Certification bonanza - Industry uses state's police powers to line their pockets...

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

10th Amendment to the United States Constitution

I constantly write about the evils of government unbound. Most of that time those comments are directed at a federal government that has ventured far beyond the constraints imposed by the 10th Amendment.

Although the federal government’s excess is often the easiest to see, Uncle Sam is far from the only offender in terms of governments growing too large and too powerful. On the contrary, state and local governments can be (and often are) equally guilty. Local governments use various devices such as zoning ordinances, arbitrary fees and various inspection regimes to impose their power the citizenry. One of the most dubious of those devices is called “certification”.

As bad as a government seeking to control its citizens is, even more pernicious is an industry using the police power of government to line their pockets and stifle competition. This is the true fount of the plague of certification.

Just as the most conservative amongst us understands that there must be some government or society will collapse into anarchy, most Americans understand that there are a number of professions where certification is necessary. For those professions where your life or liberty are at risk, one can make the argument that the state can play an important role in maintaining standards. As such, most states have a variety of certification regimes with which most of us are familiar: Doctors, lawyers, dentists, etc.

The problem however is that certification is not limited only to critical specialties… unless you consider interior design, hair cutting or florists as critical.

Perhaps not so surprising, this “certification” gauntlet is often instigated by the
practitioners of the regulated industry themselves. Seeking to sustain unwarranted pricing power and stifle potential competitors, a cabal of practitioners of a particular profession or industry will form an unofficial governing body for that industry. That body will then lobby state legislators to create a certification regime. That regime will typically include education in the form of schooling or apprenticeship, limits on advertising and may involve regulations about what equipment may or must be used as well as restrictions or requirements as to vehicles or square footage that are allowed.

While these certification requirements typically involve fees paid to the states, in reality the regime is more often than not controlled by the industry cabal. Although the industry’s captains often suggest that their industry requires regulation for public safety reasons, in reality their goal is to protect their members by limiting competition, resulting in higher prices for customers. In practice these governing bodies operate like unions in that they use government regulations to limit the ability of new entrants to compete in the marketplace. What makes this situation particularly noxious is that the advocates of this government intervention typically exempt themselves from having to meet any of the new requirements by including a grandfather clause in the legislation.

The increase in industry certifications has been going on for much of the last half century. The Wall Street Journal reports that in 1950 less than 5% of American jobs were subject to licensure by states. Today that number stands at over 23%.

The result of this industry / state regulatory straitjacket is higher prices for customers, less innovation in industry and higher unemployment across the board. Industry experts often claim that certification protects consumers by keeping unqualified practitioners out of their trades. The question is however, upon what basis does one decide what is a qualified practitioner, and who gets to decide? If flowers are not arranged properly are consumers harmed? If an unlicensed barber takes too much off the top are you permanently scarred? If a bartender pours Grey Goose instead of Absolut is there some permanent pain and suffering?

While the Constitution gives state governments far more latitude than it does the federal government (at least that’s the way it is written…) that does not mean the states should regulate everything simply because they are not barred from doing so. One must ask the question, what is the state interest in certifying masseuses, dog groomers or interior designers?

To the degree conservatives pillory the federal government for its intervention in our lives and economy, we should not ignore state governments and the fact that America’s success was built on free markets, not via a command and control economy.


Free markets work because they are the equivalent of a straight line between two points… i.e. the shortest distance between producer and consumer. Free markets create an environment where consumers are responsible for where they spend their money and entrepreneurs and capitalists are responsible for offering services for which they hope consumers will be willing to pay. To introduce government regulations into that equation is to turn that straight line into a series of unworkable knots.

Without state certification roadblocks, eventually an equilibrium would emerge where consumers choose providers based on various factors such as price, reputation and skill. Certainly some consumers will be unhappy and some merchants would fail, but that’s the beauty of market discipline, it forces both sides to pay attention to the consequences of its actions. Where necessary various private organizations would emerge that would or could provide objective criteria to help consumers make their choices: Consumer Reports, Underwriters Laboratory, Angie’s List, Tripadvisor etc.

This certification plague has interfered with that market discipline and added well over $100 billion a year in inefficiencies to consumer expenditures. Freeing our economy from it’s strictures would not only free up a trillion dollars over a decade, but it would generate a great deal of innovation and dramatically increase consumer choices at the same time.

Now that’s a real stimulus program.

Can Michigan show the country how to save itself?

One of the great things about the United States Constitution that few people realize and even fewer understand is the idea of federalism. On the most basic level federalism is the notion that there are distinct spheres of influence and responsibility between the federal and state governments. James Madison thought that that notion of federalism was crystal clear in the original document itself that he originally opposed a Bill of Rights. He believed the federal government was already limited by the fact that it could do only those things explicitly detailed in the document. John Hancock, Patrick Adams and others insisted and eventually the Bill of Rights was added with the federal perspective enshrined in the 10th Amendment.

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Aside from limiting the powers of the federal government – at least in theory, as Obamacare demonstrated – the federalist system does something quite extraordinary, or at least it’s supposed to. What is that thing? Experimentation! Fundamentally federalism has given us 50 different testing grounds for new ideas. The notion being that when one state does something - good or bad - the others will notice and act accordingly.

A big part of the problem with the federal government becoming involved in so many areas of our lives is that it kills one of the great legacies left to us by George Mason and friends. They understood that in most cases it is the people closest to problems who are best equipped to handle them. As true as that was with a population of 4 million people it is exponentially more so with one of 310 million.

As such, now that the elections are over and the march towards 2012 is on, now is the perfect time to take to experimenting. And in our center ring I would like to suggest Michigan step up and take a page out of Rahm Emanuel’s book that says “You never want a serious crisis to go to waste” and take a shot at leading the country in a different direction.

Why Michigan? Because the state is a basket case. Detroit has gotten so bad that the government is considering turning a quarter of the city into farmland! Importantly, unlike the brain dead voters in the People’s Republic of California, the people of Michigan have shown themselves to recognize bad ideas when they see them. After eight disastrous years of Jennifer Granholm, Michigan’s citizens voted 2 to 1 to make businessman Rick Snyder their Governor. In addition, they gave Republicans the majority of seats in the state legislature and they made the GOP the majority of their Congressional delegation.

Michigan is one of those states that is in the middle of the pack in terms of freedom – economic and otherwise. According to the Mercatus Center at George Mason University the state is #17 out of 50 states in terms of overall taxes although on corporate taxes it’s #48. It’s #22 on government spending and believe it or not, #1 in regulatory freedom. Overall, the state comes in at #15 overall in the Center’s 2010 Economic Freedom rankings. Given that middle tier of economic freedom, Michigan should be somewhere in the middle of the economic road relative to the rest of the country.

Alas it is not. The state has lost an average of 500,000 jobs in the last five years and today it sits with an unemployment rate of 13.5%, behind only real estate ravaged Nevada. As bad as Michigan is right now, it would have been exponentially worse had not Barack Obama’s imperial federal government taken billions of dollars from non-Michigander's to give to General Motors and Chrysler and then in turn give the UAW unearned ownership in the companies they ruined - of course at the expense of secured creditors. Without Obama Michigan under the Democrats would have made some third world countries look like Germany by comparison. It may actually be the worst state in the country in terms of economic prospects. It is this chaos that creates the opportunity that Governor Snyder has in front of him.

He should seize upon this morass to demonstrate exactly what can be done when you let people vote with their feet. The first thing he and the new GOP legislature should do is eliminate all state and local income taxes. The second is to make Michigan a right to work state. Immediately after doing so the state should auction off all of that abandoned real estate in Detroit. (There are five states with no income taxes that are also right to work states: Florida, Nevada, South Dakota, Texas and Wyoming. Florida and Nevada have surging populations but have been decimated by federal housing policy. South Dakota has the second lowest unemployment rate in the country, Wyoming the 8th and Texas created more jobs over the last decade than all of the other states combined.)

Doing these things would immediately make Michigan a kind of job magnet – to the extent any company in America wants to create jobs given the Federal government’s leftist policies. The state’s relatively low level of regulation, combined with a reasonably priced (aka non-union) skilled labor force, low real estate prices and no income taxes would make for a very compelling locale for investors and corporations.

Governor Snyder has an opportunity to do for Michigan what Rudy Giuliani did for New York City in the 1990’s. He has the opportunity to take a state that has been turned from arguably the most powerful economic engine in the country into a banana republic by decades of mismanagement and turn it around. By essentially turning the state into an Enterprise Zone he will give companies a reason to invest in the state, he will give citizens a reason to stay, and like Giuliani’s New York, a Michigan turnaround can become a shining example for other states as they seek to climb out of their own economic swamps. The Founding Father’s federalism is alive and well and one can only hope that success in the Wolverine State will show Washington what might work on a national scale.

Prosperity is not a birthright…

The Michael Crichton thriller Rising Sun was published to much fanfare in 1992. Ostensibly a murder mystery, the book was seen by many as a thinly veiled tale of alarm at the Japanese taking over the planet – economically. The book came after a decade of headlines chronicling the rise of the Japanese juggernaut. In 1987 Sony bought CBS Records and in 1989 Columbia Pictures. 1989 also saw Mitsubishi buy Rockefeller Center and in 1990 the Japanese bought the venerated Pebble Beach complex on the California coast. Not only were Americans reading headlines about Japan buying up the country but increasingly they were driving Japanese cars, entertaining themselves with Japanese electronics and staying in Japanese owned hotels if they were practically anywhere in the state of Hawaii. Three and a half decades after emerging like a phoenix out of the rubble of WWII, Japan was poised to take over the world.

A funny thing happened on the way to Japan’s economic coronation however… the country crashed into a brick wall. In 1991 Japan saw the beginning of a real estate driven financial collapse that saw the Nikki drop from a an all time high of 39,000 in 1989 to below 8,000 in 2008. Along the way the economic juggernaut cratered. Between 1980 & 1990 Japanese GDP grew at an average annual rate of 2.4%. From 1991 to 2009 it grew at an anemic average rate of .9% per year. That may not sound like much of a difference, but step back and the difference is stark. During the decade of the 1980’s the Japanese economy grew 24%. Over the two decades since it has grown by a mere 18%.

Fundamentally the Japanese took their prosperity for granted. The government sought to coddle small businesses by limiting competition, both domestic and foreign. They failed to force banks to acknowledge and dispose of their bad loans. Low and negative interest rates gave investors around the world little reason to look to Japan. Most importantly government spending as a share of GDP increased as did the taxes and debt necessary to support such expenditures. Today government expenditures exceed 41% vs. 32% in 1980 and debt has soared to 200% of GDP from 46% in 1980. At the end of the day the Japanese took their eyes off of what it takes to maintain the prosperity they had worked so hard to build.

The coup de grace proclaiming Japan’s economic fall came last week when China “officially” became the second largest economy in the world. (Measured on a Per Capita Income basis however, the Japanese are still far richer than the Chinese.) China is now seen by many the way the Japanese were in the 80’s and early 90’s. Much of the merchandise on our shelves bears a Made in China label, China is acquiring companies and natural resources around the world and the government is the single largest holder of US Treasury Bonds by far. Everything seems to be going in China’s direction.

This column however is not really about the fall of Japan or whether China’s one billion people will take over the world. The tale of Japan is illustrative, not because the Japanese turned out to be paper economic tigers or that free markets eventually fail. No, the Japanese tale is important because it demonstrates what happens when a nation forgets that prosperity is not guaranteed, it’s not a birthright. It is the Japanese’s national lapse in judgment that is important.

The United States was the driving economic force for virtually the entire 20th century. Between its inventors, innovators and entrepreneurs, it led the way to the greatest advance in the condition of man in human history. If any people had the right to think prosperity was their birthright, it would be the Americans of the 21st century. That would be a mistake however, but far too many Americans are making it.

America sits atop the world’s economic pyramid not because of divine fiat or the luck of the draw. The prosperity that Americans enjoy in 2010 (despite the current economic troubles) is the result of generations of hard work, risk taking and innovation on the part of millions of businessmen and their employees over the last 150 years – on a playing field of economic and personal freedom established by our Constitution. Our prosperity was never set in stone and things could have turned out much differently. Indeed we survived the Great Depression despite the FDR’s drive to control virtually every aspect of American economic life. Don’t forget, it was WWII that pulled America out of the Depression, not the New Deal. In 1940 unemployment still stood at 14%, up from 3.1% in 1929, federal spending as a share of GDP was at 10%, again up from 3% in 1929 and the stock market, which by 1932 had dropped 89% from its 1929 high, did not return to that level until 1954.

As America struggles with record debt and deficits, a moribund economy and its citizens awash in a raging storm of government regulation and tax increases, the passing of the torch from Japan to China should help crystallize the choices in November. There is no guarantee that putting the likes of Marco Rubio, Rand Paul and Sharon Angle in the Senate and Rob Woodall and Allen West in the House will stop President Obama and his stridently progressive agenda. What you can be certain of however is that they, along with most of their conservative and tea party brethren recognize that America’s greatness prosperity has always come from the innovation, entrepreneurship and hard work of her citizens and their willingness to brave the risk / reward paradigm in order to achieve their own version of the American dream. The alternative to fiscal conservatives is more of the Democrat idiocy that prosperity is created by government spending and regulation.

That government spending and regulation along with its companion taxes and debt are a recipe for disaster... So, as we research candidates on our Chinese made iPads and contemplate which lever to pull in November, we might want to remember that 30 years ago those iPads would likely have carried a Made in Japan label, and ponder how prosperity can be lost…

Government jobs strangle economic growth...

There are some things that are true regardless of what anyone tells us. OJ Simpson’s actual guilt at killing two people in a Brentwood doorway was not impacted by whatever verdict the jury might have returned. Armando Galarraga pitched a perfect game regardless of the call Jim Joyce made. Socialism and statism are destroying the United States, regardless of what Democrats, progressives or anyone else tells you. Not that it matters a great deal in the end, but there is a distinction between the two – socialism & statism. Fundamentally socialism seeks state ownership of the means of production and distribution of goods and services. Statism seeks government control over the same and more, only without requiring state ownership. Both are fatal for a dynamic economy and increasingly in the United States we are experiencing more of both.

Does any of this matter? Only if you want to have a country that has dynamic economic growth and living standards that move in a positive direction. Government may be good at creating jobs, but the kinds of jobs it creates are anything but dynamic and add little to the growth of the economic engine that drives an economy. Think about the things that have changed your life over the last quarter century. What names come to mind? Apple, Microsoft, FedEx, Wal-Mart, Google, Southwest Airlines, DirectTV, CNN, Marriott, Drudge Report, eBay, Rush Limbaugh, Toyota, Dell, Starbucks, Amazon, Facebook, Home Depot, Pixar, Outback Steakhouse. Like them or hate them, while some may have had more of a direct impact on your life than others, all are associated with organizations that have brought innovation in goods or services to much of the population across the country. Most are highly profitable and employ thousands of people. Now think about areas of government involvement over the same period and what comes to mind? Post Office, Amtrak, IRS, Social Security, Medicaid, Medicare, education, immigration. How do they perform? And those are just areas where the government has direct control. Think about the areas where they have significant indirect control such as healthcare, energy and financial services. While there may have been some advances in these areas, the trajectories are far different than the first list above.

Telephony makes a great metaphor for our larger economy. For almost 100 years there was essentially one phone company in the country, AT&T, and you would not exactly call Ma Bell a great innovator. The phone you had in 1982 when Judge Green decided to break up AT&T’s (government sanctioned) monopoly was probably not much different than the one you might have had 40 years before, except the rotary dial model may have been replaced by a push button model. It was only when the government decided to take a step back (or ½ step as the case might be) from the regulatory stranglehold it had on telephony did the choices of providers, features and platforms skyrocket to where they are now.


America is in the process of reversing our experience with telephony, only on a much larger scale. The continuation and acceleration of government intervention in our economy portends an America in decline. While an economic collapse is not written in stone, the concrete is quickly hardening as we increasingly come to resemble the failed socialist states of Europe. Nearby is a table from May of 2009 that looks at job creation for the prior decade. The numbers are staggering. Literally, every single one of the 3 million net new jobs came from government programs. In areas where government exercises direct or indirect control there were 6.9 million jobs created and in areas where the government exercises relatively little control there was a net loss of 3.7 million jobs!

The problem with those numbers is that it is innovation that drives economic success and those jobs do not innovate. (Although it was DARPA who started the Internet, it was private companies who did the yeoman’s work of building and developing the infrastructure and content that has made the web so successful.) The typical government employee spends their time shuffling and filing paperwork, expanding red tape and enforcing regulations, attempting to educate students and mailing checks to the tens of millions of Americans whose income is dependant on government welfare. They are not inventing new types of fuel, developing medicines cutting edge computer programs, creating and marketing new Internet offerings, starting the next McDonalds or even inventing the next Snuggie, ShamWow or George Foreman grille.

And the government jobs are only half the problem. The other half comes from the ever increasing regulation of the private sector. Be it automobiles, healthcare, finance or soon to be restaurants, companies in heavily regulated industries can hardly make a move without first getting the approval from the government – often from numerous agencies. This can be even more onerous than actual government control over an industry because in this type of a situation the government doesn’t even have to pretend to try and figure out how to pay for whatever regulations they write. They simply issue and edict and the corporations must comply. Here again, government intervention greatly distracts corporate America from doing what it does best, which is innovating and finding the best possible manner in which to serve their customers and earn profits for their shareholders.

Virtually every single thing that turned the United States into the greatest economic engine in human history came as a result of private companies pursuing private opportunities. Sometimes those pursuits flamed out like the Tucker automobile, FedEx’s Zapmail, Motorola’s Iridium or Pets.com. Often enough however some entrepreneur or company takes a leap of faith that ends up not only succeeding, but ends up surpassing their greatest expectations: Howard Johnson during the Depression, Ray Kroc bringing the McDonalds Brother’s ideas to the whole world or Jeff Bezos thinking he could sell books online. To the degree that government at all levels strangles the economic engine that has powered our success, we can look forward to a diminishing future and an economy that is less able to respond to the needs of the citizenry, less able to provide revenue for the constitutional functions of government, and perhaps most despairingly of all, fundamentally incapable of advancing the human condition… other than the conditions of the bureaucrats who will run everything.