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Friday, December 16, 2022

Food Truck Owners Sue North Carolina Town over Anti-competitive Regulations

Protecting established firms from competition isn’t just unfair, it’s economically harmful.

Image Credit: Institute for Justice

After 15 years in the Marine Corps, Tony Proctor decided it was time for a change and began working as a pastor in Jacksonville, North Carolina. Around the same time, he started cooking seafood for church functions, and the congregation loved it. It was so well-received, in fact, that Tony and his wife decided to buy a food truck and turn their Florida-style seafood passion into a business. “The Spot,” as they call it, has been serving hungry Marines, parishioners, and many others ever since.

Octavius Raymond (“Ray”) has had a similar journey. After serving in the Marines, he started a food truck called “The Cheesesteak Hustle,” and many in the Jacksonville area have appreciated his food.

Things haven’t exactly been easy for these food-truck entrepreneurs, however. Until 2021, the city of Jacksonville had effectively banned food trucks, so Tony and Ray had been forced to drive outside city limits—sometimes hours away—to sell their food.

In response to mounting public pressure, the laws recently were relaxed to “allow” food trucks to operate within the city. But as usual, the devil was in the details. Though the new legislation made it technically legal for food trucks to set up shop, it created numerous restrictions and burdens that continue to hold back the industry to this day.

For one, food trucks are not allowed to operate on private property if that property is within 250 feet of a brick-and-mortar restaurant, another food truck, or a residential property.

Signage is also severely limited. While brick-and-mortar restaurants have a great deal of flexibility in what signs they can use, food trucks are singled out with much stricter regulations. Specifically, they may only use one 5’x5’ A-frame sign. The sign can’t be externally lighted, nor can it be placed more than 20 feet from the food truck itself.

The city also charges a great deal for food truck permits. The permit fee is comparable to the level of property taxes paid by brick-and-mortar restaurants—by design. This is ostensibly to ensure “fairness” in the food industry.

In reality, of course, the city government has stacked the deck against food trucks, making it extremely difficult for people like Tony and Ray to compete against established brick-and-mortar restaurants. Though many customers love the food and there are already businesses that have expressed interest in hosting Tony and Ray’s trucks on their property, the city is refusing to budge.

As a result, Tony and Ray along with a business owner who wants to host them recently teamed up with the Institute for Justice (IJ) to take their case to court, arguing that these regulations violate North Carolina’s Constitution. Their lawsuit was filed on December 7.

Why Such Stringent Regulations?

These laws clearly hurt food-truck entrepreneurs, as well as the businesses that want to host them and the customers who want to buy from them. So what’s the upside that justifies these harms?

According to the “Purpose” section of Jacksonville’s Accessory Use Standards, these regulations are intended “to reduce potentially adverse impacts on surrounding lands.”

For the sake of argument, let’s assume the best of intentions on the part of the city. What could they mean by this? One possibility is that they are worried about social impacts. Perhaps they think food trucks will attract the wrong kind of crowd or lead to significant littering. This seems to be at least part of their concern, since one of the regulations stipulates that food trucks “provide trash receptacles of sufficient size to meet the needs of the business.”

Having said that, it also seems clear that there’s an economic component here, namely, protecting established brick-and-mortar restaurants from competition. Why else would they make proximity to brick-and-mortar restaurants a factor? Why else would they limit signage specifically for food trucks? Why else would they make the permit fee high specifically on the ground of “fair” competition?

The anti-competitive motive is certainly the view taken by IJ. “Jacksonville’s restrictions on food trucks serve no legitimate purpose,” argues IJ Attorney Bob Belden. “The city is simply seeking to protect established brick-and-mortar restaurants from competition, and that’s no role for the government.”

There is another reason to suspect this motive as well. According to the Complaint filed by IJ, when these laws were passed “the City Council was under pressure from brick-and-mortar restaurants to protect them from competition from food trucks.”

Even if the City concedes these laws are indeed protectionist, however, there is still a charitable interpretation here. The uncharitable interpretation is that this is pure cronyism—protecting established special interests to gain votes, campaign donations, or other favors from these restaurant owners.

But again, let’s assume the best of intentions. Even if the cronyism angle turns out to be true, let’s not strawman their case, let’s steelman it.

Maybe the City Councillors are genuinely concerned for the well-being of those in the established restaurant industry. Going out of business is no picnic, after all. Shouldn’t we have some sympathy for the current owners and workers who stand to lose their livelihoods? And what about the local economy? Isn’t it bad for the town when establishments are going out of business?

Sure it’s a rigged game, but maybe the game needs to be rigged in order to prevent disaster. Maybe the Councilors are just trying to protect their city from what they perceive as a threat.

Failure: A Blessing in Disguise

The issue with this line of reasoning is that it overlooks the long-run consequences. While it’s true that established restaurants can be preserved for a while by restricting competition, the end result of this policy is economic stagnation. If consumers are no longer willing to patronize a business enough for it to maintain itself—perhaps because they have found something better, like a food truck—keeping it on life support by holding back the food trucks is only hampering the necessary readjustment process. The land and capital being used by the old restaurant could be repurposed and put to better uses, but in order for that to happen the city first needs to let the business die, as painful as that may be.

Henry Hazlitt explained this well in his book Economics in One Lesson. “Paradoxical as it may seem to some,” he wrote, “it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second.”

When ineffective businesses are allowed to die, entrepreneurs have an opportunity to come in and create something new and fresh with the resources that are left behind. That’s a big part of how an economy grows. When these businesses are kept alive, however, they simply grow stale. The result is a town that looks like a poorly-funded nursing home: old, tired, and in a perpetual state of disrepair. We all know towns like that. They exist because of policies like these.

To be sure, the failure of the brick-and-mortar restaurants likely won’t be the fault of the owners or their staff. They are probably hard-working and well-meaning people. They treat their customers well, which is why they’ve survived this long.

But consumers are fickle. Their tastes constantly evolve, and even the best practices from yesterday employed by the best owners may not be enough to satisfy their ever-changing demands.

The economist Ludwig von Mises touched on this idea in his economic treatise Human Action.

“It is an inherent feature of capitalism that it is no respecter of vested interests and forces every capitalist and entrepreneur to adjust his conduct of business anew each day to the changing structure of the market. Capitalists and entrepreneurs are never free to relax. As long as they remain in business they are never granted the privilege of quietly enjoying the fruits of their ancestors’ and their own achievements and of lapsing into a routine. If they forget that their task is to serve the consumers to the best of their abilities, they will very soon forfeit their eminent position and wiIl be thrown back into the ranks of the common man. Their leadership and their funds are continually challenged by newcomers. … [The newcomers’] threatening competition forces the old firms and big corporations either to adjust their conduct to the best possible service of the public or to go out of business.”

Notice how Mises calls this a feature of capitalism, not a bug. The fact that capitalism does not protect established interests but rather lets them fail is a feature! Why? Because it means outdated and inefficient practices get regularly weeded out, freeing up capital and labor for new and better production processes. There is continual improvement in a free-market economy precisely because businesses are allowed to fail.

Protecting established firms, then, is actually harmful to an economy. True, the owners and workers at firms that go bankrupt may fall on hard times in the short run, but they too will benefit as consumers in the long run because the same process of competition and turnover will be improving every other industry.

The economist Joseph Schumpeter referred to this process of turnover as “creative destruction.” It’s creative because it takes the ruins of old businesses (buildings, vehicles etc.) and uses them as the building blocks for new and better lines of production. Like a phoenix, the new industry is born from the ashes of the old, the death being a prerequisite for the birth.

The point is, we shouldn’t be afraid of change when it comes about naturally—change is critical for a healthy economy. What we should be afraid of is those who are so resistant to change that they artificially preserve old and ineffective businesses by restricting the emergence of new and better ones.

This article was adapted from an issue of the FEE Daily email newsletter. Click here to sign up and get free-market news and analysis like this in your inbox every weekday.

  • Patrick Carroll is the Managing Editor at the Foundation for Economic Education.