Naked Economics: Undressing the Dismal Science pdfdrive com

Death by a thousand subsidies. The cost of Dan Rostenkowski’s underground
parking garage at the Museum of Science and Industry is insignificant in the face
of our $20 trillion economy. So is the ethanol subsidy. So is the trade protection
for sugar producers, and the tax break for pharmaceutical companies with

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operations in Puerto Rico, and the price supports for dairy farmers. But in total,
these things—and the tens of thousands of others like them—are significant.
Little inefficiencies begin to disrupt the most basic function of a market
economy: taking inputs and producing goods and services as efficiently as
possible. If the government has to support the price of milk, the real problem is
that there are too many dairy farmers. The best definition I’ve ever heard of a tax
shelter is some kind of investment or behavior that would not make sense in the
absence of tax considerations. And that is exactly the problem here:
Governments should not be in the business of providing incentives for people to
do things that would not otherwise make economic sense.
Chapter 3
outlined all the reasons why good government is not just
important, but essential. Yet it is also true that when Congress turns its attention
to a problem, a lot of ornaments end up on the Christmas tree. The late George
Stigler, a University of Chicago economist who won the Nobel Prize in 1982,
proposed and defended a counterintuitive notion: Firms and industries often
benefit from regulation. In fact, they can use the political process to generate
regulation that either helps them or hobbles their competitors.
Does that sound unlikely? Consider the case of teacher certification. Every
state requires public school teachers to do or achieve certain things before
becoming licensed. Most people consider that to be quite reasonable. In Illinois,
the requirements for certification have risen steadily over time. Again, that
seems reasonable given our strong emphasis on public school reform. But when
one begins to scrutinize the politics of certification, things become murkier. The
teachers’ unions, one of the most potent political forces in America, always
support reforms that require more rigorous training and testing for teachers.
Read the fine print, though. Almost without exception, these laws exempt
current teachers from whatever new requirement is being imposed. In other
words, individuals who would like to become teachers have to take additional
classes or pass new exams; existing teachers do not. That doesn’t make much
sense if certification laws are written for the benefit of students. If doing certain
things is necessary in order to teach, then presumably anyone standing at the
front of a classroom should have to do them.
Other aspects of certification law don’t make much sense either. Private
school teachers, many of whom have decades of experience, cannot teach in
public schools without jumping through assorted hoops (including student
teaching) that are almost certainly unnecessary. Nor can university professors.
When Albert Einstein arrived in Princeton, New Jersey, he was not legally
qualified to teach high school physics.

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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.
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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:

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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,