Friday Interview: Markets Work Best In Most Cases | Eastern North Carolina Now

    Publisher's note: This article was originally created by the Carolina Journal, John Hood Publisher.

Economist Richard Vedder makes case against government meddling

    RALEIGH — Markets tend to work better than government in helping to solve problems. That's the idea economist Richard Vedder promoted to a group of North Carolina lawmakers during a recent visit to Raleigh. Vedder is a professor at Ohio University, director of the Center for College Affordability and Productivity, and an adjunct scholar at the American Enterprise Institute. Vedder compared free-market and government policies during a conversation with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Kokai: Markets work better than governments. How do we know this?

    Vedder: Well, one way is to look at some evidence. Those people in your audience who are over the age of 40, or so, probably remember East Berlin versus West Berlin, or East Germany versus West Germany. One side of Germany, the western part of Germany, was largely governed by markets. Decisions were made by markets: interaction between demand and supply, buyers and sellers reaching mutually agreeable exchanges.

    [In] the other part of Germany, governments made almost all the decisions of what to produce, how to produce it, even for whom to produce things. And they had to build a wall between the two parts, and people died trying to get from East to West. Same thing [with] North Korea versus South Korea today. Why is Cuba poorer than, say, Puerto Rico today?

    So governments don't work very well because the incentive systems are not there for people to be productive, to serve consumer interest, to meet the needs of people. Quality of products is traditionally very low in the communist countries, or in countries where government plays a very large role.

    [The] same thing applies with respect to regulation, another aspect of government. Regulations, in some cases, are good. Markets don't solve all the problems. It is true. A chemical company could pollute a stream, and that could cause damage to others. We need some limits on that.

    But often these regulations tend to be too harsh, they tend to not pass any good cost/benefit test, and they just, simply, go too far. In some cases, they last too long.

    We had regulations on airlines. We put in regulations on airlines in 1938. The idea was we want to keep the airlines from these monopolies, from charging people too much. Well, the effect was just the opposite.

    By 1978, when we finally got rid of the Civil Aeronautics Board, there were one or two airlines serving each city. They charged very, very high prices. There was limited service. So we got rid of this. What happened? Prices fell 40 percent over the next decade. Traffic over the next generation tripled. More people flew at lower prices, with more choices than before. I could go on and on.

    Taxes — let's pick something that might be of interest to North Carolinians. North Carolina has historically had one of the highest income taxes in the nation, certainly in the South. You had a top rate, until recently, on your income tax in excess of 7 percent. The governor and the legislature saw fit to lower that and move to a flat tax with a rate below 6 percent. That was a very smart, very good move. It will have positive effects long term.

    But let's compare your state with Tennessee next door. In 1990, incomes were higher, per capita, per person, in North Carolina than in Tennessee. Today, incomes are higher in Tennessee, per capita, than in North Carolina. Why is this? Are the people of Tennessee smarter and brighter than the people of North Carolina?

    Kokai: They think so.

    Vedder: They probably think so, but I don't believe it for a minute. I think the reason may have something to do with the fact [that[ Tennessee has no income tax at all. They have the ultimate flat-rate tax: zero. And so, resources, productive resources, people who are highly productive move to Tennessee, a little more so than to North Carolina.

    A lot of people move to North Carolina; don't misunderstand me. But the spirit of enterprise is a little more developed in Tennessee. There is a little more to be gained from working hard and investing hard in Tennessee because you get to keep it all. ...

    Kokai: Very interesting example: North Carolina and Tennessee. And North Carolina has also been comparing itself to its other neighbors and trying to not only lessen that tax burden, but also the regulatory overreach. If politicians in this state continue to focus on those ideas, lowering and flattening tax rates, reducing the regulatory burden, what sorts of benefits are we going to see?

    Vedder: You already have a lot of population growth, so that will continue and, if anything, accelerate a little bit because the state will become more attractive to people living elsewhere and to companies living elsewhere or headquartered elsewhere. You're going to see greater productivity among your workers. I mean, this is what the evidence shows, that people in low-income-tax or no-income-tax states tend to have higher rates of economic growth.

    So 20 years from now the children of people living today will be a little bit better off. A little bit better able to afford to go to good schools, including good schools like the University of North Carolina, or Duke, or Davidson, Wake Forest. And so you're going to have those kinds of things.

    Kokai: Now I think some people will hear this and go, "Low taxes sound good. Regulatory overreach, we know that's bad. But this particular regulation is really important, and we need to do something about this." Or, "We need enough taxes to make sure that these government programs can continue." Do they have a case, or should they be looking at a different issue?

    Vedder: Of course, you need to look regulation by regulation. Some of them make sense. But there is a tendency for regulators and taxers to get overly exuberant. You have a Department of Insurance in this state that has — I counted them over the weekend — 257 workers, regulators in the Department of Insurance.

    What on earth do they do? Why do we need them? Some states, they say, "Gee, insurance is like anything else. The markets will determine what's right. We don't need a government in here to determine rates."

    You have rate determination in this state by insurance regulators, an insurance guru of some sort who, somehow, knows more than the people of North Carolina. I don't understand that. Many other states don't have this at all. Why do you have 257 people?

    Kokai: In just one department?

    Vedder: Yeah, instead of an invisible hand, you have 514 very visible hands. I assume each regulator has two hands. ... I think there's a lot of areas where there's been overregulation and probably overtaxation.

    Kokai: ... One of the things North Carolina has focused on over the last couple of years is having more periodic review of all of these regulations. Is that a good idea?

    Vedder: I think it's a good idea to stop every now and then and say, "Is it making sense what we are doing?" Some things made sense. The Civil Aeronautics Board may have made sense in 1938. I don't even doubt that. It certainly didn't make sense in 1978.

    And so, every few years, you need to stop and say, "Do we need this?" And maybe what we should do is just sunset all of these regulations. That's the more efficient way of doing it. Just say, "This regulator is going out of business unless they can make a case why they need to remain."