Government-Backed Monopolies—The Customers Pay More Forever

https://grantcoulson.files.wordpress.com/2014/04/incentiveseverywherepicturecorrect1.jpg?w=444&h=288

        Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

    Wherein we see the incredible costs paid by the consumer for the privileged position of producers. The very thing Adam Smith warned about.

National Post
William Watson

Income from unfair regulation — milk quotas, taxi licences — should be policy target on inequality

What should a taxi licence cost? A couple of bucks to produce the actual licence? A few dozen more for the test or inspection certifying the driver knows how to drive, doesn’t have a criminal record (or at least not a very serious one) and keeps his or her car clean and in good condition. What are we talking, $250 max?

If you go to “Taxi à vendre,” the very helpful official portal of Quebec’s taxi industry, you see offers to buy taxi licences that range (on just the first of 40 pages) from $150,000 to $190,000. If you go to a similar page run by the Dairy Farmers of Ontario, you see that in the month of July 442.26 kilograms of milk quota has changed hands in Ontario at a price of $25,000/kg. The price is suspiciously exact because several years ago it was capped by law. It wants to be higher, probably a lot higher, but the milk powers-that-be, presumably embarrassed by how costly the privilege of producing milk was becoming in Ontario, exercised their legal power over the market and capped it. As a result, as in all markets with capped prices, demand exceeds supply: in July, 906 farmers bid for quota, just 37 offered it for sale.

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   Pay the government for the purpose of producing something. If that sounds crazy, it is.

Why are taxi licences and milk quota so expensive, costing in the tens and hundreds of thousands of dollars? Because by law output in these industries is strictly restricted. Thus industries with hundreds if not thousands of competitors are able to imitate monopolies, make their product artificially scarce and raise its price. Which makes the respective licences worth a lot.

The high cost of these licences presents an obvious political difficulty for reformers. People who have paid so much to operate in these industries will fight hard to keep their privilege, and so the taxi industry everywhere is going hard after Uber and the dairy industry is resisting the proposed Trans-Pacific Partnership, all of whose prospective members want to see our high dairy and poultry tariffs removed. To get rid of the assisted monopolies, some form of buyout may be necessary.

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     Then it gets crazier, the taxpayer must pay the privileged.

But the licences present no great philosophical difficulty. No one would propose starting a system from scratch in which people had to ante up small fortunes to get into an industry. In the vast majority of 21st-century Canadian industries people and companies are free to enter if they want to. It’s only in a select few that completely artificial legal barriers keep competitors out, to the benefit and enrichment of those holding the licences when their price went up.

Incomes generated in this way economists refer to as rents. As I mentioned last week, a new study from the Institute for Research on Public Policy argues that a big part of the increase in top incomes in Canada over the last 30 years is the result of “rent extraction,” particularly in the financial and resource sectors. Something in the operation of these sectors apparently is enabling their executives to make off with rents — salaries and other forms of compensation greater than are needed to get them to do their jobs.

The paper, by Thomas Lemieux and Craig Riddell of the University of British Columbia, mentions in passing that another reason for the increase in inequality in the last three decades is the “increasing inability of workers in the middle of the distribution to extract rents through collective bargaining agreements.”

They don’t elaborate but think of the auto workers. When the Big Three car companies (then the Big Four, with American Motors) had North America all to themselves they made high profits that hard-nosed auto unions were able to grab at least a share of. With global competition, however, the profits and therefore the rents dissipated. (That example should raise doubts about supposed financial sector rents, by the way: It’s hard to believe competition in finance has declined in the last three decades.)

The IRPP paper adds that although doctors aren’t unionized the “occupational licensing and professional organizations of highly skilled workers can be viewed as a related form of unionization that might have played a more important role than traditional unions at the top end.” (More than once, Milton Friedman called the American Medical Association the strongest trade union in the United States.) They note that a decline in the importance of doctors in the top one per cent stopped around 2000, just as the federal government started putting more money into transfers to the provinces.

A rent, if you can get it, is a very nice form of compensation, whether you’re a doctor, cab driver, dairy farmer or financial or resource executive. As Adam Smith told us long ago, “people of the same trade seldom meet together, even for merriment or diversion,” but they plot to restrict competition and raise their incomes.

If we’re going to have a policy for the distribution of income, it’s rents we want to go after — income earned by virtue of some unfair regulation, advantage or privilege — rather than simple inequality. If people earn tons of money in a free and open competition because they’ve done something extraordinary, well, they should pay their taxes like everyone else but we shouldn’t impose an extra “inequality tax” on them simply because they’re successful.

Where people have built themselves a cosy niche safe from competition, however, we should root them out. And it shouldn’t matter whether they’re near the top of the income distribution or lower down.

Auto workers aren’t plutocrats. But being able to extract abovemarket salaries because your employers are a tight oligopoly in the North American market isn’t fair. If it’s a choice between auto executives getting the rents and auto workers, sure, maybe we go with the auto workers. But that doesn’t have to be the choice. What we want to do instead is eliminate the rents.

Same with doctors. If we have to choose, maybe we prefer to see more doctors and fewer financial executives among the one per cent. (Doctors seem more sympathetic, even those with lousy bedside manners.) But let’s not restrict ourselves to that choice. Let’s work against legislated and regulated privilege in all markets. That, not inequality, is what’s unfair.

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   Silver guilds in the Middle Ages were so powerful that non-guild silversmiths could be executed for making silver jewelry. Many would like to go back to those happy days where everything was rigidly controlled. This is what statists want–control for the sake of control–no other rationale needed. The regular person pays the price of course, but don’t we always? Higher prices and lower standard of living–the liberal daily double.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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