America’s License Raj

The “license Raj” is an epithet often used for India’s byzantine code of rules and regulations on businesses under the central-planning system finally dismantled in part in the 1990s. The Economist applies the term to the United States, which buries entrepreneurs under layers of federal, state, and local red tape. According to the Competitive Enterprise Institute, the gross cost of federal regulations alone amounts to about $15,000 per household per year, and that doesn’t include the accumulated debt of lost growth due to regulation, which may be much higher. And none of that includes the costs of state and local regulations, such as occupational licensing, which has increased dramatically in the last 60 years, now covering up to 35% of the workforce.

The Economist cites thumbtack.com surveys showing that small business owners care more about the burden of regulation than taxation (about two-thirds of them say that they pay their “fair share” in taxes, as opposed to more or less than their fair share). This preference comes as no surprise to me. Apart from the soul-deadening effects of endlessly parsing legalese and filling out form after form, regulation also tends to substitute the grand (or petty) design of a bureaucrat or politician for the price signals the market provides. When regulation limits competition under the pretense of ensuring quality for the consumer, incumbent producers benefit, but potential upstarts lose, and so do consumers. There is a net cost to society. When local governments require construction companies to obtain permits for every little thing they do, rather than simply requiring them to post a bond and pay for any damage they may cause to local infrastructure or neighboring buildings, less desirable construction happens, and the costs of regulatory compliance are also pure loss.

The thumbtack.com ratings of state regulatory environment correlate highly with both Chief Executive magazine’s survey of CEOs on state regulation and with the regulatory index found in Freedom in the 50 States. CEOs of large companies and small-business owners really want the same thing: a streamlined government that works. We’re not as bad as Argentina or Belarus, but here in the U.S., we suffer from plenty of kludge, and everyone pays the price.

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Working Papers on Federalism & Public Policy

I have just posted a couple of my working papers to SSRN for those who are interested. They are as follows:

1. “Public Policy and Quality of Life: An Empirical Analysis of Interstate Migration, 2000-2012”
   Abstract:
   Individuals and households choose their political jurisdiction of residence on the basis of expected income differentials and jurisdiction-specific characteristics covered by the general term “amenities.” In addition to fixed characteristics like climate and terrain, amenities may include public policies, as in the well-known Tiebout model of migration. Do Americans reveal preferences for certain public policies by tending to migrate toward jurisdictions that offer them? This article tests whether state government involvement in fiscal policy, business regulation, and civil and personal liberties more often reflects an amenity or a disamenity for Americans willing to move. As identification strategies, the article estimates spatial, matched-neighbors, and dyadic models of net interstate migration for all 50 states, covering the years 2000-2012. The evidence suggests that cost of living, which is in turn strongly correlated with land-use regulation, strongly deters in-migration, while both fiscal and regulatory components of “economic freedom” attract new residents. There is less robust evidence that “personal freedom” attracts residents.
2. “Civil Libertarianism-Communitarianism: A State Policy Ideology Dimension”
   Abstract:
   This paper investigates the existence of a second dimension of state policy ideology orthogonal to the traditional left-right dimension: civil libertarianism-communitarianism. It argues that voter attitudes toward nonviolent acts that are sometimes crimes, particularly weapons and drugs offenses, are in part distinct from their liberal or conservative ideologies, and cause systematic variation in states’ policies toward these acts. The hypotheses are tested with a structural equation model of state policies that combines “confirmatory factor analysis” with linear regression. The existence of a second dimension of state policy essentially uncorrelated with left-right ideology and loading onto gun control, marijuana, and other criminal justice policies is confirmed. Moreover, this dimension of policy ideology relates in the expected fashion to urbanization and the strength of ideological libertarianism in the state electorate. The results suggest that the libertarian-communitarian divide represents an enduring dimension of policy-making in the United States.

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CEOs vs. Small Business Owners on Which Policies Make for a Business-Friendly Climate

Which public policies make an economy better for business? One way to answer this question is to ask businesspeople. Two recent surveys ask businesspeople to rank the American states on their friendliness toward business.

Now, libertarians often remind us that friendliness toward business is not the same as friendliness toward markets. Indeed, libertarians believe that many of their favored policies, such as abolishing trade protection, corporate welfare, and regulations that privilege big business, will redound to the benefit of workers and small business owners. What’s so interesting about these two surveys is that they are of different types of business owners: CEOs of large companies and small businesspeople. The first survey was conducted by Chief Executive magazine and the second by thumbtack.com in partnership with the Kauffman Foundation. By relating respondents’ views about the friendliness of their states to those states’ actual policies, we can see where big and small businesses agree and disagree about which policies are most important for their success.

My first step was to draw out of these survey data those numbers that relate specifically to different states’ policy environments, as opposed to other aspects of the economic climate. From the CEO survey, therefore, I took the taxation/regulation score given for each state (higher is better). From the small business survey, I took the “Regulations” component grades. Unfortunately, the small business survey does not include raw scores for each state, so I simply quantified the grades as follows: A+ = 0, A = 1, A- = 2, and so on, up to F = 11. The small business survey only covers 45 states, but for these states, the correlation between CEO and small business scores was -0.76. Since higher is better in the CEO survey and lower is better in the small business survey, that high correlation indicates a surprising degree of agreement between large and small businesses about states’ friendliness toward their businesses.

Nevertheless, there may remain some important differences in which policies large and small businesses prioritize. To get a handle on this question,

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Do Politicians Regulate When They Can’t Spend?

Noel Johnson, Matt Mitchell, and Steve Yamarik have a new working paper answering that question in the affirmative. They look at state fiscal and regulatory policies and find that Democrats generally like to increase taxes and spending when in control of state houses and Republicans do the reverse. But when states have tough balanced-budget requirements called “no-carry rules,” Democrats and Republicans don’t differ much on fiscal policy. Instead they try to appeal to their constituencies by pursuing regulatory policies – in general, Democrats increasing regulation and Republicans cutting it. As the paper’s still in the working draft stage, they are looking for comments on it.

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In Which the Town Comes for My Garden

I’m a native plant gardener. I’ve removed all of my back lawn and replaced it with native trees, shrubs, vines, wildflowers, ferns, and grass and grass-like species, and I’ve removed most of my front lawn and done the same, apart from some mown paths. Why? Because native plants are better for the environment. Our wildlife, from insects to birds, coevolved with these plants and are well adapted to using them for survival. Alien plants often require special help to survive (watering, fertilizing, spraying with pesticides, none of which I do), or else they take over because they lack their natural predators to keep them in check. My native garden has attracted many species of birds, including things like flycatchers that one rarely sees in cities. The garden is awash in bees, moths, and butterflies the entire summer. Here are some pictures of the gardens:

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Today I received a notice of code violations. Supposedly someone complained about my front yard, and now the town is giving me two days (!) to remedy the violations, or the town will come and mow the garden down and bill me for the pleasure.

The first violation is straightforward and easily dealt with. The town prohibits trees and shrubs from obstructing vision from private driveways and requires them to be no more than three feet in height. No problem – I try to keep the shrubs by the sidewalk trimmed for public convenience, but some of them are as tall as five feet. I’ll give them a bad haircut now, and then in the fall, as per usual, I will cut them to the ground (these species respond well to this kind of hard pruning).

It’s the next citation that I find very troubling:

According to the notice, “weed and plant growth” in excess of 10 inches is prohibited. Well, that would prohibit pretty much any garden, wouldn’t it? But they clearly misrepresented the text of the ordinance, the definitions in which read as follows:

GRASS, WEEDS or PLANT GROWTH
All grasses, annual plants, trees or vegetation that are harmful to the public welfare, including stumps, roots, filth, garbage, or trash. The term “grass, weeds and plant growth” shall not include cultivated flowers, healthy trees, shrubs, or gardens.

NOXIOUS WEEDS
Plant growth deemed by the Town of Tonawanda Code Enforcement Officer as potentially dangerous to the public welfare, or such plant growth that is an unattractive public nuisance or grows in an undesirable location.

In short, my garden is fully exempted from this ordinance. Furthermore, the code enforcement officer followed the wrong procedure in citing my property. From the ordinance:

B. Written notice may be given by registered mail addressed to the owner of the parcel of real property in question together with posting at the parcel of real property in question or by personal delivery to the owner. Service shall be deemed complete upon the deposit of the registered mailing in a postpaid envelope and the posting at the real property in question and, if by personal delivery, upon the delivery of notice in person to the owner of the parcel of real property.

C. Such notice shall specify the violation(s) as determined by the Code Enforcement Officer and shall direct the owner of the parcel of real property in question to remedy the violation(s) and bring the parcel of real property into compliance with the provisions of this chapter within 10 calendar days of service of notice.

The notice did not come by registered mail; it came by regular mail. The letter does not give me 10 days from the date of service; it gives me 7 days from the date on the letter (just 2 days from the date I received it).

I believe I am on firm legal ground. The concern, however, is that the town will come and mow down my gardens without due process. This has happened all over the country and in Canada. Here’s one example from Illinois, and here’s another from Toronto. The Environmental Protection Agency even provides advice to homeowners on fighting their town governments!

From a utilitarian perspective, government should probably be subsidizing my work rather than prohibiting it. I’m providing benefits to the community and the environment. I’m still optimistic that this will end well, that I’ll be able to get in touch with either the inspector or the mayor, and the town will come to their senses. If not… watch this space.

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What’s in the Sausage?

As commentators begin to read the Dodd-Frank Wall Street Reform and Consumer Protection Act, they are discovering some hidden gems. The most recent discoveries:

Diversifying the Portfolio (via Carrie Budoff Brown at Politico):

Congress gives the federal government authority to terminate contracts with any financial firm that fails to ensure the “fair inclusion” of women and minorities, forcing every kind of company from a Wall Street giant to a mom-and-pop law office to account for the composition of its work force.

Maintaining Transparency (via Ed Morrissey at HotAir):

Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act.

Controlling the Market in “Conflict metals” (via Michael Tennant at NewAmerican):

it includes language compelling American-listed “companies to certify whether their products contain minerals from rebel-controlled mines in Congo and surrounding countries.”

Since gold is on this list of “conflict metals,” conspiracy theories are beginning to blossom.

What readers will NOT find: reforms of Freddie Mac and Fannie Mae, the two government sponsored enterprises that were embroiled in the financial meltdown (see Colin Barr, Fortune). Not to worry…hearings are scheduled.

Meanwhile…

Congress, in its infinite wisdom, is prepared to provide  the Financial Crisis Inquiry Commission an additional $1.8 million to continue its work. Daniel Indiviglio (the Atlantic) wonders why, given that Congress leapfrogged the commission:

At a time when both sides of the aisle are worried about excessive government spending on waste, it’s hard to justify providing more funding to a commission whose purpose has become questionable, at best.

Michael Smallberg and Rick D’Amato (the Project on Government Oversight) are concerned about the burdens that the new rules and mandated studies will place on regulators:

we’re concerned that Congress may be burdening regulators and watchdogs with unnecessary studies, rather than putting hard-and-fast rules in place. Many of these studies will simply provide another avenue for the financial services industry to exert its influence on the process, and in the meantime, the studies could impose a significant burden on regulators and watchdogs that are already short on funding, staff, and resources.

Of course, one man’s burden is another’s opportunity. The new regulations this should provide a great source of employment opportunities, thereby contributing to the ongoing success of Recovery Summer. As Julie Steinberg notes:

With the passing of the financial reform bill, the SEC, CFTC and FDIC are all on the hiring warpath. The new CFPB and the beefed-up OCC are also expected to join hiring fray once they figure out staffing needs. The creation of at least 1,343 jobs across two of the agencies has already been announced (SEC and CFTC), and more hiring announcements are expected to follow.

Undoubtedly, there will be thousands of more jobs to come. Ms. Steinberg provides useful information on how to snag a job as a regulator.  What is unclear is whether currently unemployed Census workers will have a suitable skill set. If they do, the last month of Recovery Summer may fulfill the administration’s promises.

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Scary metaphor of the day

This today from the WSJ:

Federal Deposit Insurance Corp. Chairman Sheila Bair said bank regulators would have the tools they need to banish “too big to fail” institutions from the financial landscape once a Wall Street overhaul bill becomes law.

…Ms. Bair said that new powers allowing regulators to seize and liquidate failing institutions would act like a threat hovering over the financial industry, deterring firms from growing too large or reckless.

“This is a kind of a nuclear bomb that you hope you never have to use,” Ms. Bair said. “The fact that it’s there, I think, is going to be important. And if we have to use it, we will.”

So I now have this mental image of a nuclear bomb “hovering” over Wall Street waiting for some bureaucrat to hit the ignition.  Like we don’t have enough to be worried about with this bill already!

Lovely.

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