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