Occupational Licensing, the Criminal Law and Vocational Liberty

He Told You So

A story on the Wall Street Journal's "Law Blog" highlights a study by the National Employment Law Project demonstrating one of the many perils of occupational licensing statutes, namely, that many such statutes needlessly exclude individuals with a criminal record, including some with misdemeanors, from employment in the field in question.  According to the story, about one in four Americans works in a profession that requires a state license, and nearly one third of Americans have a criminal record.  While some states (e.g. Minnesota), ignore convictions for offenses unrelated to the licensed occupation in question, others invoke unrelated convictions to bar individuals from a licensed occupation, sometimes declaring such convictions evidence of the sort of "moral turpitude" that requires such exclusion.

As a result of these restrictions, perhaps millions of Americans cannot pursue the vocation of their choice in some states, thereby undermining basic occupational liberty, preventing countless voluntary transactions, and depriving society of the productive services of talented individuals. To be sure, some of these restrictions may serve valid public purposes, as when a state bars convicted bank robbers from driving armored cars. However, many such restrictions do not, as when, for instance, a state bars an individual convicted of marijuana possession from serving as a manicurist, landscape worker, make up artist, travel guide, bar tender, taxidermist or animal trainer.  (See here for a list of 102 occupations to which some or all states limit entry.)

At the same time, this anti-liberty "synergy" between the criminal law and occupational licensing is just one negative facet of a legal regime that grants states nearly limitless authority to prevent individuals from pursue their chosen vocation.  As Milton Friedman explained more than half a century ago, many such statutes infringe the basic human freedoms to engage in voluntary wealth-creating transactions, while simultaneously protecting incumbent producers from competition, reducing output and increasing prices. See Milton Friedman, Capitalism and Freedom 137-160 (1962).  Thus, Friedman contended, society should adopt a very heavy presumption against such regulation.  See id. at 144.   These conclusions, of course, followed ineluctably from basic economic science. Even some progressives, including the Obama Administration, have finally conceded Friedman's point that occupational licensing wreaks significant harm on the economy.  Unfortunately these same progressives still maintain their ideological and anti-scientific support for other intrusive regulations of labor markets, thereby weakening the sort of intellectual milieu necessary to true reform.  (Indeed, the same National Employment Project supports the anti-liberty and anti-wealth measure known as the "minimum wage.")

The National Employment Law Project identifies a serious problem, namely, numerous unjustified abridgments of personal liberty.  These results come as no surprise to those who have long internalized Friedman's lessons. However, Friedman also provided the best solution to this problem, viz., a wholesale embrace of economic science and the resulting elimination of the vast majority of occupational licensing statutes, period.  Nibbling around the edges by altering the interaction between the criminal law and unjustified occupational licensing is at best, a half-measure. 

Occupational Licensing, the Criminal Law and Vocational Liberty

He Told You So

A story on the Wall Street Journal's "Law Blog" highlights a study by the National Employment Law Project demonstrating one of the many perils of occupational licensing statutes, namely, that many such statutes needlessly exclude individuals with a criminal record, including some with misdemeanors, from employment in the field in question.  According to the story, about one in four Americans works in a profession that requires a state license, and nearly one third of Americans have a criminal record.  While some states (e.g. Minnesota), ignore convictions for offenses unrelated to the licensed occupation in question, others invoke unrelated convictions to bar individuals from a licensed occupation, sometimes declaring such convictions evidence of the sort of "moral turpitude" that requires such exclusion.

As a result of these restrictions, perhaps millions of Americans cannot pursue the vocation of their choice in some states, thereby undermining basic occupational liberty, preventing countless voluntary transactions, and depriving society of the productive services of talented individuals. To be sure, some of these restrictions may serve valid public purposes, as when a state bars convicted bank robbers from driving armored cars. However, many such restrictions do not, as when, for instance, a state bars an individual convicted of marijuana possession from serving as a manicurist, landscape worker, make up artist, travel guide, bar tender, taxidermist or animal trainer.  (See here for a list of 102 occupations to which some or all states limit entry.)

At the same time, this anti-liberty "synergy" between the criminal law and occupational licensing is just one negative facet of a legal regime that grants states nearly limitless authority to prevent individuals from pursue their chosen vocation.  As Milton Friedman explained more than half a century ago, many such statutes infringe the basic human freedoms to engage in voluntary wealth-creating transactions, while simultaneously protecting incumbent producers from competition, reducing output and increasing prices. See Milton Friedman, Capitalism and Freedom 137-160 (1962).  Thus, Friedman contended, society should adopt a very heavy presumption against such regulation.  See id. at 144.   These conclusions, of course, followed ineluctably from basic economic science. Even some progressives, including the Obama Administration, have finally conceded Friedman's point that occupational licensing wreaks significant harm on the economy.  Unfortunately these same progressives still maintain their ideological and anti-scientific support for other intrusive regulations of labor markets, thereby weakening the sort of intellectual milieu necessary to true reform.  (Indeed, the same National Employment Project supports the anti-liberty and anti-wealth measure known as the "minimum wage.")

The National Employment Law Project identifies a serious problem, namely, numerous unjustified abridgments of personal liberty.  These results come as no surprise to those who have long internalized Friedman's lessons. However, Friedman also provided the best solution to this problem, viz., a wholesale embrace of economic science and the resulting elimination of the vast majority of occupational licensing statutes, period.  Nibbling around the edges by altering the interaction between the criminal law and unjustified occupational licensing is at best, a half-measure. 

A Victory for Choice and Competition in North Carolina

Pro-Choice

Anti-Choice

Earlier this week the North Carolina Supreme Court struck a blow for choice and competition in K-12 Education. In Hart et al. v. State of North Carolina and Richardson et al. v. North Carolina,  the Court rejected challenges to the state's Opportunity Scholarship Program in a well-reasoned opinion by Chief Justice Martin.  Like a similar program in Washington D.C. previously discussed on this blog, the program provides financial assistance --- $4,200 per student --- to low income families who choose to enroll their children in certain private schools.  Sometimes called "vouchers," such scholarships implement  the vision of Nobel Laureate Milton Friedman, who articulated the powerful case for educational choice in his now-famous essay "The Role of Government in Education," reproduced here at the website of the Friedman Foundation for Educational Choice.

North Carolina imposes various regulatory requirements on its non-public schools.  (See here).  In addition, schools that enroll students who receive such assistance must employ nationally-recognized standardized tests annually in the third grade and afterwards to evaluate the progress of students in "grammar, reading, spelling and mathematics" and submit the results of such tests to the State's Educational Assistance Authority. ("Authority")  Such schools must also provide the parents or guardians of such students with annual progress reports, including the results of standardized tests and inform the Authority of the graduation rates of such students.  A school that enrolls 25 or more such students must report the aggregate standardized test scores of such students to the Authority, and such aggregate scores are available to the public.     Schools that enroll such students cannot discriminate based on race, color or national origin.  Moreover, the Authority must annually retain an independent research organization to assess the "learning gains or losses" of students who receive such grants as well as the "competitive effects" of the program upon the learning outcomes of students who remain in public schools.  (See N.C.G.S. Section 115C-562.1-7, found here).  

The Authority selected about 2,300 students from more than 5,500 applicants to participate in the program in its first year, at a total cost to the state of $10.8 million.

Plaintiffs, backed by the North Carolina ACLU, raised numerous objections to program.  Most notably, the plaintiffs claimed that the spending authorized by the program did not serve a "public purpose" because some of the schools in which beneficiaries enrolled are not accredited by one or more accrediting agencies and/or employed some teachers that are not certified.  See North Carolina Constitution Article V, Section 2(1) ("The power of taxation shall be exercised in a just and equitable manner, for public purposes only, and shall never be surrendered, suspended, or contracted away.") Plaintiffs also made a related claim that the program failed to "guard and maintain" the privilege of education guaranteed by Article I, Section 15 of the state constitution.  Indeed, a lower court had ruled that the "General Assembly fails the children of North Carolina when they are sent with taxpayer money to private schools that have no legal obligation to teach them anything." (Emphasis added).

The North Carolina Supreme Court properly rejected these and other claims.  As explained above, the Opportunity Scholarship Program contains numerous features, including annual testing, reports of the results to the state, and annual progress reports to parents and reports on graduation rates that enhance the accountability of private schools to families and the public.  The most important such mechanism, however, is market competition, the institution on which free societies ordinarily rely to ensure the production of high quality products and services.  Such competition, bolstered by background rules of contract and tort law, includes rivalry among various private schools as well as rivalry between private schools and their public counterparts, including the State's 147 Public Charter Schools.  Contrary to the implication of the district court's reasoning quoted above, no North Carolina children "are sent" by the state to a private school. Instead, parents or guardians voluntarily choose such schools over the free public school, and any public charter school, the child is entitled to attend.  Many middle class families already have sufficient financial resources to choose private schools for their children, and the U.S. Constitution guarantees them that right.  The Opportunity Scholarship Program increases the number of competitive options available to low income families, thereby facilitating their participation in the same educational markets, and attendance at the same schools, that middle class families have enjoyed for decades. Absent some substantial market failure, and none is apparent, there is no reason to believe that educational outcomes will suffer.  Organizations such as the ACLU, which purports to stand for "choice" and even invokes the Statue of Liberty on its logo, would do well to reconsider prior opposition to such programs, opposition that, when successful, entrenches anti-liberty state monopolies subsidized by the taxpayers, many of whom would prefer to send their children to private schools.

To be sure, accreditation and professional certification can sometimes improve the quality of products offered by some market actors.  Any such improvements come with countervailing costs, however. Such costs include the out-of-pocket cost of compliance, the cost of monitoring such compliance, the reduction in innovation resulting from regulatory mandates, and the exclusion of otherwise qualified individuals from the occupation in question.  See generally Milton Friedman, Capitalism and Freedom, Ch. 9 (1962).  At the same time, many markets for complex products function quite well without such governmental intrusion.   No certification agency decides what apps Apple will include on its latest I-Phone or whether and how Amazon will attempt to compete with Wal-Mart.  Indeed, Wake Forest University, founded in 1834, was first accredited in 1921. Davidson, founded in 1837, was first accredited in 1917.  So far as this blogger is aware, faculty who have taught at such institutions were never "certified" by any independent body.  It's hard to imagine that these institutions did not serve "public purposes" until 1921 and 1917, respectively.

Presumably the North Carolina Legislature understood the role that markets play in ensuring educational quality and took account of the costs and benefits of additional regulatory intrusion.   The legislature obviously decided that, on balance, the Opportunity Scholarship Program enhanced the public welfare by facilitating individual choice, bolstering educational competition and enhancing educational outcomes. Indeed, the State has long declined to impose stringent regulatory oversight on its private schools, trusting market competition to assure quality, and the Opportunity Scholarship Program imposes additional regulatory requirements on those schools that accept scholarship recipients.  As Chief Justice Martin eloquently explained for the Court, this determination was a quintessentially legislative judgment and, of course, subject to legislative revision as new facts about the operation of the program become available.  Hopefully the Court's decision will clear the way for an expansion of the program and thus additional reliance upon choice and competition in the provision of education in the Tar Heel State.

Hobby Lobby and Corporate Social Responsibility

Would He Endorse Hobby Lobby?

The Hobby Lobby decision has predictably resulted in a stream of academic commentary and punditry in the blogosphere, much of it addressing the Court's determination that business corporations are RFRA persons capable of exercising religion.   For instance, two thoughtful scholars, Usha Rodrigues and Lyman Johnson, have opined that Hobby Lobby rejects the view that corporations should maximize shareholder profits in favor of so-called "Corporate Social Responsibility."   Both scholars focus on the same passage of the decision, which Professor Rodrigues quotes in full in her post over at the blog Conglomerate.  (For Professor Johnson's views, go here.)
 

"Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money.  This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations §4:1, p. 224 (3d ed. 2010) (emphasis added); see 1A W. Fletcher, Cyclopedia of the Law of Corporations §102 (rev. ed. 2010).  While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well." 

Professor Rodrigues reads this passage as reflecting a rejection of the profit maximization norm in favor of Corporate Social Responsibility.  As she puts it:

"Shareholder wealth maximization does not rule with the majority, that's for sure.   Milton Friedman be damned,  CSR is alive and well on the Supreme Court."  Later in her post she concludes that: "the conservative majority [in Hobby Lobby] moves to embrace progressive CSR-style rhetoric[.]"

Speaking of the same passage, Professor Johnson opines as follows:

 "[T]hose in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. . . .  i.e., the U.S. Supreme Court.  Time to change the syllabus on corporate purpose…  To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note:  you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose."

Nobel Laureate Milton Friedman (pictured above), of course, famously contended that corporations should reject Corporate Social Responsibility, which he defined as the sacrifice of shareholder profits in favor of broader social objectives.  In his classic work "Capitalism and Freedom" (1962)  Friedman opined as follows on the question:

"[T]here is one and only one social responsibility of business --- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman repeated this assertion in a 1970 essay in the New York Times Magazine, where he elaborated his views of the subject.  (See here).

Both posts are thoughtful efforts to understand the role of Corporate Social Responsibility in the Court's thinking. There does seem to be some tension between the views of Professor Friedman and others (including this blogger) who believe that corporations should maximize shareholder profits, on the one hand, and the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke. (See this essay contending that corporate law is best understood as requiring managers to maximize shareholder profits at the expense of other constituencies when necessary.)  

At the same time, I'd like to suggest that the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke is entirely consistent with the views of Friedman and those like myself who believe in shareholder primacy and a background profit maximization norm.  It is important to note that the passage in question twice qualifies the Court's assertion that corporations may forgo profits in pursuit other objectives. For instance, the Court states that many for-profit corporations pursue charitable causes "with ownership approval." (emphasis added)  Moreover, the Court states that "so long as the owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires." (emphasis added)  Thus, as Stephen Bainbridge has suggested in response to Professor Johnson's post, this passage does not abandon profit maximization but instead treats the profit-maximization norm as a default rule, which shareholders may alter so as to pursue objectives that reduce profits.

This "default rule" account is well-grounded in corporate law.  As this blogger and co-author Nate Oman explained in a recent essay:

"Religiously motivated decisions may sometimes increase profits, though some such decisions may reduce them.  While some case law [e.g., Dodge], suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.  No decision of which we are aware holds that managers must maximize profit over the unanimous objection of the shareholders, who can amend the charter to validate any such choice. Indeed, corporate law even empowers shareholders, by unanimous vote, to ratify alleged corporate waste."

See Alan J. Meese and Nathan B. Oman, Hobby Lobby, Corporate Law and the Theory of the Firm: Why For-Profit Corporations are RFRA Persons, 127 Harv. L. Rev. Forum 273, 284-85 (May 2014).

What, though, about Friedman's wholesale rejection of Corporate Social Responsibility?  Doesn't Hobby Lobby's recognition that corporations  may forgo profits (albeit only after shareholder approval) necessarily contradict Friedman's view?  The answer, I think, is "no."  A careful reading of his 1970 essay reveals that Friedman directed his admonition to directors and managers, not shareholders.  As Friedman put it, "the manager is the agent of the individuals who own the corporation."  Forsaking profits in favor of social goals, Friedman said, contravened the requirements of faithful agency and rendered the manager a principal instead of an agent.  As Friedman put it:    "[t]he whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interest of his principal.  This justification disappears when the corporate executive imposes taxes [i.e., diverts profits away from shareholders] and spends the proceeds for 'social' purposes.").

Indeed, it is worth quoting a lengthy portion of Friedman's 1970 essay in full:

"In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for exam­ple, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.  In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.  Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined."

It seems clear, then, that Friedman would be comfortable allowing shareholders  --- the "principals" who "employ" managers --- to alter the default profit-maximization norm, so long as courts could assure themselves that shareholders really did consent to such a modification.  If those who create enterprises can forgo the profit motive altogether, then they can also choose some combination of profit and other objectives.  While such a modification of the profit maximization norm would reduce shareholder profits, the modification would presumably enhance shareholder utility.  Put another way, the profit-maximization norm is not an end in itself, but instead a means of maximizing shareholder welfare, which may consist of values other than material wealth.   Indeed, in the same essay, Friedman expressly stated that "individual proprietors" should feel perfectly free to forgo profit in favor of other objectives.  As he put it:

"The situation of the individual proprietor is somewhat different.  If he acts to reduce the returns of his enterprise in order to exercise his 'social responsibility,' he is spending his own money, not someone else's.  If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so."

One doubts that Friedman would treat closely held corporations like Hobby Lobby any differently from firms owned by such "individual proprietors."  In each case the same individuals both own and control the firm in question, with the result that the agency problem that Friedman identified would disappear.  Allowing shareholders of a closely held corporation to pursue certain objectives that reduce profits would thus seem indistinguishable from "allowing" individuals to give money to charity.  Both practices would reduce the material wealth of the donor or shareholder, but both would also presumably increase such individuals' utility.  Thus, shareholder-approved departures from profit maximization of the sort invoked by the Hobby Lobby majority do not, in my view, reflect a rejection of Friedman's views or an embrace of Corporate Social Responsibility.   

 

 

In Praise of (Fettered) Capitalism, AKA Freedom

Opposes Unregulated Capitalism

 Ditto

Language in the first Apostolic Exhortation of Pope Francis, "Evangelii Gaudium," ("The Joy of the Gospel"),  has fueled the never-ending debate about the relative merits of alternative economic systems.  In particular, commentators on various parts of the political spectrum have critiqued or praised the Holy Father's supposed condemnation of "unfettered capitalism."   From the Right, Walter Williams has taken issue with the Pope's supposed claim that "unfettered capitalism" is "a new tyranny."   From the Left, John Nichols of the Nation has praised this supposed claim, asserting that the Pontiff has given an articulate voice to the Occupy Wall Street movement, which the Pope did not mention.  Numerous other commentators have also weighed in about the Pope's supposed comments.  (See here, here and here for examples).  One pundit even declared that "Liberation Theology is Back."   None of these pundits, so far as I am aware, has actually defined "capitalism" or "unfettered capitalism."

Ironically, as others have pointed out, the document does not include the word "unfettered" or "capitalism."  Instead, the Exhortation refers to the "absolute autonomy of the marketplace," which it blames for a widening income gap between rich and poor.  (See Evangelii Gaudium, 2.I.56 and 4.II.202).  Nonetheless, the term "unfettered capitalism" has taken on a life of its own and will likely play a significant role in our public discourse.  It therefore makes sense to develop a working definition of the phrase so as to facilitate a useful public discussion of the merits and demerits of "unfettered capitalism" and various alternative economic systems.  As will be seen, most proponents of free markets support some "fetters" on such freedom, fetters that help channel individual initiative in socially useful directions.  Thus, instead of deciding between a world with "fetters" or "no fetters," societies that wish to advance economic justice must choose among various possible fetters, some of which help create wealth and opportunity and some of which destroy both.

But first, it should be noted that the term "capitalism" is itself a misnomer that often adds little to public discourse.  (Perhaps this explains why the Holy Father, pictured above in a photo taken by the official Brazilian press agency (see here), does not employ the term.)  As Frank Knight once explained, the free market is the natural result of society's recognition of private property, including each individual's ownership of his or her own labor.  Such ownership, Knight said is "a synonym for individual freedom," freedom that includes the right to exchange such property with a willing buyer.  See Frank H. Knight, Risk, Uncertainty and Profit, at 56-57 (1921).  Thus, what pundits call "capitalism" is often just a synonym for "freedom" or "liberty."  This is not always true, however.  In some cases systems that pundits call "capitalism" entail significant intrusions on liberty and property inconsistent with any plausible conception of freedom or liberty, as seen below.

With this caveat in mind,  here are several possible definitions of "capitalism," fettered and unfettered.

1.  Capitalism as State of Nature.  Under this model, there is no State.  Each individual is entirely free to acquire as much property as he or she can, whether by manual labor, trade, invention, or theft from others.    Having acquired such property, an individual can only retain it if he or she can ward off others who seek to acquire it by force. 

2.  Capitalism as the Common Law Baseline: Under this model, individuals reject the State of Nature and form a State so as to enhance the security of their persons and property.  The State, in turn, employs coercion (jail time, criminal fines and monetary damages) to deter and prevent individuals from harming others or invading others' property.  The State may also allow individuals to employ reasonable private force to defend their persons and property from invasion by others.   Such a society may entail less liberty in some sense than the State of Nature, as individuals are not "free" to injure others or steal others' property and suffer state-backed coercion if they do.  However, individuals may still prefer such a society to the State of Nature, because what liberty and property they do possess can be more secure and result in more prosperity, assuming, of course, that the State respects the Rule of Law and avoids arbitrary and selective enforcement of this baseline.   

3.  Capitalism as Wealth Maximization:  Under this model, the State employs coercion to enforce the common law baseline described in Model 2, above.  The State also employs coercion when necessary to overcome market failures that may arise because transaction costs prevent a wealth-maximizing allocation of resources.  Examples include contract law, which reduces the cost of transacting and thus facilitates wealth creation, corporate law, which facilitates the creation of large scale enterprises,  patent law, which ensures that individuals who invest in innovation can reap the rewards of doing so, and antitrust law, which prevents market actors from exercising market power that is not necessary to achieve efficiencies.  Such regulations steer individual conduct and initiative in wealth-creating directions.  This model also justifies expenditures on public goods such as national defense and education, because private actors will not be able to capture the benefits of investments in such goods and thus will under invest in their production.  This model also justifies state expenditures on public works such as highways and harbors, projects that private enterprises may not undertake because transaction costs make it difficult to employ the private market to amass property from numerous individual owners.   Finally, this model would empower the State to conduct macroeconomic stabilization policy, e.g., raising taxes and/or reducing public spending to slow an overheating economy and cutting taxes and/or increasing spending to stimulate a slow one. 

    It should be noted that the distributional consequences of Model 3 will depend upon how the State raises the revenue to pay for various public goods and public works, for instance.  The State could simply divide the cost of such expenditures equally among all of its adult citizens, in which case the distributional consequences could be neutral, depending upon how the State distributes its expenditures.  If, however, the States relies upon a sales tax or an income tax, for instance, Model 3 will redistribute income from rich to poor.  (An individual who pays the State 10 percent of a $100 million income will pay for a much larger share of the State's expenditures than one who pays 10 percent of a $10,000 income.  Unless the State spends 10,000 times more on public goods for the former individual than the latter, reliance on this "flat tax" to fund the State will redistribute income to individuals of modest means.  In the same way, so long as wealthy citizens spend more on consumption than those who are poor, the wealthy will pay more taxes under a sales tax regime, thereby resulting in possible redistribution.)

4.  Capitalism as Utility or Welfare Maximization.  Under this model, the State enforces the common law baseline and also employs coercion when necessary to overcome market failure, as in Model 3 above.  Operating within such a framework, individuals may, alone or in association with others, create great wealth.  Under Model 4, the State also relies upon coercive taxation to redistribute a portion of such wealth from well-to-do individuals to those who are less well off.   While the taxation necessary to accomplish such redistribution will reduce incentives to create wealth in the first place, the result might be an increase in overall welfare, i.e., society's total utility, assuming there is a diminishing marginal utility of wealth.    For instance, redistributing $100,000 from the annual income of a wealthy individual to ten poor persons could increase society's overall utility, if one assumes that these persons collectively derive more utility from that $100,000 than the wealthy individual would forgo because of the redistribution.   Model 4 is truly a "Welfare State," insofar as the State employs its legal and regulatory machinery with one goal --- enhancing society's overall welfare --- in mind.

5.  Corporatism Confused With Capitalism.  Under this system, the State enforces the common law baseline, employs coercion to overcome market failure and spends resources on public goods.  The State may also  engage in redistributive taxation in an effort to increase society's total welfare.  In addition, however, the State also structures taxes, subsidies and regulations so as to encourage particular industries and/or firms within such industries.  Often such rules might favor large, capital-intensive firms over smaller, labor intensive firms, thereby raising barriers to entry and fortifying the market power of incumbents.  See generally Oliver E. Williamson, Wage Rates as Barriers to Entry: The Pennington Case in Perspective, 82 Q. J. Econ. 85, 91-98 (1968) (explaining how imposition of minimum wages industry-wide can disadvantage smaller, labor-intensive firms).   The State may even reserve to itself the authority to approve entry into particular markets, consulting marketplace incumbents before allowing such entry.  The requirement that new entrants into the hospital market obtain a so-called "certificate of need" is one such example, discussed previously on this blog.      The State may also adopt rules, including exemptions from antitrust laws, that encourage the formation and operation of labor cartels known as unions, cartels that seek to obtain a portion of any market power that their employers possess.  Such cartels can rarely thrive, however, unless the State also prevents free entry into the industries subject to such labor cartels.  See generally Michael L. Wachter, Labor Unions, A Corporatist Institution in a Competitive World, 155 U. Penn. L. Rev. 581, 601-604 (2007) (describing NIRA’s support for collective bargaining).   Indeed, once society recognizes as legitimate legislation that bestows economic benefits on some at the expense of others, consciously picking economic winners and losers, economic actors will rationally invest scarce resources attempting to influence political decision makers to enact more and more such legislation.  Such "rent seeking," of course, diverts valuable economic resources away from productive economic activities that would otherwise increase society's overall wealth.   As previously explained on this blog, James Madison claimed that societies that consistently allow such legislation are akin to the State of Nature, given that both such societies allow the strong to united to oppress the weak.

* * * * *

The United States is perhaps best described as a mix of Models 4 and 5, with some Socialism thrown in "to boot."  For instance, the Constitution, at least as interpreted by the Courts and the political branches, empowers states and the national government to restrain economic liberty for the sole purpose of enriching some industries or groups of individuals at the expense of others.  (But see here for a discussion of a recent decision in the United States Court of Appeals for the Fifth Circuit rejecting such rent seeking as a valid basis for interfering with economic liberty.)     Certificate of need laws and unions are quintessential examples.  Ditto for the regulation of taxi cab markets, of all things.  In addition, states and the national government sometimes own the means of production themselves, the very definition of Socialism.  For instance, all states own and operate one or more colleges or universities, ownership that is not necessary to ensure an appropriate investment in education.  (States could, instead, simply provide their college-aged citizens with vouchers, as explained here with respect to primary and secondary schools.)  Moreover, the national government once owned General Motors, after an ill-advised bailout of two automobile manufacturers whose products have failed in the marketplace.         At the same time, governments do not always exercise their power to restrain economic liberty or own the means of production, partly because of a political culture that values competition, and partly because competitive federalism deters individual states from adopting policies that drive capital and productive citizens to migrate to other states.

Of these five models, only Models 1 and 2 can be characterized as "unfettered capitalism."  Model 3 empowers the State to impose any number of harm-reducing regulations ("fetters") and to "tax and spend" so as to produce various public goods, including education.    Moreover, Model 4 expressly empowers the State to employ additional coercion to redistribute wealth from some individuals to others.   Model 5 empowers the State to favor some industries or firms over others, favoritism that necessarily restricts the liberty of those firms and individuals not favored.  Model 5 also empowers the State to compel firms to recognize and bargain with labor cartels also known as unions. 

Very few individuals advocate Models 1 or 2 as organizing principles for an economic system.   Instead, most individuals, including most who support "limited government" or some synonym thereof, embrace Model 3 or even Model 4.  For instance, most prefer a world in which the State imposes the "fetters" necessary to protect individuals from others' harmful exercise of property rights and vice versa.  Most also prefer a world in which the State expends the resources necessary to produce public goods, using coercive taxation to raise the necessary revenue.  As noted above, States that rely upon a flat income tax, for instance, to fund such goods will redistribute income from the wealthy to the less well-to-do.  Finally, many proponents of limited government also endorse expenditures to provide the poor with basic services, education and even enough income to lift such individuals out of poverty and into the middle class.  For instance, Milton Friedman (pictured above at a White House ceremony), always a proponent of limited government, advocated both a negative income tax and school vouchers, both of which redistribute income from some to others.   See e.g. Milton Friedman, Capitalism and Freedom, 191-94 (1962) (advocating the negative income tax) id. at 85-100 (discussing proper government role in education).  See also this discussion of the negative income tax between Milton Friedman and William F. Buckley. 

In short, most members of society, whether they be Progressive, Conservative or even Libertarian, agree that Capitalism or individual freedom should be fettered in some way.  The much harder question is how many and what sort of fetters the State should impose.  It should also be clear that "not all fetters are created equal."  Some coercive regulations clearly enhance society's welfare, while others plainly reduce it.  Moreover, we must never lose sight of the fact that robust free markets produce the very wealth that many wish to redistribute to the less fortunate.  A society of "haves" and "have nots" may well be more just than a society in which everyone is (equally) destitute, particularly if the State uses its powers of taxation to redistribute some income from rich to poor.  As previously explained on this blog, individuals who create massive fortunes for themselves often do so by simultaneously enhancing the welfare of countless others, even before the State imposes redistributive taxes.   Finally, the existence of significant poverty in a nation such as the United States that allows some economic freedom does not thereby justify any and all additional restrictions purportedly designed to reduce poverty.  Instead, such poverty may be the predictable result of fetters already in place, the removal of which may actually increase wealth, opportunity and employment.  Labor cartels, minimum wages and state-protected monopolies are obvious examples of such wealth-destroying fetters that reduce opportunity and increase poverty.

F-22 Stimulus ?

Economic Stimulus ?

This morning Martin Feldstein, who chaired President Reagan's Council of Economic Advisors, weighs in on the version of the stimulus package the House passed yesterday. Among other things, Feldstein argues that some of the debt-financed federal spending will simply displace debt-financed spending at the state level, an argument I made in my previous post. He also argues that spending on infrastructure projects, e.g., roads and bridges, won't take place until it is too late to counteract the current downturn. Moreover, he contends that temporary tax cuts will provide little stimulus, since consumers will simply save the cuts, knowing that they will have to pay higher taxes two years from now. While savings is generally a good thing, Keynesians at least believe in the "paradox of thrift," i.e., if everyone saves too much, aggregate demand will suffer, and the economy will spiral into recession, unless the government borrows the savings and spends it. By contrast, it is said, so-called Classical economists believed that "too much" savings would reduce interest rates and therefore increase investment and long term economic growth, pursuant to "Say's Law."

How, then, would Feldstein stimulate the economy ? He proposes rapid increases in military procurement and construction of military bases. The F-22 Raptor, pictured above, costs over $100 million apiece. Instead of spending billions on mass transit programs, perhaps we can buy another 50 Raptors? Feldstein does not mention Raptors; he may have in mind more mundane items such as ammunition and spare parts depleted during the wars in Iraq and Afghanistan.

Note that Feldstein's conclusion regarding the non-efficacy of temporary tax cuts follows naturally from Milton Friedman's "Permanent Income Theory of Consumption." See Milton Friedman, A Theory of the Consumption Function (Princeton 1957). According to Friedman, individuals make their consumption decision based upon their expectation of their long term "permanent income" and not simply the income they expect in a particular year. Hence, a temporary cut in tax rates, for instance, will have only a modest impact upon consumption, because the cut will have only a modest impact on the consumer's expected income over time. By contrast, a permanent reduction in tax rates will, other things being equal have a larger impact on consumption.

Here is Feldstein's op-ed, from the Washington Post, entitled: "The $800 Billion mistake."

Query whether Feldstein's implicit adoption of Friedman's hypothesis undermines part of his argument. For instance, while infrastructure projects might not literally create jobs within, say, the next six months, they may create the expectation of jobs (and profits for the firms that perform them) and thus increase the permanent income for thousands of individuals, thus increasing consumption expenditures sooner than one might otherwise think.