Friday, December 23, 2011

Competitive Federalism Punishing California

Economic Dynamo
Not So Much
A recent Op-ed by George Will adduces additional evidence vindicating a fundamental choice by those who framed and ratified the Constitution, namely, the decision to limit the power of the National Government and thus to divide regulatory authority between the National Government and the States.  According to James Madison's Federalist 51, this division of power between the central and various state governments, along with the separation of powers between judicial, executive and legislative branches at the national level, ensures that a "double security arises for the rights of the people."  Madison apparently recognized that competition between states for productive citizens and capital would deter a state from infringing on the rights of its citizens who, if dissatisfied with their state's laws, could move to other states.  Thus arose a system of competitive federalism, whereby each state can attempt to attract labor and capital by offering regulatory regimes and thus institutional frameworks most conducive to free market wealth creation and job creation. 

California has not been doing well in this competitive struggle as of late.  Once considered a land of opportunity, the state experienced a net outflow of citizens in 2008.  The state's unemployment rate currently stands at over 11 percent, one of the highest in the nation.  Will's Op-ed calls attention to part of California's problem, namely, a plethora of unduly burdensome regulations that inhibit the creation and expansion of businesses and thus job creation.  Will focuses on the plight of CKE, Inc., which owns the Hardees and Carl's Jr. fast food chains.  Each such restaurant creates 25 jobs, Will reports.  According to Will, these and other "California restaurants are governed by 57 categories of regulations."  Moreover, Will goes on to explain that:

"CKE has about 720 California restaurants, in which 84 percent of the managers are minorities and 67 percent are women. CKE has, however, all but stopped building restaurants in this state because approvals and permits for establishing them can take up to two years, compared to as little as six weeks in Texas, and the cost to build one is $100,000 more than in Texas, where CKE is planning to open 300 new restaurants this decade."

Simply put, California has apparently made it all but impossible to open a new restaurant, while Texas facilitates the creation of these businesses and the jobs they bring.  That is to say, California stands in the way of voluntary arrangements that improve the welfare of consumers who would voluntarily patronize new restaurants and the employees who would work there.  If California were to replicate similar regulatory strategies with respect to other industries, many California residents would have little choice but to move elsewhere to locate employment, and residents of other states would decline to immigrate to California in the first place.  It's not much of a stretch to surmise that a portion of California's high unemployment rate results from these sorts of regulations.

Of course, some regulation is critical to a well-functioning free market and the welfare of a polity's citizens.   No state would or should win the struggle for labor and capital contemplated by our constitutional design  by embracing the state of nature as its regulatory philosophy.  Even the most ardent libertarians properly endorse "police power" regulation that implements the ancient principle "Sic utere tuo ut alienum non laedas," viz. "use what is yours so as not to injure another's."  States that leave their citizens at the mercy of predatory commercial tactics, such as the sale of impure food or fraud will lose citizens and investment just as surely as those that impose unduly burdensome regulations that prevent market entry or otherwise interfere with bona fide economic liberty.  There is, however, no indication that, say, delaying market entry by two years is necessary to protect the public from such predatory behavior.  Instead, such permit requirements function as a barrier to entry, plain and simple, protecting incumbent firms and limiting consumer choice.

Unfortunately, the system of competitive federalism that is punishing California and rewarding Texas is not self-enforcing but is instead constantly under attack.  As federal regulatory power expands, the space for competition between states contracts, rendering such regulatory competition a less effective tool for enhancing the welfare of citizens.  If, say, the central government imposes one model of "health insurance reform," on every citizen in the nation, then states cannot compete with each other to provide reforms that meet the needs of their own citizens.  Moreover, if the national solution is suboptimal, citizens can only avoid the resulting reform by emigrating to another country, hardly a plausible option for most people.  Unfortunately, proponents of the most recent "health care reform," overlooked this downside of  a "one-sized fits all" centralized plan.