The MC: The Mackinac Center Blog

How Occupational Licensing Redistributes Income

No benefits to consumers to be found.

The Mercatus Center at George Mason University has a new working paper looking at the effects of occupational licensure in the area of opticians. The results show the problems of state licensing in a variety of areas.

From 1950 to today, it is estimated that the percent of occupations now requiring a license has risen from five percent to 30 percent. In other words, the percent of occupations which require people to pay a fee to the state or take mandated classes has risen six-fold. According to Dr. Morris Kleiner of the University of Minnesota, most of this licensing drives up costs for consumers but does not lead to better health and safety results.

The Mercatus paper, authored by Dr. Edward Timmons and Anna Mills, compares the 21 states which require a license for an optician and those which do not. Opticians are eye care specialists who fit glasses and lenses to correct vision. They do not require a license in Michigan.

The paper finds that licensing causes a redistribution of wealth from consumers to opticians with no observable benefit in health or quality of services. Specifically, the authors write:

“The results suggest that opticians earn 0.3-0.5 percent more for each year that a licensing statute is in effect. In addition, tougher licensing provisions (in the form of more exams or longer education requirements) increase optician earnings by 2-3 percent. In an examination of vision insurance and malpractice insurance premiums, we find little evidence that optician licensing has enhanced the quality of services delivered to consumers. By and large, optician licensing appears to be reducing consumer welfare by raising the earnings of opticians without enhancing the quality of services delivered to consumers.”

This is a fairly common finding, backed up by research from scholars at many different organizations. Licensing should only be required if the public’s health and safety is at risk — otherwise, it simply redistributes wealth from consumers to select special interests.

The Facts on Electricity Choice

Consumers pay a high price for utility monopolies.

Electricity choice in Michigan is under attack again this year. The two big utility companies are investing heavily in an advertising campaign and contract research. Ultimately, they’d like to eliminate market competition and force all consumers to buy only their electricity. The facts are, however, that electricity choice in Michigan has a track record of driving down rates, and electricity consumers will be worse off if the state enlarged the utilities’ monopoly.

Michigan first authorized a choice program with Public Act 141 of 2000. At the time, Michigan’s electricity rates were higher than the national average and higher than any nearby state.


Michigan soon saw the benefits of its choice program. Over the next eight years, electricity rates rose nationally, but less in Michigan compared to the Great Lakes states and the country as a whole. By 2008, the last year in which Michigan had a full choice program, Michigan rates were more competitive with rates in nearby states and had dropped below the national average.

Michigan’s choice program was largely ended in 2008. A new law capped choice at 10 percent of electricity sales, so the big utilities were guaranteed 90 percent of the electricity market. The cap was filled in only a few months, and today electricity consumers seeking an alternative to the utilities were placed on a waiting list. Currently almost twice as many customers are seeking alternative electricity providers than are participating in the choice program.

Michigan rates quickly became less competitive after the cap was imposed. By 2009, Michigan had soared back above the national average. Michigan electricity customers now pay more than customers in any of the surrounding states, and 6 percent more than the national average. Today Michigan residents, employers, and the state economy as a whole are paying a high price for protecting the monopoly status of its large utilities.

There are too many school districts, according to state officials. Even though student enrollment is declining, more school districts open every year, these officials say, putting existing districts under financial pressure.

Though this may seem like a school finance and administrative issue, the “too many school districts” narrative is often used to criticize charter schools. Juxtaposing Michigan’s decreasing enrollment with the rising number of school districts (entirely driven by charter schools) is just a way to complain about the fact that more charter schools are opening.

Charter schools in Michigan are legally defined as “districts,” even though most are single buildings enrolling far fewer students than Michigan's conventional districts.

Madison-Carver Academy, an elementary school serving 300 K-6 students in Detroit, is a “district.” Detroit Public Schools, with close to 100 buildings and serving more than 40,000 students, is also a “district.”

In fact, about 80 percent of charter school “districts” have just a single school building, compared to just over 10 percent of conventional school districts. The truth is, the enrollment/district comparison does not provide any useful information — because it pretends large districts such as DPS are statistically equal to single-building charter schools such as Madison-Carver Academy.

A better approach is to compare school buildings to student enrollment. And there, Michigan is on track. As you can see in the chart below, the total number of school buildings, counting both charter schools and district schools, has followed the same trend as the number of students.

Despite the addition of more than 300 new charter school buildings since 1996, the number of students per school building in Michigan has hardly changed. There were 441 students per school building in 1996 and about 448 now — a mere 1.5 percent increase. There is only a small difference between charters and conventional schools: 407 students per charter school building and 453 per district school building.

State officials should worry less about the quantity of public schools and more about the quality of educational options available to Michigan families.

Right to Work Isn't the Only Option

‘One or none’ also gives workers, unions choice

Even with Michigan’s right-to-work law, workers do not have full freedom. In bringing true fairness to both unions and workers, Michigan has the power to give public workers a complete choice when it comes to associating with a union, while at the same time lifting government unions’ burden of representing nonmembers.

In Michigan, unlike non-right-to-work states, workers do not need to pay a union to keep their jobs.

However, in both types of states, employees in a unionized job must accept union representation whether they want it or not.

But right-to-work isn’t the only option available for bringing real fairness to the workplace. In a few short weeks the Mackinac Center will publish a study introducing a concept called “one or none,” which would allow workers to fully opt out of union representation and represent themselves.

As I detailed in a 2013 op-ed in the Detroit Free Press, opponents of right-to-work attempt to make it an issue of either/or. They claim either unions will have to represent workers who are not paying them or that workers will have to pay for unwanted representation.

Some opponents even go as far as calling workers who opt out of union representation “free riders.”

However, Terry Bowman, a United Automobile Workers member and president of Union Conservatives, says there is a better term for this kind of worker: a “forced rider.”

Forced riders have to accept the contract the union negotiates. And in most of those cases, people who have a problem with the employer must go through the union.

But states have the ability to solve the forced-rider problem, at least for public employees. While private-sector collective bargaining is governed by federal legislation, public-sector collective bargaining is governed by state law.

Lawmakers could simply amend state law to allow workers who do not want to associate with a union to opt out and represent themselves.

Instead of doing away with exclusive representation, a one-or-none policy could be adopted.

One-or-none legislation would not disturb the normal exclusive bargaining relationship between public employers and unions. Unions would still need to get a majority of workers to agree to representation and the one union would be the only representative in the workplace. This union would still negotiate for all unionized employees and nothing would change in terms of collective bargaining.

However, employees who do not want to be in the union would be free to represent themselves. They would not have the ability to create a minority union or create multiple unions at a workplace, but instead would be treated as normal non-union employees.

Public workers would finally be given a true choice of whether to associate with a union, accept representation and pay for it. A one-or-none law would also alleviate one of the main problems unions have with right-to-work, which is representation without pay.

If unions are doing a good job and representing their members well, nonmembers would be willing to pay for their services.

Right-to-work opponents maintain that “free riding” is unfair. While forced riding is unfair for both workers and unions, mandating that workers pay for something they do not want from a private third party simply to keep their jobs is a greater injustice.

The best option is to give workers the chance to say “no thanks,” and unions the ability to say “goodbye.”

(Editor’s note: A version of this article appeared on the Illinois Policy Institute Blog.)

February 20, 2015, MichiganVotes Weekly Roll Call

Guns, drones and votes. Subsidies ate the budget.

Senate Bill 54, Ban using a drone to interfere with hunters: Passed 38 to 0 in the Senate

To prohibit using an aerial drone to interfere with or harass a person who is hunting. This would expand an existing law that bans interfering with or harassing hunters. Senate Bill 55 bans using a drone for hunting and also passed unanimously.

Who Voted “Yes” and Who Voted “No”

Senate Bill 53, Expand “gun free zone” concealed pistol exception: Passed 37 to 1 in the Senate

To revise the “gun free zone” provision of the concealed pistol permit law to exempt retired federal law enforcement officers who carried a firearm during their employment. This provision prohibits regular citizens who have received a permit after meeting the background check and training requirements from carrying a pistol in specified places including schools, bars, restaurants, churches, arenas and more.

Who Voted “Yes” and Who Voted “No”

House Bill 4110, Revise school aid budget: Passed 62 to 48 in the House

To shift funding sources in the current year school budget to compensate for lower than expected balances in the state general fund. This is due to higher than expected payouts to corporations granted selective “tax credit” deals lasting up to 20 years by the previous administration (in many cases these are actually cash subsidies). This unexpected draw-down in some state accounts is happening despite revenue collections actually rising faster than spending this year. The bill also reduces previously authorized spending to reflect lower than expected school enrollment, and suspends payments intended to “catch up” on underfunding of the school employee pension system.

Who Voted “Yes” and Who Voted “No”

Senate Bill 44, Hold GOP presidential primary on March 8, 2016: Passed 72 to 38 in the House

To hold the Republican presidential primary election on March 8, 2016, rather than Feb. 23 as currently authorized.

Who Voted “Yes” and Who Voted “No”
 

SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit http://www.MichiganVotes.org.

From 1995 to 2011, Michigan ran a program that granted special tax exemptions to chosen companies. The research on this program – the Michigan Economic Growth Authority – has been pretty consistent: It was a failure.

The Mackinac Center did two studies on MEGA; a 2005 study showed that the few jobs “created” from the program were temporary and expensive and a 2009 study found that it had an overall negative impact on Michigan’s economy. The Michigan Office of the Auditor General has found repeated problems with state “economic development” programs over-promising and under-delivering. The Anderson Economic Group found a negative impact on job creation. The only favorable study was done by the Upjohn Institute, but even that found only a very small positive economic effect and that the actual MEGA program was almost incidental to the state’s economy. A recent review of the program showed that only 2.3 percent of the projects given tax credits ever met their job projections.

Though the program was ended in 2011, it lives on. Michigan taxpayers are on the hook for up to $9 billion over the next two decades because of credits handed out over past years. This will cause a continuing hole in the budget.

So what is the defense of the Michigan Economic Development Corporation?

MLive business columnist Rich Haglund, who has written positively and critically of its programs in the past, offers one up. In a recent article, he says that when former Gov. John Engler eliminated some “economic development” programs in the early 1990s, Michigan “quickly gained a reputation for having unilaterally disarmed in the war among the states for jobs.”

He adds: “[T]he agency offers some valuable programs, particularly those that aid entrepreneurs and community development. And it has tight linkages with local economic development agencies, which would suffer if the state sacked the MEDC. The reality is that the states are engaged in a costly battle of their own making for jobs and business investment. Unless this war is somehow ended, it would be unwise for Michigan to disarm again.”

This is mostly anecdotal and even Haglund admits in the piece, “[The MEDC’s] overall impact on job creation is arguably minimal.”

Besides the fact that the bulk of the research shows poor economic effects from Michigan’s programs, there are two main reasons the state should not be in the business of deciding which companies get special favors and which have to pay to subsidize their competitors.

First, centralized planning just doesn’t work. This is because of the “economic calculation problem” developed by Ludwig von Mises. In short, no centralized actor (even a large and democratically elected one like a state government) can possibly have more knowledge than the market as a whole, which means attempts at “economic development” will most often do more overall harm than good because it will misallocate resources away from their most productive use.

Second, government programs tend to expand beyond their core mission. While the MEDC and MEGA started as small, focused programs, they quickly grew larger. During the administration of former Gov. Jennifer Granholm, the agency expanded into all kinds of areas, with bipartisan support. Today, much of what was done is widely recognized as having caused more economic harm than good. It’s good that MEDC has shrunk – but that doesn’t mean it will stay that way.

The MEDC does more political development – helping politicians look good – than economic development. The state should end it.

Members of the Michigan House of Representatives today announced efforts to reform the state’s criminal laws. The efforts will be spearheaded by a working group, co-chaired by Rep. Chris Afendoulis, R-Grand Rapids Township, and Rep. Kurt Heise, R-Plymouth.

The group will identify antiquated or unnecessary criminal statutes that can be repealed, and will recommend penalties that fit the severity of the crime. A package of bills introduced would repeal numerous outdated laws. The announced reforms are part of the House Republican Action Plan.

A 2014 study published by the Mackinac Center and the Manhattan Institute found that Michigan has more than 3,100 laws on the books and has created an average of 45 new crimes in each of the last six years.

Legislators are taking an encouraging first step toward a comprehensive review of Michigan’s criminal code. Its criminal law is overgrown with prohibitions that do little to protect personal safety or property. The House would do well to review even more criminal laws, particularly where the law harshly penalizes activity that most residents would consider harmless. In addition to repealing silly or outdated laws, the Legislature should enact a “default mens rea” bill, which would clarify the criminal intent required for the commission of a crime.

LaFaive in National Media

Mackinac Center experts' analysis on cigarette smuggling cited in national reports

The work of Michael D. LaFaive, Todd Nesbit, Ph. D. and Scott Drenkard is used as the basis of a reports by the Wall Street Journal, Reason, New York Post, The Sacramento Bee, The Wichita Eagle, SILive.com, CSPnet.com and several radio stations in Kansas: WHBL, WSAU, WNCY, WTAQ, WYDR. An op-ed by Dr. Nesbit also appeared in the Columbus Dispatch.

These experts show how high excise taxes on cigarettes lead to counterfeit products and tax stamps; smuggling; violence against police, people and property; and other unintended consequences.

Recommendations include cutting taxes or improving police tactics or both to reduce the smuggling problem.

LaFaive is director of the Morey Fiscal Policy Initiative.

Media Covers McHugh's Committee Testimony

Few jobs, little transparency for Michigan corporate welfare machine

Senior Legislative Analyst Jack McHugh’s Feb. 18 testimony to a House committee received attention in media outlets including WOODTV, Detroit Free Press, The Detroit News, Grand Rapids Press, Lansing State Journal, WZZM 13, Battle Creek Enquirer and HometownLife.com. Members of the House Tax Policy committee expressed concern about the $9.38 billion tax credit liability estimate from Michigan Economic Development Corp (MEDC), a nearly $3 billion increase from previous estimates. McHugh’s testimony also questioned the lack of economic development and transparency from the MEDC.

The Mackinac Center has done hundreds of news articles and commentaries about the lack of jobs generated by the MEDC's Michigan Economic Growth Authority (MEGA) tax credit program, which was eliminated in 2011 but is in the news because the state budget is taking a hit due to past deals.

A 2009 study and 2005 study found that state corporate welfare programs exaggerated job claims and cost more money than they were worth. Numerous reports from the Michigan Auditor General found similar results.

(Editor's note: Jack McHugh, senior legislative analyst, delivered this testimony to the Michigan House Committee on Tax Policy on Feb. 18, 2015.)

I’m going to touch on three issues in the next few minutes. First, some recent history on Michigan’s government economic development programs. Second, characterizing what an extensive body of scholarly research on such efforts has found. And third, offering some reform recommendations.

In the modern era Michigan first began systematically trying to influence the direction of the economy under Gov. Kim Sigler in 1947. Since then every governor has put his or her stamp on the activity, with several major expansions along the way.

Fast forward to 1995, when Gov. John Engler created the Michigan Economic Growth Authority. This granted select firms Single Business Tax credits in in return for agreements to create a specified number of jobs — initially there was a minimum of 75 or 150 jobs.

The program was used sparingly at first, with only 15 deals during its first full year. However, by mid-2009 the statute had been amended 20 times, mostly with eligibility expansions and weakening of once-tight requirements.

As rigorous performance thresholds and standards for companies were eroded, use of the program steadily grew. In 2010, 110 MEGA deals were announced.

A graphic illustrates the rise in MEGA deals overlaid with Michigan’s unemployment rate. To many observers it appeared that MEDC’s main response to plummeting state employment was ever increasing job press releases. The reality was, even with its MEGA powers, the MEDC presided over arguably the worst economic decline in Michigan’s history.

MEGA has been around long enough that several institutions have performed systematic studies. None of these gave a full-throated endorsement, though one had a more positive take.

  • In 2010 the Michigan Auditor General reported that MEGA agreements “have a combined success rate (excluding retention credits) of 28 percent ...” relative to stated goals.

The figure overstated the impact because it did not control for how the firms without special favors fare. Studies published by the Mackinac Center in 2005 and 2009 did control for this, and found lower job creation impact.

  • In 2010 the Anderson Economic Group found that the opportunity cost of running the program versus comparable across-the-board business tax cuts cost Michigan 8,200 jobs.

This is the only positive assessment I am aware of. Upjohn scholars argued MEGA had created 18,000 jobs over 11 years, a very modest 1,600-plus per year.

  • The Mackinac Center’s 2005 MEGA study found that for every $123,000 in tax credits offered just one construction job was created, all of which disappeared within two years. The program had zero net impact on manufacturing or warehousing employment.
  • In 2009 we did a second MEGA study that found a statistically significant link between MEGA and manufacturing jobs — but it was negative. For every $1 million in credits actually earned there was a loss of 95 manufacturing jobs in counties with MEGA firms.

More broadly, a great deal of academic literature exists on selective business incentive programs. Overall, the assessments are unflattering. The title of one 2004 compilation of findings tells the tale: “The Failures of Economic Development Incentives.” Here’s an excerpt:

Since these programs probably cost state and local governments about $40-$50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons … to believe that economic development incentives have little or no impact on firm location and investment decisions.

Why doesn’t it work? In a 2009 Mackinac Center Policy Brief on Michigan’s film incentive program, my colleague Mike LaFaive laid out four reasons:

  • First, government has nothing to give anyone it doesn’t take from someone else. At best these programs just redistribute income.
  • Second, doing that costs money. Just the MEDC staff expense amounts to tens of millions annually.
  • Third, it also misallocates scarce resources. MEDC employees are not imbued with Warren Buffet-like ability to pick winners and losers in the marketplace. If they were, they would be billionaire hedge fund owners, not civil servants.
  • Lastly, bureaucrats are inherently inclined to make decisions based on political rather than economic factors. That’s a recipe for bad performance in a competitive marketplace.

What’s the solution?

The truth is these are mostly political development programs, not economic development programs. They’re a perennially attractive nuisance for elected officials, but the public is catching on. The political costs of supporting these programs are starting to catch up with the perceived political benefits. 

The solution is actually quite simple: Just say no, starting with the appropriations process. We estimated last year that “just say no” would save at least $300 million in the current budget. Next year it will be more. The usual counter-argument is that since other states do it this would amount to “unilateral disarmament.” My response is, let the other states keep their expensive and ineffective pop-guns — we will surpass them by offering all opportunity seekers a fair field with no favors.

In the meantime, while the agency still remains, it absolutely must be made more transparent. The MEDC is almost certainly Michigan’s least transparent government agency. A 2009 Mackinac Center Policy Brief gave startling details of this dismal record.

The current administration has tried to change this. Still, as the budget drama of the past few weeks has shown, the liabilities created by past MEGA deals are still surrounded in mystery, secrecy and uncertainty.

Actually, the MEDC wasn’t always quite so secretive. From 1995 through part of 2009, when asked it routinely provided breakdowns of the value of credits claimed and the companies claiming them up.

However, our 2009 study of MEGA could not be replicated today because since then officials have asserted “administration of a tax” confidentiality. To the extent this is anything more than a specious effort to dodge accountability, the assertion raises troubling questions:

  1. If the state violated the law by publishing such data in the past was anyone called to account? Did anyone lose their job?
  1. Who at Treasury or the MEDC decided that such data was now off limits, and why didn’t they make this determination sooner?

What we do know is that after being criticized many times with rigorous specificity for poor outcomes MEDC became aggressively less transparent. Less available data means a lower likelihood that rigorous analysis of alleged “job creation” abilities would reveal these to be lacking.

We recommend the following transparency solutions:

  1. Demand that the MEDC or Treasury explain why “administration of a tax” secrecy applies now but not in the past.
  1. Require that current claims of any past MEGA credits must be accompanied by public disclosure of their value by company, agreement, and when the credits were claimed.
  1. Require the MEDC identify which MEGA projects are no longer active.
  1. Going forward, any company that accepts tax credits, abatements or subsidies should waive any right to privacy related to its transactions with the state, including cash disbursements and taxes foregone by the state.
  1. For the MEDC, mandate a rigorous and independent “opportunity cost” estimate of every program, similar to the one performed by Patrick Anderson. Don’t let the MEDC choose the consultant! Maybe the Auditor General could do that.