Economic Regulation (Part 2): An Upside Down Economy

We need more balance in the economy.

Adam Smith, the so-called “father of economics,” claimed in the 1700’s that there was an "invisible hand" through which the economic accumulation of wealth by the elite would benefit the larger population because the elite would spend it on products and services produced by the people. Two hundred years later, the “invisible hand” theory of the 18^th century became the foundation of modern-day "trickle down" economics.  

Part of the mantra of the Republican Party platform is that consumer protection regulations interfere with competition and the “invisible hand” that shares the wealth in a laissez-faire economy.
 
The entrepreneurial ingenuity of Americans is the best job-creator the world has ever seen.  But companies need to be held accountable for their actions when they are not being responsible.  Having served as Attorney General or Solicitor General of this State for over 15 years, I have seen a number of economic regulations that are not for the average person at all. 
 
Let’s take a look at a few of them:

Anti-Competition Covenants in Employment Agreements.
 
Decades ago, restrictive covenants were inserted into employment contracts to stop scientists, inventors, or high-level executives from usurping confidential information or inventions of a company. The employment contracts were generally between high-paid professionals, who were compensated for agreeing not to compete.
 
Not so today. An estimated 30 million Americans—or 1 in 5 employees—are now bound by noncompete clauses. Dog sitters, tree trimmers, laborers, hair stylists, day care workers, doctors, sales people, mid-level financial professionals, and even Jimmy John’s sandwich shop makers and Amazon warehouse workers have all been required to sign noncompete clauses that limit their ability to work for competing businesses.  So much for competition.
 
Today’s restrictive covenants are applied so broadly—and to so many jobs and industries—that they stifle competition.  They make it harder for employees to seek out better jobs for higher pay or start their own company.  When applied to low and middle-income jobs, noncompete clauses don’t protect trade secrets…but they do limit the upward mobility of employees and stifle wage growth.  Studies show that employees in states where these restrictions are banned make more money than people in states where the restrictions are permitted. 
 
Some states—like California, where there are lots of technology companies that have trade secrets—prohibit restrictive covenants in employment contracts.  Other states—like North Dakota, Oklahoma, Montana, and Colorado—severely restrict their use.  President Obama proposed that restrictive covenants should be abolished in employment agreements except in cases involving legitimate trade secrets.
 
Minnesota is one of the less enlightened states on this subject. Dozens of court decisions have been issued by Minnesota courts on the merits of restrictive covenants.  The courts generally permit them, because there is no state law restricting their limits. 
 
This should change.  Minnesota should join the growing list of states—both Democrat and Republican-leaning—that limit these restrictions to jobs that truly involve high-value trade secrets. 
 
If you have been subject to a noncompete clause that has gotten in the way of your ability to get a new job or start your own company, I hope you will tell your state legislators about it.  You can look them up online.
 
Propane.

About 250,000 Minnesota homes and farms are heated with propane fuel. Propane consumers must either rent or purchase a storage tank to store the fuel.  Tanks are expensive to purchase and can’t easily be moved, so many people rent them. 
 
Customers who rent their tanks can’t shop around for the competing prices. This is because Minnesota law requires a customer who rents a tank to buy their propane from the company from which the tank is rented.  This would be like saying that a car owner can only fill their tank at one gas station.  What do you think would happen to prices?
 
The price of propane is not regulated and is usually subject to a long-term contract imposed by the supplier.  As a result, the consumer is trapped when fuel prices go up. After all, the supplier knows that few customers will go through the trouble and expense of changing propane systems just to buy propane at a cheaper price. 
 
Competition is stifled with such a one-sided regulatory scheme.  This market-lock unnecessarily drives up the cost of propane for the public.
 
I previously sued a large propane company for inserting into the fine print of its 20-some page contract language stating that its rates for propane were based on “our current market price.” [1]  As it turned out, the company’s “current market price” was not even close to a real “market price.” The matter was settled with a change in business practices by the company.
 
For-Profit Colleges.
 
Education is the gateway to economic mobility.  Nothing is more American than the idea that, through hard work and a good education, people can separate themselves from the circumstances of their birth. 
 
For nearly 200 years, universities were largely non-profit, religious, or governmental institutions that regulated themselves under the tight scrutiny of alumni, faculty, students, families, sponsoring entities, and communities.  A reputation for academic excellence was the primary regulator of scholastic achievement.
 
Over the last 20 years, for-profit colleges have mushroomed. The yardstick of success for too many for-profit colleges are dividends for shareholders, not academic success. Without government oversight, these companies focus on student recruitment by making overblown promises about job placements and degrees that are not accepted by occupational licensing boards or employers.  The result?

• In 1970, less than 1% of students enrolled in a for-profit college.  Today, more than 12% do so [2]. 

• As of 2013, students enrolled in for-profit schools received 25% of the financial aid and accounted for 44% of loan defaults.

• Although many for-profit colleges promise high job placement rates, almost ¾ of their graduates earn less than high school dropouts.

• The average tuition at for-profit schools is almost double that of four-year public colleges.

The Obama Administration proposed several rules to address predatory activity in this industry, including:

• The “borrower defense” rule, where a student could have loans erased if the college tricked the student into enrolling through fraud.  The college would have to put up collateral to cover the costs of these loan discharges.

• The “gainful employment” rule, which cuts off federal financing to colleges whose graduates do not earn enough money to pay off their student loans.

• Abolishment of mandatory arbitration clauses in enrollment forms, which strip cheated students of their right to their day in court.

Unfortunately, one of the first actions of the new Administration was to backtrack on the enforcement of these regulations.[3]
 
Sensible government regulation of for-profit schools protects honest competition in the academic world.  If the government does not set, and enforce, standards to protect higher education students from being cheated of their futures, it fails its responsibility of improving the lives of its people. 
 
Given the retrenchment of the new federal administration, states need to fill the role of being the “competition cop” as it relates to higher education.
 
These situations—restrictive covenants, propane distribution, and for-profit colleges, are but three examples where government regulation should ensure fair competition. I hope to refer to other examples in future reports. 
 
The purpose of these reports is to give you some thoughts about Minnesota as I look to the future of this state.  As always, I appreciate your thoughts. 
 

[1] http://www.startribune.com/ag-propane-firm-gouging-customers/63858457/

[2] http://www.onlinecolleges.net/for-students/for-profit-colleges-student-guide/

[3] https://www.nytimes.com/2017/06/14/business/student-loans-for-profit-schools-colleges.html?mcubz=0