Tag: public choice theory

The Institute for Justice Exposes the Plague of Occupational Licensing

Today, the Institute for Justice released a 200-page, comprehensive study on occupational licensing in the United States. The report details the plague of occupational licensing that has swept the country over the past 60+ years. According to the study, “In the 1950s, only one in 20 U.S. workers needed the government’s permission to pursue their chosen occupation. Today, that figure stands at almost one in three.”

Fifty years ago, in Capitalism and Freedom, Milton Friedman warned against the dangers of professional licensing. At that time, Friedman quoted a previous study on licensure by Walter Gellhorn:

By 1952 more than 80 separate occupations exclusive of ‘owner-businesses,’ like restaurants and taxicab companies, had been licensed by state law; and in addition to the state laws there are municipal ordinances in abundance, not to mention the federal statutes that require the licensing of such diverse occupations as radio operators and stockyard commission agents. As long ago as 1938 a single state,North Carolina, had extended its law to 60 occupations. One may not be surprised to learn that pharmacists, accountants, and dentists have been reached by state law as have sanitarians and psychologists, assayers and architects, veterinarians and librarians. But with what joy of discovery does one learn about the licensing of threshing machine operators and dealers in scrap tobacco? What of egg graders and guide dog trainers, pest controllers and yacht salesmen, tree surgeons and well diggers, tile layers and potato growers? And what of the hypertrichologists who are licensed in Connecticut, where they remove excessive and unsightly hair with the solemnity appropriate to their high sounding title?

The Institute for Justice’s study found that licensing has only become more wide-spread and more absurd. But an increase in licensure is expected when interest groups are allowed to capture government and violate our economic liberties. Public choice theory predicts a growth in licensing if the anti-competitive interests of trades are not checked by constitutional rights. As Friedman observed,

In the absence of any general arrangements to offset the pressure of special interests, producer groups will invariably have a much stronger influence on legislative action and the power that be than will the diverse, widely spread consumer interest. Indeed from this point of view, the puzzle is not why we have so many silly licensure laws, but why we don’t have far more.

There are significant real-world effects to these laws. In a world of nine percent unemployment, barriers to work should be the last thing we want, particularly if those barriers do not make us safer or better off. The study found that the average license forces would-be workers to pay an average of $209 in fees, take one exam, and complete nine months of training. In the four places in which they are licensed (three states and DC), interior designers have the highest barriers to entry, apparently to save us from shag carpeting and misuses of the Pottery Barn. In the face of such requirements, particularly the months of training, it’s easy to see how someone can be discouraged from even looking for a job.

In addition, out-of-control licensing has other, more human costs, such as the monks of Saint Joseph Abbey, who were prohibited from building caskets in their monastery unless they obtained a funeral director license. The Institute for Justice won that case. Here’s hoping the new study gives IJ’s attorneys the data they may need to defeat other unconstitutional licensing regimes.

Below is the video announcing the study:

Earmark Donor States

I have an op-ed in Politico about “earmark donor states.” It’s a term I invented to highlight a rarely discussed side of earmarking: public choice economics.

As public choice theory would predict, the earmarking process operates under a system of concentrated benefits and diffuse costs.  Based on an analysis of 2009 data, 16 states receive a disproportionately large percentage of the earmark pie and can be labeled “earmark beneficiary” states. The other 34 states and the District of Columbia are “earmark donors,” as they receive fewer earmark dollars than they proportionally should.

To determine which states win and lose in the earmarking game, I looked at the share of taxes each state sends to Washington and compared it to the share of earmarks that each state receives. 

In the op-ed, I use Colorado, one of the biggest earmark donor states, as an example:

Colorado taxpayers contribute about 1.6 percent of total federal taxes, but they receive just over two-tenths of one percent of earmarked funds—proportionally speaking, less than a third of what it should be getting. This works out to more than $200 million dollars that Coloradans are spending to subsidize earmarks in other states – hardly chump change. So while Colorado’s representatives might pat themselves on the back for securing funding for an occasional municipal bus or bioenergy plant, their earmarking rivals in other states like West Virginia and Hawaii obtain funding for larger and more expensive projects and send the bill to the Centennial State.

Below is a table with additional data indicating which states are earmark donors and recipients.  The key column is the “earmark ratio.” The lower the figure, the smaller a state’s share of earmarks is relative to the amount of taxes its residents and businesses pay.  A state with an earmark ratio below 100% is a donor state.  As you can see, Utah is the first state on the table that receives slightly more than its proportional share of earmark funds. Mississippi, the last state on the list, remarkably receives 11 times more than its proportional share. 

 Also note that the most populous states in the country are earmark donors – almost 90 percent of Americans live in earmark donor states.

State TOTAL FEDERAL TAXES % of Total Taxes Proportional Share of Earmarks (millions of $) Earmarks Received (millions of $) % of Total Earmarks Earmark Ratio % of Delegation on Approps
New York 193,446,916 8.2% 1642.75 418.71 2.1% 25.5% 12.9%
Illinois 116,130,852 5.0% 986.18 252.19 1.3% 25.6% 14.3%
Nebraska 16,200,400 0.7% 137.57 41.53 0.2% 30.2% 20.0%
Colorado 38,484,608 1.6% 326.81 106.15 0.5% 32.5% 11.1%
Connecticut 44,684,141 1.9% 379.46 124.83 0.6% 32.9% 14.3%
New Jersey 103,548,696 4.4% 879.34 319.06 1.6% 36.3% 13.3%
Arizona 32,372,226 1.4% 274.91 102.00 0.5% 37.1% 10.0%
Ohio 103,638,344 4.4% 880.10 345.98 1.7% 39.3% 25.0%
Georgia 59,486,251 2.5% 505.16 203.94 1.0% 40.4% 13.3%
Minnesota 67,646,589 2.9% 574.46 233.10 1.2% 40.6% 10.0%
Texas 200,521,512 8.5% 1702.83 695.59 3.5% 40.8% 17.6%
California 264,868,391 11.3% 2249.27 971.05 4.9% 43.2% 14.5%
Indiana 42,108,854 1.8% 357.59 156.44 0.8% 43.7% 9.1%
Massachusetts 70,108,079 3.0% 595.36 265.75 1.3% 44.6% 8.3%
Wisconsin 38,642,363 1.6% 328.15 171.34 0.9% 52.2% 20.0%
North
Carolina
63,348,252 2.7% 537.95 288.11 1.4% 53.6% 6.7%
Pennsylvania 106,613,979 4.5% 905.37 488.57 2.5% 54.0% 14.3%
Tennessee 44,047,939 1.9% 374.06 208.02 1.0% 55.6% 27.3%
Michigan 56,050,689 2.4% 475.98 279.99 1.4% 58.8% 5.9%
Florida 110,156,809 4.7% 935.45 556.55 2.8% 59.5% 14.8%
Delaware 13,683,353 0.6% 116.20 69.38 0.3% 59.7% 0.0%
Oklahoma 24,297,410 1.0% 206.33 123.91 0.6% 60.1% 14.3%
Oregon 21,736,643 0.9% 184.59 111.85 0.6% 60.6% 0.0%
Virginia 58,598,281 2.5% 497.62 312.80 1.6% 62.9% 15.4%
Wyoming 3,833,691 0.2% 32.56 21.33 0.1% 65.5% 0.0%
District of
Columbia
19,487,689 0.8% 165.49 111.59 0.6% 67.4% 0.0%
Missouri 44,310,000 1.9% 376.28 256.45 1.3% 68.2% 18.2%
Washington 48,587,720 2.1% 412.61 287.22 1.4% 69.6% 18.2%
Maryland 44,484,984 1.9% 377.77 304.09 1.5% 80.5% 10.0%
Kansas 20,374,354 0.9% 173.02 141.68 0.7% 81.9% 33.3%
New Hampshire 8,739,838 0.4% 74.22 62.40 0.3% 84.1% 25.0%
Louisiana 34,882,848 1.5% 296.23 272.57 1.4% 92.0% 22.2%
Arkansas 25,727,268 1.1% 218.48 202.37 1.0% 92.6% 33.3%
Rhode Island 10,909,205 0.5% 92.64 87.58 0.4% 94.5% 50.0%
South Carolina 17,806,603 0.8% 151.21 145.36 0.7% 96.1% 0.0%
Utah 14,270,839 0.6% 121.19 131.18 0.7% 108.2% 20.0%
Idaho 6,859,632 0.3% 58.25 63.27 0.3% 108.6% 25.0%
Nevada 13,770,576 0.6% 116.94 129.88 0.7% 111.1% 0.0%
Kentucky 23,313,696 1.0% 197.98 248.74 1.2% 125.6% 37.5%
Maine 6,105,799 0.3% 51.85 73.04 0.4% 140.9% 25.0%
Iowa 17,614,407 0.8% 149.58 336.88 1.7% 225.2% 28.6%
Alabama 20,093,422 0.9% 170.63 424.18 2.1% 248.6% 33.3%
Vermont 3,366,627 0.1% 28.59 81.97 0.4% 286.7% 33.3%
Montana 4,136,011 0.2% 35.12 101.02 0.5% 287.6% 66.7%
South Dakota 4,888,826 0.2% 41.52 135.48 0.7% 326.3% 33.3%
New Mexico 8,188,815 0.3% 69.54 235.09 1.2% 338.1% 0.0%
North Dakota 4,115,943 0.2% 34.95 136.79 0.7% 391.3% 33.3%
Hawaii 6,747,592 0.3% 57.30 270.74 1.4% 472.5% 25.0%
Alaska 4,670,157 0.2% 39.66 227.81 1.1% 574.4% 33.3%
West Virginia 6,332,264 0.3% 53.77 336.92 1.7% 626.6% 20.0%
Mississippi 9,603,121 0.4% 81.55 900.57 4.5% 1104.3% 16.7%

Source:
IRS: http://www.irs.gov/taxstats/article/0„id=206488,00.html
Taxpayers for Common Sense
Author’s calculations

Suspecting that the disparity between states is a product of political clout, I calculated the percentage of each state’s congressional delegation serving on the House and Senate Appropriations Committees.  The graph below shows the correlation between this metric and the earmark ratio of each state. The closely tracking trend lines suggest there is a connection between a state’s representation on the Appropriations Committees and earmarks. The correlation between these figures is 0.264, which is especially strong when you consider that earmarking proponents often argue that the process is entirely merit-driven and apolitical.  To be sure, this is a very rough indicator – earmark recipient states like Alaska and West Virginia were long represented by earmark champions Ted Stevens and Robert Byrd, neither of whom is included in the figure.  Also, it should be noted that Hawaii and Mississippi are represented by Daniel Inouye and Thad Cochran who, respectively, are the chairman and ranking Republican on the Senate Appropriations Committee.  As such, they carry significantly more clout than the average appropriator. Additionally, Nevada’s status as an earmark beneficiary state despite its lack of appropriators might be explained by Senator Harry Reid’s influence as Senate Majority Leader.

I also evaluated the correlation between earmark ratios and median income. Based on the arguments of earmark proponents, one would expect a very strong negative correlation here as earmarking is intended to direct federal funds to needy, underserved parts of the country.  The strength of that correlation is -0.255, which is slightly weaker than the political-based correlation.  This suggests that in the earmarking process, political power is more important than financial need.

The connection between political power and earmarking prowess is hardly surprising. More startling is the disparity between the shortchanged earmark donor states and the earmark beneficiary states. Perhaps politicians from donor states are unaware of the extent to which their constituents subsidize out-of-state projects. More likely, most congressmen are successfully pulling off a political sleight of hand – trumpeting their occasional earmark project and hoping it distracts their constituents from the disproportionately large number of earmarks in other states.

After all, the vast majority of Americans would be far better off if Congress stopped earmarking and removed itself from spending decisions that should be made by local governments and private entities.  

I must acknowledge several of my colleagues who helped with this analysis – many thanks to Kurt Couchman and Andrew Mast.