fight is largely over, and was actually pretty much won even before gay marriage recognition.

But there is another side, and it ties back into the treatment of religious people. Some adoption agencies are tied to religious groups who do not want to serve same-sex couples or place children in same-sex homes. They are also typically recipients of state funding for placing children, and are therefore subject to state regulation. Should they be required to serve gay couples?

Some states, such as Illinois, attempted to force them. As a result, Catholic Charities, which helped the state find adoptive and foster home services for four decades, stopped providing their services in 2011.

At the time, a gay activist declared this a victory, saying “Finding a loving home for the thousands in the foster/adoption system should be the priority, not trying to exclude people based on religious dogma.”

Some libertarians I admire have taken the view that where any public dollars are involved, private social service agencies must be held to rigorous anti-discrimination standards.

While I respect this view, I don’t share it.

Programs that are explicitly voucherized (such as G.I. Bill college tuition benefits, which can be used for seminary study) often go to institutions that I might find discriminatory, and the same logic can apply even with some less explicitly voucherized benefits.

If a state depot is dispensing gasoline to rescuers’ boats after Katrina, and Catholic Charities’s boats spare the need for government boats to reach some rescue targets, the “subsidy” might in fact save the taxpayers money.

In Olson’s experience, the more agencies out there serving the needs of the children looking for homes, the better. …

Much as with the controversies over bakers and florists, being denied service by one agency does not actually impact a gay couple’s ability to find and adopt children at all.

But eliminating Catholic Charities from the pool reduces the number of people able to help place these children. It’s the children who are punished by the politicization of adoption, not Catholic Charities.

This is especially important when dealing with older children or children with special medical needs. … Allowing both sides (and others as well) to play their role as they see fit benefits all children in the system.

As for the concern that some adoption agencies take taxpayer money and then discriminate, Olson points out that it’s much more expensive to the taxpayers to leave children to be raised by the state, not to mention terribly cruel.

“If you don’t care about the kids or the families, at least care about the taxpayers,” Olson says. But you should probably care about the kids, too.

I’ve written about the same set of issues (in the foster care context) before. The new Reason piece is here.


Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

RELATED ARTICLE: ‘Cake Artist’ Fights in Court to Be Able to Refuse to Make Wedding Cakes for Gay Couples

EDITORS NOTE: This post first appeared at Cato.org.

Gays Need the Freedom to Discriminate by Jeffrey A. Tucker

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Gaining the right to be married is a win for liberty because it removes a barrier to free association. But how easily a movement for more freedom turns to the cause of taking away other freedoms!

Following the Supreme Court decision mandating legal same-sex marriage nationwide, the New York Times tells us that, “gay rights leaders have turned their sights to what they see as the next big battle: obtaining federal, state and local legal protections in employment, housing, commerce and other arenas.”

In other words, the state will erect new barriers to freedom of choice in place of the old ones that just came down!

To make the case against such laws, it ought to be enough to refer to the freedom to associate and the freedom to use your property as you see fit. These are fundamental principles of liberalism. A free society permits anything peaceful, and that includes the right to disassociate. Alas, such arguments seem dead on arrival today.

So let us dig a bit deeper to understand why anti-discrimination laws are not in the best interests of gay men and women, or anyone else. Preserving the ability to discriminate permits the market system to provide crucial information feedback to a community seeking to use its buying power to reward its friends and noncoercively, nonviolently punish those who do not share its values.

Ever more, consumers are making choices based on core values. Does this institution protect the environment, treat its workers fairly, support the right political causes? In order to make those choices — which is to say, in order to discriminate — consumers need information.

In the case of gay rights, consumers need to know who supports inclusion and who supports exclusion. Shutting down that information flow through anti-discrimination law robs people of crucial data to make intelligent buying decisions. Moreover, such laws remove the competitive pressure of businesses to prove (and improve) their commitment to community values, because all businesses are ostensibly bound by them.

A market that permits discrimination, even of the invidious sort, allows money and therefore success and profits to be directed toward those who think broadly, while denying money and profitability to those who do not. In this way, a free market nudges society toward ever more tolerant and inclusive attitudes. Money speaks far more persuasively than laws.

Notice that these proposed laws only pertain to the producer and not the consumer. But discrimination is a two-edged sword. The right can be exercised by those who do not like some groups, and it can be exercised by those groups against those who do not like them.

Both are necessary and serve an important social function. They represent peaceful ways of providing social and economic rewards to those who put aside biases in favor of inclusive decision making.

If I’m Catholic and want to support pro-Catholic businesses, I also need to know what businesses don’t like Catholics. If I’m Muslim and only want my dollars supporting my faith, I need to know who won’t serve Muslims (or who will put my dollars to bad use). If a law that prohibits business from refusing to serve or hire people based on religion, how am I supposed to know which businesses deserve my support?

It’s the same with many gay people. They don’t want to trade with companies that discriminate. To act out those values requires some knowledge of business behavior and, in turn, the freedom to discriminate. There is no gain for anyone by passing a universal law mandating only one way of doing business. Mandates drain the virtue out of good behavior and permit bad motivations to hide under the cover of law.

Here is an example from a recent experience. I was using AirBnB to find a place to stay for a friend. He needed a place for a full week, so $1,000 was at stake. The first potential provider I contacted hesitated and began to ask a series of questions that revolved around my friend’s country of origin, ethnicity, and religion. The rental owner was perfectly in his rights to do this. It is his home, and he faces no obligation to open it to all comers.

On the other hand, I found the questions annoying, even offensive. I decided that I didn’t want to do business with this person. I made a few more clicks, cancelled that query, and found another place within a few minutes. The new renter was overjoyed to take in my friend.

I was delighted for two reasons. First, my friend was going to stay at a home that truly wanted him there, and that’s important. Force is never a good basis for commercial relationships. Second, I was able to deny $1K to a man who was, at best, a risk averse and narrow thinker or, at worst, an outright bigot.

Declining to do business with him was my little protest, and it felt good. I wouldn’t want my friend staying with someone who didn’t really want him there, and I was happy not to see resources going toward someone whose values I distrusted.

In this transaction, I was able to provide a reward to the inclusive and broad-minded home owner. It really worked out too: the winning rental property turned out to be perfect for my friend.

This was only possible because the right to discriminate is protected in such transactions (for now). I like to think that the man who asked too many questions felt a bit of remorse after the fact (he lost a lot of money), and even perhaps is right now undergoing a reconsideration of his exclusionary attitudes. Through my own buyer decisions I was actually able to make a contribution toward improving cultural values.

What if anti-discrimination laws had pertained? The man would not have been allowed to ask about national origin, religion, and ethnicity. Presuming he kept his room on the open market, he would have been required under law to accept my bid, regardless of his own values.

As a result, my money would have gone to someone who didn’t have a high regard for my friend, my friend would have been denied crucial information about what he was getting into, and I would not be able to reward people for values I hold dear.

This is precisely why gay rights leaders should be for, not against, the right to discriminate. If you are seeking to create a more tolerant society, you need information that only a free society can provide.

You need to know who is ready to serve and hire gay men and women, so they can be rewarded for their liberality. You also need to know who is unwilling to hire and serve so that the loss part of profit-and-loss can be directed against ill-liberality. Potential employees and customers need to know how they are likely to be treated by a business. Potential new producers need to know about business opportunities in under-served niche markets.

If everyone is forced to serve and hire gays, society is denied important knowledge about who does and does not support enlightened thinking on this topic.

Consider the prototypical case of the baker who doesn’t want to make a wedding cake for a same-sex couple. He is within his rights. His loss of a potential customer base is his own loss. It is also the right of the couple to refuse to give this baker business. The money he would have otherwise made can be redirected towards a baker who is willing to do this. It is equally true that some people would rather trade with a baker who is against gay marriage, and they are within their rights as well.

Every act of discrimination, provided it is open and legal, provides a business opportunity to someone else.

How does all this work itself out in the long run? Commerce tends toward rewarding inclusion, broadness, and liberality. Tribal loyalties, ethnic and religious bigotries, and irrational prejudices are bad for business. The merchant class has been conventionally distrusted by tribalist leaders — from the ancient to the modern world — precisely because merchantcraft tends to break down barriers between groups.

We can see this in American history following the end of slavery. Blacks and whites were ever more integrated through commercial exchange, especially with the advance of transportation technology and rising incomes. This is why the racists turned increasingly toward the state to forbid it. Zoning laws, minimum wage regulation, mandatory segregation, and occupational licensing were all strategies used to keep the races separate even as the market was working toward integration.

The overwhelming tendency of markets is to bring people together, break down prejudices, and persuade people of the benefits of cooperation regardless of class, race, religion, sex/gender, or other arbitrary distinctions. The same is obviously and especially true of sexual orientation. It is the market that rewards people who put aside their biases and seek gains through trade.

This is why states devoted to racialist and hateful policies always resort to violence in control of the marketplace. Ludwig von Mises, himself Jewish and very much the victim of discrimination his entire life, explained that this was the basis for Nazi economic policy. The market was the target of the Nazis because market forces know no race, religion, or nationality.

“Many decades of intensive anti-Semitic propaganda,” Mises  wrote in 1944, “did not succeed in preventing German ‘Aryans’ from buying in shops owned by Jews, from consulting Jewish doctors and lawyers, and from reading books by Jewish authors.” So the racists turned to the totalitarian state — closing and confiscating Jewish business, turning out Jewish academics, and burning Jewish books — in order to severe the social and economic ties between races in Germany.

The biggest enemy of marginal and discriminated-against populations is and has always been the state. The best hope for promoting universal rights and a culture of tolerance is the market economy. The market is the greatest weapon ever devised against bigotry — but, in order to work properly, the market needs to signaling systems rooted in individuals’ freedom of choice to act on their values.

And, to be sure, the market can also provide an outlet for people who desire to push back for a different set of values, perhaps rooted in traditional religious concerns. Hobby Lobby, Chick-Fil-A, In-and-Out Burger, among many others, openly push their religious mission alongside their business, and their customer base is drawn to them for this reason. This is also a good thing. It is far better for these struggles to take place in the market (where choice rules) rather than through politics (where force does).

Trying to game that market by taking away consumer and producer choice harms everyone. Anti-discrimination laws will provide more choices at the expense of more informed choices. Such laws force bigotry underground, shut down opportunities to provide special rewards for tolerance, and disable the social learning process that leads to an ever more inclusive society.

New laws do not fast-track fairness and justice; they take away opportunities to make the world a better place one step at a time.


Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

Is Michelle Obama a Brilliant Experimental Economist? by B.K. Marcus

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A consensus is emerging among advocates of personal freedom and economic literacy that the Healthy, Hunger-Free Kids Act, passed in 2010 with the support of Michelle Obama, is a typical failure of the nanny state.

Reason’s Robby Soave writes, “Like so many other clumsy government attempts to make people healthier by forbidding the consumption of things they like, the initiative is a costly failure.”

But I’d rather imagine the first lady is conducting a sophisticated empirical test of economic theory. All she needs are a few more interventions to correct the “unintended consequences” of the 2010 law, and we’ll be swimming in data.

As Ludwig von Mises explained in “Middle-of-the-Road Policy Leads to Socialism,” each round of intervention into voluntary exchange leads to consequences the interventionists find undesirable. Over and over, the officials are confronted with a choice: undo the initial intervention or initiate the next round of laws and regulations in an attempt to undo the effects of the previous round. Rinse, lather, repeat.

Testifying before the House Subcommittee on Early Childhood, Elementary, and Secondary Education, school administrator John S. Payne from Hartford City, Indiana, told Congress about some of the supposedly unintended consequences in evidence at his area’s public schools.

“Perhaps the most colorful example in my district is that students have been caught bringing — and even selling — salt, pepper, and sugar in school to add taste to perceived bland and tasteless cafeteria food.”

“This ‘contraband’ economy,” says Payne, “is just one example of many that reinforce the call for flexibility” on the part of local government officials.

While laissez-faire liberals may call for the scrapping of government-managed school lunches altogether, and federalists might join Payne in advocating the efficacy of decentralized, local authority over dietary central planning from Washington, DC, those who care more about economic science than nutrition or freedom should look forward to the next several rounds of loophole-closing, ratcheting coercion, and other adjustments needed to isolate students from their remaining lunchtime alternatives.

Currently, according to Payne, some of the parents in his district are signing their children out in the middle of the school day and taking them out for a quick fast-food meal. Those without the option of escape simply choose to eat less during the day. “Whole-grain items and most of the broccoli end up in the trash,” Payne told the subcommittee.

While exit and abstention are of some interest to economic theorists, the real intellectual treat is in seeing what happens when an isolated and otherwise powerless community is reduced to black markets and barter.

In “The Economic Organisation of a POW Camp” in the November 1945 issue of Economica, former prisoner of war R.A. Radford described the economic laboratory of German prison camps:

POW camp provides a living example of a simple economy which might be used as an alternative to the Robinson Crusoe economy beloved by the text-books, and its simplicity renders the demonstration of certain economic hypotheses both amusing and instructive.

In Radford’s camp, everyone received the same rations from both the prison and the Red Cross. Some prisoners also received private parcels, but these were less reliable. At first, barter exchange among the prisoners made them all subjectively better off: the lactose-intolerant smoker will feel richer from trading his tinned milk for the nonsmoker’s cigarettes.

While those who weren’t hooked on tobacco were at first happy to trade their extra smokes for more appealing products, over time, “cigarettes rose from the status of a normal commodity to that of currency.”

This means that all goods could be exchanged directly for cigarettes. There was no longer any need to find another prisoner who both (1) had a surplus of exactly what you needed and (2) wanted just what you had in excess. Everything took on a “price” in cigarettes, eventually listed on “an Exchange and Mart notice board in every bungalow, where under the headings ‘name,’ ‘room number,’ ‘wanted’ and ‘offered’ sales and wants were advertised.”

The public and semi-permanent records of transactions led to cigarette prices being well known and thus tending to equality throughout the camp, although there were always opportunities for an astute trader to make a profit from arbitrage.

Cigarettes were the best money in the context of a POW camp. A good commodity money is valuable, countable, and fungible — divisible in such a way that it retains proportional value. A half an ounce of gold, for example, is worth about half the value of a full ounce of gold. Cutting a diamond in half is not only difficult; it could render two smaller stones whose combined value is far lower than the one you began with.

Cigarettes are somewhere in between gold and diamonds: a single cigarette isn’t as easily divisible, but a half carton probably trades for half the value of a full carton. And the cigarette itself plays the same role with its tobacco contents as coinage does with precious metals: it establishes a countable unit that makes trade more convenient and prices easier to establish and track. And in a POW camp, where the supply is limited and relatively predictable, price inflation isn’t a problem.

Today’s Hartford City schools have not yet developed the economic sophistication of Radford’s German stalag. Students smuggle in packets of salt, pepper, and sugar, and trade them directly for consumption. But if a few more rounds of intervention can reduce students’ lunch options, we can expect to see a new medium of exchange emerge. I’m betting on salt, which already has a long history as commodity money throughout the ancient world.

But if the nanny-state nutritionists are forced to back off and allow either more flexibility or more freedom, we will lose an excellent opportunity to study the evolution of basic monetary economics in a controlled setting.

Won’t someone please think of the science?

B.K. Marcus

B.K. Marcus is managing editor of the Freeman.

Hillary Staffers Can’t Afford New York’s Government-Controlled Housing Market by David Boaz

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The New York Times reports:

For decades, idealistic twenty-somethings have shunned higher-paying and more permanent jobs for the altruism and adrenaline rush of working to get a candidate to the White House. But the staffers who have signed up for the Clinton campaign face a daunting obstacle: the New York City real estate market….

Mrs. Clinton’s campaign prides itself on living on the cheap and keeping salaries low, which is good for its own bottom line, but difficult for those who need to pay New York City rents….

When the campaign’s finance director, Dennis Cheng, reached out to New York donors [to put up staffers in their apartments], some of them seemed concerned with the prospective maze of campaign finance laws and with how providing upscale housing in New York City might be interpreted.

Here are some words that don’t appear in the article: rent control, regulation, zoning.

But those are among the reasons that housing is expensive in New York. As a Manhattan Institute report noted in 2002:

New York City and State have instituted policies that severely distort the dynamics of housing supply and demand. Only 30 percent of the city’s rental units, for instance, are subject to market prices.

These distortions — coupled with Rube-Goldbergian environmental and zoning regulations — have denied New York the kind of healthy housing market enjoyed by most other major cities.

And a report by Edward Glaeser and Joseph Gyourko for the Federal Reserve Board of New York Economic Policy Review suggests that “homes are expensive in high-cost areas primarily because of government regulation” that imposes “artificial limits on construction.”

As I’ve said in other contexts: This is the business you have chosen. If you want the government to control rents and impose regulatory costs on the building of housing, then you can expect to see less housing and thus more expensive housing. Welcome to your world, Hillary Clinton staffers.

This post first appeared at Cato.org.

Related: Jim Epstein notes that fully one third of Manhattan, and 33,000 buildings and 114 entire districts across the city, are “encased in a life-sized historical diorama,” unable to be modified or demolished thanks to the city’s “landmark preservation” law.


David Boaz

David Boaz is executive vice president of the Cato Institute. He is the editor of The Libertarian Reader, editor of The Cato Handbook for Policymakers, and author of The Politics of Freedom.

California Government Puts Uber on Blocks by Jeffrey A. Tucker

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The California Labor Commission, with its expansive power to categorize and codify what it is that workers do, has dealt a terrible blow to Uber, the disruptive ride-sharing service. In one administrative edict, it has managed to do what hundreds of local governments haven’t.

Every rapacious municipal taxi monopoly in the state has to be celebrating today. It also provides a model for how these companies will be treated at the federal level. This could be a crushing blow. It’s not only the fate of Uber that is at stake. The entire peer-to-peer economy could be damaged by these administrative edicts.

The change in how the income of Uber drivers is treated by the law seems innocuous. Instead of being regarded as “independent contractors,” they are now to be regarded as “employees.”

Why does it matter? You find out only way down in the New York Times story on the issue. This “could change Uber’s cost structure, requiring it to offer health insurance and other benefits, as well as paying salaries.”

That’s just the start of it. Suddenly, Uber drivers will be subject to a huge range of federal tax laws that involve withholding, maximum working hours, and the entire labor code at all levels as it affects the market for employees. Oh, and Obamacare.

This is a devastating turn for the company and those who drive for it.

Just ask the drivers:

Indeed, there seems to be no justification for calling Uber drivers employees. I can recall being picked up at airport once. Uber was not allowed to serve that airport. I asked the man if he worked for Uber. He said he used to but not anymore.

“When did you quit?”

“Just now,” he said. Wink, wink. He was driving for himself on my trip.

“When do you think you will work for Uber again?”

“After I drop you off.”

That’s exactly the kind of independence that Uber drivers value. They don’t have to answer any particular call that comes in. They set their own hours. They drive their own cars. When an airport bans Uber, they simply redefine themselves.

They can do this because they are their own boss; Uber only cuts them off if they don’t answer a call on their mobile apps for 180 days. But it is precisely that rule that led the commission to call them “employees.”

That’s a pretty thin basis on which to call someone an employee. And it’s also solid proof that the point of this decision is not to clarify some labor designation but rather to shore up the old monopolies that want to continue to rip off consumers with high prices and poor service. No surprise, government here is using its power to serve the ruling class and established interests.

This is exactly the problem with government regulations that purport to define and codify every job. Such regulations tend to restrict the types and speed of innovation that can occur in enterprises.

The app economy and peer-to-peer network are huge growth areas precisely because they have so far manage to evade being codified and controlled and shoe-horned into the old stultifying rules.

If everyone earning a piecemeal stream of income is called an employee — and regulated by relevant tax, workplace, and labor laws — many of these companies immediately become unviable.

There will be no more on-demand hair stylists, plumbers, tennis coaches, and piano teachers. The fate of a vast number of companies is at stake. The future is at stake.

For now, Uber is saying that this decision pertains to this one employee only. I hope that this claim is sustainable. If it is not, the regulators will use this decision to inflict a terrible blow on the brightest and fastest growing sector of American economic life.


Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

5 Reasons the FDA’s Ban on Trans Fat Is a Big Deal by Walter Olson

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The Obama administration’s Food and Drug Administration today announced a near-ban, in the making since 2013, on the use of partially hydrogenated vegetable fats (“trans fats”) in American food manufacturing.

Specifically, the FDA is knocking trans fats off the Generally Recognized as Safe (GRAS) list. This is a big deal and here are some reasons why:

1. It’s frank paternalism. Like high-calorie foods or alcoholic beverages, trans fats have marked risks when consumed in quantity over long periods, smaller risks in moderate and occasional use, and tiny risks when used in tiny quantities. The FDA intends to forbid the taking of even tiny risks, no matter how well disclosed.

2. The public doesn’t agree. A 2013 Reason-RUPE poll found majorities of all political groups felt consumers should be left free to choose on trans fats.  Even in heavily governed places like New York City and California, where the political class bulldozed through restaurant bans some years back, there was plenty of resentment.

3. The public is also perfectly capable of recognizing and acting on nutritional advances on its own. Trans fats have gone out of style and consumption has dropped by 85 percent as consumers have shunned them.

But while many products have been reformulated to omit trans fats, their versatile qualities still give them an edge in such specialty applications as frozen pizza crusts, microwave popcorn, and the sprinkles used atop cupcakes and ice cream. Food companies tried to negotiate to keep some of these uses available, especially in small quantities, but apparently mostly failed.

4. Government doesn’t always know best, nor do its friends in “public health.” The story has often been told of how dietary reformers touted trans fats from the 1950s onward as a safer alternative to animal fats and butter.

Public health activists and various levels of government hectored consumers and restaurants to embrace the new substitutes. We now know this was a bad idea: trans fats appear worse for cardiovascular health than what they replaced. And the ingredients that will replace minor uses of trans fats – tropical palm oil is one – have problems of their own.

5. Even if you never plan to consume a smidgen of trans fat ever again, note well: many public health advocates are itching for the FDA to limit allowable amounts of salt, sugar, caffeine, and so forth in food products. Many see this as their big pilot project and test case.

But when it winds up in court, don’t be surprised if some courtroom spectators show up wearing buttons with the old Sixties slogan: Keep Your Laws Off My Body.


Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

EDITORS NOTE: This post first appeared at Cato.org.

Bed Bugs Are the New Plague by Jeffrey A. Tucker

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It must have been pretty rotten to sleep in, say, the 12th century Europe. Your floor was dirt. Your mattress was made from hay or bean husks. The biggest drag of all must have been the bed bug problem. It’s not so fabulous to lie there asleep while thousands of ghastly critters gnaw on your flesh. You wake with rashes all over your body.

They heal gradually in the course of the day, but, at night, it starts all over again.

No, they don’t kill you. But they surely make life desperate and miserable. They know where you are. They sense the carbon dioxide. They are after your blood, so they can stay alive. No wonder some people have been driven to suicide.

It stands to reason that among the earliest priorities of civilized life was the total eradication of bed bugs. And we did it! Thanks to modern pesticides, most especially DDT, generations knew not the bed bug.

That is, at least in capitalist countries. I have a friend from Russia whose mother explained the difference between capitalism and socialism as summed up in bed bugs. In the 1950s, capitalist countries had eliminated them. The socialist world, by contrast, faced an epidemic.

But you know what? They are back with an amazing ferocity, right here in 21st century America.

There is a new book getting rave reviews and high sales: Infested: How the Bed Bug Infiltrated Our Bedrooms and Took Over the World.

You can attend Bed Bug University, which is “an intensive four day course that covers bed bug biology and behavior, treatment protocols and explores the unique legal challenges and business opportunities of bed bugs.”

You can browse the Bed Bug Registry, with dozens of reports coming in from around the country. You can call a local company that specializes in keeping them at bay.

Welcome to the post-DDT world in which fear of pesticides displaced fear of the thing that pesticides took away. Oh, how glorious it is to embrace nature and all its ways — until nature begins to feed on you in your sleep.

The various restrictions and bans from the 1970s have gradually brought back the nightmares that wonderful, effective, killer chemicals took away. Some people claim that today not even DDT works because the new strain of bed bug is stronger than ever.

Forget innovating with new pesticides: the restrictions are just too tight. There is not a single product at your local big box hardware store that can deal with these blood suckers. And the products that more-or-less work that are available online, such as Malathion, are not approved for indoor use — and I know for sure that everyone obeys such rules!

In our current greeny ethos, people are suggesting “natural” methods such as: “take all of your laundry and bedding to the Laundromat and wash and dry it at high temperatures.”

Why not do it at home? Well, thanks to federal regulations, your hot water heater is shipped with a high temperature of 110 degrees, which is something like a luxurious bath for the bed bug. Add your detergent — which, by government decree, no longer has phosphates — and your wash turns into Mr. Bubble happy time for Mr. Bed Bug.

So you could stand over gigantic pots of boiling water in your kitchen, fishing beddings in and out, beating your mattresses outside with sticks, and otherwise sleeping in plastic bags, like they do in the new season of “Orange Is the New Black.” You know, like in prison. Or like in the 12th century.

No matter how modernized we become, no matter how many smartphones and tablets we acquire, we still have to deal with the whole problem of nature trying to eat us — in particular, its most wicked part, the man-eating insect. There is no app for that.

Google around on how many people die from mosquitos, and you are immediately struck by the ghastly reality: These things are even more deadly than government. And that’s really saying something.

But somehow, starting in the late 1960s, we began to forget this. Capitalism achieved a wonderful thing, and we took it for granted. We banned the chemicals that saved us, and gradually came to prohibit the creation of more. We feared a “Silent Spring” but instead created a nation in which the noise we hear at night is of an army of bugs sinking their teeth into our flesh.

A little silence would be welcome.

So here we are: mystified, afraid to lie down and sleep, afraid to buy a sofa from Craigslist, boiling our sheets, living in fear of things we can’t see. It’s the Dark Ages again. It gets worse each year, especially during summer when the bed bugs leave their winter hibernation and gather en masse to become our true and living nightmare.

How bad does it have to get before we again unleash the creative forces of science and capitalism to restore a world that is livable for human beings?


Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

Nevada Passes Universal School Choice by Max Borders

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People are becoming more conscious about animal welfare. The livestock, they say, shouldn’t be confined to factory farms — five by five — in such horrible conditions. These beings should be given more freedom to roam and to develop in a more natural way. They’re treated as mere chattel for the assembly line. It’s inhumane to keep them like this, they say — day after day, often in deplorable conditions.

Unfortunately, only a minority extends this kind of consciousness to human children. But that minority is growing, apparently.

Nevada is changing everything. According to the NRO,

Nevada governor Brian Sandoval [recently] signed into law the nation’s first universal school-choice program. That in and of itself is groundbreaking: The state has created an option open to every single public-school student.

Even better, this option improves upon the traditional voucher model, coming in the form of an education savings account (ESA) that parents control and can use to fully customize their children’s education.

Yes, school choice has often advanced through the introduction of vouchers and charter schools — which remain some of the most important reforms for breaking up the government education monopoly.

But vouchers were, to quote researcher Matthew Ladner, “the rotary telephones of our movement — an awesome technology that did one amazing thing.” States such as Nevada (and Arizona, Florida, Mississippi, and Tennessee) have implemented the iPhone of choice programs. They “still do that one thing well, but they also do a lot of other things,” Ladner notes.

So what’s the deal? What do parents and kids actually get out of this?

As of next year, parents in Nevada can have 90 percent (100 percent for children with special needs and children from low-income families) of the funds that would have been spent on their child in their public school deposited into a restricted-use spending account. That amounts to between $5,100 and $5,700 annually, according to the Friedman Foundation for Educational Choice.

Those funds are deposited quarterly onto a debit card, which parents can use to pay for a variety of education-related services and products — things such as private-school tuition, online learning, special-education services and therapies, books, tutors, and dual-enrollment college courses.

It’s an à la carte education, and the menu of options will be as hearty as the supply-side response — which, as it is whenever markets replace monopolies, is likely to be robust.

This is big news. Not merely because it is the most ambitious school choice measure yet passed, but also because it represents a very real opportunity to demonstrate the power of competitive forces to unleash entrepreneurship and innovation in the service of children.

When we compare such a bold measure to the status quo, it’s pretty groundbreaking. So it’s probably not the time to quibble about the ideological purity of such a policy.

But we should seriously consider the concerns of those who advocate full privatization, as opposed to tax and voucher reform.

Here are three things to keep an eye on:

  1. Nevadans have to remain vigilant that this doesn’t become an entree for regulators and incumbent crony schools to jack up the prices and mute the very market forces that will liberate teachers and kids.
    In other words, you don’t want to see what happened to health care (and, to some extent, higher education) happen to private education, just as low-income students finally have a chance to escape government-run schools.
  2. Nevadans have to ensure that cost spirals don’t infect the system due to cross-subsidy. This is what happened to the university system.
  3. Nevadans have to capitalize on the wiggle room quickly, by fundamentally disrupting the education market in such a profound way that it wards off the specter of those who are waiting to seize it back from parents and children.
    This can have spillover effects into other states, too, due to innovation and copycat entrepreneurship. (It might also attract a lot of parents to the state.)

Such alterations to the status quo should be welcome news to those who understand that freedom is not some ideal sitting atop Mt. Utopia.

This is a weak joint and a leverage point to unleash creative, tech-propelled market forces in a space that has been dominated by politics and unions and stifling bureaucracy.

There will be battles ahead on this front. But Nevada’s change is certainly cause for cautious celebration.


Max Borders

Max Borders is the editor of the Freeman and director of content for FEE. He is also co-founder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

How Government Turned Baltimore into Pottersville by James Bovard

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Baltimore’s recent riots are not surprising in a city that has long been plagued by both police brutality and one of the nation’s highest murder rates. Though numerous government policies and the rampaging looters deserve blame for the carnage, federal housing subsidies have long destabilized Baltimore neighborhoods and helped create a culture of violence with impunity.

Yet just last week, Baltimore officials were in Washington asking for more. Given the history, it defies understanding.

The U.S. Department of Housing and Urban Development was created in 1965, and Baltimore received massive subsidies to build housing projects in the following years. Baltimore’s projects, like those in many other cities, became cornucopias of crime.

One 202-unit sprawling Baltimore subsidized housing project (recently slated for razing) is known as “Murder Mall.” A 1979 HUD report noted that the robbery rate in one Baltimore public housing project was almost 20 times higher than the national average. The area in and around public housing often becomes “the territory of those who do not have to be afraid — the criminals,” the report said. Baltimore Mayor Kurt Schmoke in 1993 blamed maintenance problems at one public housing projects on drug dealers who refused to let city workers enter the buildings.

In the 1990s, the Baltimore Housing Authority began collecting lavish HUD subsidies to demolish public housing projects. But critics complained that HUD was merely replacing “vertical ghettos with horizontal ones.” Baltimore was among the first cities targeted for using Section 8 vouchers to disperse public housing residents.

HUD and the city housing agency presumed that simply moving people out of the projects was all that was necessary to end the criminal behavior of the residents. Baltimore was one of five cities chosen for a HUD demonstration project — Moving to Opportunity (MTO) — to show how Section 8 could solve the problems of the underclass.

But the relocations had “tripled the rate of arrests for property crimes” among boys who moved to new locales via Section 8. A study published last year in the Journal of the American Medical Association reported that boys in Section 8 households who moved to new neighborhoods were three times more likely to suffer post-traumatic stress disorder and behavioral problems than boys in the control group.

A 2009 research project on Section 8 published in Homicide Studies noted that in the one city studied, “Crime, specifically homicide, became displaced to where the low-income residents were relocated. Homicide was simply moved to a new location, not eliminated.”

Ed Rutkowski, head of a community development corporation in one marginal Baltimore neighborhood, labeled Section 8 “a catalyst in neighborhood deterioration and ghetto expansion” in 2003.

Regardless of its collateral damage, Section 8 defines Valhalla for many Baltimoreans. Receiving a Section 8 voucher can enable some recipients to live rent-free in perpetuity. Because recipients must pay up to a third of their income for rent under the program, collecting Section 8 sharply decreases work effort, according to numerous economic studies.

Last October, when the local housing agency briefly allowed people to register for the program, it was deluged with 73,509 applications. Most of the applications were from families — which means that a third of Baltimore’s 241,455 households sought housing welfare. (Almost 10% of Baltimoreans are already on the housing dole.) Section 8 is not an entitlement, so the city will select fewer than 10,000“winners” from the list.

HUD’s Federal Housing Administration also has a long history of destabilizing neighborhoods in Baltimore and other big cities. A HUD subsidized mortgage program for low-income borrowers launched in 1968 spurred so many defaults and devastation that Carl Levin, then Detroit City Council president and later a long-term U.S. senator, derided the program in 1976 as “Hurricane HUD.”

In the late 1990s, more than 20% of FHA mortgages in some Baltimore neighborhoods were in default — leading one activist to label Baltimore “the foreclosure capital of the world.” HUD Inspector General Susan Gaffney warned in 2000: “Vacant, boarded-up HUD-owned homes have a negative effect on neighborhoods, and the negative effect magnifies the longer the properties remain in HUD’s inventory.”

The feds continued massive negligent mortgage lending in Baltimore after that crisis, creating fresh havoc in recent years. In late 2013, more than 40% of homes in the low-income Carrollton Ridge neighborhood were underwater. Reckless subsidized lending in Baltimore and other low-income areas helped saddle Maryland with the highest foreclosure rate in the nation by the end of last year. One in every 435 housing units in Baltimore was in foreclosure last October, according to RealtyTrac.

President Obama said the Baltimore riots showed the need for new “massive investments in urban communities.” What Baltimore needs is an investment in new thinking. The highest property taxes in the state and oppressive local regulation often make investing in jobs and businesses in Baltimore unprofitable. Only fixing that will produce a stable community. Shoveling more federal money into the city is the triumph of hope over experience.

James Bovard

James Bovard is the author of Public Policy Hooligan. His work has appeared in USA Today, where this article was first published.

LA Unions Demand Exemption from $15 Minimum Wage They Created by Daniel Bier

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If there was ever any doubt that LA’s minimum wage hike was meant to help the labor unions at the expense of everyone else, I hope we can now put that idea to bed.

The LA Times reports,

Labor leaders, who were among the strongest supporters of the citywide minimum wage increase approved last week by the Los Angeles City Council, are advocating last-minute changes to the law that could create an exemption for companies with unionized workforces. . . .

Rusty Hicks, who heads the county Federation of Labor and helps lead the Raise the Wage coalition, said Tuesday night that companies with workers represented by unions should have leeway to negotiate a wage below that mandated by the law.

“With a collective bargaining agreement, a business owner and the employees negotiate an agreement that works for them both. The agreement allows each party to prioritize what is important to them,” Hicks said in a statement. “This provision gives the parties the option, the freedom, to negotiate that agreement. And that is a good thing.”

Unions want to give workers and business the option — the freedom! — to prioritize what’s important to them and negotiate their own pay! Isn’t that nice. But only if those workers are paying union dues, and only if those businesses are using union labor.

The minimum wage hike was always meant to make independent workers more expensive and make unions look better by comparison. But it’s a bold move for the unions to simply say, in one breath, “Everyone deserves a living wage! It’ll be good for everyone! Except us, thank you. We’ll set our own pay — and also, give a break to any businesses who agree to go back to union labor.”

More on this transparently corrupt policy of the minimum wage by FEE’s Jeffrey Tucker.


Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Who Should Choose? Patients and Doctors or the FDA? by Doug Bandow

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Good ideas in Congress rarely have a chance. Rep. Fred Upton (R-Mich.) is sponsoring legislation to speed drug approvals, but his initial plan was largely gutted before he introduced it last month.

Congress created the Food and Drug Administration in 1906, long before prescription drugs became such an important medical treatment. The agency became an omnibus regulatory agency, controlling everything from food to cosmetics to vitamins to pharmaceuticals. Birth defects caused by the drug Thalidomide led to the 1962 Kefauver-Harris Amendments which vastly expanded the FDA’s powers. The new controls did little to improve patient safety but dramatically slowed pharmaceutical approvals.

Those who benefit the most from drugs often complain about the cost since pills aren’t expensive to make. However, drug discovery is an uncertain process. Companies consider between 5,000 and 10,000 substances for every one that ends up in the pharmacy. Of those only one-fifth actually makes money—and must pay for the entire development, testing, and marketing processes.

As a result, the average per drug cost exceeds $1 billion, most often thought to be between $1.2 and $1.5 billion. Some estimates run more.

Naturally, the FDA insists that its expensive regulations are worth it. While the agency undoubtedly prevents some bad pharmaceuticals from getting to market, it delays or blocks far more good products.

Unfortunately, the political process encourages the agency to kill with kindness. Let a drug through which causes the slightest problem, and you can expect television special reports, awful newspaper headlines, and congressional hearings. Stop a good drug and virtually no one notices.

It took the onset of AIDS, then a death sentence, to force the FDA to speed up its glacial approval process. No one has generated equivalent pressure since. Admitted Richard Merrill, the agency’s former chief counsel:  “No FDA official has ever been publicly criticized for refusing to allow the marketing of a drug.”

By 1967 the average delay in winning approval of a new drug had risen from seven to 30 months after the passage of Kefauver-Harris. Approval time now is estimated to run as much as 20 years.

While economist Sam Peltzman figured that the number of new drugs approved dropped in half after Kefauver-Harris, there was no equivalent fall in the introduction of ineffective or unsafe pharmaceuticals. All the Congress managed to do was strain out potentially life-saving products.

After all, a company won’t make money selling a medicine that doesn’t work. And putting out something dangerous is a fiscal disaster. Observed Peltzman:  the “penalties imposed by the marketplace on sellers of ineffective drugs prior to 1962 seem to have been enough of a deterrent to have left little room for improvement by a regulatory agency.”

Alas, the FDA increases the cost of all medicines, delays the introduction of most pharmaceuticals, and prevents some from reaching the market. That means patients suffer and even die needlessly.

The bureaucracy’s unduly restrictive approach plays out in other bizarre ways. Once a drug is approved doctors may prescribe it for any purpose, but companies often refuse to go through the entire process again to win official okay for another use. Thus, it is common for AIDS, cancer, and pediatric patients to receive off-label prescriptions. However, companies cannot advertise these safe, effective, beneficial uses.

Congress has applied a few bandages over the years. One was to create a process of user fees through the Prescription Drug User Fee Act. Four economists, Tomas Philipson, Ernst Berndt, Adrian Gottschalk, and Matthew Strobeck, figured that drugmakers gained between $11 billion and $13 billion and consumers between $5 billion and $19 billion. Total life years saved ranged between 180,000 and 310,000. But lives continue to be lost because the approval process has not been accelerated further.

Criticism and pressure did lead to creation of a special FDA procedure for “Accelerated Approval” of drugs aimed at life-threatening conditions. This change, too, remains inadequate. Nature Biotechnology noted that few medicines qualified and “in recent years, FDA has been ratcheting up the requirements.”

The gravely ill seek “compassionate access” to experimental drugs. Some patients head overseas unapproved treatments are available. The Wall Street Journal reported on those suffering from Lou Gehrig’s disease who, “frustrated by the slow pace of clinical drug trials or unable to qualify, are trying to brew their own version of an experimental compound at home and testing it on themselves.”

Overall, far more people die from no drugs than from bad drugs. Most pharmaceutical problems involve doctors misprescribing or patients misusing medicines. The deadliest pre-1962 episode involved Elixir Sulfanilamide and killed 107 people. (Thalidomide caused some 10,000 birth defects, but no deaths.) Around 3500 users died from Isoproterenol, an asthmatic inhaler. Vioxx was blamed for a similar number of deaths, though the claim was disputed. Most of the more recent incidents would not have been prevented from a stricter approval process.

The death toll from agency delays is much greater. Drug analyst Dale Gieringer explained:  “The benefits of FDA regulation relative to that in foreign countries could reasonably be put at some 5,000 casualties per decade or 10,000 per decade for worst-case scenarios.  In comparison … the cost of FDA delay can be estimated at anywhere from 21,000 to 120,000 lives per decade.”

According to the Competitive Enterprise Institute, among the important medicines delayed were ancrod, beta-blockers, citicoline, ethyol, femara, glucophage, interleukin-2, navelbine, lamictal, omnicath, panorex, photofrin, prostar, rilutek, taxotere, transform, and vasoseal.

Fundamental reform is necessary. The FDA should be limited to assessing safety, with the judgment as to efficacy left to the marketplace. Moreover, the agency should be stripped of its approval monopoly. As a start drugs approved by other industrialized states should be available in America.

The FDA’s opinion also should be made advisory. Patients and their health care providers could look to private certification organizations, which today are involved in everything from building codes to electrical products to kosher food. Medical organizations already maintain pharmaceutical databases and set standards for treatments with drugs. They could move into drug testing and assessment.

No doubt, some people would make mistakes. But they do so today. With more options more people’s needs would be better met. Often there is no single correct treatment decision. Ultimately the patient’s preference should control.

Congress is arguing over regulatory minutiae when it should be debating the much more basic question: Who should decide who gets treated how? Today the answer is Uncle Sam. Tomorrow the answer should be all of us.

Doug Bandow

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

Health Insurance Is Illegal by Warren C. Gibson

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Health insurance is a crime. No, I’m not using a metaphor. I’m not saying it’s a mess, though it certainly is that. I’m saying it’s illegal to offer real health insurance in America. To see why, we need to understand what real insurance is and differentiate that from what we currently have.

Real insurance

Life is risky. When we pool our risks with others through insurance policies, we reduce the financial impact of unforeseen accidents or illness or premature death in return for a premium we willingly pay. I don’t regret the money I’ve spent on auto insurance during my first 55 years of driving, even though I’ve yet to file a claim.

Insurance originated among affinity groups such as churches or labor unions, but now most insurance is provided by large firms with economies of scale, some organized for profit and some not. Through trial and error, these companies have learned to reduce the problems of adverse selection and moral hazard to manageable levels.

A key word above is unforeseen.

If some circumstance is known, it’s not a risk and therefore cannot be the subject of genuine risk-pooling insurance. That’s why, prior to Obamacare, some insurance companies insisted that applicants share information about their physical condition. Those with preexisting conditions were turned down, invited to high-risk pools, or offered policies with higher premiums and higher deductibles.

Insurers are now forbidden to reject applicants due to preexisting conditions or to charge them higher rates.

They are also forbidden from charging different rates due to different health conditions — and from offering plans that exclude certain coverage items, many of which are not “unforeseen.”

In other words, it’s illegal to offer real health insurance.

Word games

Is all this just semantics? Not at all. What currently passes for health insurance in America is really just prepaid health care — on a kind of all-you-can-consume buffet card. The system is a series of cost-shifting schemes stitched together by various special interests. There is no price transparency. The resulting overconsumption makes premiums skyrocket, and health resources get misallocated relative to genuine wants and needs.

Lessons

Some lessons here are that genuine health insurance would offer enormous cost savings to ordinary people — and genuine benefits to policyholders. These plans would encourage thrift and consumer wisdom in health care planning,  while discouraging the overconsumption that makes prepaid health care unaffordable.

At this point, critics will object that private health insurance is a market failure because the refusal of unregulated private companies to insure preexisting conditions is a serious problem that can only be remedied by government coercion. The trouble with such claims is that no one knows what a real health insurance market would generate, particularly as the pre-Obamacare regime wasn’t anything close to being free.

What might a real, free-market health plan look like?

  • People would be able to buy less expensive plans from anywhere, particularly across state lines.
  • People would be able to buy catastrophic plans (real insurance) and set aside much more in tax-deferred medical savings accounts to use on out-of-pocket care.
  • People would very likely be able to buy noncancelable, portable policies to cover all unforeseen illnesses over the policyholder’s lifetime.
  • People would be able to leave costly coverage items off their policies — such as chiropractic or mental health — so that they could enjoy more affordable premiums.
  • People would not be encouraged by the tax code to get insurance through their employer.

What about babies born with serious conditions? Parents could buy policies to cover such problems prior to conception. What about parents whose genes predispose them to produce disabled offspring? They might have to pay more.

Of course, there will always be those who cannot or do not, for one reason or another, take such precautions. There is still a huge reservoir of charitable impulses and institutions in this country that could offer assistance. And these civil society organizations would be far more robust in a freer health care market.

The enemy of the good

Are these perfect solutions? By no means. Perfection is not possible, but market solutions compare very favorably to government solutions, especially over longer periods. Obamacare will continue to bring us unaccountable bureaucracies, shortages, rationing, discouraged doctors, and more.

Some imagine that prior to Obamacare, we had a free-market health insurance system, but the system was already severely hobbled by restrictions.

To name a few:

  • It was illegal to offer policies across state lines, which suppressed choices and increased prices, essentially cartelizing health insurance by state.
  • Employers were (and still are) given a tax break for providing health insurance (but not auto insurance) to their employees, reducing the incentive for covered employees to economize on health care while driving up prices for individual buyers. People stayed locked in jobs out of fear of losing health policies.
  • State regulators forbade policies that excluded certain coverage items, even if policyholders were amenable to such plans.
  • Many states made it illegal to price discriminate based on health status.
  • The law forbade associated health plans, which would allow organizations like churches or civic groups to pool risk and offer alternatives.
  • Medicaid and Medicare made up half of the health care system.

Of course, Obamacare fixed none of these problems.

Many voices are calling for the repeal of Obamacare, but few of those voices are offering the only solution that will work in the long term: complete separation of state and health care. That means no insurance regulation, no medical licensing, and ultimately, the abolition of Medicare and Medicaid, which threaten to wash future federal budgets in a sea of red ink.

Meanwhile, anything resembling real health insurance is illegal. And if you tried to offer it, they might throw you in jail.

Warren C. Gibson

Warren Gibson teaches engineering at Santa Clara University and economics at San Jose State University.

Los Angeles Pummels the Poor: A $15 an hour wage floor is a cruel and stupid policy by JEFFREY A. TUCKER

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Does anyone on the Los Angeles City Council have a clue about what they have just done? It really is unclear whether reality matters in this legislative body. Rarely have we seen such jaw-dropping display of economic fallacy enacted into law.

The law under consideration here is a new wage floor of $15, phased in over five years. Why phased in? Why not do it now? Why not $30 or $150? Perhaps the implied reticence here illustrates just a bit of caution. Somewhere in the recesses of the councilors’ minds, they might have a lurking sense that there will be a price to pay for this.

Such doubt is wholly justified. Recall that the minimum wage was initially conceived as a method to exclude undesirables from the workforce. The hope, back in the time when eugenics was the rage, was that a wage floor would cause the “unemployable” to stop reproducing and die out in one generation.

Racism drove the policy, but it was hardly limited to that. The exterminationist ambition applied to anyone deemed unworthy of remunerative work.

“We have not reached the stage where we can proceed to chloroform them once and for all,” lamented the progressive economist Frank Taussig in his 1911 bookPrinciples of Economics. “What are the possibilities of employing at the prescribed wages all the healthy able-bodied who apply? The persons affected by such legislation would be those in the lowest economic and social group.”

Professor Taussig spoke for a generation of ruling-class intellectuals that had egregiously immoral visions of how to use government policy. But for all their evil intentions, at least they understood the basic economics of what they were doing. They knew what a wage floor excludes marginal workers, effectively dooming them to poverty — that’s precisely why they favored them.

Today, our situation seems reversed: an abundance of good intentions and a dearth of basic economic literacy. The mayor of LA, Eric Garcetti, was elated at the decision: “We’re leading the country; we’re not going to wait for Washington to lift Americans out of poverty.”

Leading the country, maybe, but where is another question. This is a policy that will, over time, lock millions out of the workforce and forces many businesses to cut their payrolls. Machines to replace workers will come at a premium. The remaining workers will be expected to become much more productive. Potential new business will face a higher bar than ever. Many enterprises will close or move.

As for the existing unemployed, they can forget it. Seriously. In fact, it is rather interesting that in all the hooplah about this change, there’s not been one word about the existing unemployed (officially, 7.5% of the city’s workforce). It’s as if everyone intuitively knows the truth here: this law will not help them at all, at least not if they want to work in the legal economy.

The underground economy, which is already massive in Los Angeles, will grow larger. New informal enterprises will pop up everywhere, doing a cash-only business. The long, brawny arm of the state will not be powerful enough to stop it. Sneaking around and hiding from the law is already a way of life for millions. Look for this tendency to become the dominant way of work for millions more.

All of this will happen, and yet the proponents of the minimum wage will still be in denial, for their commitment to the belief that laws can make wealth is doctrinal and essentially unfalsifiable.

As for those who know better, business owners all over the city pleaded for the Council not to do this. But their pleas fell on deaf ears. The Council had already been bought and paid for by the labor unions and interests that represent the already employed in Los Angeles. Such union rolls do not include the poor, the unemployed, or even many of the 50% of workers in the city who work for less than $15. They represent the working-class bourgeoisie: people rich enough to devote themselves to politics but do not actually own or run businesses.

Will such unions be helped by this law? Perhaps, a bit — but at whose expense? Those who work outside union protection.

This is a revealing insight into why unions have been so passionate about pushing for the minimum wage at all levels. Here is the truth you won’t read in the papers: a higher wage floor helps cartelize the labor market in their favor.

You can understand this by reflecting on your own employment. Let’s say that you earn $50,000 for a task that could possibly done by others for $25,000, and those people are submitting resumes. This is your situation, and it potentially applies to a dozen people in your workplace.

Let’s say you have the opportunity to enact a new policy for the firm: no one can be hired for less than $50,000 a year. Would this policy be good for you? In a perverse way, it would. Suddenly, nobody else, no matter how deserving, could underbid you or threaten your job. It’s a cruel way to go about padding your wallet, but it might work for a time.

Now imagine pushing this policy out to an entire city or an entire country. This would create an economic structure that (however temporarily) serves the interests of the politically connected at the expense of everyone else.

It certainly would not create wealth. It would not help the poor as a whole. And it would do nothing to create a dynamic and competitive marketplace. It would institutionalize stasis and cause innovation to stall and die.

The terrible effects are many and cascading, and much of the damage will be unseen in the form of business not formed, laborers not hired, efficiencies not realized. This is what the government of Los Angeles has done. It is a self-inflicted wound, performed in the name of health and well-being.

The City Council is cheering. So are the unions. So are the ghosts of the eugenists of the past who first fantasized about a labor force populated only by the kinds of people they approved.

As for everyone else, they will face a tougher road than ever.


Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.