Sunday, April 29, 2012

When City Councilors Pass Laws Without a "Rational Basis"

Published in The Tennessean, Sunday, April 29, 2012 and Forbes with archives.

by Richard J. Grant

Just as most new regulations are “needed” to correct the damage caused by previous regulations, attempts to enforce such regulations often lead to a worsening of practice. City laws to regulate private transportation services and to enforce price fixing are an example of unnecessary laws that lead to even worse government intrusions.

Municipal agencies looking for reasons to exist love regulations such as the ordinance passed in Nashville two years ago that requires limousine operators to charge their customers a minimum price of $45 per trip. Now inspectors from Nashville's Metropolitan Transportation Licensing Commission (MTLC) have an excuse for running sting operations to catch those limousine operators that have the audacity to charge their customers lower prices.

But the MTLC inspectors have been operating above their station. Last week, Metro Nashville's police chief sent a rather blunt letter to the city's transportation licensing director warning the agency against violating the law, misrepresenting itself, and acting unaccountably. The transport inspectors were using police badges, carrying guns, and putting blue lights on their cars.

The MTLC ended up stinging itself, but the “police badge” issue is a sideshow. The Metro Nashville city council caused the real problem by passing a law that was clearly against the public interest. To counter lawsuits from the companies that they are trying to put out of business, Metro's lawyers must put forward a “rational basis” for the price-fixing law.

The “rational basis” is rarely the original true reason for the passage of such laws. The real reason was to restrict the supply to the public of vehicles-for-hire in order to protect the higher-priced limousine companies from competition. But voters hate hearing that kind of argument, so a fluffy version of reality is trotted out as window dressing to distract the public.

This publicly acceptable version will collapse under rational scrutiny. If Metro lawyers were to defend the ordinance as an attempt to ensure “fair pay” for drivers, then what source of omniscience did the city councilors tap to gain such knowledge of what fair pay is? They can't even define the word “fair.”

Were they to justify the regulation as necessary “to prevent poaching” of customers, then city councilors are admitting their role as enforcers in a turf war. They are admitting that they are anti-competition and opposed to market freedom. They are apparently quite happy to put the lower-priced limousine companies out of business and thereby to concede their “turf” to the political survivors.

If the councilors were to claim that the regulation would give customers a “clearer understanding” of what they were purchasing, would the customers truly understand that they are being charged a higher price than necessary? Would they understand that they are being protected from lower prices but not from higher prices?

Did councilors need a law to help “differentiate between types or classes of licenses”? Perhaps they have a rational basis for wanting to have licenses at all, but it’s unlikely to be any less vacuous than their reasons for price-fixing. The councilors have exhibited less knowledge about the transportation industry than have those they threaten to put out of business.

Perhaps councilors want tourists to pay higher prices. They have already purchased a convention center and granted tax breaks to an amusement park. Perhaps they should now buy a bakery. Then we could have bread with our circuses.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012 

Sunday, April 22, 2012

“Too High” Prices Are a Symptom, Not the Cause, Of Our Problems

Published in The Tennessean, Sunday, April 22, 2012 and Forbes with archives.

by Richard J. Grant

A sure sign that a politician is floundering is when he resorts to blaming those mysterious “speculators” for some price moving in an unpopular direction. President Barack Obama is merely the latest head of government to attempt to deflect public attention onto an abstract scapegoat. But even in the unlikely event that he understood the implications of his call, last week, for Congress to adopt tougher regulations against speculators in the oil markets, he can't distract us completely from his own role in the misdirection of speculation.

Ironically, were President Obama less inclined to centrally plan our lives, the price of oil would not be a political issue at all. In those countries most-free from central planning, the prices of most goods tend to fall and incomes rise. We are better able to acquire more goods and services for every hour that we work. The case against the Obama administration is that it is limiting systematically our ability to organize our own lives to increase production and raise our standards of living.

This limitation is especially glaring in those industries, such as the energy industry, that have received special attention from the administration. It is as if the president just can’t reset his Marxist default switch that leaves him in constant temptation to “seize the commanding heights” of industry.

If the president had striven to reduce government involvement in the energy industry, other than its proper function of enforcing property rights, he would now be immune to accusations of blame for higher energy prices. Not only would the price of gasoline and other related prices not be a remarkable issue in our lives, the energy industry would now be more free and confident to expand supplies. It would also be free to innovate and expand into truly promising alternative energy sources, such as nuclear power, which has been hampered by superstition rather than science and by the resulting regulations that have unnecessarily driven up its costs.

Instead, in the name of “green energy,” the Obama administration has plunged into activities about which it knows little. It has encouraged companies to speculate, notably with taxpayers’ money, on technologies that hold little promise for the near future.

In the real world, speculators invest with their own money and, if they are wrong, lose their own money. They have an incentive to correct their mistakes. But in Obama’s world, the mistakes continue until they run out of taxpayers’ money.

The recurring energy crises of the 1970s were not the result of any physical limitation on energy supply. They were the direct result of heavy and misguided government regulations on the production and transportation of fuels and on the implementation of energy-related projects. Even the much-dreaded OPEC was nothing more than a cartel of governments that not only had trouble policing its own members’ production levels, but was ultimately no match for freer markets. When the newly arrived Reagan administration acted to deregulate the markets, the term “energy crisis” was relegated to the past.

Our problem is not a lack of “energy independence,” but a lack of independence from government interference. It is an interference that drains resources from those best-suited to use them wisely and directs them into the speculative dreams, and pockets, of the politically connected.

When speculators foresee higher gasoline prices, it’s a symptom, not the cause, of our problems.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays. 

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Copyright © Richard J Grant 2012

Sunday, April 15, 2012

Just as Henry Ford was a better constitutional scholar than FDR ...

Published in The Tennessean, Sunday, April 15, 2012
and Forbes with archives.

by Richard J. Grant

Those who watched episodes of the Little Rascals from the early 1930s might remember the distinctive eagle in a white square that appeared in the end credits. This Blue Eagle was the symbol of the National Industrial Recovery Act (NRA), which became law at the beginning of the New Deal in 1933.

Display of the Blue Eagle showed compliance with the NRA. It called on each industry’s leaders to meet together to write “codes of fair competition” that would result in uniformly higher prices and be binding on all producers in their industry, whether they signed on or not. With the NRA, labor unions had greater power to organize and restrict the supply of labor in order to push up wages without necessarily increasing productivity.

The administration of Franklin D. Roosevelt, much like its ideological descendants in the Obama administration, believed that the sluggishness of recovery from recession was due to a lack of consumer demand. The imagined solution was to replace competition with “fair competition” so that businesses could charge higher prices without fear of being undercut and could thereby afford to pay higher wages. Higher-paid workers were expected to consume more.

In a break with previous American history, the price cutter became the enemy. Threatened with fines and imprisonment, innovators and small businesses found it illegal to compete on price. Many small businesses failed, and many resisters were jailed.

But, as Burton Folsom writes in his book, New Deal or Raw Deal?, not all men who refused to sign the code could be easily intimidated. “In the auto industry, Henry Ford refused to sign the NRA code and jack up his car prices, as his competitors were doing.” General Motors, Chrysler, and the smaller independents had “eagerly signed Blue Eagle codes,” which regulated their production, wages, prices, and the hours of work. Ford denounced the law as un-American and unconstitutional.

President Roosevelt and Hugh Johnson, his NRA czar, tried to pressure Ford into signing the code by shutting Ford out of any government contracts. They rejected Ford's lower bids. Roosevelt justified paying more for government cars and trucks because Ford had not “gone along with the general [NRA] agreement.”

They didn't dare put Ford in jail, but many other smaller businessmen, who were given hope and strength by Ford's example, were fined and imprisoned. Another source of strength was a clear perception of economic reality around them, a clarity not shared by the Roosevelt administration. Companies constrained by the NRA price-fixing requirements saw their business steadily decrease.

Ayn Rand did not need to predict the future to formulate her fictional “Anti-Dog-Eat-Dog Act.” She lived through 1930s America. She knew from experience that “fair competition” meant the destruction of competition and industrial progress.

But it was not her philosopher-physicist John Galt who brought down the NRA: it was the Schechter brothers, who sold kosher chickens in Brooklyn. When the NRA prosecutors came for them, they hired a good legal team and took it all the way to the Supreme Court. During the proceedings, the absurdity of the regulations showed them clearly to be unconstitutional.

Roosevelt decried this limitation of the Constitution's Commerce Clause, through which Congress can regulate interstate commerce. But Roosevelt had to accept that, as any real constitutional scholar knows, the Supreme Court has the power and the duty to strike down unconstitutional legislation.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb Universityand a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012

Sunday, April 08, 2012

For Healthcare, What Is The Cure?

Published in The Tennessean, Sunday, April 8, 2012
and Forbes with archives.

by Richard J. Grant

Whichever way the Supreme Court rules as to the constitutionality of the Patient Protection and Affordable Care Act, those who opposed the act will continue to be asked, “With what would you replace it?”

An ideal answer is not allowed to ignore immediate political constraints and the history of how we got where we are now. This is why we are often faced with choices between false or incomplete alternatives — and why some suggestions, even from Republicans, have sounded little better than watered-down nationalization, a timid postponement of the real deal.

The deadly assumption that has plagued the debate and lured us into our current health-care predicament is that “health care is different.” It is argued that the practice of medicine is a very complex field and that patients lack the knowledge possessed by doctors. It is also argued that the stakes are high in the medical field and that lives depend on every decision. Recitation of such premises opens us up to the non sequitur that healthcare is “too important to be left to the market.”

In every country where I have lived, someone has attempted to convince me that the laws of economics were different there than in America. Similarly, in every industry where some player has argued for special regulation or tax breaks, the argument has been some variation of “our industry is different” or “this time is different.”

But the laws of economics do not change between countries, between industries, or between time periods. Central planning has destroyed economies and cultures wherever and whenever it has been attempted. We have already demonstrated this in America: Medical services and medical insurance are among the most heavily regulated industries. Over 50 percent of medical expenditures are channeled through government. If we have problems in the U.S. medical system, it is ludicrous to blame free markets.

In every industry, we expect successful producers to know more about their products than the average customer. Even the simplest products are the result of a complex process. In his famous essay, “I, Pencil,” Leonard Read demonstrated that no single person on the face of the earth knows more than a fraction of what is needed to make something as simple as a pencil.

The same can be said of auto mechanics and food production and any other factor on which human lives depend. It could also be said that “for want of a nail (or pencil) ... a kingdom was lost.”

In the case of medical care, the long-term result of government interference in medicine and the economy in general has been a loss of innovation and available resources. A child born today with a life-hindering “pre-existing condition” is worse off, not because of free markets, but because of all the innovations and wealth that were never produced because governments thought that they could be the masterminds. In a free market, parents could buy permanent insurance contracts that protect their as-yet-unborn children throughout their lives.

Government officials have no particular aptitude for judging potential doctors and medical procedures. Government’s main role has been to serve as the enforcer of a cartel that limits the supply of doctors, of hospitals, of drugs, and of innovative alternatives. It has also prevented the medical insurance industry from competing and developing products that serve people’s full range of needs.

Only greater freedom can correct this.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012

Sunday, April 01, 2012

With or without mandate, Affordable Care Act fails

Published in The Tennessean, Sunday, April 1, 2012
and Forbes with archives.

by Richard J. Grant
It is not necessary for the U.S. Supreme Court to find the individual mandate portion of the Patient Protection and Affordable Care Act (ACA) to be unconstitutional in order to strike down the entire act, but it would be sufficient. It is also the most visible legal weakness in the act, which is why supporters of the ACA have now suggested that the mandate is severable from the remainder of the act.

The ACA’s supporters hope that by sacrificing the mandate they can keep the rest of the act alive. Where there’s life, there’s hope; and the hope in this case is that the remainder of the act’s provisions will become sufficiently integrated into the system that they become politically entrenched. Then, a future Congress could find another, less constitutionally offensive method to serve the same function as the mandate.

That other method would most likely be an overt tax. The economic impact of the remaining portions of the ACA would make such a tax necessary. Although popularly sold as a means of reducing overall health-care costs, the creators of the ACA knew that the inclusion of such provisions as the mandatory coverage of pre-existing conditions and the setting of premiums based on average costs rather than actuarial costs would necessarily increase the total cost of such coverage. Everyone who kept their insurance coverage would pay more.

Such an increase in premiums would cause many previously insured people to drop their coverage. It would no longer be worth it to them. Their refusal to remain insured, and to subsidize those with higher risks (more would now enter the market), would raise the premiums still higher for those who remained. The burden is imposed by the ACA, not by those who drop out.

The individual mandate, by forcing everyone to buy medical insurance or to pay a fine, was intended to force those who preferred not to purchase insurance to do so in order to subsidize the other customers and their insurance companies. This forcing of Americans to purchase a product is the constitutional red flag that now gets the most attention. It is rightly feared that the acceptance of such a provision would turn the Constitution into a mere doormat on the way to greater government intrusion into our lives.

It was difficult enough for the previous Congress to pass the ACA. Although the act imposes other taxes, an overt tax of the size needed to do the same job as the mandate would have been politically unpalatable. As it was, and given the amount of pork-barrel spending deals needed to pass the bill, public acceptance of the ACA collapsed as more people learned what was in it.

This is why the 2010 elections produced a new Congress that would never pass anything resembling the ACA. Just as severability of the mandate has no political future, it has no legal future. The mandate, not something else, is in the current act. Even with the mandate, the ACA will fail to achieve its originally stated goals. But without the mandate it would be even more expensive; the remaining provisions, taxes, and regulatory powers would impose even more burdens and disruptions on the healthcare market.
Perhaps the only compromise possible at that point would be to repeal the remaining portions of the act. The next question is, “Then what?”

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012