Interventionist Assumptions in the World Bank’s “Doing Business” Index: Part 1

This is Part 1 of a two-part series on the World Bank’s Doing Business Report. In this entry, I discuss the World Bank’s implicit embrace of occupational licensing restrictions. In the next entry, I will discuss the World Bank’s dim view of private, contractarian approaches to corporate governance. 

 

I. Introduction

The World Bank’s annual Doing Business Report represents an invaluable resource to researchers, policymakers, entrepreneurs and investors. It comprehensively ranks how well each country in the world has managed to achieve John Adam’s elusive aphorism:  “the rule of law, not of man”. Its findings are cited thousands of times each year by academics and are directly incorporated into regression models to form the basis of a substantial empirical literature spanning developmental economics to comparative political economy. It is subsequently relied on by other similar projects, such as the Fraser Institute’s Economic Freedom index as a part of its own ranking methodology.

Which is why its flaws matter. While the Report generally ranks relatively laissez-faire economies with an efficient and uncorrupt civil service ahead of kleptocratic kludgeocracies, it nonetheless incorporates several interventionist assumptions into its measure of the ease of doing business. I will explore several such examples below. For instance, the Report rewards countries with a higher score on their Dealing with Construction Permits index if they have a stringent, government-administered occupational licensing and permitting regime for architects and construction projects. In the “Protecting Minority Investors” category, the Report similarly punishes countries if they even allow for corporate governance structures other than the Platonic Form envisioned by the World Bank. In this instance, it privileges a mandatory, anticontractarian approach to corporate law over the enabling, contractarian approach.  How does preventing parties from Coasian bargaining around contractual defaults so as to achieve a Pareto-improving outcome increase the ease with which they do business?      

Before we examine these interventionist assumptions, let’s begin with how the Report measures ease of doing business. First, it creates a series of index variables (e.g. protecting minority shareholders, labor market regulations) comprising multiple indicia, and then aggregates these variables into a single Ease of Doing Business score for each country. Many of these are unobjectionable:

“The time necessary for the judge to issue a written final judgment once the evidence period has closed.” [Contract Enforcement]; “Whether unmarried men and unmarried women have equal ownership rights to property. A score of -1 is assigned if there are unequal ownership rights to property; 0 if there is equality.” [Registering Property].

II. Dealing with Construction Permits

Yet in several categories, the World Bank has decided that the more government requirements needed before a given transaction is authorized, the better. The main culprit here is the “Building Quality Control” subcategory of the “Dealing with Construction Permits” index, weighted as 25% of that index. The three separate sub-sub-categories of “Building Quality Control” are Quality Control Before/During/After Construction. Higher scores are awarded to countries that require either direct approval by a government entity, or approval from a “licensed” engineer and/or architect to review the plans/building, but only if that license is granted by “the national association of architects or engineers (or its equivalent)”. In other words, in a country with an unrestricted, competitive market for safety appraisals, allowing builders to contract with the top-rated such firm counts for naught unless that firm has been officially sanctioned by the occupational guild or by the government itself.

So as to remove any doubt about the entry-restricting credentialism embraced by this occupational licensing framework, it is given its own sub-index, the “Professional Certification Index.” The highest possible score is awarded if:

National or state regulations mandate that the professional must have a minimum number of years of practical experience, must have a university degree (a minimum of a bachelor’s) in architecture or engineering, and must also either be a registered member of the national order (association) of architects or engineers or pass a qualification exam.

Lower scores are meted out for less stringent (read: arbitrary and restrictive) requirements.

Consequences of Mayor de Blasio’s Mandated Personal Leave

This week Mayor Bill de Blasio proposed mandating paid personal leave benefits for all employees in New York City. The policy, which applies to both full and part-time workers, would make New York City the first city to mandate personal leave in the country.

The policy is billed as benefiting the 500,000 workers in New York City that currently have no personal days off. Although the idea may sound fresh and New Yorkers no doubt like the sound of paid time off, they may be less enthused if they understood the economics of mandated benefits.

Currently, the Bureau of Labor Statistics estimates that 32 percent of an average U.S. employee’s compensation is in employee benefits, while 68 percent of an average U.S. employee’s total compensation is in salary or wages. So, although most employees don’t realize it, around one-third of employee compensation is already devoted to paying for paid leave and other benefits.

When policymakers mandate benefits for employees, employers typically pay for them through a reduction in salary and wages or other employee benefits. This is because employers are interested in limiting total costs –and therefore total compensation– for a given productivity level. If a reduction in existing salary, wages, or benefits is not possible (due to minimum wage laws, for example) then employers may try to avoid hiring the type of workers they can’t afford.

In a related example, Illinois, New York, and New Jersey each mandated employers provide maternity benefits to women. As a result, women’s wages were reduced to reflect the cost of mandated maternity benefits. The estimated reduction in wages was around 100 percent of the cost of benefits.

Some employees may willingly accept a reduction in wages or benefits for paid personal time. However, not all employees would. For example, part-time workers that already have flexible schedules may prefer higher wages or other benefits instead of paid personal leave. Counterintuitively, when policymakers like de Blasio mandate benefits, the policy reduces employee choice.

Immigration and Aging Populations

Many advanced democracies face slowing growth of GDP because their birth rates are low, implying aging populations.

For example:

Because demographics are supposed to be destiny, Japan was long ago consigned to stagnation with its aging population and rock-bottom birthrate.

But in recent years Japan has defied destiny. Since 2012, its working-age population has shrunk by 4.7 million, yet the number of people working has surged by 4.4. million, the critical ingredient in what is now Japan’s second-longest economic expansion since World War II. The proportion of the population in the labor force has risen sharply since 2012, by more than in any other major advanced economy.

 
As the article notes, Japan’s experience 
offers important lessons for the many other countries that now, or will soon, face similar demographic pressures. A population’s size can still impose limits on long-term growth, but they may be further away than long assumed by economists and policy makers.
Assuming, of course, policy does not disincentivize labor force participation by the elderly and women, or unduly restrict immigration.

U.S. Corporate Tax Rate Still Too High

Democrats are making waves in tax policy by promising to reverse some of the 2017 Republican reforms. Rep. Alexandria Ocasio-Cortez called for raising the top federal individual income tax rate to 70 percent, which was the rate before Ronald Reagan came to office. I noted that the global economy has dramatically changed in recent decades, and such a high rate would be even more damaging today.

Democrats are also calling for a higher federal corporate tax rate, partly reversing the GOP’s cut from 35 percent to 21 percent. Democratic House Budget chair John Yarmuth, for example, is proposing to raise the rate to 28 percent. The problem, again, is that the global economy has changed and U.S. businesses face a more intense competitive climate than ever.

The chart shows the average federal-state corporate tax rate in the OECD industrial countries since 1980. The United States led a global wave of corporate tax rate cuts in the 1980s, but then federal policymakers sat on their hands for three decades as other countries continued cutting.

President Trump pushed hard and convinced Congress to reduce the federal corporate rate to 21 percent. But state taxes are piled on top of that for a combined U.S. federal-state rate of 27 percent. That is still higher than the 24 percent average of the OECD countries in 2018, according to KPMG. The global average rate per KPMG is also 24 percent.

On corporate taxes, America is still a high-rate country.

The data is sourced from OECD and KPMG.

This Is Our Emergency

Last Friday, President Trump threatened to declare a national emergency and build his border wall using “the military version of eminent domain.” By Tuesday, Trump seemed to have climbed down somewhat, declining to repeat the threat in his televised Oval Office address. But the week’s end found the president declaring it would be “very surprising” if he didn’t pull the trigger.

So is the emergency-powers gambit a live option or—like the executive order revoking birthright citizenship Trump floated before the midterms—another pump-fake designed to thrill the base and rile the media? Either way, it’s a noxious, thuggish proposal. Using the army to do an end-run around Congress is not how constitutional government is supposed to work. Imagine believing that Latin American immigration so threatens our free institutions that only banana republic tactics can protect us. 

About the best one can say for the idea is that it has the accidental virtue of concentrating the mind wonderfully about the powers we’ve concentrated in the executive branch. 

Our Constitution cedes vanishingly few emergency powers to the president. He commands “the Militia of the several States, when called into the actual Service of the United States,” and has the power, via Article II, section 3, to convene Congress on “extraordinary Occasions,” such as a national emergency. “That is about as far as his crisis authorities go,” notes the University of Virginia’s Saikrishna Prakash: “the convening authority would have been unnecessary if the chief executive could take all actions necessary to manage ‘extraordinary occasions.’” 

In Youngstown, the 1952 “steel seizure” case, the Supreme Court rebuffed the Truman administration’s claim of a general presidential emergency power divorced from specific statutory or constitutional authority. Justice Jackson, in his influential concurrence, suggested that the Framers neglected to provide such authority for fear “that emergency powers would tend to kindle emergencies.” 

Surely, then, the president can’t just gin up a bogus crisis and use the military to get what he wants when Congress won’t give it to him—can he? It would be nice to be able to answer that question with a confident “no.” Unfortunately, in this case, at least two provisions of the U.S. Code passed during the 1980s, 33 USC § 2293  and 10 USC § 2808, give Trump a non-frivolous rationale for his claim that “I can do it if I want.” 

Overbroad delegations of emergency authority to the executive are a longstanding problem. During the Watergate-era congressional resurgence, a 1974 Senate special committee investigation (co-chaired by Frank Church of Church Committee fame) identified 470 provisions of federal law delegating emergency powers to the president and four proclamations of national emergency, dating as far back as 1933, then still in effect. That investigation led to the National Emergencies Act of 1976, which repealed existing emergency declarations, required the president to formally declare any claimed national emergency and specify the statutory authority invoked, and subjected new declarations to a one-year sunset unless renewed.  

Despite those efforts, the U.S. Code today remains honeycombed with overbroad delegations of emergency power to the executive branch. A Brennan Center report released last month identifies 136 statutory powers the president can invoke in a declared national emergency. Few of these provisions require anything more than the president’s signature on the emergency declaration to trigger his new powers—“stroke of the pen, law of the land—kinda cool,” in the Clinton-era phrase. 

Most of these emergency powers have never been invoked, many of them are innocuous, and some—like the provision that allows suspension of the Davis-Bacon Act in a natural disaster—are even sensible. But other long-dormant powers are extraordinarily dangerous.

Writing in the Atlantic, the Brennan Center’s Elizabeth Goitein highlights a WWII-era amendment to the Communications Act of 1934 empowering the president to close or take over “‘any facility or station for wire communication’ upon his proclamation ‘that there exists a state or threat of war involving the United States.’” She sketches a nightmare scenario in which Trump puts the country on a war footing with Iran; invokes § 706 of the Communications Act to assume control of U.S. internet traffic, deploys federal troops to put down the resulting unrest, and scares people away from the polling stations with a menacing Presidential Alert text message. Goitein grants that “this scenario might sound extreme,” and I admit I found it a bit overcooked. Even if the administration wanted to do something like this, I’m confident it would go bust, thanks to the sort of spectacular ineptitude that botched the initial rollout of the Travel Ban. 

However, she’s absolutely right to call on Congress to “shore up the guardrails of liberal democracy” with comprehensive reform of emergency powers. “Committees in the House could begin this process now,” she writes, “by undertaking a thorough review of existing emergency powers and declarations,” laying out a roadmap for repealing unnecessary delegations, and providing “stronger protections for abuse.” The sooner, the better: you never know when a competent authoritarian is going to come along. 

The Libertarian Experiment That Isn’t

According to Paul Krugman, the government shutdown amounts to a potentially big libertarian experiment.

With nine departments and multiple agencies closed, maybe for months, the New York Times columnist and Nobel laureate envisages a coming test of whether the country can live without the Food and Drug Administration, the Small Business Administration and farm subsidies.

So are those of us at Cato who believe in the abolition of these programs celebrating? Not quite.

As the vast majority of the U.S. population go about their daily lives, barely noticing that 25 percent of federal discretionary spending has been paused, it’s certainly possible many will wonder why debt is being racked up for programs that have no noticeable effect on their well-being. Who knows, many employees, businesses and farms may also reconsider the wisdom of placing their livelihoods at the whims of the political process.

Better still, the shutdown may bring attention to these otherwise rarely-scrutinized programs. If major columnists continue identifying Cato as proponents of scrapping things such as farm subsidies and small business cronyism, linking to our research on the damaging economic, political, and social consequences of existing provisions, the shutdown could serve a useful public education role too!

But, the truth is, most libertarians aren’t cheering current events because shutdowns appear not to change much in regards the size and scope of government in the long term, yet bring chaos, ill-feeling and uncertainty in the short.

Markets are powerful precisely because they allow people to interact in voluntary ways to fulfil wants and needs. Necessity, as they say, is the mother of invention.

Libertarians are indeed confident that, as in countries such as New Zealand, scrapping agricultural subsidies would deliver a more efficient industry, taxpayer savings, and a bigger economy.

But it’s obvious, as Krugman acknowledges, that temporary suspension of promised support is not an environment conducive to farmers making long-term crop or farm ownership decisions, private companies banding to form market-based food safety certification agencies, or small businesses sourcing new finance.

Yes, economic actors will take steps to mitigate the effects of disruption. But knowing government will eventually reopen, there is little to no incentive for the new institutions to develop or businesses and farms to undertake the structural change we would see if government absented from these roles. Instead, businesses and individuals are temporarily crippled in their forward planning and paralyzed by the uncertainty promises made to them being broken.

The natural priority for those farms, businesses and federal employees right now is to lobby successfully for the government to reopen and their payments to start flowing again. Hence the newspaper stories we see already about their difficulties, indicating precisely the diffuse costs yet concentrated benefits associated with much government spending.

That doesn’t mean libertarians are any less supportive of removing government from these activities. In fact, as Chris Edwards shows, a host of other areas likely to be noticeably affected by a sustained shutdown – security screening at airports, air traffic control, and the management of national parks – are better managed in other countries with more private sector involvement. If the shutdown brings attention to this, then great.

Overall though, libertarians are fully aware that for the real policy experiments we desire, the public and/or politicians must be convinced of the necessity or desirability for permanent policy change in a market-based direction. The best chance for success with that is in an environment where those affected can adjust in an orderly manner, and replacement private-sector institutions have time to develop.

Krugman knows it is disingenuous to suggest that the current chaos is some libertarian policy experiment. But as some Republicans do make the case that the programs above are vital for the health of the economy, and libertarians continue to make the case for their abolition, perhaps he will finally cease lumping Republicans and libertarians together in his columns.

New Bill Would Stop Eminent Domain Abuse Along the Border

President Trump’s proposed border wall would cut across nearly a thousand miles of privately owned land, so to build this project, the administration would need to use eminent domain to seize the land—something that the president is eager to do. Aside from the unpleasantness of taking people’s property without their consent, federal eminent domain use comes with it a particularly obnoxious component: the government can take the land but not provide just compensation until years later. New legislation would stop this practice.

As I wrote in 2017:

Right now, when Border Patrol wants to take someone’s land, they send them a letter offering them a nominal low sum of money for their land and threatening to file condemnation proceedings against them if they don’t accept it… . [But] under the eminent domain statute, the federal government can seize property almost as soon as it files a condemnation proceeding—as soon as the legal authority for the taking is established—then they can haggle over just compensation later.

It’s called “quick take.” Quick take eminent domain creates multiple perverse incentives for the government. 1) It can quickly take land, even when it doesn’t really need it, and 2) it has no real incentive to compromise or work with the land owner on compensation. The owner’s bargaining power is significantly diminished. The federal government already possesses the property. This means that for years, people who are subject to a border wall taking go without just compensation.

An NPR analysis of fence cases found that the resolved cases took more than 3 years to resolve. In many other cases, the process took more than a decade for a court to determine just compensation, and some cases are still pending more than 12 years later. Unfortunately, the Supreme Court has determined that this “quick take” eminent domain does not violate the 5th amendment requirement that no “private property be taken for public use, without just compensation.” The reasoning is that as long as the person will eventually get compensation, the taking is constitutional.

The awful component of this process is that, in order to challenge the taking, the property owner must not accept the offered payment. But the border wall will go up on their land just the same. Meanwhile, they have to fight in court without getting the compensation that they deserve. Many people cannot even afford to challenge the taking for this reason alone.

Today, Rep. Justin Amash (R-MI) introduced the Eminent Domain Just Compensation Act to deal with just this issue. “It is unjust for the government to seize someone’s property with a lowball offer and then put the burden on them to fight for what they’re still owed,” Rep. Amash said in a statement. “My bill will stop this practice by requiring that a property’s fair value be finalized before DHS takes ownership.”

It makes this reform by amending Section 103 of the Immigration and Nationality Act (8 U.S.C. 1103), which details the powers of the Secretary of Homeland Security.  Current law provides that:

The [Secretary of Homeland Security] may contract for or buy any interest in land, including temporary use rights, adjacent to or in the vicinity of an international land border when the [Secretary] deems the land essential to control and guard the boundaries and borders of the United States against any violation… When the [Secretary] and the lawful owner of an interest identified pursuant to paragraph (1) are unable to agree upon a reasonable price, the [Secretary] may commence condemnation proceedings pursuant to section 3113 of title 40.

The Eminent Domain Just Compensation Act would amend this provision by adding that: “the Government may not take any land prior to the issuance of a final judgment pursuant to the proceedings under section 3113 of such title.’’ This language forecloses the opportunity for the Trump administration to seize land quickly for the president’s unnecessary, ineffective, and costly border wall without first fully compensating the owners.