Competition and Inequality

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James K

James is a government policy analyst, and lives in Wellington, New Zealand. His interests including wargaming, computer gaming (especially RPGs and strategy games), Dungeons & Dragons and scepticism. No part of any of his posts or comments should be construed as the position of any part of the New Zealand government, or indeed any agency he may be associated with.

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38 Responses

  1. Avatar zic
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    says:

    Let’s get electric. Electricians are licensed by states, for obvious reasons. Public safety requires your home’s electrical system meet certain safety standards so that it doesn’t catch fire while you and your family sleep at night.

    Electricians Unions offer hosts of training courses and apprenticeships, ensuring a supply of well-trained electricians. Yes, the same training is available at vocational schools; but a major difference is the on-the-job vs classroom training; an apprenticeship program through a union makes the education affordable to someone who can’t afford tuition. And the school graduate still needs to complete an apprenticeship under a master electrician; think of it as the electrifying equivalent of a doctor’s residencies. It enhances public safety.

    In honesty, I’d prefer to see more of these types of programs — working under a skilled master to gain the knowledge, experience, and credentials necessary to hang out your own shingle.

    Do all electricians need to belong to a union? No. But the presence of the union certainly enhances the supply of electricians — union members or not — to meet the demands for a safe power deliver system in our homes, business, schools, hospitals, and on our streets. These people tend the power grid, often in extreme conditions, working with something that would quickly kill most folk without the training to handle electricity safely.

    Now lets look at hotel workers. Do you think, just maybe, that the training provided by their unions helps keep workers safe from guests with sexual predation on their minds? Or is it the maids job to service the guests in all ways?

    There’s more to life then competition and growth.Report

    • Avatar Kolohe in reply to zic
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      says:

      The carpenters and most other trades do something similar. I think unions can and should fill a valuable – and currently mostly unfilled – niche in training and first line leadership. The model would be similar to how the non-commissioned officer ranks function for military occupational specialties (which are similar to the trades in many ways, and in several cases, *are* trades)Report

    • Avatar Koz in reply to zic
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      says:

      “Do you think, just maybe, that the training provided by their unions helps keep workers safe from guests with sexual predation on their minds?”

      No.Report

      • Avatar zic in reply to Koz
        Ignored
        says:

        (sadly laughing) You’re right.

        But it sure does help them know how to report it to the authorities as criminal.Report

        • Avatar Pierre Corneille in reply to zic
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          says:

          I would say it’s less an issue of training than one of having someone to stand up for you when someone mistreats you. If the workers are organized, either in a union or less formally just to be vigilant about guests (who often have more money and enjoy such things like access to legal representation) who also predate on workers, they can better stand up to such behavior. These workers are human beings and shouldn’t be expected to put up with that cr-p. And maybe unions can help them in that respect.Report

    • Avatar Simon K in reply to zic
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      says:

      Why do electricians have to be licensed? If I do electrical work on my own house, I pull a permit, do the work, call the building inspector, he comes and says “okay” and we’re done. The only difference if I have a licensed contractor is that he can pull the permit for me as well as doing the work. Why does it make any actual difference to safety?Report

      • Avatar Pat Cahalan in reply to Simon K
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        says:

        In theory, it doesn’t, because you have to have an inspection.

        In practice, it provides some additional layer of safety as not all inspectors are competent.

        Of course, not all licensed electricians or home practitioners are competent, either. Security in depth, as it were.

        No, I don’t think (for the most part) that this is a necessary security in depth. It used to be. Nowadays, most people who are too dumb to work with electricity are also too lazy to do it themselves.Report

    • Avatar James K in reply to zic
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      says:

      There’s a world of difference between voluntary certification / training and a legally-required licence. It’s the latter I find problematic, not the former.

      Now lets look at hotel workers. Do you think, just maybe, that the training provided by their unions helps keep workers safe from guests with sexual predation on their minds? Or is it the maids job to service the guests in all ways?

      So you’re saying that the absence of legally-mandated professional licensure for hotel staff is the equivalent of granting a licence to rape to hotel guests? A bit overblown, don’t you think? And how much training do you need to call the police?Report

      • Avatar zic in reply to James K
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        says:

        My point is that when you’re considering something like ‘unions,’ it’s really good to ask yourself what are the benefits here that I might not appreciate? Workforce education and training are major benefits in both public safety and worker safety. Are the net economic gains of these benefits part value of Unions? (This matters to the middle class; because there really wasn’t much of a middle class before unions.)

        At it’s root, I found your question, “How can government help those in need,” and your dismissal of unions disturbing, an ends looking for justification, perhaps. Unions can do a lot to help those in need, from providing job training to advancing career skills to representing a worker’s needs for benefits including health insurance and worker safety. They provide a political voice for workers — whose interests are not alway aligned with employers. More importantly, they are, in essence, workers helping themselves.

        They can also screw the whole industry over if poorly run and unwilling to consider the health of the employer. But then, so can free trade, technology, and progress. Because some unions are failures, failing to appreciate the benefits of unions is shortsighted. Some corporations are failures, too. Some governments are failures.

        In comments, you actually finger health care costs as the culprit killing the middle class; I think this might be getting closer. I’d add other costs that are significantly increased, college tuition, day care for children, entertainment gadgets — the $100 cell phone bills, the cable TV bills, etc. Quite possibly other expenses that make it possible for two parents to work — transportation, household help with cleaning/yard work/home maintenance if both parents in a family work full time.

        Finally, with rape, it’s NEVER as simple as simply calling the police; something every woman knows. I think you might better understand middle class issues of you better understood women’s issues. With a nearly endless supply of low-wage immigrant workers available, it’s might not be in a hotel’s best interest to call the police; particularly when your guests are both rich and powerful; sometimes a strong union with job-safety training also helps management do the right thing.Report

        • Avatar Pat Cahalan in reply to zic
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          says:

          > Unions can do a lot to help those in need, from
          > providing job training to advancing career skills
          > to representing a worker’s needs for benefits
          > including health insurance and worker safety.

          Does the amount of job training a worker gets from a union surpass that which they could acquire themselves from spending their union dues on training?

          I’m not trying to be snarky, I’m honestly curious. How much training does your average union actually subsidize? And what is it actually worth?

          How much is worker safety an issue now that we have OSHA? If worker safety is still an issue, does that mean that OSHA isn’t working?Report

          • Avatar zic in reply to Pat Cahalan
            Ignored
            says:

            At least in the US, becoming a master electrician (and this would be state, not federal law, so will vary), where you can ‘hang out your own shingle,’ requires the combination of serving an apprenticeship as a journeymen electrician under a master for several years and a course work. Given the dangers of high voltage work to the worker and the public, this is a very good thing. Numbers of other licensed trades function in the same way; with the licensing is based on education, work experience, and some measure of competency such as a test and ongoing education requirements.

            Where I live, any master electrician can take on an apprentice, but because of the time involved, few independents do so. Courses are offered by unions and by technical high schools and community colleges. The curriculum I’ve seen used by a local Community College was published by IBEW, the electricians union. The vehicles for apprenticeship seem to be unions and large construction firms with electrical staff.

            OSHA is not going to inspect every home, school, shop, or factory being wired or re-wired, and I wouldn’t want them to do so. OSHA standards are part of the training an electrician would receive, at least the programs I’m familiar with. OSHA is also not going to measure worker competency; is this job being done so that it’s safe for the public? No fires? No electrocutions when you plug your computer in?

            But here’s the important notion: beyond looking out for worker wages/conditions/benefits, unions can and do offer benefit to employers and the public. This greater good is often lost in the discussion.

            I think it’s also important to challenge the idea that licensing is inherently bad and a method of limiting competition. It can be that; but it’s also a method of establishing base-line competency in professions and trades where there’s substantial public risk. I want a plumber who knows the difference between the fresh and gray water pipes. Hairstylist that knows how to use dyes safely. Surgeons who’s been carefully trained in surgery. Engineers who design bridges and buildings that don’t collapse.

            Without a method of training, apprenticing, and licensing, protecting public interest would happen how? Activists courts? Insurance companies? What’s the mechanism?Report

            • Avatar Pat Cahalan in reply to zic
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              says:

              Er, you didn’t exactly answer my question.

              But okay, moving on:

              > Given the dangers of high voltage work to
              > the worker and the public, this is a very
              > good thing.

              This is sort of a complicated process. Now, I know very little about specific trades, but I know a decent amount about security processes and audit is part and parcel.

              Process A: Worker requires baseline training through internship/apprenticeship. Worker “graduates”. Worker performs work. Inspector checks work. Work passes. Double loop: if worker fails to perform adequate work on N occasions, worker loses licensing.

              Potential failures in Process A:
              * baseline training is wrong, AND inspector doesn’t catch failure scenario
              * baseline training is correct, but doesn’t cover a particular failure scenario AND inspector doesn’t catch failure scenario
              * new, unknown-to-previous aggregate experience failure scenario

              Process B: Worker teaches him/herself. Worker performs work. Inspector checks work. Work passes.

              Potential failures in Process B:
              * self-taught training is wrong
              * self-taught training is correct, but doesn’t cover a particular failure scenario AND inspector doesn’t catch failure scenario
              * new, unknown-to-previous aggregate experience failure scenario
              * worker can continue to produce bad work without official censure

              There are a couple of differences between the two. The first one is obvious: most exception scenarios with mildly hazardous work involve personal injury, so it’s probably the case that more people will injure themselves with Process B as the norm.

              However, in either case, you’re not going to get bad wiring at the end of the job unless the inspector is incompetent.

              Yes, it’s less likely that you’ll get bad wiring at the end of the job *when* the inspector is competent if the original worker *is* competent. But I don’t know how much less likely this is, as I have no grounds to judge the efficacy of the inspector.

              Process A does have a weakness that Process B doesn’t: embedded procedures. Example: you can’t install PEX plumbing in Pasadena, local building code is copper plumbing. But PEX is manifestly more flexible than copper and might actually be a better piping option in a seismically active area.

              > I want a plumber who knows the difference
              > between the fresh and gray water pipes.

              Well, sure. So do I. But I’ve hired an awful lot of contractors in my life and they’ve all been licensed and half of them did utter crap work.

              A license is a proxy for authorization. When done well, licensing can work very well for keeping incompetent people out of a work space, but this usually involves lots of rigor on all levels of the licensing process, from training to granting to renewing to revoking (seems like most license processes fail before they get to that last step, indeed one of the regrettable problems with aggregate workers – ie, unions – is that they don’t support proper revocation processes for their population).

              I have no beef with licensing conceptually, any authorization scheme can increase the barrier that cuts down on bad or malignant work. But in order to judge a licensing scheme, you have to look at it end-to-end, and most licensing schemes *aren’t* good schemes.

              This makes them basically useless. If 50% of licensed contractors can do crap work, the licensing process is either to easy to pass, or not stringent enough for revoking licensing. And if we can’t have a licensing process that gives us better than a coin flip, we’re doing it wrong; the double-loop section of Process A is basically not present at all, and what’s worse: half of the licensed practitioners actually have a veneer of respectability that they don’t deserve.

              > Without a method of training, apprenticing,
              > and licensing, protecting public interest
              > would happen how? Activists courts?
              > Insurance companies? What’s the mechanism?

              This begs three questions: one, that we have a mechanism now (which as you can see above, I dispute); two, that the mechanism we have now is better than the alternative; and three, that there must be some additional alternative.

              We use lots of corrective mechanisms now, they seem to be failing at the job, on the whole.Report

        • Avatar James K in reply to zic
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          says:

          I’m not suggesting unions are without merit, but I don’t think they can help beyond what they are now. For one thing I think their political power will make some things worse (see: international trade).

          But still you’re right, union do help workers in a number of ways.Report

    • Avatar James Hanley in reply to zic
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      says:

      But the presence of the union certainly enhances the supply of electricians — union members or not — to meet the demands for a safe power deliver system in our homes, business, schools, hospitals, and on our streets

      A claim, with neither explanation nor evidence. I’m not necessarily opposed to licensing of electricians (although I’ve rewired my own home just with the help of Lowes’ do-it-yourself books), but how do Unions help electricians meet these demands?Report

      • Avatar Will Truman in reply to James Hanley
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        says:

        I’m not saying that he’s right about this (I have no idea whether unions increase or decrease the number of electricians), but he did answer your question:

        Electricians Unions offer hosts of training courses and apprenticeships, ensuring a supply of well-trained electricians. Yes, the same training is available at vocational schools; but a major difference is the on-the-job vs classroom training; an apprenticeship program through a union makes the education affordable to someone who can’t afford tuition.Report

  2. Avatar RTod
    Ignored
    says:

    A good post, James. A few random thoughts where I would appreciate your feedback…

    “One thing that is commonly misunderstood about the power of monopolies is… the ease with which new firms can enter the market. … Is it really necessary that taxi drivers, interior designers and barbers / hairstylists be licensed by the government to operate?”

    It seems to me you make an argument here where you make your pitch, and then give examples that disprove it. Licensing for these professions may or may not be a good idea. (Certainly for hairstylists I am drawing a blank on what the initial logic for licensing might have been.) But if anything these seem like perfect arguments for why the impediments of licensing do not create monopolies. In fact, you have taken industries where the vast preponderance of professionals are small independent contractors.

    “So the key area of focus for antitrust regulators shouldn’t be scrutinising every merger, but rather asking “is this going to make it easier for new firms to enter or harder”. “

    I’m not sure how true this is. If I want to start, say, a worker’s comp insurance company in my state I need to have about $2 million capital on day one. (That’s not a state regulation, just an industry standard baseline.) If I am competing against a monopoly that has its sights set on eliminating competition (either by a single insurance carrier or – as is more often the case in insurance anti-trust cases – collusion by a group of existing carriers) I still need that $2million. But if they set premiums at an underwriting loss for the next three years, I will not be able to compete. Dept. of Insurance regulations and licensing requirements might make it more tiresome to set up my company and have it thrive, but the former example makes it actually impossible.

    And, like the note from above, regulation in the insurance industry has been cumbersome for years – but competition is fierce, and new carriers enter the market place every day.

    Tying into some of the posts Erik has been making recently, I might suggest that the above speaks to neither greater nor lesser governmental licensing /oversight / regulation. These arguments seem more and more to me to simply be strategic right vs. left arguments to get folks to joint the party or get out the vote. Better a pragmatic approach, where we approach it from a “some industries absolutely need government oversight and some absolutely need none. Let’s discuss on a case by case basis which is which.”Report

    • Avatar Pierre Corneille in reply to RTod
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      says:

      (Certainly for hairstylists I am drawing a blank on what the initial logic for licensing might have been.)

      I wonder, and this is just speculation, if it had anything to do with the claim in some cities, in the late 1800s and early 1900s, that hairstyling places were allegedly places of prostitution? I don’t know how valid the claim is, other than that some people sometimes made that claim in some American cities, but perhaps that is one reason why licensing requirements were imposed in that industry.Report

    • Avatar Will Truman in reply to RTod
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      says:

      (Certainly for hairstylists I am drawing a blank on what the initial logic for licensing might have been.)

      It might have to do with the use of chemicals, sanitation requirements with blades, and so on. My biggest problem with licensing is when it goes beyond “you must have training for using the instruments that you use” to “you must have training for all types of tools and hair-dyes whether you depend to be a full-on hairstylist or an old school barber.”

      My grandfather was a barber. I shutter to think of what he would have done with what I read to be New Jersey’s requirements.Report

    • Avatar James K in reply to RTod
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      says:

      But if anything these seem like perfect arguments for why the impediments of licensing do not create monopolies. In fact, you have taken industries where the vast preponderance of professionals are small independent contractors.

      I’m using monopoly in a broad sense here. When economists speak of “monopoly rents” we don’t just mean the rents extracted by literal monopolies, but oligopolies and other less-than-perfectly competitive markets as well. Imperfect competition may be more visible with large conglomerates, but it’s probably more common at small scales.

      There’s another reason why small-scale barriers to entry matter – they makes it hard for low income people to start their own business, thereby restricting the opportunities for poor people to increase their income.

      I might suggest that the above speaks to neither greater nor lesser governmental licensing /oversight / regulation.

      I’m afraid I don’t follow the workers’ comp example (we don’t really have it in New Zealand, so I don’t have enough context), but I wouldn’t want to lump licensing, oversight and regulation together. Not all regulations affect barriers to entry equally. Regulation in the form of “here are some safety standards you must follow, but anyone who does can enter” is a very different proposition to “in order to enter the market the government will perform a needs assessment to determine whether another firm is necessary”. I’m talking more about the specific content of regulation than the quantity of it, though if the overall quantity of regulation becomes sufficiently complex it can pose a real problem for small businesses.Report

    • Avatar James Hanley in reply to RTod
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      says:

      If I want to start, say, a worker’s comp insurance company in my state I need to have about $2 million capital on day one. (That’s not a state regulation, just an industry standard baseline.) If I am competing against a monopoly that has its sights set on eliminating competition (either by a single insurance carrier or – as is more often the case in insurance anti-trust cases – collusion by a group of existing carriers) I still need that $2million. But if they set premiums at an underwriting loss for the next three years, I will not be able to compete.

      Yeah, you might have trouble drawing sufficient capital to compete. And I might have trouble starting up a car manufacturer that can compete against GM, Ford, Toyota and Honda. But the issue is not whether any random person who can manage to do the bare minimum can successfully compete–it’s whether enough non-random someones can manage to do so. And there are plenty of corporations, or even individuals, who can manage to do so if they are not prevented from doing so by law.

      Anyway, you’re basically reiterating the long-discredited infant industry argument for protectionism. The idea is a theoretical possibility, but it just doesn’t really happen that much. Anyway, if a series of potential competitors could force an established firm to keep running losses, the benefits would be to the consumers. And that’s what really matters.Report

  3. Avatar E.D. Kain
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    says:

    Excellent post, James.Report

  4. Avatar Dan Miller
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    says:

    Here’s my question–over the past 40 years, growth has been pretty solid, about 3.2% per year. At the same time, inequality has dramatically increased. Are you saying that over that time period, the US has had dramatically more licensure requirements? That scrutiny of proposed mergers has gone up? I’ll concede that lack of competition in a given industry is a problem, but I’m not at all convinced that it’s actually gotten worse over the last 40 years, which it would need to have done if we want to blame middle-class stagnation on it.Report

    • Avatar James K in reply to Dan Miller
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      says:

      I think there are other factors that are affecting inequality that are less amenable to policy solutions. For instance, I’m pretty sure the Superstar Effect is responsible for a lot of income growth in the top 1% of the income distribution, but there’s not a lot to be done about it. Also, there may be somethign dodgy going on with executive pay, but while that would make the top 1% richer, executives aren’t paid enough in aggregate for it to affect the middle class (or poorer people) to any significant extent.

      As for the cause of middle class stagnation, I think there’s more than just low competition at work, I was really talking more about the welfare of low income people in this post. If I were to finger a culprit for middle class stagnation it would be health care costs (I presume the value of benefits are not included in the household income statistics, at least that would be the normal way of reporting) and health needs a whole post to itself. Also, while middle class stagnation is a real problem, middle class Americans are still extremely rich by international and historical standards, so I wanted to focus on people who are suffering significant disadvantage.Report

  5. Avatar Pat Cahalan
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    says:

    Just a side note.

    I know a bunch of people who are more than willing to hang out their own shingles. Many of them have been screwed enough by “workin’ for the man” that they actually want to work for themselves.

    The regulatory and licensing burdens, such as they apply to each of them, are of zero moment. They’re all willing to file the stupid paperwork and pay the $N license fee, such as it is.

    It’s the health insurance cost that keeps everyone working for the man. Remove all the other barriers, you’re probably not going to be encouraging entrepreneurial spirit all that much except among those who are also highly correlated with least likely to succeed (and more bankruptcies aren’t going to be helping the economy any).

    Not that there aren’t necessarily good reasons to get rid of some of the red tape, but I don’t think the outcome will be the big net positive we’d all like it to be.Report

  6. Avatar Sam MacDonald
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    says:

    “Electricians Unions offer hosts of training courses and apprenticeships, ensuring a supply of well-trained electricians.”

    Or is it:

    Electricians Unions limit training courses and apprenticeships, ensuring a limited supply of well-trained electricians.Report

    • Avatar zic in reply to Sam MacDonald
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      says:

      Since any master electrician — union member or independent — can take on an apprentice, since the course work is also available at community colleges, I don’t think unions are limiting the supply of electricians.

      More likely the cyclical nature of construction and parents pushing their children toward white-collar jobs are limiting factors.Report

      • Avatar Jaybird in reply to zic
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        says:

        Since any master electrician — union member or independent — can take on an apprentice

        Are there any “no Irish need apply” issues when it comes to the established powers picking and choosing who they’ll take under their wing?Report

        • Avatar zic in reply to Jaybird
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          says:

          It is essentially an employee, but with additional burden of training; the rules of hire in the locality would apply, with the addition of the local (state in the US) apprenticeship programs on top.

          Should someone be forced to hire someone not of their liking?

          The burden of training is significant. I was told tradesmen were once encouraged take least one apprentice during their working life, to maintain a stable skill base over time. Often, it was a father/son deal, passing skill down the generations. I’ve not heard it stressed much of late; the era of “Jaybird and Sons” (or daughters) seems to be fading.

          Apprenticeship seems a neglected training method, these days. And some skilled trades are at risk of being lost — tool and die makers a prime example — those craftsmen who shape the tools necessary to shape metal. My son, a machinist, has searched for an apprenticeship, and they don’t seem exist outside large union shops. Yet small, specialized machine shops abound, and the skill remains much needed; particularly for specialty niche manufacturing and prototyping.Report

          • Avatar Jaybird in reply to zic
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            says:

            Should someone be forced to hire someone not of their liking?

            Now you sound like a Libertarian.

            Are we allowed to not hire Irish people just because we figure that even though some of our best friends are Irish, we have to take into account the fact that not all of our customers like Irish people and with a business where there is a lot of competition out there, we need every edge we can get, which (in this case) means people who don’t smell of potatoes when they talk to customers.

            So even if a fully-qualified Irishman comes in, it should be okay for me to hire someone less qualified (nepotism, maybe) just because I like the less qualified guy?Report

            • Avatar zic in reply to Jaybird
              Ignored
              says:

              There are many Irish; veterans, women, disabled, not to mention hue. Seeing Irish instead of Human disturbs me; but I don’t know how to regulate it away.

              In honesty, I don’t know how to sort this out. But for small businesses, I’d defer to a libertarian standard. (And I am a social libertarian; I don’t buy the anti-government propaganda, a way to avoid thinking about the complexities of formulating, implementing, evaluating, and fine tuning or eliminating public policy endeavors.)Report

              • Avatar Jaybird in reply to zic
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                says:

                Well, *THAT* is my problem with “Only Licensed Electricians”. If the cartel is not inclined to take on anyone who isn’t already related to someone already in the cartel, then no Irish folks will ever be Electricians.

                Effectively, Licensing Laws become anti-Irish in practice because the Irish know better than to try to apprentice themselves and so they’ll all become cops or something because that’s the only job that will hire them.

                The mixture of the libertarian attitude toward apprenticeship (which I understand absolutely and sympathize with) and the more statist attitude toward official licensing (which I do not) will, effectively, result in a cartel.Report

  7. Avatar Barry
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    says:

    James K: “I’ll just finish up with a little on growth promotion. I think there’s not a whole lot governments can do here (long-run per-capita real growth rates have been stable in the West for the best part of 200 years), but there are a few things – keeping public infrastructure properly built and maintained, perhaps the promotion of basic research. But other than that growth is not somethign that is easily amenable to government control. ”

    This argues in favor of a strong social safety net, excellent public infrastructure and government provision of many public goods. And this is backed up by evidence; the neoliberal regime in the USA has fallen flat on its face in terms of growth.Report

    • Avatar James K in reply to Barry
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      says:

      This argues in favor of a strong social safety net, excellent public infrastructure and government provision of many public goods. And this is backed up by evidence; the neoliberal regime in the USA has fallen flat on its face in terms of growth.

      Three points:
      1) What you just described is neoliberalism, which can basically be described as a small regulatory state combined with a moderate to large welfare state.
      2) Given the definition above the US isn’t neoliberal – the US government is a moderate-to-large regulatory state, with a patchy welfare state.
      3) US GDP growth rates are quite respectable, nothing I’m talking about is going to have much of an effect on growth rates – there’ll be some effect at the margin but that’s about it.Report

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