Naked Economics (25 page)

The most striking (and frustrating) thing about all of this is that researchers have found that certification requirements have virtually no correlation with performance in the classroom whatsoever. The best evidence on this point (which is consistent with all other evidence that I’ve seen) comes from Los Angeles. When California passed a law in the late 1990s to reduce class size across the state, Los Angeles had to hire a huge number of new teachers, many of whom were uncertified. Los Angeles also collected classroom-level data on the performance of students assigned to any given teacher. A study done for the Hamilton Project, a public policy think tank, looked at the performance of 150,000 students over three years and came to two conclusions: (1) Good teachers matter. Students assigned to the best quarter of teachers ended up 10 percentile points ahead of students given the worst quarter of teachers (controlling for the students’ initial level of achievement); and (2) certification doesn’t matter. The study “found no statistically significant achievement differences between students assigned to certified teachers and students assigned to uncertified teachers.” The authors of the study recommend that states eliminate entry barriers that keep talented people from becoming public schoolteachers.
⁴
Most states are doing the opposite.

Mr. Stigler would have argued that all of this is easy to explain. Just think about how the process benefits teachers, not students. Making it harder to become a teacher reduces the supply of new entrants into the profession, which is a good thing for those who are already there. Any barrier to entry looks attractive from the inside.

I have a personal interest in all kinds of occupational licensure (cases in which states require that individuals become licensed before practicing certain professions). My doctoral dissertation set out to explain a seemingly anomalous pattern in Illinois: The state requires barbers and manicurists to be licensed, but not electricians. A shoddy electrical job could burn down an entire neighborhood; a bad manicure or haircut seems relatively more benign. Yet the barbers and manicurists are the ones regulated by the state. The short explanation for the pattern is two words: interest groups. The best predictor of whether or not a profession is licensed in Illinois is the size and budget of its professional association. (Every profession is small relative to the state’s total population, so all of these groups have the mohair advantage. The size and budget of the professional association reflects the extent to which members of the profession have organized to exploit it.) Remarkably, political organization is a better predictor of licensure than the danger members of the profession pose to the public (as measured by their liability premium). George Stigler was right:
Groups seek to get themselves licensed.

Small, organized groups fly under the radar and prevail upon legislators to do things that do not necessarily make the rest of us better off. Economists, particularly those among the more free-market “Chicago school,” are sometimes perceived to be hostile toward government. It would be more accurate to describe them as skeptical. The broader the scope of government, the more room there is for special interests to carve out deals for themselves that have nothing to do with the legitimate functions of government described in Chapter 3.

Tyranny of the status quo.
If small groups can get what they want out of the legislative process, they can also stop what they don’t want, or at least try. Joseph Schumpeter, who coined the term “creative destruction,” described capitalism as a process of incessantly destroying the old structure and creating a new one. That may be good for the world; it is bad for the firms and industries that make up the “old structure.” The individuals standing in capitalism’s path of progress—or destruction, from their standpoint—will use every tool they have to avoid it, including politics. And why shouldn’t they? The legislative process helps those who help themselves. Groups under siege from competition may seek trade protection, a government bailout, favorable tax considerations, limitations on a competing technology, or some other special treatment. With layoffs or bankruptcy looming, the plea to politicians for help can be quite compelling.

So what’s the problem? The problem is that we don’t get the benefits of the new economic structure if politicians decide to protect the old one. Roger Ferguson, Jr., former vice chairman of the board of governors of the Federal Reserve, explains, “Policymakers who fail to appreciate the relationship between the relentless churning of the competitive environment and wealth creation will end up focusing their efforts on methods and skills that are in decline. In so doing, they establish policies that are aimed at protecting weak, outdated technologies, and in the end, they slow the economy’s march forward.”
⁵

Both politics and compassion suggest that we ought to offer a hand to those mowed over by competition. If some kind of wrenching change generates progress, then the pie must get bigger. And if the pie gets bigger, then at least some of it ought to be offered to the losers—be it in the form of transition aid, job retraining, or whatever else will help those who have been knocked over to get back on their feet. One of the features that made the North American Free Trade Agreement more palatable was a provision that offered compensation to workers whose job losses could be tied to expanded trade with Mexico. Similarly, many states are using money from the massive legal settlement with the tobacco industry to compensate tobacco farmers whose livelihoods are threatened by declining tobacco use.

There is a crucial distinction, however, between using the political process to build a safety net for those harmed by creative destruction and using the political process to stop that creative destruction in the first place. Think about the telegraph and the Pony Express. It would have been one thing to help displaced Pony Express workers by retraining them as telegraph operators; it would have been quite another to help them by banning the telegraph. Sometimes the political process does the equivalent of the latter for reasons related to the mohair problem. The economic benefits of competition are huge but spread over a large group; the costs tend to be smaller but highly concentrated. As a result, the beneficiaries of creative destruction hardly notice; the losers chain themselves to their congressman’s office door seeking protection, as any of us might if our livelihood or community were at risk.

Such is the case in the realm of international trade. Trade is good for consumers. We pay less for shoes, cars, electronics, food, and everything else that can be made better or more cheaply somewhere else in the world (or is made more cheaply in this country because of foreign competition). Our lives are made better in thousands of little ways that have a significant cumulative effect. Looking back on the Clinton presidency, former Treasury secretary Robert Rubin reflected, “The economic benefits of the tariff reductions we negotiated over the last eight years represent the largest tax cut in the history of the world.”
⁶

Cheaper shoes here, a better television there—still probably not enough to get the average person to fly somewhere and march
in favor
of the World Trade Organization (WTO). Meanwhile, those most directly affected by globalization have a more powerful motivation. In one memorable case, the AFL-CIO and other unions did send some thirty thousand members to Seattle in 1999 to protest against broadening the WTO. The flimsy pretext was that the union is concerned about wages and working conditions in the developing world. Nonsense. The AFL-CIO is worried about American jobs. More trade means cheaper goods for millions of American consumers
and
lost jobs and shuttered plants. That is something that will motivate workers to march in the streets, as it has been throughout history. The original Luddites were bands of English textile workers who destroyed textile-making machinery to protest the low wages and unemployment caused by mechanization. What if they had gotten their way?

Consider that at the beginning of the fifteenth century, China was far more technologically advanced than the West. China had a superior knowledge of science, farming, engineering, even veterinary medicine. The Chinese were casting iron in 200 B.C., some fifteen hundred years before the Europeans. Yet the Industrial Revolution took place in Europe while Chinese civilization languished. Why? One historical interpretation posits that the Chinese elites valued stability more than progress. As a result, leaders blocked the kinds of wrenching societal changes that made the Industrial Revolution possible. In the fifteenth century, for example, China’s rulers banned long-sea-voyage trade ventures, choking off trade as well as the economic development, discovery, and social change that come with them.

We have designed some institutions to help the greater good prevail over narrow (if eminently understandable) interests. For example, the president will often seek “fast-track authority” from Congress when the administration is negotiating international trade agreements. Congress must still ratify whatever agreement is reached, but only with an up or down vote. The normal process by which legislators can add amendments is waived. The logic is that legislators are not allowed to eviscerate the agreement by exempting assorted industries; a trade agreement that offers protection to a few special interests in every district is no trade agreement at all. The fast-track process forces politicians who talk the talk of free trade to walk the walk, too.

The unfairly maligned World Trade Organization is really just an international version of the fast-track process. Negotiating to bring down trade barriers among many countries—each laden with domestic interest groups—is a monumental task. The WTO makes the process more politically manageable by defining the things that countries must do in order to join: open markets, eliminate subsidies, phase out tariffs, etc. That is the price of membership. Countries that are admitted gain access to the markets of all the existing members—a huge carrot that gives politicians an incentive to say no to the mohair farmers of the world.

Cut the politicians a break.
In the fall of 2000, a promising political career was launched. I was elected president of the Seminary Townhouse Association. (Perhaps “elected” is too strong a word; the outgoing president asked if I would do it, and I was too naive to say no.) At about that time, the Chicago Transit Authority (CTA) announced plans to expand an elevated train station very close to our homes. The proposed expansion would bring the station into compliance with the Americans with Disabilities Act and allow the CTA to accommodate more riders. It would also move the elevated train tracks (and all the accompanying noise) thirty feet closer to our homes. In short, this plan was good for Chicago public transportation and bad for our townhouse association. Under my excellent leadership, we wrote letters, we held meetings, we consulted architects, we presented alternative plans (some of which would have required condemning and demolishing homes elsewhere in the neighborhood). Fullerton Avenue eventually got a new elevated train station, but not before we did everything in our power to disrupt the project.

Yes, ladies and gentlemen, we are the special interests. All of us. You may not raise Angora goats (the source of mohair); you may not grow corn (the source of ethanol). But you are part of some group—probably many of them—that has unique interests: a profession, an ethnic group, a demographic group, a neighborhood, an industry, a part of the country. As the old saying puts it, “Where you stand depends on where you sit.” It is facile to declare that politicians should just do the right thing. The hoary old cliché about tough decisions is true. Doing the right thing—making a decision that generates more benefits for the nation than costs—will not cause people to stand up and cheer. It is far more likely that the many people you have made better off will hardly notice while the small group you have harmed will pelt your car with tomatoes.

In 2008, my unpromising political career got more interesting (but not necessarily any more promising). President Obama appointed Congressman Rahm Emanuel to be his chief of staff, which left an opening in the Illinois Fifth Congressional District. That’s my congressional district, and I, along with more than twenty other candidates, decided to run in the special election to fill the seat. (Our race should not be confused with the vacant Illinois Senate seat that former Governor Rod Blagojevich tried to sell.) I figured that if I was going to write books like this one that criticized public policies, then I ought to be willing to step into the ring, rather than just cast rocks from the outside. (For the record, I opposed the ethanol subsidy—a relatively meaningless position given that the Fifth Congressional District is entirely urban and has not a single farmer.)

The punch line of this chapter can be encapsulated in a single experience from that campaign. At the first candidates’ forum, the moderator, a political columnist for a Chicago newspaper, asked each candidate to comment on his or her view of federal earmarks. Earmarks are the mechanism by which members of Congress insert pork into bills; an earmark directs federal money to a specific project in a member’s district and is therefore insulated from any formal review as to whether the project makes sense or not. For example, an earmark in a transportation bill, such as the notorious “bridge to nowhere” in Alaska, allocates money for the bridge even if the Department of Transportation never would have funded it. The subject of earmarks had come up because the first spending bill signed by President Obama had nearly nine thousand earmarks. (No, that is not an exaggeration.)

One by one, each candidate excoriated both the concept of earmarks and the politicians who support them. One candidate even proposed arresting members of Congress who cut such deals. But the earmark question was a trap, and a clever one at that. The moderator asked a follow-up question, something like, “So each of you would oppose an earmark to support Children’s Memorial Hospital?” As you may have inferred, this particular children’s hospital is in the Fifth Congressional District, about 300 yards from where we were sitting. The answers to the follow-up question were less emphatic than the original assault on earmarks and included comments like, “Of course, a hospital is different” and “That particular earmark involves children” and “I will do everything I can as a congressman to support Children’s Memorial Hospital” and so on. No one suggested that politicians who support an earmark for the hospital should go to prison.