How to Fix the Economy, and Income Inequality
The libertarian way.
Conservatives want to get the economy roaring again. Republican presidential candidate Jeb Bush, for instance, wants to bring back 4 percent growth. Liberals want to reduce economic inequality. Hence the surging support for Bernie Sanders. The two goals often seem to work at cross purposes. But what if there were an idea that could do both? Brink Lindsey, a scholar at the Cato Institute, has written a paper that identifies not just one such idea, but four. Each of them addresses what he terms "regressive regulations": government rules that "redistribute income and wealth up the socioeconomic scale." Those rules have two other common features: They impede economic progress, and they have few disinterested defenders anywhere along the political spectrum. Nearly the only people who support them are the moneyed interests that benefit from them. They are, therefore, "low-hanging fruit guarded by dragons." Tackle them, and you can do a great deal of good.
Lindsey's ideas address:
1. Overly restrictive copyrights and excessive patents. Copyrights and patents are supposed to incentivize innovation by protecting property rights. Lindsey argues they have gone too far. A 1998 extension of copyright protection, for instance, was retroactive — even though "it is impossible to change incentives with respect to works that are already created. Retroactive extension thus amounted to a straight-up wealth transfer from consumers — and would-be adapters and remixers — to copyright holders."
Patents have exploded, from 61,620 in 1983 to more than 300,000 today — even though research and development outlays, as well as the rate of technological breakthroughs, have remained steady. Now you can patent such nebulous things as "methods of doing business."
The proliferation of patents has fed an army of "patent trolls," who buy patents on the cheap from distressed companies. As the Electronic Frontier Foundation explains, "the Patent Office has a habit of issuing patents for ideas that are neither new nor revolutionary, and these patents can be very broad. … (T)he troll will then send out threatening letters to those they argue infringe their patent(s)," demanding exorbitant licensing fees as the price of staying out of court — and in business.
Indeed, the majority of patent infringement suits today are "brought by firms that make no products … and whose chief activity is to prevent other companies" from making any. Result: the stifling of innovation, often by struggling entrepreneurs.
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2. Too-tight immigration policies, especially for high-skilled workers. "The most straightforward way to increase economic output," Lindsey notes, "is simply to add more inputs used in production — namely, capital and labor." He recaps reams of research showing that immigrants "are disproportionately entrepreneurial and innovative."
One-fourth of Silicon Valley companies have at least one founder born abroad, for instance, even though immigrants make up less than 13 percent of the U.S. population. Others have reported that immigrants are now twice as likely to start a business as native-born Americans, and in 2011 created one out every four new businesses in the U.S.
Immigrants might be poorer than the typical American when they arrive here, but many don't stay that way, and those who climb the economic ladder bring many native-born Americans with them: Immigrant-owned businesses have created 4 million jobs here. Unfortunately, only 7 percent of permanent resident visas go to "individuals who qualify on the basis of their work skills or other economic value," Lindsey writes.
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3. Occupational licensing. Nearly one-third of American occupations now require a permission slip from the government — up from 10 percent in 1970 — including makeup artists, auctioneers, bartenders, florists, and ballroom dance instructors.
This causes harm in several ways. It acts as a drag on employment, which impedes economic growth. It raises prices for consumers, sometimes by as much as one-third, which hits the poor the hardest. It erects barriers to entry for the less educated: Thirty-two percent of Americans have a college degree, but 43 percent of people in licensed jobs are required to have one.
And for what? Not for health or safety. Lindsey points out that if health and safety were the principal drivers of licensing, then most states would license the same basket of occupations. That's not the case. Moreover, as Matthew Yglesias notes, in a Vox article on how the Obama administration is encouraging states to rethink excessive occupational licensing: "You can tell from the enormous state-to-state variation that rules are often going well beyond what's needed for safety." Alaska requires three days of training for manicurists; Alabama, 163.
Yglesias adds another point: "Licensing has in some cases become a cudgel with which to punish the already disadvantaged. Over a dozen states have rules that can make nonpayment of student loans into grounds for license revocation — turning state licensing boards into debt collectors. And rules barring people with felony convictions from obtaining licenses are widespread, which tends to exacerbate all the problems with racial and socioeconomic disparities in the criminal justice system."
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4. Zoning. From 1950 to 1970, housing prices moved in tandem with construction costs. Then prices began to outstrip costs, and the trend "has been especially dramatic in America's big coastal cities."
Density might explain that — maybe some cities are just filling up — except that home prices do not correlate highly with density. However, prices do apparently correlate with "the progressive tightening of land-use restrictions." This "regulatory tax" can add as much as 50 percent to the cost of a dwelling.
Zoning, Lindsey says, exists "to protect homeowners' property values at the expense of housing for everybody else … and accomplishes its objectives by keeping poor people away from rich people." Not surprisingly, zoning "controls tend to be strictest in the cities with the highest per capita incomes."
As a result, and contrary to historical trends, people are moving away from big coastal cities — which are, by the way, "the country's most productive places," the ones that have "incubated the greatest productivity gains."
High prices caused by zoning are forcing people — non-rich people — to move to less productive regions, which hurts both their own economic prospects and the economy overall. (Lindsey cites a writer for The Economist who terms the phenomenon "moving to stagnation.")
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It's customary in contemporary political discourse to pit economic liberty against economic equality: A laissez-faire economy supposedly brutalizes the weak, while a controlled economy slowly chokes to death on its own red tape. Lindsey has done the country a service by reminding everyone this dichotomy is too simplistic. Sometimes the best way to give the poor a hand up is simply to take government's boot off their neck.
This article originally appeared at The Richmond Times-Dispatch.
