Chris Rufo and Austen Hufford have a good piece on California’s Gay Certification program. Yes, you read that right.

In 1986, Governor George Deukmejian signed Assembly Bill 3678, which required certain CPUC-regulated utilities to submit annual “plans” for buying goods and services from woman- and minority-owned companies. Two years later, CPUC created its “Supplier Diversity Program,” which would enforce the law and set contracting “goals” for large utilities.

Under a series of Democratic governors, the program has expanded to include gay-owned businesses. In September 2014, then-Governor Jerry Brown signed legislation requiring CPUC to recognize “LGBT-owned businesses” as eligible for supplier-diversity benefits. Five years later, Governor Gavin Newsom expanded the program further, “encouraging” other companies involved in the energy sector to award contracts to gay-owned firms.

…This scheme raises an obvious question: How does a business qualify as officially gay? Paperwork. Supplier Clearinghouse, a group that certifies firms for the CPUC program, features a list of qualifications linked on its website. Applicants can secure certification by providing a letter from an “LGBT organization” attesting to their sexual preferences; proof that a newspaper identified them as “LGBT”; or three letters from “personal contacts” written “on company letterhead” attesting to their homosexual orientation. Corporate officials who “falsely represent” their business as gay face up to a year in county jail.

So there you have it. Under the logic of ever increasing privileges for pretty much anyone except white males we now certify whether someone is gay or not.

This is an economics blog, however, so let’s turn from the culture war and ask, following Luke Froeb at Managerial Economics, what these set-asides cost the taxpayer:

A set-aside moves price through two separate channels, and they push the same direction.

• First, it shrinks the number of bidders, so the second-lowest cost is higher (or the second-highest value is lower).
• Second, the set-aside bidders themselves may be higher-cost or lower-value than the bidders they replace.

Both channels move price against the government….The lesson applies to California. Fewer, weaker bidders mean a worse deal for the government.

Brannman and Froeb estimate that set asides for small businesses reduce revenues in timber auctions by 15%, a substantial amount.

Addendum: It is worth noting that optimal auction theory tells us that it can sometimes be in the seller’s interest to handicap a strong bidder in order to make them increase their bids. Thus, in theory, an “affirmative action” program (not a set-aside) that deemed a bid from a minority firm as say 5% higher (so a minority bid at 100 can beat a non-minority bid at 104) could raise revenues. Note, however, that this optimal auction story only works when the minority firm loses the bid! In practice, even these sorts of schemes are money losers for the taxpayer.