As economists have understood for more than half a century, government agencies charged with regulating industries are often subject to regulatory capture. Rather than protect consumers from bad actors in the industries they were created to oversee, regulators too often develop cozy relationships with industry leaders and work at their behest to advance their interests. In Free to Choose, Milton and Rose Friedman detailed a particularly egregious example: the Interstate Commerce Commission (ICC).
Established in 1887, the ICC’s mission was to regulate the powerful railroad industry, which critics accused of engaging in cartel-like price fixing and market sharing. Instead, the railroad industry took almost immediate control of the ICC. The ICC’s first commissioner, Thomas Cooley, was a lawyer who had long represented the railroads and, as the Friedmans explained, many of the agency’s the bureaucrats “were drawn from the railroad industry, their day-to-day business tended to be with railroad people, and their chief hope of a lucrative future was with railroads.”
Rather than protect the consumers from the railroads, the ICC primarily protected the railroads. The ICC raised prices on consumers, shielded the railroads from state and local regulations, and even protected the railroads from outside competition. In the 1920s, the nascent trucking industry was emerging as the railroads’ most serious competitors. Like Uber against the taxi cartel, the lower-cost trucking industry benefited from the artificially high prices of the railroad cartel. And also like the taxi cartel, rather than seek deregulation, the railroad cartel turned to their friends in government to put the brakes on their “unregulated” competition. The bureaucrats all-too-happily complied. In 1933, the Motor Carrier Act gave the ICC authority over the trucking industry, which it used to limit the number of trucks that could operate on the roads and otherwise constrain the trucking industry. Fortunately, the railroad industry was significantly deregulated in the early 1980s and the ICC was abolished in 1995.
Milton Friedman - Do-Gooders And Special Interest
If regulatory capture is a common problem among the regulators of private industries, it can be even more acute when one government agency is overseeing other agencies. Bureaucrats at the various state departments of education tend to identify with the district schools they oversee and seek to protect them from outside competition. Lawmakers who support greater educational choice should keep this in mind when crafting choice policies. It is unwise to give an agency the power to regulate the primary competition to its core constituency.
Examples of state education agencies trying to undermine school choice initiatives abound. In Wisconsin, home to the nation’s first school voucher program, the Department of Public Instruction is currently subjecting private schools accepting vouchers to intrusive audits:
“I’ve been a CPA for 25 years and I’ve never seen anything like DPI’s approach to the audits of choice schools,” Noel Williams told Wisconsin Watchdog.
Williams, managing partner of Williams CPA in Milwaukee, has worked as an auditor for MPCP schools for 10 years. […]
“Although the law does allow DPI to follow-up with the auditor to clarify things that weren’t clear, in my opinion, DPI has grossly abused that power. Every one of the audit firms I’m acquainted with has gotten countless phone calls and emails on every audit report, requesting copies of data, clarification as to how they arrived at a conclusion.”
“It seems DPI’s intent has been to make it difficult and unpleasant to work with choice schools,” Williams said.
Indeed, the Wisconsin Institute for Law & Liberty and EAG News issued a report in 2013 detailing the Wisconsin DPI’s history of abuses against choice schools, including the use of audits to “harass and intimidate” them, withholding funding intended for private schools, forcing applicants to jump through hoops and provide lots of information and documentation not required by law, and more.
This summer, the Mississippi Department of Education initially limited the application period for the state’s new education savings account program to just 10 days in a move choice supporters called “unworkable” and “inconsistent with the law” which not only imposed no such application window, but actually stated that applications must be accepted on a rolling basis. The department eventually relented due to public outcry, but it’s unlikely to be the last of the DOE’s shenanigans.
Meanwhile, the New Hampshire Department of Education is trying to eliminate the town tuitioning program created by the village of Croydon (population 764). The village is too small to maintain its own school system so after 4th grade, it contracts with neighboring towns to provide schooling. In 2007, as its contract neared expiration, the village school board decided to pay for students to attend the district or private school of their family’s choice, similar to arrangements in nearby Vermont and Maine. However, the state DOE demanded that they cease and desist last fall. The town’s attorney, former NH supreme court justice Charles Douglas, argues that the state’s attempt to terminate the program is on shaky legal grounds. After nearly a year of negotiations, the state issued an ultimatum: terminate the program or the state will withhold its funding. The village is now trying to crowdfund a legal defense fund.
There are exceptions to the rule. The Florida Department of Education has a strong track record of supporting the state’s school choice programs. However, that could change as the political pendulum swings, as Indiana has demonstrated. And even where the top official at a state education agency support educational choice, there is no guarantee that the bureaucrats who preceded him or her will share that view or competently manage choice programs. Under John Huppenthal, Arizona’s DOE was ostensibly pro-school choice yet the agency repeatedly botched implementation of the state’s education savings account program.
Where some regulation or state program implementation is necessary, wise lawmakers have invested that authority in the state department of revenue, where the green-eyeshade bureaucrats are less likely to have an axe to grind against school choice than the state education establishment. Several states have already taken this approach, particularly for scholarship tax credit laws. Likewise, Nevada’s new education savings account is administered by the State Treasurer.
In “Fiddler on the Roof,” someone asks the town’s rabbi if there is a proper blessing for the tsar. “Of course!” replies the rabbi, “May G-d bless and keep the tsar… far away from us!” Educational choice policies should be similarly blessed.