How Capitalism Will Save Us

by Steve Forbes

  Minimumwage supporters forget that in a free market, transactions take place based on mutual agreement and perceived benefit. If the wages for unskilled jobs were truly too low, there would be no takers. People who take minimumwage positions clearly perceive that there is a benefit in taking these jobs, usually as a way to gain entry into the economy and as short-term employment. Remember, markets are spontaneous systems that behave in ways that bystanders may not always like. By imposing their ideas about what people should be making in low-skilled jobs, labor advocates have done their constituents a disservice by pricing out of the market the very neediest job seekers.

  REAL WORLD LESSON

  Low-wage, unskilled jobs have more benefits than critics believe because markets do not always behave according to the preconceptions of bystanders.

  Q DIDN’T DEREGULATION WRECK THE AIRLINE INDUSTRY?

  A NO, DEREGULATION GREATLY BENEFITED CONSUMERS. THE PROBLEM IS THAT GOVERNMENT DID NOT FINISH THE JOB.

  As we have seen in the case of the financial crisis, people often blame problems on a lack of regulation when the real culprit is bad regulation. This is true of the problems plaguing the airline industry.

  Anyone who travels knows that airline travel can be a nightmare, with endless time spent on security lines, runways, and crowded planes and coping with lost luggage. No wonder everyone is angry, passengers and staff included. In 2008, the U.S. Department of Transportation received 40 percent more complaints about airline service than in December 2006.

  These problems are usually blamed on airline deregulation. Writer Matthew Yglesias, a freemarket critic, insists that airline quality has suffered because airlines are free to compete on price: “Previously, airlines barred from competing on the basis of price engaged in fairly vigorous competition on the basis of service quality. So while products generally get better over time, the quality of air travel has deteriorated rapidly as a low-cost, low-quality equilibrium has proven to be consistently more profitable.”38

  Is that really true? Airline delays and lost luggage are problems endured by passengers across the board, regardless of what they paid for their tickets. Is bad service really due to the fact that airlines make more money delivering poor quality? In most industries, the high-quality products usually offer the biggest profit margins, because they allow companies to charge more.

  Washington’s deregulation of airlines is not responsible for today’s poor service. The problems stem from the fact that—contrary to what is believed—the entire airline industry was not deregulated. Airports and air-traffic-control systems that are critical to smooth and efficient flying were left under the control of government.

  Writing in Regulation magazine, Robert Poole Jr. and Viggo Butler explain that government management of our airports and air-traffic-control systems has produced an antiquated, inefficient infrastructure unequipped to handle the explosion of air travel resulting from deregulation.

  Government-run airports, for example, are unable to use market-based methods to reduce airport congestion—such as using peak pricing to direct some usage by carriers into off-hours. This would not only cut down on overcrowded terminals, it would generate much-needed fees to finance expansion and technological improvements both in air traffic control and in airport facilities.

  Poole and Butler say that the misery of today’s air travel is largely caused by an air-traffic-control system that relies on outdated 1950s technology. Only recently did the FAA announce that it would phase in more sophisticated NextGen air-traffic-control systems that use the kind of GPS satellite navigation technology consumers have had for years in passenger cars. The new systems would enable airports to handle at least twice as much traffic.

  NextGen technology has existed for years. But the system has been bogged down in political debate. Not having to account to consumers, bureaucrats, as always, take their time at taxpayer expense. NextGen isn’t expected to be fully in use until about 2025, at a total cost of some $35 billion.

  Other countries already have more efficient, up-to-date air-traffic-control systems than the United States because they have given the management of airports and air-traffic-control systems to nonprofit corporations under industry control—and out of the hands of politically interested government bureaucrats.

  The Rap on airline deregulation is anything but the truth. Airline deregulation actually has made service cheaper and more abundant. Adjusted for inflation, fares today are 25 percent to 44.9 percent lower than they were before deregulation three decades ago. Carriers offer far more service to more cities. And studies show travel is safer, too. The real problem in the United States isn’t our airline traffic jam. It’s the bureaucratic bottleneck in Washington.

  REAL WORLD LESSON

  Government management, driven by politics and divorced from the realities of supply and demand, is not up to the task of managing the complex logistics of aviation infrastructure.

  Q WHY IS NET NEUTRALITY A BAD IDEA?

  A GOVERNMENT-MANDATED “NET NEUTRALITY” IS ESSENTIALLY RENT CONTROL FOR THE INTERNET. LIKE ALL PRICE CONTROLS, IT WOULD PRODUCE SHORTAGES AND LOWER THE QUALITY OF PRODUCTS AND SERVICES.

  Few economic policy discussions have been as muddied by technological jargon as the argument over net neutrality. We will spare you the mind-numbing lingo and technological details. The question, however, boils down to whether telecommunications companies should be able to set their own prices for the bandwidth they supply to Internet content providers. The dispute pits phone and cable companies like AT&T, Comcast, and Verizon—also known as Internet service providers or ISPs—against content providers such as Google, Yahoo!, and YouTube, among others.

  Cable and telephone companies want to charge higher rates to those big customers because of the explosion of Web traffic clogging the information superhighway. Internet applications, such as video-and file-sharing networks, are rapidly taking up available space. A high-definition feature film, for example, requires as much data as 2,300 songs or 35,000 Web pages. According to the Wall Street Journal, bandwidth usage is growing at about 50 percent a year.

  ISPs have traditionally relied on “all you can eat” pricing. Internet service companies assert that a tiered pricing system—where high-intensity users are charged more—will help to manage the congestion while encouraging companies to invest in more fiber-optic networks that expand their data pipelines.

  But opponents of tiered pricing insist that it will force companies to “discriminate” against high-bandwidth users to control costs. For Web users, this means that some Web sites might suddenly operate more slowly or be less available. Some say this is already happening. The Internet service provider Comcast came under fire from net-neutrality advocates, who alleged the company blocked service to some of its customers.

  Net-neutrality advocates have turned their campaign into a moral crusade to preserve the democratic heart and soul of the Internet. Yet no one argues when tiered pricing is used in other industries. The example most often given is FedEx: it seems reasonable that the parcel delivery giant charges more money to people who make use of its service by requesting quicker package delivery. And even today there’s not true net neutrality. For instance, individuals pay premiums to get high-speed DSL service.

  Despite the vague, high-tech label, government-mandated “net neutrality” is essentially price control. And price controls, no matter what they’re called, always end up harming the consumer. When companies are unable to generate sufficient profit, they have less money left over to invest in maintaining and improving operations. Enhancements are halted. Service eventually declines.

  New York City’s chronic housing shortage provides a powerful example of the perils of price controls. New York’s rent-control laws were enacted in 1943, ostensibly to protect less affluent tenants against gouging by landlords. Other cities, including Boston, areas of Los Angeles, and San Francisco, followed New York’s example. By the early 1980s, about 10 percent of the nation’s renters were covered b
y rent-control regulations.

  What happened? Less capital was available for real-estate development. The consequence: new housing in rent-controlled areas stopped being built or was sharply curtailed. By the 1990s, only about eight thousand new units were coming online each year in New York City, the lowest number since the Great Depression. Lower-income people had to make do with deteriorating rentals and more expensive nonrental housing.

  Rent-control laws were loosened in the 1990s. But part of the market remains strictly controlled. To this day, New Yorkers are loath to move from rent-controlled apartments with cheap, below-market rents. The cost of housing in New York City today is about twice the national average.

  Rent control did anything but bring more “neutrality” or fairness to the market. Affluent people were usually the ones who gained from hanging on to cheap, rent-controlled apartments. In one recent notorious case, an outcry ensued after it was disclosed that Charles Rangel, the powerful chairman of the House Ways and Means Committee, had at least four rent-controlled apartments.

  Meanwhile, studies have shown that “freemarket cities” with no rent regulations, such as Philadelphia, Chicago, San Diego, Phoenix, and Seattle, have almost perfectly competitive housing markets, with housing available at every price level.

  Little wonder some have called net neutrality “rent control for the Internet.” Net neutrality would turn the Internet broadband providers like Comcast and AT&T into the equivalent of New York City landlords. According to the Wall Street Journal, the debate in Washington has already discouraged investment. It’s one reason that the United States lags behind countries like South Korea and Japan in developing broadband capacity and is fifteenth in the world in bandwidth penetration.

  Price controls are always destructive, a lesson we should have learned from the 1996 Telecommunications Act. Under the guise of fostering competition, the legislation mandated that incumbent companies such as Verizon lease their wires to new phone companies at subsidized prices. No surprise, the incumbents then slashed capital spending. Why invest money in facilities that would benefit competitors? When these controls were lifted, the startups failed because they had been artificial creations of political legislation.

  Unfortunately, “net neutrality” is the latest case of one industry group attempting to harness the powers of government to distort market behavior to suit its interests. Whether it’s net neutrality or rent control, government-imposed price constraints only harm the economy and damage people and are anything but fair.

  REAL WORLD LESSON

  Promoting the interests of content companies over broadband providers, “net neutrality” is anything but neutral and is essentially price control.

  Q DON’T WE NEED OCCUPATIONAL LICENSING TO PROTECT CONSUMERS FROM BAD OR UNETHICAL PRACTITIONERS?

  A MOST OCCUPATIONAL LICENSING LAWS ARE NOT ABOUT PRESERVING INDUSTRY STANDARDS BUT ABOUT PROTECTING INCUMBENTS FROM COMPETITION. THEY HURT BOTH THE ECONOMY AND CONSUMERS.

  In January 2005, a local news Web site in Miami featured the story of ten-year-old Carolyn Lipsick, who wanted to raise money for the victims of Asia’s devastating tsunami—only to be shut down by city officials. Why? Because she lacked the appropriate license. The Web site recounts:

  Miami Beach city officials reportedly told [the] 10-year-old …, who wanted to sell cookies and drinks in her front yard to raise money for tsunami victims, that she could not hold the fund raiser because they could not grant her an occupational license.

  “I feel bad for them,” said Carolyn. … “Some children have no clothes, no food, no water and no shoes and most important, that I want to help them, they can’t find their parents….”39

  After the story got local news coverage, Florida’s top officials were so embarrassed that they paid for Carolyn to set up her lemonade stand at the state capitol. She eventually succeeded in raising five hundred dollars—at the expense of taxpayers, who of course paid for her trip.

  Carolyn’s story illustrates what’s wrong with most of the country’s countless occupational licensing regulations—they’re rigid, excessive, and often just plain dumb. And they end up costing the taxpayer and the economy.

  According to a 2007 Reason Foundation report, more than one thousand occupations are currently regulated by the states (in addition to municipal and federal oversight). Certainly we want to license some of these professions—like doctors and maybe lawyers. Some may argue for licensing of real estate salespeople. But do we really need occupational licenses for interior designers, beekeepers, florists, and turtle farmers? The state of Maryland licenses fortune-tellers. Does that mean they’re better equipped to predict the future?

  Occupational licensing laws are billed as a means of protecting the public from negligent, unqualified, or otherwise substandard practitioners. But in many cases they were instituted to protect the interests of existing businesses. The Mackinac Center’s Jack McHugh noted:

  The dirty little secret about state licensure is that the people who lobby for it are usually the stronger competitors of those who would be licensed. Their goal is not to protect the public, but instead to raise barriers to new competitors who might cut prices and lower profits.40

  By limiting competition, licensing laws restrict job growth—by an average of 20 percent, according to the Reason Foundation report. The total cost of licensing regulations is estimated at between $34.8 billion and $41.7 billion per year.41

  The laws also hurt consumers by reducing choice and enabling government-protected licensees to charge higher prices. Take the field of optometry. The Reason Foundation found that the average eye exam and eyeglass prescription is 35 percent more expensive in cities with more restrictive optometry regulations.42

  Licensing regulations have also helped hike the price of funerals. Why are caskets so expensive? The industry’s occupational licensing regulations have helped drive up prices by creating a “casket cartel.”43In some states, it is illegal to sell caskets without a funeral director’s license. This has led to enormous markups—as much as 600 percent above wholesale in states like Oklahoma and Tennessee.44

  But don’t we need occupational licensing laws to assure that practitioners of a profession deliver quality service? The answer is yes in the case of doctors and nurses. But as we’ve mentioned, the free market to a substantial degree is self-regulating. The average florist is not likely to keep your business or get recommendations if he or she constantly delivers wilted merchandise.

  Most of us know from experience that occupational licensing is no protection against a bad plumber or even, in some cases, a bad physician. That’s why we still want to get referrals and recommendations before employing, say, a licensed electrician.

  Licensing exams test knowledge that often has little or nothing to do with the real-world skills required by the profession. For example, it once took longer in Illinois to become a master plumber than for a newly graduated physician to become a Fellow of the American College of Surgeons—until the state court finally stepped in and changed the rules. And then there’s the famous case of hair-braiding laws in Minnesota. We’re not saying African hair braiding doesn’t require specialized knowledge. Cosmetology in general requires training. But in parts of the state it takes more time to become a licensed hair braider than it does to become a certified emergency medical technician.

  Getting a hair-braiding license can mean $15,000 in tuition and at least ten months of schooling.45 Any braider who refuses to secure a government license can face up to one thousand dollars in fines and up to ninety days in jail. Defenders of these exams always say they’re to ensure health and safety. But they’re really intended to make it harder to enter a profession.

  Little wonder that in some professions people, desperate for employment, ignore state licensing laws and operate illegally. In this way, overly burdensome licensing laws create black markets, turning law-abiding people into criminals in the eyes of our legal system. But even worse, some never enter a profession at all.
They are denied their rightful opportunity to advance in a freeenterprise system that’s not free enough.

  REAL WORLD LESSON

  Occupational licensing, while necessary in some professions, raises prices and constricts employment.

  CHAPTER SIX

  “Aren’t Free Trade and ‘Globalization’ Destroying American Jobs and the Economies of Other Nations?”

  THE RAP American jobs have been destroyed and the economic welfare of people in poor countries has been harmed by the increasing globalization of business—through trade, industrialization, and the growth of multinational corporations. This global corporate juggernaut is bulldozing the cultures of other nations as well as the environment. The spread of the economic crisis from the United States to the rest of the world demonstrates the dangers of a global economy.

  THE REALITY Since World War II, a historic era of free trade has brought unprecedented prosperity and opportunity to millions of people around the world, bringing greater freedom to many nations that were once dictatorships. The best way to expand the global middle class and increase prosperity is to continue reducing trade barriers—and establishing stable monetary policies. Bottom line: trade is a job creator, not destroyer.

  What if the state of New York suddenly decided to boost employment during the recession by prohibiting residents from buying out-of-state products? You could buy only food, clothing, computers, furniture, and other products if they were made in New York. Most people would consider such a move unrealistic and unfeasible. For all its economic diversity, New York simply does not have the manpower and expertise to make everything residents need.

  If New Yorkers could buy only state-produced products and services, their choices would be sharply reduced. Not many microchips are made in New York. There’s no way the state could grow all the agricultural products that residents now take for granted. Sugar, for example, is a tropical crop. Tomatoes in the winter are imported from Florida and Mexico. And what about automobiles? Could a New York auto industry—if one managed to get started—possibly offer as many alternatives as three domestic and fifteen foreign carmakers? In this tightly confined market, many products would become expensive or unavailable. Companies would be unable to achieve economies of scale that make so many things affordable.