Thursday, December 22, 2016

Prosperity Districts and Predatory Capitalism

It is well established that economic freedom and limited government is the best path to prosperity. Big government is an enduring impediment to economic growth, and has been so ever since the idea was invented that government should engage in economic redistribution among private citizens.

It is equally well established that economic freedom requires a certain level of order and predictability in public institutions in order to function. The institutional framework needed to secure the blessings of economic freedom are not very extensive - on the contrary, all government has to do is protect the life, liberty and property of individuals and businesses, and the free market and free, voluntary interaction between citizens can take care of the rest. 

This sounds simple enough, but it is not. 

A government capable of securing economic freedom is not a simple government. It must provide unwavering support for people's personal liberty, as well as unrelenting protection of rightfully earned property. That takes skills and commitment; one of the most important parts of this protection is that government be an independent arbiter of conflict.

Unfortunately, many libertarians, who by definition should be supportive of a maximum of economic freedom and a minimum of state, become the strongest enemies of their own ideas. Some of them do it by forgetting that when two people dispute over something - a piece of property or how to interpret a contract - the only way to peacefully settle the dispute is by means of an independent judiciary. Instead, they want to privatize every last piece of government, especially the courts. Private, for profit companies can provide the services of settling dispute, they say. 

One need not think very far to realize how private courts will turn economic freedom into a judicial nightmare. Imagine the Bill Gates of the court system owning 95 percent of all courts. Imagine getting into a dispute with him over a contract, and you end up in a court owned by him. Imagine the independence of the judge as he tries to determine who is making the right interpretation of the contract.

Another area where some libertarians lose sight of reality by sticking their heads in the sand is in the economics of economic freedom. Ironically, there are proponents of economic freedom who simply do not understand the basics of economics.

This problem is unfortunately relevant as we go into the 2017 legislative session here in Wyoming. A number of readers have approached me, asking about the so-called Prosperity District initiative by the Compact for America Educational Foundation

Since its founding, the Compact has been advocating an amendment to the U.S. constitution that would effectively cap the federal government's debt. That is a noble effort of which I have been a dedicated supporter. 

Unfortunately, last spring the Compact decided to steer away from the balanced-budget amendment fight and get involved in something they call "prosperity districts". Mark Lutter, Ph.D., economist with the NeWAY Foundation, explains:
Prosperity Districts are special jurisdictions which can opt out of laws, taxes, and regulations which reduce economic growth. They are a tool to empower the creation of new communities with regulatory systems that promote investment, create jobs, and maximize economic opportunity. Prosperity Districts have two stages. The first stage is the state level. This occurs when Arizona, or another state, passes the Prosperity District legislation. Prosperity Districts, which can opt out of harmful state laws, taxes, and regulations, can then be created. The second stage is the federal level. After two or more states pass the legislation and the interstate compact takes effect, congress can pass a law allowing Prosperity Districts to opt out of harmful federal laws, taxes, and regulations.
Notably, Lutter forgot to mention government spending. A major question is: should residents of prosperity districts be eligible for government entitlements? When your Prosperity District opts out of Medicaid - on page 3 Lutter hints that is exactly what they will do - and when you make $15,000 per year cooking lunches at the local diner, how will you obtain health insurance? If the district is not big enough to provide a suitable risk pool for private health insurance, and the district is not paying any taxes into either the federal or the state part of Medicaid, how is that cook going to obtain health insurance?

The risk-pool question is more relevant than many people understand. Living in a state with less than 600,000 residents, I know how expensive even catastrophic health insurance becomes when the risk pool is limited. 

To generalize that question, is there a minimum population requirement for a Prosperity District, or can a few neighbors on Secession Avenue apply and be approved as a district? Lutter uses the size of 100,000 residents in his estimations of the possible economic benefits from a Prosperity District; a health insurance market ceases to function effectively at a population about three times that size.

Another question related to the size of the District has to do with securing the very core of economic freedom, namely the free market. Many libertarians skipped Microeconomics 101 in college, which is fine so long as they do not get themselves involved in the fight for economic freedom. In the case of the Prosperity Districts, however, it seems as though the absence of insights into basic free-market economics has been pervasive. 

As the Prosperity District is explained by Mark Lutter, it would be exempt from federal anti-trust laws. The economic intention behind that legislation is to make sure private companies do not monopolize free markets. Plain-yoghurt libertarians dismiss the threat of private monopolization as something that either won't happen on a free market, or, if it happens, will not have any harmful consequences. 

The problem is that the smaller the population is, the smaller is also every market in the economy that this population constitutes. The smaller the market, the easier it is to monopolize it. In how many cities the size of 100,000 residents do you have a meaningful choice of car dealerships? If you want to buy a new Ram truck, how many Ram dealerships is there in your average city of 100,000 residents?

The medical field is another important industry where it is relatively easy to find a high degree of market concentration. How many orthopedic specialists can you choose between in a city of 100,000? How many IKEAs can you fit within a 100,000-resident city?

To rephrase the question: how many entrepreneurs in a city of 100,000 do not dream of being the sole provider of a service or a commodity in that urban area?

Despite what your local plain-yoghurt libertarian may suggest, the pursuit of profits, a key driving force behind private enterprise, will always lead the entrepreneur to try to outsmart, outsell and out-profit his competitors. You don't need to be an economist to realize that when a firm has monopolized the market where it operates, it can jack up prices and make more money per unit it sells, than if it has to share the market with competitors. 

Economists often held in high esteem among plain-yoghurt libertarians were in fact deeply concerned with the tendency of market concentration under free-market capitalism. In Austrian-leaning economics literature, the pursuit of a monopoly is referred to as "rent seeking" and rightly criticized as a harmful practice. Yet in his eight-page long policy paper for the Compact for America, Mark Lutter makes no mention of this problem. 

In other words, the way the Compact defines its Prosperity Districts, they invite rent seekers to operate with no legal inhibitions to their market practices. Combined with the significant risk of leaving low-wage workers without access to a working health-insurance market, and generally a free-for-all atmosphere for the corporate bully, it looks like the Compact is out to recreate the kind of predatory capitalism that crushed many small businesses under the boot of big corporations back in the 19th century.

In Lutter's defense, his policy paper is not about the practical problems with the Prosperity District idea. His purpose is solely to report regression analyses that, he suggests, provide scientific support for the Prosperity District idea. Citing a long list of studies of the benefits of economic freedom, Lutter explains that it is statistically significant that economic freedom is good for the economy.

I agree with Lutter on the general premise: economic freedom has proven to be superior to every other means of organizing the economy. The problem for Lutter is that he uses studies of economic freedom in general - typically relying on an economic-freedom score for existing jurisdictions - to suggest support for the particular version of economic freedom that the Compact is advocating. For example, Lutter suggests that the economic freedom of U.S. states, which is estimated by the Frazer Institute in Vancouver, BC, correlates positively with per-capita GDP. Therefore, he says, the freedom offered by the Prosperity District will have significant positive effects on per-capita GDP within its jurisdiction. 

The problem for Lutter is that the institutional framework of economic activity in a current U.S. state and in the hypothetical Prosperity District is very different. The best example, again, is the prohibition of entrepreneurial pursuit of market concentration. A private monopoly can be just as stifling to economic growth and prosperity as a government monopoly. While there are institutional restrictions on market concentration in the U.S. states, no such measures would exist in the Compact's Prosperity Zones. 

In other words, Lutter's statistical argument is at best a moot point, at worst meaningless because it compares apples to oranges. 

It is hugely important that we advance economic freedom in general, and here in Wyoming in particular. Sadly, initiatives such as the Compact for America's Prosperity Districts do not help that effort. Their contribution is in fact counter-productive: by completely disregarding the real threat of predatory capitalism, the Compact's initiative plays right into the hands of statists who see every downside of free markets and capitalism as a reason to advance their own, economically very harmful agenda. 

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