Archive for the 'business' Category

Occupational licensing and ex-cons


Matt Yglesias has had a great series of posts up about how little sense it makes for state governments to require certification before someone can provide simple services like haircuts. The silliness of occupational licensing is one of my pet issues, and I’m stunned by how many intelligent people spend time justifying the status quo instead of applying the free market principles they otherwise claim to support.

For an indication of just how ridiculous some of this licensing gets, check out this list of occupations in North Carolina requiring government licensing. Along with Yglesias’s hobbyhorse, barbers, North Carolina also requires government charters for athletic agents, chick and egg dealers [presumably referring to chickens], geologists and soil scientists [but no other scientists], interpreters, landscape contractors, manicurists, refrigeration contractors, seed dealers, and scores of other workers.

Those of us who question the extent of occupational licensing in America usually argue that it is just a tool that helps currently-licensed providers limit competition and thus artificially raise prices and profits — all while hiding under the guise of consumer protection. To be sure, licensing is a good idea for certain classes of services in which market forces and lawsuits don’t provide sufficient deterrent to and remedies for harm. But how does “landscape contractor” fall into that category? Anyone who believes that landscape contractors clearly need a government license to operate, while gardeners are good to go without public imprimatur, is probably letting their preexisting beliefs and status quo bias guide their ‘principles’.

But back to Matt Yglesias. His final post in the series praises Barack Obama for making some positive moves towards liberalizing Illinois’ licensure regime.

And Yglesias is partly right. Barack Obama, as a state senator in Illinois, was the primary sponsor behind a bill that eased occupational licensing restrictions for convicted felons. The felon, after living crime-free for a period of time and documenting certain pro-social behaviors, could apply for a ‘Certificate of Relief from Disabilities’ (CRD) that would remove certain legal disabilities all felons face when released into the world. No longer would a single felony conviction bar someone from getting a license to cut hair; the licensing board would have to come up with some other excuse, instead.

Yglesias is skeptical about the broader impact of the CRDs:

“The problem here is that when you set up these boards, they have incentives to think up any kind of halfway plausible reason to bar people from entering the field.”

Remove the felony bar, the logic goes, and the boards will just come up with other flimsy excuses.

He’s almost certainly right about most licensing boards and most occupations. But in the particular case of Illinois, the problem isn’t that the licensing boards don’t approve ex-cons despite their Certificates. It’s that few ex-cons end up applying for licensing in the first place. As this report (PDF) indicates, only 47 applications for CRDs were made within the first 2 years of the program’s implementation. Of that extremely low number, 81% of applications for CRDs were approved. But none of those recipients ended up applying for occupational licenses within the observation period. That said, a very few ex-cons without CRDs did apply for occuptional licenses, and 67% of those applicants were eventually approved during the same period.

The bottle-neck in Illinois, then, isn’t necessarily the board rejecting felons, but qualified felons not knowing about or not applying for CRDs or occupational licenses in the first place.

I guess the take-home lesson here is that occupational licensing boards really can be nothing more than thinly disguised guilds covering their own economic interests. But occupational licensing reform isn’t exactly the key to rehabilitating felons. Connecting felons with existing benefits and procedures is the easy low-hanging fruit there. That doesn’t mean that making it easier for ex-cons to become barbers isn’t worth doing … it’s just not the kind of major reform that should get our blood pumping. It turns out that the actual benefit of CRDs may just be the perception among private employers that the state says these guys (and they are mostly guys) are safe(r).*

* No, I didn’t closely follow Barack Obama’s occupational licensing and recidivism reform policies in the Illinois state legislature. I came by this knowledge honestly, as part of a much larger research project this summer.

Filthy lucre

[by JSC5]

I’m amazed how common it is to believe that people who’s job it is to help others shouldn’t benefit too much in the process. Here’s the latest installment, from the New York times, quoting politicians and professional worry-worts:

“A nearly $1 million salary and benefit package for a nonprofit executive is not only questionable on its face but also raises questions about how the organization manages its finances in other areas,” said Senator Tom Coburn, Republican of Oklahoma. …

“Many donors feel that paying the leader of a charity a six-figure salary is outrageous,” said Ken Berger, [president of the website Charity Navigator]. … “I’m not advocating poverty wages,” he said. “But arguing that those working for the benefit of the neediest people in our society should make millions and multimillions like corporate leaders defies common sense.”

A world in which it “defies common sense” to compensate people highly when they provide goods and services on a charity basis that are undersupplied by a market economy is a world in which lots of people believe that money is dirty. The outcome of such a belief – low pay in the NGO sector – ensures that only the children of the ruch can afford to do things like conduct research into development interventions abroad, or run an organization connecting at-risk youth with older adults.

The world I prefer to live in is a world in which we encourage the provision of charitable goods and services by making sure that salaries at all levels are sufficient to encourage bright people with new ideas to get into the field and improve efficiency. And if someone happens to live well by doing good, then more power to ’em!

Now, of course, there is some sort of tradeoff here. High salaries in the non-profit sector could attract good people, or they could be a waste of resources that could have otherwise gone to additional provision of charity goods and services. Clearly both happen, to a certain extent. Just like with faux-scandals over corporate pay, the answer in the NGO world is to strengthen the transparency of the donor market, strengthen board oversight of NGO management, and increase competition among providers of charity goods and services so that more efficient and successful organizations can prosper, while lurking behemoths fall.

State-owned enterprises

[by JSC5]

A good illustration of the incoherence of our discourse about government-owned enterprises, from today’s NYT:

Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program of the Treasury Department, said both carmakers [GM and Chrysler] needed to shut down some underperforming dealerships. But it questioned whether the cuts should have been made so quickly, particularly during a recession. The report, released on Sunday, estimated that tens of thousands of jobs were lost as a result.

After having read and watched most of Mr. Barofsky’s congressional testimony for a one of my jobs, I can honestly say that I think he’s done a great job as Special Inspector General for TARP. This latest SIGTARP report, however, seems to suffer from a problem shared by just about all analysts, commentators, politicians, and academics who work on bailout issues and the problems of state ownership. What exactly are our goals with these bailed-out institutions? Should we run them for the public benefit, or run them as businesses to return them to profitability as soon as possible? Or do we have hybrid, competing goals?

I think conservatives (and the rest of us!) were worried that state-owned enterprises would get treated like adjunts of the state and be forced to operate suboptimally in order to support public goals like employment. It now turns out that the Administration, perhaps afraid this perception, has been very aggressive in pursuing profit-maximizing personnel cuts and dealership reorganizations. Does anyone think this will win the Administration any love from conservatives (or from the rest of us)? If anything, the Adminstration is now catching flack for not doing enough to support employment.

All I’m saying is, we need to decide what the proper goals for SOEs are. And then we need to tell SIGTARP, congressional representatives, and everyone else in the system, so that we don’t get whiplash going from shouts of “socialism!” to “free market ideolog!” in 2.6 seconds.

Fame and awkwardness

Besides being intensely jealous of JSC7’s brush with blogging fame in China, I also have one observation to add: the single biggest obstacle to spending time with interesting / important people isn’t the target’s busy schedule or sense of self importance. It’s your own awkwardness, your fear of your own awkwardness, and the target’s fear of your awkwardness and their own awkward reaction to it. The bottom line: we’d all be spending more time hanging out with the people we want to hang out with if we could give better signals as to our ability to hold a normal, interesting conversation.

This is also a major skill that great schools don’t teach.

It’s called ‘VAT’, guys

Reporting from the NYT indicates that states across the country, facing huge fiscal deficits they must close, are going to institute a number of new taxes “on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.”

The Times tries to explain this as a move to widen the tax base to match the modern economy:

In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods. But as the nation’s economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that.

It’s certainly true that, given the modern service economy, state sales taxes don’t cover nearly as much of total economic activity as they once did. But the new state taxes are in no way a serious attempt to widen the tax base and fix the problems of the sales and income taxes.

How do I know this? Well, if you’re really and truly interested in doing this right, then you implement a VAT, or a Value Added Tax. VATs are what many European states use to solve the problem of a narrow sales tax. They have the benefit of taxing both goods and services , putting the cost of compliance on the company instead of the state, and taxing only the value-added at each stage, instead of having the cascading effect of a traditional sales tax.

The most important point about the VAT is that it applies at an equal rate to everything you buy. No chance to game the system, no way lobbyists can say, “Don’t tax clowns, tax those evil armored car services instead”. But imposing a VAT would be too politically difficult in most US states right now, given our puerile political culture. Socialism! So instead, our state governments are imposing specific taxes on specific services that just happen to be politically weak, or easy targets, or deemed ‘bad’ in some moral framework. Just so we’re clear, this is a terrible way to impose taxes. It will artificially shift consumption away from the services unlucky enough to be taxed and towards the services that had a better lobbying operation in the state capital. From the standpoint of justice and free markets, it’s probably better to impose a lower VAT that covers everybody than it is to tax the bejeesus out of a grab-bag of targeted services. After all, clowns are people, too.

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This is a group blog. JSC5 currently writes from the US. JSC7 writes from behind the Great Firewall of China.

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