Anne O. Krueger on market failures, government failures and incentive

From David Henderson.

"Some of these arguments about the market assume that if there are market failures, then whatever the government will do will be better. Maybe the market failures are huge, but that does not persuade me that government failures will not automatically be as huge. That’s the part that’s wrong. I still think that when you’re talking about lots of economic activities, you want to just look at incentives. If there’s something wrong with the market, get the incentives right. Giving bureaucrats the incentive to regulate is not the incentive that will work best in most cases."

Tariffs Have Long Been a Corruption Magnet

Transparency is a hallmark of good tax policy; opacity is its enemy

Letter to The WSJ. 

"Paul Rahe’s justifications for tariffs fail under scrutiny (“There’s a Case for Tariffs,” op-ed, April 16).

Mr. Rahe assumes tariffs boost resiliency, but recent history shows the opposite. National security might justify narrow trade restrictions, but tariffs have not insulated Americans from economic disruptions and have frequently made things worse. The baby-formula crisis of 2022 and automakers’ recent struggles to obtain aluminum, each triggered by the sudden closure of a tariff-protected U.S. factory, show that localized supply chains are vulnerable to local shocks—and tariffs block alternatives. Research from the pandemic finds that globalized supply chains performed better and adjusted faster than nationalized ones.

Mr. Rahe also errs on tariffs’ ability to promote manufacturing. Decades of protection failed to create thriving U.S. steel, shipbuilding, textile and footwear industries. More recent duties on solar panels did the same. With around half of imports being manufacturing inputs, tariffs raise American producers’ costs and undermine competitiveness. Combined with uncertainty surrounding executive branch tariffs, this explains why surveys consistently reveal manufacturers opposed to new protectionism.

Mr. Rahe is correct about the intrusiveness of income taxes, but tariffs can’t replace them because import volumes are far too small. Their invisibility, meanwhile, isn’t the benefit Mr. Rahe thinks. Since the 19th century, tariffs have been a breeding ground for rent-seeking and corruption and have persisted after decades of failure, precisely because their costs are hidden and diffuse. Transparency is a hallmark of good tax policy; opacity is its enemy.

Alfredo Carrillo Obregon and Scott Lincicome

Washington

Mr. Carrillo Obregon is a trade policy analyst and Mr. Lincicome is vice president for economics and trade at the Cato Institute" 

The Elevator Problem: How Rent-Seeking and Regulation Make Modern Life Unaffordable

By Patrick Carroll of AIER.

"On July 8, 2024, a guest essay by Stephen Smith on elevator policy was published in The New York Times. Though this may seem like a rather dry topic at first glance, Smith’s essay quickly dispelled that notion. The piece immediately went viral and has sparked a considerable amount of commentary from across the political spectrum. 

In the essay, Smith summarized the findings of a lengthy report on elevators that he had authored in May of that year for a think tank, the Center for Building in North America, which he founded in 2022. Prompted by a personal struggle with a lack of elevator access, Smith conducted a comprehensive review of the global elevator industry with the goal of answering a very specific question: Why are there so few elevators in North America compared to the rest of the world? 

“Despite being the birthplace of the modern passenger elevator, the United States has fallen far behind its peers,” he writes in the report. 

While the US has more than 1.03 million elevators — one of the highest totals in the world — it has fewer elevators per capita than any other high-income country for which data can be found, and Canada’s position on a per capita basis is similar. 

“…Part of this absence is due to the dominance of freestanding single-family houses in North America,” Smith acknowledges, “but even apartments in the United States are less likely to have elevators than those in much of Europe and Asia.” He points out, for example, that while New York City and Switzerland have similar populations, and a greater percentage of New Yorkers than Swiss live in apartment buildings, New York only has half the number of passenger elevators. 

“No matter how you slice the numbers,” he says, “America has fallen behind on elevators.” 

Smith’s findings all pointed to cost as the major factor. In Canada and the US, he says, new elevator installations cost at least three times as much as in Western Europe — roughly $150,000 compared to $50,000. What is driving this cost differential? Smith spends the majority of the report outlining three main culprits: mandatory minimum cabin sizes, labor issues with elevator installers, and technical codes and standards, which are harmonized for practically the whole world except the US and Canada. 

He writes: 

The North American approach is one of extremes. American and Canadian elevators have the largest cabins, the strongest doors, the most redundant communication systems, the best paid workers, and the most diversity of codes on the one hand. And in exchange, Americans and Canadians have the highest prices, the most limited access, the most uncompetitive market for parts, and the most restricted labor markets.

‘One of the Most Powerful Construction Unions in North America’ 

Smith’s comments on the labor point have attracted particular attention, because the inefficiencies are so glaring. As he wrote in The New York Times: 

Architects have dreamed of modular construction for decades, where entire rooms are built in factories and then shipped on flatbed trucks to sites, for lower costs and greater precision. But we can’t even put elevators together in factories in America, because the elevator union’s contract forbids even basic forms of preassembly and prefabrication that have become standard in elevators in the rest of the world. The union and manufacturers bicker over which holes can be drilled in a factory and which must be drilled (or redrilled) on site. Manufacturers even let elevator and escalator mechanics take some components apart and put them back together on site to preserve work for union members, since it’s easier than making separate, less-assembled versions just for the US. 

National Review economics editor Dominic Pino has noted, along with City Journal contributor Connor Harris, that this is a textbook example of what’s known as featherbedding, a practice in labor relations where unions obtain “make work” rules so that more union workers can be employed. 

The main elevator union in Canada and the US is the International Union of Elevator Constructors (IUEC), which Smith points out is “one of the most powerful construction unions in North America.” A 2011 comment from its General President, Dana Brigham, is revealing. 

“We can’t afford to sit back and see our trade dumbed down through factory prefabrication and preassembly to a point where all our members will have to do on the job is simply uncrate the elevator, set it, and plug it in,” Brigham said. Responding to this quote, Pino quips: “Heaven forbid elevators be easy to install.” 

It’s no wonder that featherbedding has a bad reputation. As Leonard Read observed in 1960, these practices are “as obviously absurd to the layman as they are disgusting to the economist.” 

In modern jargon, the economist’s disgust is often expressed by characterizing these practices as a kind of rent-seeking. Indeed, Alec Stapp, co-founder of the Institute for Progress, recently cited the elevator union rules that Smith uncovered as a good example of this concept. 

The notion of rent-seeking comes from the public choice school of economics, specifically the work of economists Gordon Tullock and Anne Krueger. Developed in the ‘60s and ‘70s, rent-seeking refers to any practice where you are trying to increase your wealth by changing the rules of the game, as compared to profit-seeking, which is trying to increase your wealth by being more productive. 

Common examples of rent-seeking include lobbying for tariffs or subsidies — or, in this case, union featherbedding. Profit-seeking, on the other hand, would include activities such as research and development aimed at creating new products to sell to customers. 

The word “rent” in this context refers to the old economic definition of rent, which is about the excess returns yielded by a factor of production, and not the colloquial definition of a payment made for the use of property.

Elevators Are Just the Tip of the Iceberg 

The other two factors that Smith discusses — minimum cabin sizes and technical codes and standards — are a classic case of government regulations making things considerably more expensive than they need to be (and regulation, particularly licensing, no doubt contributes to the labor issues as well). 

Now, if the mandated wastefulness that we find in the elevator industry were unique, it would still be cause for alarm, but the absurd truth is that regulations like this are everywhere. 

“When most people go through their daily lives, they don’t think about the ways in which government regulations are making their lives more difficult,” writes economist Scott Sumner, reflecting on Smith’s elevator story. “In almost every case I come across with systematic inefficiency, the root cause is counterproductive regulations.” 

It feels like every few months, a story like this comes along that grips the public’s attention. Calls for reform are heard, a public outcry fills the airwaves, maybe legislation is introduced. But it rarely occurs to people that these stories form a pattern. As such, we’ve fallen into this routine where our news feeds periodically become dominated with the latest absurd regulation story, and then at best we play whack-a-mole with legislation designed to address the Current Thing. 

Perhaps, if we can focus on the bigger picture, we should consider trying a different approach. Maybe there will come a point where we realize that news-driven piecemeal deregulation isn’t particularly effective, and more fundamental changes, such as blanket limits on government intervention in the economy, must be considered."

Protection for Whom? The Origins of Protective Labor Laws for Women

States were more likely to pass labor laws purportedly meant to protect women when more voters stood to benefit economically from restricting women’s employment.

By Matthias Doepke, Hanno Foerster, Anne Hannusch, & Michèle Tertilt. Excerpts:

"These protective labor laws, enacted by almost all states, imposed work restrictions on women that did not apply to men. They included maximum working hours, bans on night work, seating requirements, weight-lifting limits, and minimum wage provisions. These were presented as measures to protect women’s health and well-being, but in practice, they often curtailed women’s access to employment and economic independence. Most remained in place until the civil rights era, when anti-discrimination legislation rendered gender-specific laws unconstitutional."

"the answer primarily lies not in social norms or gendered values but in economic incentives and shifting labor market dynamics. Particularly, these laws found support among specific segments of the population that benefited from reduced competition in the workforce."

"Protective labor legislation limited women’s employment, thereby increasing the income of households that depended primarily on male earnings."

"a crucial force behind the rise and fall of protective labor legislation was these changing concerns about labor market competition from women."

"we developed a model in which women and men (single or married) can participate in the labor market and vote on protective labor legislation. In this model, two household types are key: single lower-skilled men and married couples consisting of a lower-skilled husband and a stay-at-home wife. For these groups, household income depends entirely on the male earner, who benefits from the exclusion of women from competing jobs."

"households where women contribute to family income—single working women or dual-earner couples—and households with higher-skilled men are more likely to oppose protective labor laws. Higher-skilled men benefit when women enter the workforce because women often perform roles that support and enhance the productivity of higher-skilled jobs."

"the two household types favoring restrictions did constitute the majority of the voting population when protective labor laws were introduced. In contrast, when these laws were dismantled, the share of the population opposing them had regained the majority. Further analysis shows that states were more likely to pass restrictive labor laws when a larger share of their voting population consisted of households that would economically benefit from limiting women’s employment."

"states were more likely to support equal rights amendments when the proportion of households that stood to benefit from eliminating gender-based labor restrictions was larger."

"Our research does not find support for the claim that states where women gained the right to vote earlier were more likely to introduce protective legislation. This finding confirms that the primary reason protective labor laws were passed was not because women pushed for their own protection. Similarly, we found little support for the idea that organized labor played a decisive role in promoting these laws."

Matthias Doepke

London School of Economics, Northwestern University, and IZA—Institute of Labor Economics

Hanno Foerster

Boston College and IZA—Institute of Labor Economics

Anne Hannusch

University of Bonn and IZA—Institute of Labor Economics

Michèle Tertilt

University of Mannheim and IZA—Institute of Labor Economics

Massive Rent-Seeking in India’s Government Job Examination System

By Alex Tabarrok.

"In India, government jobs pay far more than equivalent jobs in the private sector–so much so that the entire labor market and educational system have become grossly distorted by rent seeking to obtain these jobs. Teachers in the public sector, for example, are paid at least five times more than in the private sector. It’s not just the salary. When accounting for lifetime tenure, generous perks, and potentially remunerative possibilities for corruption, a government job’s total value can be up to 10 times that of an equivalent private sector job. (See also here).

As a result, it’s not uncommon for thousands of people to apply for every government job–a ratio far higher than in the private sector.  In one famous example, 2.3 million people submitted applications for 368 “office boy” positions in Uttar Pradesh. 

The consequences of this intense competition for government jobs are severe. First, as Karthik Muralildharan argues, the Indian government can’t afford to pay for all the workers it needs. India has all the laws of say the United States but about 1/5 th the number of government workers per capita leading to low state capacity. But there is a second problem which may be even more serious. Competition to obtain government jobs wastes tremendous amounts of resources and distorts the labor and educational market.

If jobs were allocated randomly, applications would be like lottery tickets with few social costs. Government jobs, however, are often allocated by exam performance. Thus, obtaining a government job requires an “investment” in exam preparation. Many young people spend years out of the workforce studying for exams that, for nearly all of them, will yield nothing. In Tamil Nadu alone, between one to two million people apply annually for government jobs, but far less than 1% are hired. Despite the long odds, the rewards are so large that applicants leave the workforce to compete. Kunal Mangal estimates that around 80% of the unemployed in Tamil Nadu are studying for government exams.

Classical rent-seeking logic predicts full dissipation: if a prize is worth a certain amount, rational individuals will collectively spend resources up to that amount attempting to win it. When the prize is a government job, the ‘spending’ is not cash, but years of a young person’s productive life. Mangal calculates that the total opportunity cost (time out of the workforce) that job applicants “spend” in Tamil Nadu is worth more than the combined lifetime salaries of the available jobs (recall jobs are worth more than salaries so this is consistent with theory). Simply put, for every ₹100 the government spends on salaries, Indian society burns ₹168 in a collective effort of rent-seeking just to decide who gets them. The winners are happy but the loss to Indian society of unemployed young, educated workers who do nothing but study for government exams is in the billions. Indeed, India spends about 3.86% of GDP on state salaries (27% of state revenues times 14.3% of GDP). If we take Mangal’s numbers from Tamil Nadu, a conservative (multiplier of 1 instead of 1.68) back of the envelope number suggests that India could be wasting on the order of 1.4% of GDP annually on rent seeking. (Multiply 3.86% of GDP by 15 (30 years at 5% discount) to get lifetime value and take .025 as annual worker turnover.) Take this with a grain of salt but regardless the number is large.

India’s most educated young people—precisely those it needs in the workforce—are devoting years of their life cramming for government exams instead of working productively. These exams cultivate no real-world skills; they are pure sorting mechanisms, not tools of human capital development. But beyond the staggering economic waste, there is a deeper, more corrosive human cost. As Rajagopalan and I have argued, India suffers from premature imitation: In this case, India is producing Western-educated youth without the economic structure to employ them. In one survey, 88% of grade 12 students preferred a government job to a private sector job. But these jobs do not and cannot exist. The result is disillusioned cohorts trained to expect a middle-class, white-collar lifestyle, convinced that only a government job can deliver it. India is thus creating large numbers of educated young people who are inevitably disillusioned–that is not a sustainable equilibrium.

Mangal valiantly proposes redesigning the exams to reduce waste, but this skirts the core issue: India’s wildly skewed public wage structure. Government salaries far exceed what is justified by GDP per capita or job requirements, distorting education, employment, and unemployment throughout the entire economy in deeply wasteful ways. The only real solution is to bring public sector pay back in line with economic fundamentals."

Government Versus Your Health

By John C. Goodman.

"A new book by Dr. Jeffrey Singer proposes a simple idea: “Every human being of adult years and sound mind has the right to determine what shall be done with his own body.” You might think that principle is hard to argue with. Yet in Your Body, Your Health Care, Singer shows that government potentially interferes with just about every decision we make in health care.

Government regulations limit whom we can seek care from, what facilities we can seek care in, what drugs we can take and who can prescribe them. In fact, there is hardly any area of medicine where we are able to make unrestricted choices.

In Dallas, Texas, where I live, for example, I am not allowed to seek care from a nurse-practitioner in independent practice, even if the services she offers are services she has been trained to provide by government-sanctioned training programs. The only exception is for a nurse who pays a doctor an average of $50,000 a year to “supervise” her practice. Yet this supervision is perfunctory and has almost no real content. It is little more than an expensive bribe that nurses are required to pay doctors for the right to do what they have been trained to do. Both patients and nurses are paying the cost of that bribe.

You might think that restrictions like this one exist because of government’s concern that patients might make bad decisions that would be harmful to themselves. Yet in states where nurses are able to practice without paying doctors $50,000 (27 in all), there is no evidence of patient harm.

At times, Singer (who is himself a general surgeon) suggests that much government regulation of medical care is overzealous paternalism. But if that is what mainly motivates lawmakers, why are we allowed to make so many risky choices unimpeded by the state? For example:

• There is no law that prevents me from putting on a scuba tank and exploring an underwater cave. Yet in as many as 1 in every 3,000 cave dives, someone dies.
• No law prevents me from hang-gliding. Yet among those who engage in the sport, as many as 1 in 1,000 die every year.
• No law prevents me from mountain climbing—an even riskier sport. Yet one in every 80 people who attempt to climb Mt. Everest dies. Of those who reach the summit, one in 20 never makes it back down.

The most important reason for most medical interventions, as Singer acknowledges, is the financial self-interest of those who benefit from the regulations.

Beginning in the middle of the 19th century, the Amercian Medical Association set out to make licensing of physicians a reality in every state. By the second decade of the 20th century organized medicine had gained virtually complete control over the practice of medicine.

Like the medieval guilds of old, organized medicine has successfully sought to restrict supply in order to increase doctor incomes. Singer gives us a short review of that history, which I have explored in a full-length monograph for the Cato Institute (also the publisher of Singer’s book). He also brings us up to date on the many studies of the competency of nurses. If anything, nurses may be slightly better than doctors for those tasks they have been trained to do.

Right now, America is suffering from a doctor shortage. One way to solve that problem is to expand the number of providers and the scope of services they are allowed to provide. In addition to nurse practitioners, there are physician assistants, foreign-trained medical doctors and assistant physicians. None of these are being utilized to the full extent of what they have to offer.

And here is a fact some readers might find surprising. Most people know that after students complete medical school, they go through a complicated process of finding a residency program to complete before they can become full-fledged practicing doctors. But 7 percent of doctor-of-medicine graduates and 10 percent of doctor-of-osteopathy graduates never find a residency. These students fall into a sort of legal limbo—unable to use their skills to meet patient needs.

We could greatly expand the supply of medical care in this country if politicians would just step aside and let the market for professional services work.

Without regulation, what would keep patients from seeing providers who are untrained in the care they offer to deliver? Singer says the private sector already has tools that protect us against that eventuality. If Singer claims he has surgical skills that he never trained for (brain surgery, for example), no hospital would allow him to practice there; no health insurance company would pay for his services; and no malpractice insurer would cover him.

Space does not permit a full discussion of the many valuable contributions to health policy you will find in this book. But no reader should skip Singer’s excellent treatment of the “War on Drugs.”

Singer introduces us to the “iron law of prohibition,” which holds that as law enforcement of prohibited drugs becomes more intense, the potency of the prohibited drug increases. That’s partly because smaller packages of the drug make smuggling easier. The iron law explains why bootleggers smuggled whiskey instead of beer or wine during alcohol prohibition. The iron law explains why cannabis has become more potent, why crack cocaine replaced powdered cocaine, why cracking down on black market prescription pain pills brought on heroin, and why cracking down on heroin brought on fentanyl.

For students of health policy, Singer’s new book is a must-read contribution."

US Withdrawal from the World Trade Organization Would Be an Epic Mistake

By Clark Packard of Cato. 

"Earlier this year, Rep. Tom Tiffany (R‑WI) introduced a resolution to withdraw the United States from the World Trade Organization (WTO). The resolution is privileged so it will force a vote on the House floor in the coming months. Former chairman of the WTO’s Appellate Body and current Cato Institute scholar James Bacchus and I participated in a Cato briefing event on Capitol Hill earlier today, where we explained why such a move would severely damage US economic interests and its global influence.

As Bacchus documents in a forthcoming Cato Institute paper, the United States has benefited tremendously from its participation in the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT). The GATT and WTO have facilitated a massive expansion in global trade as tariffs have fallen and red tape has been cut. This led to lower prices for American consumers—both firms and families—and greater access to foreign markets for American producers. Withdrawing from the WTO would open the door to higher prices and fewer varieties and allow foreign governments to increase tariffs and impose nontariff barriers on American goods and services. Indeed, the Bertelsmann Stiftung, a German think tank, in 2019 found that WTO membership increased the US Gross Domestic Product by about $87 billion, more than any other WTO member country. 

Likewise, coming on the heels of President Trump’s reckless and ill-advised trade wars, withdrawing from the WTO would further erode the United States’ global standing. As the world’s largest economy, the US has historically played a leading role within the WTO system. In our absence, much of the leadership within the organization would fall to China, the second-largest economy. In calling for the US to withdraw from the organization, Rep. Tiffany argued that the WTO system has “overlooked” several of China’s “unfair” trade practices. It seems odd, then, to advocate a position that would grant China a more commanding role within the WTO system. 

Some libertarians and market-oriented analysts have a complicated relationship with trade agreements. Most would prefer unilateral reductions in tariffs and nontariff barriers since the economic benefits of global trade largely flow from imports. Politically, however, trade agreements play a valuable role in constraining the protectionist proclivities of politicians and regulators. 

A higher tariff regime increases incentives for businesses to engage in rent-seeking—that is, bending government power to confer economic benefits on themselves or disadvantage their competitors. New research from Goldman Sachs suggests that multilateral trade agreements through the GATT/WTO system since the early 1970s “brought down tariff levels and reduced governments’ discretion in imposing them.” This means, they add, that the “relationship between countries’ tariff structures and rent-seeking measures” largely disappeared. 

(Source: Jan Hatzius et al., “The Long-Term Effects of Higher Tariffs (Abecasis),” Goldman Sachs, May 14, 2025)

To be sure, the WTO system needs reform. Membership within the organization, however, has conferred immense benefits on the United States and its citizens. Proposals to withdraw the United States from the WTO do not stand up to serious scrutiny and would be a colossal policy misstep."