Don’t Just Stand There: Undo Something

Thursday, May 5, 2022

“Something must be done. This is something. Therefore we must do it.” Those are my favorite three lines from Yes, Prime Minister, a British comedy series about politics. Most politicians who face a problem think that “something must be done.” Unfortunately, they tend to reach the same conclusion that the adviser reached in the Yes, Prime Minister episode.

But in the US economy, in which governments at all three levels tax, spend, and regulate as much as they do, there’s another way to confront problems that does not involving taxing, spending, and regulating more. That way is to reduce taxes, spending, and regulation. In short, some things must be undone.

There’s a long list of things that should be undone and that would help ameliorate, rather than exacerbate, some of the problems we face. I’ll settle for five: regulations on home food production, the Jones Act, protectionist trade policies, restrictive immigration policies, and occupational licensing. In each case, I’ll show a particular problem that undoing these policies would ameliorate.

Home Food Production

State and local governments in the United States regulate, in various degrees, businesses run from homes. One of the most regulated sectors of home businesses is food production. Cato Institute economist Chris Edwards recently wrote:

At one end of the freedom spectrum, Wyoming home businesses can sell any type of food except meat within an annual sales limit of $250,000. At the other end of the spectrum, Rhode Island only allows farmers to sell food made in their homes, and even sales from farmers are tightly restricted.

This is particularly perverse given the fact that many parents, especially women, who want to make money but also take care of their children, find home food production to be a natural fit.

Last month, the New York Times told of Jullet Achan, a woman in Brooklyn who cooks dishes that “are picked up and delivered to customers who order through an app called WoodSpoon.” Even though the food vendors are supposed to comply with New York state laws that require food to be produced only in commercial kitchens, Oren Saar, the chief executive of WoodSpoon, estimates that only 20 to 30 percent of chefs who sell through the site use licensed commercial kitchens. Fortunately, Achan and others seem confident enough that they openly acknowledge ignoring the regulations. But surely the regulations dissuade some people from working in their homes. Deregulating would allow a thriving sector to thrive even more. And, according to Alvin Salehi, a former technology adviser in the Obama administration and a founder of a competing app called Shef, being able to make meals at home helps people with limited childcare options.

But how can people be assured, without government inspection of kitchens, that the food is safe? The answer is that the people who run the apps have a strong incentive to monitor customer complaints and respond accordingly.

The Jones Act

The Jones Act, which I’ve written about in “How the Jones Act Harms America,” raises the cost of shipping goods between locations in America and gives people an artificial incentive to import from other countries. This law, passed in 1920, imposes a four-part test for cargo to be shipped by water between two US ports. The ships must be (1) US-owned, (2) crewed by Americans, (3) registered in the United States, and (4) built in the United States. All of these requirements, especially (2) and (4), make shipping in US ships much more expensive. As a result, many firms that would normally buy American items find it cheaper to buy from producers in other countries, to save on shipping costs. In “A Short Course in Oil Economics,” I noted one of these consequences. Maryland and Virginia buy rock salt to put on roads in winter. The largest producer of rock salt in the world is the United States; Louisiana, in particular, is a major producer. But if Maryland and Virginia were to buy rock salt from Louisiana, the Jones Act would require them to use US-built and US-crewed ships. So what do they do? Buy from Chile.

We hear a lot about our supply chain problems. Repealing or, at least, suspending the Jones Act would make shipping cheaper, and that would, all else equal, mitigate the supply chain problem.

Protectionist Trade Policies

That brings us to protectionist trade policies in general, of which the Jones Act is only one. Former president Donald Trump increased a number of tariffs on imports from China. Those tariffs make imports more expensive to American buyers. Tariffs on consumer goods cause prices to US consumers to be higher; tariffs on intermediate goods cause US production costs to be higher, which then causes prices to consumers to be higher.

One of the best sources for information about the effects of protectionism is the Peterson Institute for International Economics (PIIE). In a study published in March, Gary Clyde Hufbauer, a senior fellow with PIIE, and Megan Hogan and Yilin Wang, both research analysts with PIIE, advocated trade liberalization as a way to reduce inflation and increase real incomes for American households. They estimate that eliminating Trump’s trade war tariffs and ending his 25 percent tariffs on steel would achieve the equivalent of a 2-percentage-point reduction in tariffs. Based on this, they estimate, the consumer price index (CPI) would be 1.3 percentage points lower than otherwise. So, for example, if these measures were undertaken this year, and assuming that importers could adjust quickly, the CPI for 2022 would be 1.3 percentage points lower than otherwise. That would not be a permanent reduction in inflation, but it would mean that the CPI would be permanently 1.3 percentage points lower than it would have been. Hufbauer et al. estimate further that relaxing Buy America rules would lead to a further one-time 0.6-percentage-point reduction in inflation.

What would that mean for the average American household? A lot. The authors note that in 2020 the average American household spent $61,334 on goods and services. A 1.3 percentage point in reduction in the CPI, due to repealing the Trump tariffs, would save that average household $797. And the saving would be 1.3 percent of spending every year. And a 1.9-percentage-point reduction in the CPI, which would occur if the Trump tariffs were repealed and the Buy America rules were relaxed, would save the average family $1,165 annually.

Looser Immigration Restrictions

One factor that holds back American economic growth is its fairly tight restriction on immigration. Although Donald Trump put a lot of energy into attacking illegal immigration, he was pretty tough on legal immigration also. Also, after the COVID-19 pandemic began, the US government closed down many US consulates, which created a backlog of people applying for visas. In 2021, according to David Bier, associate director of immigration studies at the Cato Institute, the government wasted approximately 400,000 “slots for visas authorized by Congress under both temporary and permanent visa programs.” Bier notes that as of January 2022, there were still long waits for visas and many consulates are still closed or partially closed. He points out that as of January, half a million immigrants who were trying to become permanent residents were waiting for appointments.

In a recent Zoom speech given to the Stanford Institute for Economic Policy Research, Cecilia Rouse, chair of Biden’s Council of Economic Advisers, pointed out correctly that immigrants are a source of innovation. The data back her claim. A related point, noted by Arnobio Morelix, an analyst at the Kauffman Foundation, is that immigrants are twice as likely to start new businesses as people born in America. Rouse also pointed out that immigrant labor often complements, rather than substitutes for, labor by US workers. She, like most economists, favors more immigration. Think about the waits you might have had recently for service in a restaurant or in a retail store. With more immigration, those waits would likely be less.

But isn’t our welfare state a big draw for immigrants? Actually, no, for one simple reason: the welfare state in America is aimed mainly at the elderly, and most immigrants are young. The two biggest government transfer programs are Social Security and Medicare. In fiscal year 2022, according to the federal government’s latest data, the US government will spend $1,219.5 billion on Social Security and $760.9 billion on Medicare. That’s a total of $1,980.4 billion, which is over one-third of all federal government spending. In 2001, leftist economist Paul Krugman, whom I don’t usually quote favorably, had a great line that, although exaggerated, made the point: “[T]he post-cold-war federal government is a big pension fund that also happens to have an army.”

But because most working-age immigrants come here to, you know, work, they are not a big drain on the welfare system. Especially now, in the short run, new immigrants would fill many unfilled job openings and in the long run would contribute to innovation, one of the key drivers of economic growth.

Reduce and Reform Occupational Licensing

People move between jobs but often keep the same occupation. When their move is across state lines, many workers face a problem: occupational licensing rules make it illegal for them to work in their new state without first getting permission from a state government agency. Sometimes they can get permission by filling out a few forms. Sometimes they must take exams or even attend classes. These restrictions get in the way of economic dynamism.

Occupational licensing is a bad idea. While the usual rationale for licensing is that it is needed to protect consumers, occupants of the current job categories are typically the ones who support licensing. This drives up prices of services and makes it harder for people, typically young people, to get into various occupations. Currently there are more than eight hundred occupations for which some state government requires a license and almost 30 percent of jobs are in those occupations. I have written about that at length in “Occupational Licensing Is a Bad Idea.”

But even if you think that licensing is a good idea, it’s much harder to justify one state government requiring that people who move to their state go through the cumbersome process of getting a license in their new state. In 2019, to their credit, Arizona’s legislature passed and Arizona’s governor, Doug Ducey, signed a bill accepting people from other states. The requirements are minimal. The law, according to Lurissa Carbajal of Cronkite News, “allows a person who has held an out-of-state occupational license for at least one year to practice their profession in Arizona as long as they abide by the outlined stipulations, including being a current certified or licensed professional in good standing, and do not have any pending complaints, allegations, or investigations relating to unprofessional conduct.” According to Jeffrey A. Singer and Michael D. Tanner of the Cato Institute, as of October 2020, the state governments of Pennsylvania, Missouri, Montana, and Utah had enacted similar reforms. More states should follow. By easing the transition for people who want to move, occupational licensing reform would increase productivity and, with it, economic growth.

Conclusion

Politicians’ kneejerk reaction to a problem is usually to add a regulation, tax, or spending program and almost never to examine existing regulations, taxes, or spending programs to see if they contribute to the problem. I’ve laid out four examples of regulations and one example of taxes, in the form of tariffs on imports, that reduce economic Americans’ well-being. Congress and state governments, hear my message: don’t just stand there; undo something.