How to fix the economy and income inequality
The Conservatives want to revive the economy. Republican presidential candidate Jeb Bush, for example, wants to bring back 4 percent growth. The Liberals want to reduce economic inequality. Hence the growing support for Bernie Sanders. The two goals often seem to go against the grain. But what if there was an idea that could do both? Brink Lindsey, researcher at the Cato Institute, has write a paper which identifies not just one of these ideas, but four. Each of them addresses what he calls “regressive regulations”: government rules that “redistribute income and wealth up the socio-economic ladder.” These rules have two other characteristics in common: they hinder economic progress and they have few disinterested supporters in the political spectrum. Almost the only people supporting them are the financial interests who benefit from them. They are therefore “fruits within easy reach, guarded by dragons”. Take on them, and you can do a lot of good.
Lindsey’s ideas address:
1. Too restrictive copyright and excessive patents. Copyrights and patents are supposed to encourage innovation by protecting property rights. Lindsey maintains that they have gone too far. A 1998 extension of copyright protection, for example, was retroactive – even though it is “impossible to alter the incentives in respect of works already created.” and remixers – to copyright holders.
Patents have exploded from 61,620 in 1983 to over 300,000 today, although research and development spending, as well as the pace of technological advancement, have remained stable. Now you can patent such nebulous things as “methods of doing business”.
The proliferation of patents has fueled an army of “patent trolls,” who buy cheap patents from struggling companies. As Electronic Frontier Foundation Explain“The Patent Office is used to granting patents for ideas that are neither new nor revolutionary, and these patents can be very broad. … (T) the troll will then send threat letters to those he believes infringe their patent (s), “demanding exorbitant license fees as a price for staying out of court – and in business.
Indeed, the majority of patent infringement actions today are “brought by companies which do not manufacture any product … and whose main activity is to prevent other companies” from manufacturing them. The result: the stifling of innovation, often by entrepreneurs in difficulty.
2. Overly strict immigration policies, especially for highly skilled workers. “The easiest way to increase economic output,” notes Lindsey, “is simply to add more inputs used in production, namely capital and labor.” He recaps tons of research showing that immigrants “are disproportionately enterprising and innovative.”
A quarter of Silicon Valley companies have at least one foreign-born founder, for example, even though immigrants make up less than 13% of the US population. Others reported that immigrants are now twice as likely to start a business as native Americans, and that in 2011 they started one in four new businesses in the United States
Immigrants may be poorer than the typical American when they arrive here, but many don’t stay it, and those who move up the economic ladder bring with them many native-born Americans: immigrant-owned businesses have created 4 million jobs here. Unfortunately, only 7 percent of permanent resident visas go to “people who qualify on the basis of their professional skills or other economic value,” Lindsey writes.
3. Professional license. Almost a third of America’s professions now require government clearance – up from 10% in 1970 – including makeup artists, auctioneers, bartenders, florists and ballroom dance teachers.
This causes damage in several ways. It acts as a brake on employment, which hinders economic growth. It raises prices for consumers, sometimes by as much as a third, which hits the poor hardest. It erects barriers to entry for the less educated: 32% of Americans have a college degree, but 43% of people in licensed jobs must have one.
And why? Not for health or safety. Lindsey points out that if health and safety were the primary drivers of licensing, most states would allow the same basket of occupations. This is not the case. Moreover, as Matthew Yglesias notes, in a Vox article on how the Obama administration encourages states to rethink excessive professional licensing: “You can tell from the huge state-to-state variation that the rules often go far beyond what is necessary for safety “. Alaska requires three days of training for manicures; Alabama, 163.
Yglesias adds another point: “Licensing has in some cases become a club with which to punish already disadvantaged people. More than a dozen states have rules that can make non-payment of student loans grounds for license revocation, turning state licensing commissions into debt collectors. And rules prohibiting those convicted of felons from obtaining licenses are widespread, which tends to exacerbate any problems of racial and socio-economic disparities in the criminal justice system. “
4. Zoning. From 1950 to 1970, house prices moved in parallel with construction costs. Then prices started to exceed costs, and the trend “has been particularly dramatic in the major American coastal cities.”
Density might explain this – maybe some cities are just filling up – except that house prices are not strongly correlated with density. However, the prices apparently correlate with “the gradual tightening of land use restrictions”. This “regulatory tax” can add up to 50 percent to the cost of housing.
Zoning, according to Lindsey, exists “to protect the value of owner’s properties at the expense of everyone else’s housing … and achieves its goals by keeping the poor away from the rich.” Not surprisingly, the zoning “controls tend to be the strictest in cities with the highest per capita incomes”.
As a result, and contrary to historical trends, people are moving away from large coastal cities – which are incidentally “the most productive places in the country”, those which “have incubated the greatest productivity gains”.
The high prices caused by zoning are forcing people – the non-rich – to move to less productive areas, hurting both their own economic prospects and the economy in general. (Lindsey quotes a writer for The Economist which qualifies the phenomenon of “passage to stagnation”. )
It is customary in contemporary political discourse to pit economic freedom against economic equality: a laissez-faire economy is supposed to brutalize the weak, while a controlled economy slowly suffocates with its own bureaucracy. Lindsey has done the country a favor by reminding everyone that this dichotomy is too simplistic. Sometimes the best way to lend a hand to the poor is to just take the government boot off them.
This article originally appeared at The Richmond Times-Dispatch.