## Friday, October 17, 2008

### Joe the Metaphor

Since being mentioned 2 dozen times at Wednesday's debate, "Joe the Plumber" has become an instant celebrity. But beyond the media craziness, his example illustrates some interesting points about policy and how it's portrayed in the campaigns.

Catherine Rampell at Economix points out the crucial distinction that was somehow missing from the debate: when Joe said he wanted to purchase a plumbing company that makes $250,000 per year, was he referring to revenue or profit? As she explains: "If he was talking about revenue, then Senator Obama’s plans probably will not affect him. Taxes on corporations are based on profit, not on revenue, and so Senator Obama’s$250,000 threshold refers to profits above $250,000. (Which Joe’s company cannot be making if it is bringing in$250,000 in revenue but has even 1 cent in expenses.) Senator Obama’s reply bungled this point. He said, 'If your revenue is above 250, then from 250 down, your taxes are going to stay the same.'"
Assuming this is the case, then Joe's story is actually representative of the majority of American small businesses:
"...most small businesses earn much less [than $250,000] in profit. In 2009 about 35 million tax returns will report some income from small businesses, according to Roberton Williams, principal research associate at the non-partisan Tax Policy Center. Of these only about 660,000 tax units — or 1.9 percent — would see an increase under Senator Obama’s tax proposal. Joe probably overstated how much his company makes, though. According to the Bureau of Labor Statistics, the mean wage for a plumber is$47,930 per year. A plumber in the 90th percentile earns $73,500. (Joe’s company is apparently a two-person company; if we assume the employees each take half of the company’s profits basically in lieu of a salary, which is not necessarily the case, then the$250,000 to \$280,000 profit figure means that the company is exceptionally successful.)"

So Joe really was an appropriate metaphor, though not the one McCain would have liked.

Joe's story became even more interesting after we learned that he is not a licensed plumber (See the first link in this post). This raises the issue of the wisdom of professional licensing, which is common in many fields. This practice was heavily criticized by Milton Friedman (the godfather of the free market) as an unnecessary barrier to entry into many fields, one that artificially raised the price of services by restricting the supply of workers. The standard argument is that inept plumbers, for example, would be driven out of the market by competition, rendering the licenses superfluous.

Certainly there's room for debate on a job-by-job basis. Inept doctors may lose repeat customers by killing them. Similarly, faulty construction can put people in serious risk. But Alex Tabarrok at Marginal Revolution provides several examples of ludicrously unnecessary license regimes:
"In Alabama it is illegal to recommend shades of paint without a license. In Nevada it is illegal to move any large piece of furniture for purposes of design without a license. In fact, hundreds of people have been prosecuted in Alabama and Nevada for practicing "interior design" without a license. Getting a license is no easy task, typically requiring at least 4 years of education and 2 years of apprenticeship."
Which category does plumbing fall into? It's an issue that should perhaps be debated.