Want to Reduce Inequality?

For liberals who want to reduce inequality, the answer is simple: Reduce the number of burdensome regulations, according to a Mercatus Center article.

The article, using an example of an entrepreneur who has created a popular phone app, makes a convincing case against regulation.

The app’s creator will earn profits over time as the app’s popularity and sales increase. However, her profits will eventually decline due to the process of creative destruction: a newer, better app will hit the market that pulls her customers away from her product, erodes her sales and forces her to adapt or fail. The longer she is able to differentiate her product from others, the longer she will be in business and the more money she will earn. … A lack of competition stretches out a firm’s life cycle since the paucity of substitutes makes it costlier for consumers to switch products if the value of the firm’s product declines.

Indeed, regulation–especially regulation that inhibits market entry–exacerbates inequality by dampening competition and allowing entrepreneurs to dominate a market longer than they would in a world with no or reduced regulation. The article continues:

Maintaining market power for a long period of time by restricting entry not only increases corporate profits, it also allows doctors, lawyers, opticians, and a host of other workers who operate under a licensing regime that restricts entry to earn higher wags than they otherwise would.

Occupational licensing is a huge problem. Indeed, lawyers and doctors–using laws that require inordinate amounts of education–artificially reduce the supply of doctors and lawyers, which increases their pay. Even if you favor occupational licensing for doctors and lawyers,  licensing for hair braiding is clearly ridiculous. In fact, the percentage of the workforce that is required to have licensing rose from 5% in the 1950s to 20% by 2000 and 29% in 2006. A lot of fields, as a result, have been closed to low-skilled workers, which makes it harder for them to rise above poverty. These laws protect the entrenched laborers and quash the newcomers; in other words, they worsen inequality.

The Mercatus article continues:

Throughout America’s history the economy has been relatively dynamic, and this dynamism has made it difficult for businesses to earn profits for long periods of time; only 12% of the companies on the Fortune 500 in 1955 were still on the list in 2015. In a properly functioning capitalist economy, newer, poorer firms will regularly supplant older, richer firms and this economic churn tempers inequality. … But this dynamism may be abating and excessive regulation is likely a factor. For example, the rate of new-bank formation from 1990 – 2010 was about 100 banks per year. Since 2010, the rate has fallen to about three per year. Researchers have attributed some of the decline of small banks to the Dodd-Frank Wall Street Reform Act, which increased compliance costs that disproportionately harm small banks. Fewer banks means less competition and higher prices.

While some degree of inequality will always exist in a capitalist economy, especially in a society like ours which is (historically, at least) hyper-meritocratic, there would always be a churn. People would rise and fall, and there would always be a degree of dynamism. But as regulation is hampering competition, fat cats have the ability to get fatter without adding anything to society. Ironically, regulations meant to curtail their power have actually increased it by wiping out their competition.

America deregulated throughout the 1980s and 1990s. We were more prosperous as a result. Now, the issue isn’t even about becoming wealthier; it is about defeating the entrenched upper-class and unleashing competition into the market place. The answer isn’t more regulation. It’s less.


Boston University Study Says Regulation INCREASES Corporate Profits

Bernie Bros, listen up: Federal Regulations increase corporate profits. Unfortunately, Sandernistas refuse to acknowledge the true source of the problem–big government–in order to simply focus on “soaking the rich,” which would have deleterious impacts on our economy.

According to a recent Boston University study, “since 2000 much of the rise in profits is caused by growing political rent seeking.”

For those who don’t know what rent-seeking his, here is a definition: “Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the company.”

So how do more regulations enable rent-seeking behavior? Simple. The bigger the government, the more incentive a company has to invest in the government.

A more complex tax system works in favor of established businesses because smaller businesses and upstarts cannot afford to hire lawyers and accountants to sift through the rules, whereas big companies do have those resources.

Regulations benefit large companies as they can afford to not only incur the costs, but also have the influence to decide how they are written. Regulations harm small businesses that cannot incur the costs and, oftentimes, are written in ways meant to reduce competition from new up-and-comers.

Sandernistas, take note: Citizens United is not the source of the problem–big government is. And this is no longer just theory; there’s now evidence to prove it.

Marriage Does Matter

Despite the overwhelming evidence to the contrary, Matthew Yglesias believes the decline of marriage is not a problem. There here are three reasons to think he is wrong.

1) The Brookings Institution report

On October 15, 2015, the Brookings Institution published the newest Future of Children report. They find, “Whereas most scholars now agree that children raised by two biological parents in a stable marriage do better than children in other family forms across a wide range of outcomes, there is less consensus about why.”

We don’t definitively know why marriage matters, but we know it does. Whether it promotes better parenting, brings in two incomes, have different attributes than non-married couples, or whatever the reason, we know that marriage somehow makes children better off. While no single one of these factors likely leads to better outcomes, there’s been “a growing appreciation of how these factors interact, and all of them appear to be involved.”

  1. The American Enterprise Institute report

While AEI is often seen as the conservative version of the Brookings Institution, they do agree on the issue of marriage. The report, “Strong Families, Prosperous States,” found that states with higher rates of marriage—and higher rates of married-parent families—were associated with more growth, more economic mobility, less child poverty, and higher median incomes.

Specifically, they find “[w]hen we compare states in the top quintile of married-parent families with those in the bottom quintile, we find that being in the top quintile is associated with a $1,451 higher per capita GDP, 10.5 percent greater upward income mobility for children from lower-income families, a 13.2 percent decline in the child poverty rate, and a $3,654 higher median family income.”

These are huge differences, and serve to highlight how important the institution of marriage is to a functioning society—and it means the decline of marriage is very, very worrisome.

  1. The Northwestern University report

The report found that less-advantaged boys did worse in school than more-advantaged ones. This was not fully explained by differences in income. Part of the gap was because less-advantaged children were less likely to grow up in married households than more-advantaged ones.


Marriage does matter—and the evidence proves it. Answering the ‘why’ is much more difficult, but most social scientists have come to accept the conclusion that marriage matters due to the overwhelming evidence.

Has Financial Regulation Made the Financial Sector More Stable?

President Obama, in the wake of the financial crisis, passed a multitude of financial regulations aimed meant to reduce the risk of future financial crises. Paul Krugman, of course, gave Obama a raving review. He wrote:

Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

While Krugman doesn’t think the regulation went far enough, at least it’s a start. And I actually agree: banks should hold more capital.  Even the Adam Smith Institute–which, just looking at the name, you can guess what their political leanings are–supports higher minimum bank capital requirements.

But, with all of these accomplishments, I wouldn’t call these new regulations “a success story.” Bank capital reserve increases are a positive, but do they outweigh the negatives?

An interesting study by the Federal Reserve Bank of Richmond finds that “61 percent of the liabilities of the financial system are subject to explicit or implicit protection from loss by the federal government.” Why is that a problem?

Because of simple incentives. If your money is insured, you are willing to take more risks with that cash than you otherwise wouldn’t. A risky loan or investment makes more sense if you can expect full or partial recompense from the government than if there were no (or less) insurance overall. If risky investments as a whole begin to go south, the economy will enter a collapse–like we did in 2008. Except this time will probably be worse, as interest rates are already close to zero and the Federal Reserve has fewer tools in its toolbox than it had in 2008.

It is impossible to know which effect will outweigh the other. Capital requirements make crisis less likely; Federal insurance, on the other hand, makes it more likely. Only time will tell whether or not these new rules will have any impact on the rate of financial crisis in this country.

As the evidence on the efficacy of these regulations is somewhat ambiguous, and there are known problems with these laws, we should consider changing–or outright repeal and replacement of–these laws.

Wharton School of Business on NAFTA

Despite Trump’s Wharton credentials, he seems to not share their view on free trade. The Wharton School of Business has a good article on the impacts NAFTA had on the United States. The article can be read here. Here are some of the highlights:

[T]wenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually ‘Made in USA’ content, as are 40 cents out of every dollar for goods imported into the U.S. from Mexico… Mexico imports more from the U.S. these days than do all of the so-called BRIC nations combined – Brazil, Russia, India and China… [T]he United States has been $127 billion richer each year thanks to ‘extra’ trade growth fostered by NAFTA… And while the costs of NAFTA are highly concentrated in specific industries…the benefits of the trade pact (such as lower prices for imported electronics or clothing) are distributed widely across the U.S.

For example, according to a 2014 report by the Peterson Institute for International Economics (PIIE), the United States has been $127 billion richer each year thanks to “extra” trade growth fostered by NAFTA. ….the pure economic payoff was …$400 [per person].

…[S]ome 14 million jobs rely on trade with Canada and Mexico combined, and the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost… [O]nly about 15,000 jobs on net are lost each year due to NAFTA… ‘[S]ince NAFTA’s enactment, fewer than 5% of U.S. workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico… For every net job lost in this definition, the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households

Stop Blaming Capitalism For Drug Price Increases

EpiPen has made headlines recently, putting pharmaceutical prices at the top of the political agenda. When Martin Shkreli hiked the price of Daraprim, progressives were outraged. “Capitalism is evil” was the leftist battle cry.

Now, with EpiPen raising its prices, progressive hero Bernie Sanders has criticized the company for valuing profits over people. Hillary Clinton, who comes off as a lifeless and heartless reptilian, even released a statement condemning the price increase.

But does the EpiPen and Shkreli scandal prove that capitalism is destroying our health care system? Ironically, it proves the opposite.

In my first day of introductory microeconomics, the teacher said that greed is never the problem. Whether our government is small or large, socialistic or anarchistic, tyrannical or benevolent, people are always as self interested as they always have been. Of course, we aren’t reptilian beings (like Hillary Clinton), and some individuals do have altruistic streaks. But, the simple fact is, humans usually look out for themselves (and those close to them) over a random person off of the street.

What really makes greed a good thing or a bad thing, the professor said, was institutions. In a world where the government is small and protects us from others–not ourselves–greed works out pretty well. In a world where there is stable money, freedom to trade, and a rule of law, greed works out great.

And we see this with drug prices. The problem is not that EpiPen is greedy or that Shkreli wants to make an extra buck; the problem is that the government has bad institutions–bad policies–that have constricted competition and made it easier for these individuals to hike prices.

A new article in the Wall Street Journal lays it out pretty clearly:

In a health care system notoriously resistant to cost-containment, generic drugs are an exception. Americans enjoy a huge range of generic medicines at-ever declining prices, largely thanks to robust competition among multiple manufacturers.

In 1984, the Waxman-Hatch Act slashed the regulatory hurdles for generic copies of patented drugs. Since then, generics have risen from 19% to 84% of all prescriptions. Their prices have fallen 70% over the past eight years, while branded prices have risen 164%, according to Express Scripts, a pharmacy benefit manager.

The main driver of those price declines is competition. A 2010 study found that within three years of the first generic launch, the average generic has 12 competing suppliers and its price has fallen 94%.

In the generic world of prescriptions, prices have fallen dramatically because of free market competition. The WSJ accompanied this article with the following graph:

Indeed, the generic market has a lot of competition and lower prices. The brand name market has no competition and thus has rising prices. Why is there no competition?

In large part due to the government. We have very strict approval rules, which makes it hard for generics to become commonplace. This is why many economists, like Alex Tabarrok, support reciprocity. What is reciprocity? According to Tabarrok, reciprocity is “if a drug is approved in Europe it ought to be approved here. … [all reciprocity does is allow the importation] of any generic approved as such in Europe to be sold in the United States.”

Essentially, he wants free trade in the realm of drugs to make it easier for more generics to enter the market more quickly, which forces both domestic and brand name medicines competing in the same market to slash costs. Reciprocity would dramatically reduce costs. In fact, Senators Ted Cruz and Mike Lee have been proponents of reciprocity for a long time now.

Of course, we shouldn’t allow reciprocity with every nation. I don’t trust the Chineese or Somalian approval process, for example. But we should make reciprocity agreements–like trade agreements–with nations who have a proven track record of approving safe drugs (e.g. Most of Western Europe, Canada, Australia, Japan, Korea, etc.)

Essentially, if you want lower drug prices, support more competition. The reason EpiPen and Daraprim cost so much is because they have no competitors, which makes it easy to hike the price with no consequences. Induce competition–in other words, let the market work–and drug prices will fall.