CON Laws in 2020: About the Update

February 19, 2021

Certificate-of-need (CON) laws require healthcare providers to seek permission from state regulators before they offer new services, expand facilities, or invest in technology. Researchers find that these laws tend to restrict access to healthcare, make services more expensive, and undermine the quality of care.

Over the past decade, there have been a number of attempts to quantify state CON regulation. The most notable of these include research from the American Health Planning Association in 2016, the National Conference of State Legislatures in 2019, and the Institute for Justice in 2020. We add to these efforts and improve on our own past research by providing a single, comprehensive source that shows the current status of CON regulation in all 50 states and the District of Columbia.

The History of CON Laws

Nearly six decades ago, New York became the first state to enact a CON law for healthcare services. A decade later, the federal government mandated state implementation of CON regulation in an effort to control healthcare costs, increase access to care, and improve quality. When early research suggested that CON regulations were failing to meet these goals, the federal government repealed the mandate, but many states kept their CON programs on the books.

As of January 2020, 35 states and the District of Columbia required providers to obtain a CON before offering at least one healthcare service. Two additional states, Minnesota and Wisconsin, set numerical caps on certain services such as the total number of hospital beds and nursing home beds. Other states require a CON for ground and air ambulance services, though these laws are often found in transportation statutes, and their effects on health outcomes are not as well studied. If one includes states with caps as well as those that require a CON for ambulance services, then the total number of states with CON or CON-like regulations of healthcare services rises to 39, plus the District of Columbia (see the accompanying chart).

Number of Regulated Services, by State, 2020

What’s New in the Latest Version?

Since the previous edition of this project, we have added three important categories: (1) CON regulations for new hospital construction or hospital-sized capital investments, (2) caps on services and facilities, and (3) ambulance CON regulations, even in otherwise non-CON states.

Our Findings

Across 35 regulated services, we find that the most common CON requirements are for nursing homes, psychiatric services, and hospitals (new construction and expansion). Regulating 28 services, Hawaii has the highest number of CON requirements of any state. North Carolina (27 services) and the District of Columbia (25 services) fall close behind. Meanwhile, Indiana and Ohio each regulate one service, and Arizona and New Mexico have only ambulance service CON requirements. Wisconsin has caps on services and facilities, but no statewide CON requirement. Minnesota has ambulance CON requirements and caps on services and facilities. Eleven states have no CON laws or caps: California, Colorado, Idaho, Kansas, New Hampshire, North Dakota, Pennsylvania, South Dakota, Texas, Utah, and Wyoming (see the accompanying chart).

Our Methods

Our latest data are drawn from each state’s statutes, regulations, and agency documents. Where these sources were contradictory or ambiguous, we relied on direct communication with administrators.

The following principles guided our research:

  • If any portion of a category of healthcare service requires CON approval, we consider this a regulated category for our purposes. For example, if a state’s CON requirement for MRI machines applies only to certain independent facilities, we count the whole category of MRI machines as CON regulated in that state—even though the MRI CON requirement is not universally applicable to all providers.
  • Except for the “hospital-sized investments” category, we do not automatically count services and equipment on the basis of CON-cost thresholds alone. Some states impose a low-cost threshold. But because we do not attempt to estimate the costs associated with any category, we do not categorize a service as being regulated unless it is explicitly mentioned in the law.
  • Whereas our analysis covers only state CON laws, some local governments have additional CON requirements in their jurisdictions. These local CON laws are not represented in the statewide data. However, if a state requires its local governments to establish and enforce a particular CON requirement at the local level, we count this toward the state’s total.

Moving Forward

Some states, such as Florida, have taken steps to repeal or otherwise reform their CON laws. Some of the changes adopted by Florida will take effect in mid-2021, reducing the number of regulated services in the state from 9 to 6. But more than two-thirds of the states continue to restrict entry, expansion, and competition in healthcare through CON laws. There is still more to be done to achieve greater access to low-cost, high-quality healthcare.

Curing High Healthcare Prices

Thursday, September 24, 2020
Authors: 
Robert Graboyes

For the majority of Americans, the cost of healthcare is a thing of mystery. Go in for a major procedure, and you’ll have no idea what sort of financial statement will waft into your mailbox weeks or months later. And even after the statement (perhaps labeled “this is not a bill”) arrives, it takes a while to figure out how much, if anything, you owe.

This is a genuine problem. But one proposed solution—legally mandated price transparency—has its own pitfalls. In some cases, the impact of mandatory transparency may be negligible—not harmful, but not a cure for high prices. In other cases, this cure may be worse than the disease.

The Appeal of Price Transparency

In competitive markets, easily and instantly available prices are the lubricant that keeps the wheels of those markets turning so efficiently. Knowledge of the prices available tends to decrease the range of prices offered for similar goods and can lower overall price levels as sellers compete for buyers’ patronage.

This is why many consumers and policymakers are drawn to the idea of price transparency in healthcare—that is, legal requirements that healthcare providers publicly list the prices for their services. As the Trump administration explains in its executive order on hospital price transparency (recently upheld by a federal court), “Making meaningful price and quality information more broadly available to more Americans will protect patients and increase competition, innovation, and value in the healthcare system.”

Tacit Collusion: Why the Cure May Be Worse Than the Disease

The received (but sometimes inaccurate) wisdom is that price transparency (in this case mandatory transparency) will spur competition, thereby pushing prices downward. And, as basic economic theory tells us, that also means expanded supplies of those goods and services because sellers will produce more goods and services in response to the increased demand caused by lower prices. The problem is that many or most healthcare markets in the United States don’t fit that textbook description of “competitive.” And under the conditions common to many noncompetitive markets, price transparency—mandatory or not—may have the opposite effect, raising prices and shrinking supplies.

This is owing to a problem that economists call “tacit collusion” and antitrust attorneys call “conscious parallelism.” If competitors talked to one another and agreed to raise prices and cut supplies, antitrust law would likely deem that to be a conspiracy against the public, with the potential for civil and criminal penalties. But with tacit collusion, there’s no need for the competitors to communicate with one another because the publicly available price is itself the communication. As long as one competing firm doesn’t charge more than the others, that firm will not lose customers to its competitors. The competitors effectively become partners in a silent cartel, with the same economic effects as a conspiracy but with no legal penalties.

One reason that tacit collusion occurs is that, with transparent, publicly available prices, no provider has to offer low prices out of fear that his competitors may be seizing market share by undercutting him. And no provider is tempted to undercut because his competitors will immediately see this move and respond in kind.

Tacit collusion requires three conditions: a small number of providers, a high level of difficulty for new providers to enter the market (in other words, a barrier to entry), and mutual knowledge of competitors’ prices. In 2011, a federal court found the presence of tacit collusion in gasoline markets on Martha’s Vineyard, Mass. On that island, there were only a few companies operating gas stations. Local regulations prevented newcomers from opening competing gas stations. And, of course, the pump prices were displayed on large signs for all to see.

These three conditions, the court found, enabled the gas station operators to act like a cartel, raising prices considerably above what they would have been in a competitive market. However, since there was no actual conspiracy—no explicit agreement to raise prices—the court found that the operators had not violated antitrust laws.

Perhaps the most famous example of tacit collusion was that of Danish cement factories in the 1990s. There were only a few manufacturers, and the costs of entering that market were prohibitive. Thus, two of the three conditions necessary for tacit collusion were present. Then Danish antitrust authorities required the competitors to post their prices publicly. Contrary to hopes and expectations, prices rose rather than declined. Having seen the results, the government dropped the transparency mandate later on.

On the Forbes website, Northwestern University economist Craig Garthwaite wrote a clear, illuminating article on what all of this means for pharmaceutical markets—notably, that mandatory price transparency could lead to higher drug prices, directly opposite the hoped-for effect.

Many segments of America’s healthcare sector are ripe for tacit collusion, even when one might assume that competitive conditions exist. For example, there are lots of pharmaceutical companies—which sounds like a competitive market—but in many specific therapeutic markets with specific conditions to be treated, such as anaphylactic shock, there are often no more than two or three sellers.

Furthermore, pharmacy benefit management companies, the middlemen between drug companies and health insurers, are powerful in impact and few in number. The same is true in medical device markets. (Controversy over epinephrine pen pricing provides a good example.) In many communities, there are only a few hospitals or insurers. Even primary care markets can be concentrated when many of the local doctors are employed by larger companies.

The upshot is that sweeping transparency requirements may push prices downward in some markets but upward in a lot of markets. Hence, our recent paper didn’t say that mandatory transparency is always a bad idea. Rather, as we said in our title, transparency mandates should be applied with caution—with a scalpel, rather than with a machete.

Why the Cure May Simply Not Be a Cure

Before making blanket decisions about requiring price disclosure in the healthcare market, policymakers would be wise to consider who will use this information, patients or providers, and when. In general, consumers use prices to change their decisions only about health services that are “shoppable” and relatively impersonal—a relatively small portion of the healthcare market. A “shoppable” health service is one that can be scheduled in advance. Few people are sitting down to compare prices before they call an ambulance during a family emergency, but many are likely to choose a cheaper MRI provider as they schedule an appointment a few weeks in advance. Additionally, MRIs tend to be relatively impersonal and similar across providers.

But other shoppable services may be intensely personal. A patient is unlikely to jettison a trusted doctor because another one down the street is offering a lower price on annual checkups. In some personal areas, consumers generally prioritize long-standing relationships, personal characteristics, friends’ recommendations, and even proximity to home over lower prices.

More importantly, even consumers who are offered greater price transparency often do not use the pricing tools available to them. In one survey of US insurers, by 2014, 94 percent of respondents offered some form of price comparison platform, but less than 10 percent of patients so much as logged onto the platforms. In part, this is because consumers simply do not have the incentive to shop. Health insurance buffers patients against astronomical costs, but also against most of the marginal price differences between services.

Another disincentive is that price tools often feature the same complicated language that plagues hospital invoices, making the tools confusing. It’s even possible that the price-shopping tools are sometimes counterproductive, with some patients wrongly assuming that higher prices imply higher quality. The seeming lack of interest in existing pricing tools presents a critical warning to lawmakers who assume that a lack of information is the main barrier to better health decisions.

Other Possible Cures

In markets poised for tacit collusion—those with few providers and high barriers to entry—we’ve seen how mandatory transparency might be counterproductive. In such cases, it may be more productive for policymakers to focus on lowering barriers to entry rather than on transparency. The threat of new providers entering the markets will likely exert greater downward pressure on prices than price transparency will under most circumstances.

There are many ways this can happen. Eliminate certificate-of-need laws; reduce protectionist medical licensure requirements; allow nonphysicians (such as nurse practitioners) to compete with physicians in providing those services that they are trained to do; expand telemedicine markets; reduce the time, costs, and unpredictability involved in approving new drugs and devices. (Dozens of such ideas are discussed in Fortress and Frontier in American Health Care and in the Healthcare Openness and Access Project (HOAP), both authored or co-authored by one of the authors of this article and published by Mercatus.)

The COVID-19 pandemic has also led to a rush at the federal and state levels to reduce barriers to entry. For example, federal regulators have greatly expanded the availability of telemedicine during the crisis.

On the consumers’ side, a more effective approach to policy might consider how and when to encourage the use of price information—not just demanding transparency for transparency’s sake. First, healthcare providers and insurance companies might voluntarily work together to expand which services are shoppable by selling treatments as a bundle. In the case of a heart attack, for example, the payment could be tied to the full episode of care—a bundle including a certain amount of nights in the hospital, bypass surgery, equipment, and rehabilitation—rather than a long, incomprehensible list of individual services and materials that are arbitrarily priced and invoiced.

Bundling is becoming a more popular approach to care, spurred by bundled payment initiatives from the Centers for Medicare and Medicaid Services. To some extent, this is the idea behind direct primary care practices, through which consumers gain access to physicians, nonphysician providers, clinics, and services, all at a fixed monthly fee. (Like price transparency, legally mandated bundling may be counterproductive, but we’ll save that discussion for another day.)

Second, consumers are more likely to pick higher-value (that is, greater quality-to-price ratio) services when they have greater financial stake in the decision. Some insurance companies have found success in reference pricing, a payment structure in which the patient pays all of the additional cost for a service above a set price threshold, rather than a small percentage of any cost. This system works well in combination with insurer-based price disclosure platforms, especially since the pricing information most relevant to consumers usually comes from their own insurance company, not from their provider.

So far, price transparency initiatives at the state level have not prioritized consumer usage in these ways, and the results show it. Many states disclose prices for inpatient care, surgeries, and other non-shoppable and highly personal services, while very few provide information about shoppable services such as laboratory and imaging services. The vast majority of states display billed charges from hospitals, not anticipated final costs or out-of-pocket costs. And very few include any quality indicators on specific goods and services. As a result, these state initiatives do not greatly affect consumer search behavior or final amounts paid.

Nothing we’ve written here implies that the opaqueness of healthcare prices is a good thing, or that transparency will never improve the situation for consumers and patients. Applied with precision, limited transparency mandates can enable consumers to make more informed decisions and increase competition. However, we also assert that in many healthcare markets, competitiveness would be better achieved by lowering barriers to entry, thereby limiting the ease of tacit collusion among providers.

This essay is taken from the authors’ recent paper, Price Transparency in Healthcare: Apply with Caution.

Image credit: Prapass Pulsub/Getty Images

Subtitle: 
Mandatory healthcare price transparency does not always benefit consumers

Price Transparency in Healthcare: Apply with Caution

August 19, 2020

There is a widespread perception that healthcare price transparency would result in lower prices for consumers. While more information about the costs of services may make a difference in certain markets, in many others it would likely have little effect on prices. Indeed, in a substantial number of healthcare markets, price transparency could even have the undesirable result of raising prices rather than lowering them. 

In “Price Transparency in Healthcare: Apply with Caution,” Robert F. Graboyes and Jessica McBirney show that price information can empower consumers to shop—but, under certain conditions, can also enable sellers to collude (or act as if they are colluding). So, while greater knowledge about prices charged is usually a good thing, in the healthcare sector, transparency mandates can help consumers only in specific markets and can actually do harm. Hence, such mandates should be applied with caution. 

Price Transparency Can Encourage “Tacit Collusion” Among Providers

  • In many healthcare markets, the number of sellers is small, and the barriers to entry by new sellers are high. 
  • In such markets, mutual knowledge of prices among competitors can lead to tacit collusion—strategic behavior wherein sellers individually restrict supply and raise prices. 
  • Tacit collusion does not require any actual coordination or conspiracy on the part of sellers (hence the descriptor “tacit”). When this occurs, even active price-shopping by consumers is unlikely to push prices down to competitive levels. 

Patients Regularly Fail to Engage in Price Comparisons

  • There are other circumstances besides tacit collusion where access to price information will have limited influence on con­sumer decisions. For example, consumers probably won’t engage in price comparisons when hiring an ambulance provider during an emergency. Patients are also unlikely to shop for cheaper MRI providers just to save their insurance companies $200 and themselves $10. 
  • Price isn’t all that matters in healthcare. Consumers would probably rather spend more money on a doctor they like, or a hospital that’s close by, than less money on a lower-quality doctor or farther-away hospital. 
  • In general, price information helps consumers only when they have the ability and incentive to use that information: They must be able to shop around for the goods in question and must have enough “skin in the game” to make shopping worth their effort. 

Key Takeaway 

Price transparency mandates ought to be applied with care and only in those markets where they are likely to yield lower prices. In markets characterized by consumer indifference to prices, transparency mandates will have minimal impact. In markets poised for tacit collusion, counterintuitively, transparent prices can actually harm consumers.

Liberalizing Land Use Regulations: The Case of Houston

August 17, 2020

Over the past decade, housing affordability has emerged as a pressing issue in many American cities. In an annual survey of mayors conducted by researchers at Boston University, one-third of the mayors surveyed ranked housing affordability as one of the top challenges their cities face. The data confirm the urgency of this concern: from 1970 to 2010, median home values appreciated at a rate outpacing median household incomes. By one estimate, half of all renters were “rent burdened” in 2018, meaning that they spent more than a third of their income on rent, and a quarter of American renters spent more than half of their income on rent.

That is the bad news. The good news is that policymakers and planners can ameliorate this crisis by liberalizing the restrictions on land use that drive up housing costs and block new development.

There is substantial agreement in the literature that restrictive local land use regulations, such as zoning and subdivision regulations, are a major driver of housing costs, to the extent that they limit the quantity of new housing developed and raise construction costs. Reducing regulations that inhibit new construction would make housing more affordable, but often a powerful constituency of local homeowners opposes building new housing, as new housing is often seen as a threat to property values. Simultaneously, urban renters might have antidevelopment attitudes tied to fears of gentrification. State and local leaders face a tricky political minefield on the road to affordability.

Sweeping subdivision regulation reform in Houston, Texas, provides an instructive alternative to what can often seem like a no-win scenario for local planners. The circumstances surrounding the city’s 1998 reduction of minimum lot sizes for single-family homes hold two key lessons for policymakers: First, allowing homeowners who are strongly opposed to reform to opt out of a reform’s effects can effectively negate local opposition to citywide reform. Second, postreform redevelopment following a citywide reform is likely to occur mostly in middle-income residential neighborhoods and underutilized former industrial and commercial areas, not the marginalized residential communities that urban renters are concerned about. This policy brief outlines what researchers know about minimum-lot-size regulation, sketches out Houston’s unique system of urban land use regulation, and draws lessons from Houston’s successful experience with subdivision liberalization.

What Do Researchers Know About Minimum-Lot-Size Regulation?

Subdivision regulations control the process of breaking larger lots into smaller lots. Minimum lot sizes are foundational to this process, requiring that every parcel of land in a defined area meet a specified minimum square footage. These rules are often accompanied by other land use regulations controlling elements such as street design. Cities sometimes grant exceptions, or variances, to their set minimums, but the resulting noncompliant lots are generally within a few square feet of the regulated minimum, allowed only to accommodate topographical irregularities.

The consensus in the research community is that minimum-lot-size rules have a limiting effect on new development. That is, these rules tend to keep lot sizes larger than what might otherwise be demanded by housing consumers. Clustering of lot sizes just larger than the set minimum evinces the extent to which minimum-lot-size regulations affect new development. This clustering suggests that developers are barely meeting the minimum regulatory criteria and might have platted smaller lots if allowed. One of us (Nolan Gray), with Salim Furth, finds strong evidence of binding effects in suburban Texas, showing that “where minimum sizes creep above 5,000 square feet, actual lot sizes tend to cluster at the zoned minimum.”

Minimum-lot-size regulations may leave prospective buyers who require small, lower-priced homes with no options within their price range, locking these prospective buyers out of the housing market entirely. The housing market thereby distorts, with housing costs rising above what they would otherwise be in a less regulated building environment. Setting relatively large minimum lot sizes also restricts density, which drives excessive urban horizontal expansion (colloquially referred to as “sprawl”) and increases transportation and commuting costs for buyers already compromising on cost.

Houston Land Use Regulation in Context

Houston famously does not enforce traditional zoning laws, which broadly restrict densities and segregate land uses. In fact, it is the only major American city without zoning, which was heavily promoted by the US Department of Commerce beginning in the 1920s. Houston voters rejected the policy in three separate referenda in 1948, 1962, and 1993.

But the Bayou City is not without any land use regulations. For example, Houston restricts certain businesses, such as sex shops and junkyards, from locating close to schools and certain residential areas. Similarly, Houston subdivision standards hew closely to standards in other cities, with setbacks for residential units, minimum-parking-space requirements, and minimum block widths. These rules are written on a shall-approve basis. That is, the Houston Planning Commission must approve any replats that comply with all the subdivision guidelines, making Houston’s development process highly predictable and transparent.

Beyond these standard public regulations lies a unique, extensive network of private deed restrictions, which are “binding upon every owner in a subdivision.” Many Houston homeowners rely on restrictive covenants to privately regulate zoning mainstays such as use, density, and design within their neighborhoods, beyond what would be required by the Houston Planning Commission. A deed restriction could, for example, restrict a neighborhood exclusively to single-family homes, blocking the development of new apartments. Researchers have characterized these deed restrictions as a kind of de facto zoning.

Nonetheless, by 1998 Houston provided an exceptionally liberal, pro-growth regulatory environment for housing development. One exception to this was the city’s minimum-lot-size regulations, which required 5,000 square feet of land for detached single-family homes and 2,500 square feet of land for townhouses. The former requirement restricted most housing development to a standard low-density, suburban form, while the latter generally proved to be infeasible. The 1998 overhaul of Chapter 42, Houston’s “Subdivisions, Developments, and Platting” code, amended these regulations.

The reform ordinance broke the city into urban and suburban zones, the former bounded by the I-610 ring road, which broadly encompasses the most intensely developed area of Houston. Within this urban area, the as-of-right minimum lot size for single-family homes dropped from 5,000 square feet to 3,500 square feet. Yet, subject to certain lot-coverage and width conditions, the minimum lot size could go as low as 1,400 square feet. The reform also removed certain unworkable open space and setback requirements. These provisions combined to reduce minimum-lot-size requirements by as much as 72 percent, effectively unlocking substantial new housing development opportunities across Houston.

The Wisdom of an Opt-Out Provision

The 1998 reform was motivated by at least two major factors. The first was an economic boom that raised Houston’s population and income considerably. Between 1990 and 2000, Harris County’s population grew by 21 percent, and median household incomes grew by 38 percent, boosting demand for new housing, especially in the urban area encircled by the I-610 loop. According to market participants, this was driven in part by young professionals moving to the city in order to live close to major job centers. The impact of these market pressures can be observed in the lead-up to 1998, when the planning commission began to take a liberal attitude toward smaller lots near Houston’s major employment centers.

Before reform, permission to replat sub-5,000-square-foot lots came easily via planning commission variances, which points to the second source of reform pressure: changing attitudes among planners. There was a growing interest among both the commission and planning staff in “urban revitalization,” defined as increasing urban densities and improving walkability. This helps explain the frequency with which pre-1998 variances were granted to allow sub-5,000-square-foot lots as well as the 1998 reform’s additional, nonresidential density measures, such as its reduction of commercial setbacks.

But market forces and planning objectives are often insufficient to override antiliberalization interests. Homeowners, for example, often effectively resist the loosening of zoning or subdivision requirements because they fear that new housing supply may lower their own property values, detract from public services, or diminish neighborhood character, a concern often loaded with racial or class animosities. Houston homeowners, however, uniquely rely on private deed restrictions rather than on public regulation to assert local development preferences. This institutional buffer mitigated opposition to the 1998 subdivision reform: homeowners with the strongest opposition to the smaller lot sizes were mostly already protected against them.

For reform opponents who could not fall back on a private deed restriction, the planning commission added an opt-out provision to Chapter 42, which allowed local homeowners to petition to adopt a “Special Minimum Lot Size,” which typically limits new lot minimums to the current local average for 40 years, with the approval of 60 percent of nearby owners. In 2013, when the subdivision reforms were later extended to the entirety of Houston, the threshold dropped to 55 percent. The added protection meant that even homeowners without deed restrictions could organize with their neighbors to exempt themselves from the loosened regulations. Homeowners with extreme lot-size preferences thus had little incentive to stymie the reforms, clearing a path for liberalization.

Growth Was Concentrated in Middle-Income Neighborhoods 

Allowing wealthy property owners to exempt themselves from a reform designed to encourage more affordable housing risks being counterproductive. If residents of high-demand areas can block new development, developers may instead shift to low-income neighborhoods with less expensive land and proceed to price longtime residents out of their old communities. An analysis of US census tract data from before and after the reform reveals that this was not the case: rather, reform-style development occurred at a statistically significant rate in underbuilt middle-income neighborhoods and underutilized former industrial areas.

Between 1999 and 2016, 25,269 new residential parcels smaller than 5,000 square feet were developed, according to data from the Harris County Appraisal District. A regression analysis of census tract data reveals that the relationship between income and new development is not linear, but rather an inverted “U” shape, meaning new development was concentrated in middle-income tracts. Indeed, many areas picked up as hotspots for reform-style development by 2016 were largely middle- or upper-income neighborhoods in 2000. The typical development in these areas consisted of two to three townhouses replacing a detached single-family house on a 5,000 square foot lot. The result has been a dramatic increase in density in many of Houston’s western and northern inner suburbs: while the city’s overall population density held steady between 2000 and 2016, densities in these neighborhoods more than doubled.

At the same time, postreform development activity was significantly correlated against households receiving public assistance. A hotspot analysis likewise revealed that postreform development did not occur at significant rates in southeast Houston, historically home to more moderate-income households, including portions of the city’s large African American community. On the one hand, this might help to alleviate traditional concerns related to gentrification; on the other, this might rekindle traditional concerns related to disinvestment. We leave an interpretation of the appropriate balance here to policymakers and planners.

Conclusion

The experience of Houston reaffirms much of what researchers already know: minimum-lot-size regulations limit urban development, driving up lot sizes and thereby increasing housing prices. By liberalizing these rules, the 1998 subdivision reforms allowed developers to meet a large and growing demand among Houstonians for smaller houses closer to major job centers.

But the reforms also chart new territory: a key element of their success involved allowing homeowners with the most extreme lot-size preferences to opt out of reform, thereby mitigating opposition to the broader reform. Even accounting for this concession, postreform subdivision has been heavily concentrated in neighborhoods that were either middle class or sparsely populated, without imposing an undue burden on traditionally marginalized communities. As planners and policymakers across the country wrestle with the complicated politics of land use liberalization, the case of Houston thus offers an instructive example.

Vocational Programs Won’t Hit the Mark in an Ever-changing Job Market

February, 2020

Flat standardized test scores, low college completion rates, and rising student debt has led many to question the bachelor’s degree as the universal ticket to the middle class. Now, bureaucrats are turning to the job market for new ideas. The result is a renewed enthusiasm for Career and Technical Education (CTE), which aims to “prepare students for success in the workforce.” Every high school student stands to benefit from a fun, rigorous, skills-based class, but the latest reauthorization of the Carl D. Perkins Act, which governs CTE at the federal level, betrays a faulty economic theory behind the initiative.

Modern CTE is more than a rebranding of yesterday’s vocational programs, which earned a reputation as “dumping grounds” for struggling students and, unfortunately, minorities. Today, CTE classes aim to be academically rigorous and cover career pathways ranging from manufacturing to Information Technology and STEM (science, technology, engineering, and mathematics). Most high school CTE occurs at traditional public schools, where students take a few career-specific classes alongside their core requirements.

In addition to building skepticism toward “college for everyone,” researchers have identified a “skills gap” between what employers want and the skills job-seekers offer. STEM training is a particularly trendy solution. Trump recently signed a presidential memo expanding the National Science Foundation’s STEM education initiatives and Virginia established a STEM Education Commission last year. With its many pathways, local customizability, and promise of immediate income upon graduation, CTE feels like a practical answer for young people and the economy.

As recent changes to the Perkins Act suggest, “alignment” between CTE courses and labor markets is a growing concern. Now, programs applying for federal funds must conduct a “local needs assessment” to ensure their course offerings align with local labor markets. One recent study attempted an early measure of this alignment in several metropolitan areas. Findings are mixed, but the quest for alignment itself shows how hope in career training programs has exceeded good economic sense.

Consider some of the phrases found in states’ CTE mission statements:

“…to prepare students for in-demand, high-skilled, and high-waged jobs.” (MD)

“…relevant experiences leading to purposeful and economically viable careers.” (AZ)

“…meeting the commonwealth’s need for well-trained workers.” (VA)

The desire to parse out an economy and plan accordingly is not new, but there are limits to predicting in-demand skills and future jobs. Friedrich Hayek conceives of the market not as a math problem to deconstruct but as a “discovery procedure.” The market changes, rapidly and unexpectedly, based on information identified only along the way. It is the cumulative and dynamic result of thousands of individual plans coordinating through prices and wages. Thus, a central authority could never collect enough information to make accurate predictions about market outcomes. Aiming at a particular social or economic goal—such as fixing a list of gaps in the labor market—will likely fall short of another outcome we didn’t even consider.

For this reason, Hayek explains in his Constitution of Liberty, flourishing societies must be economically and politically free, and public education should be offered to the extent that it nurtures the independent citizens that a free society requires. Education oriented toward a particular vocational end shortchanges the student. Hayek explains:

"We are not educating people for a free society if we train technicians who expect to be ‘used,’ who are incapable of finding their proper niche themselves … All that a free society has to offer is an opportunity of searching for a suitable position, with all the attendant risk and uncertainty which such a search for a market for one’s gifts must involve.” (Hayek 1960, 144-45).

Picking training goals for a student body is no guarantee of long term success, and may block even better outcomes. It is no accident that Hayek does not count increased earning potential or national economic strength among the reasons to publicly subsidize education. Instead, he favors general education and literacy for social cohesion and democratic participation. Rising wages for high-demand skills should entice students into sparse job markets without extra encouragement from school programs.

Hayek is not alone in his insistence that individuals are in the best position to choose and experiment with their professions. In The Wealth of Nations, Adam Smith recognizes,

"In  a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper […] every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment." (Smith 1776, 151)

Rather than encourage programs to narrowly direct CTE training towards local “needs,” the federal government should focus on clearing barriers to entry into those professions. It can preempt state occupational licensing laws for opticians and interior designers, among other professions. States can follow the lead of Arizona and recognize out-of-state occupational licenses.

It is worth noting that CTE advocates are not attempting to plan the American economy one web-design class at a time. High schoolers earn only 12 percent of their credits from CTE, and some of the most prominent proponents recognize the challenges a changing economy poses. But the language we use will shape our goals over time. Requiring districts to consider “labor market alignment” in their annual CTE budgets is exactly the choosing between different kinds of education Hayek cautions against. Today’s alignment can be tomorrow’s stagnation.

This is not to deny the academic and personal benefits of taking CTE classes. Teenagers who do are more likely to graduate high school, to get a job, and to earn higher wages right away. Other studies suggest non-academic benefits like increased attendance. It makes intuitive sense that students would welcome non-traditional learning opportunities to break up their daily studies, and that their high school experience would be better for it. But by insisting CTE programs be training for certain job categories, we may be selling students short.