July 6th, 2020


Welcome to the modern economy, where increasingly, everything not compulsory is forbidden

Megan McArdle

By Megan McArdle Bloomberg View

Published May 19, 2016

When my mother retired from selling real estate, she toyed with the idea that she -- a talented cook who had long made her own croissants -- might make a little money on the side by selling homemade baked goods. It's the sort of business that people have started from time immemorial, letting them share what they love with someone willing to pay for it.

A quick investigation, however, revealed that the thing was impossible. You can't just bake a little stuff at home and sell it, for fear that you might poison people. If you want to poison people with your deliciously flaky homemade croissants, it must be done on a strictly ad-hoc volunteer basis.

Welcome to the modern economy, where increasingly, everything not compulsory is forbidden. We are hedged around with rules to protect us, to protect other people, to protect some theoretical victim who exists only in the minds of regulators and judges. And there's reason to worry that this red tape is getting wrapped so tight that it risks rendering us immobile.

I'm not talking about environmental regulations, or even the labor regulations that make it increasingly expensive and burdensome to employ people. Today I'm talking about occupational licensing, and the burden it places on people who want to build a career.

In 2012, the Institute for Justice -- a public-interest law firm advocating libertarian causes -- looked at the number of occupations that require licensing. Specifically, the institute looked at occupations typically filled by lower- and middle-income workers. These are not your airline pilots, your certified public accountants and your neurosurgeons; they're the nations interior decorators, auctioneers and florists. (Yes, you read that right: In at least one state, these occupations cannot be practiced without a license.)

Why, you might ask, is the state requiring a license to decorate an interior? Are customers at risk of death from collapsing piles of pillow shams? Must we fear that they will be blinded by the decorator's decision to pair fuchsia chiffon drapes with a chartreuse brocade sofa? Do we worry that without the threat of losing their license to keep them on the straight and narrow, these fly-by-night operators might be tempted into purchasing furniture from unlicensed auctioneers, and sourcing their floral arrangements from black-market florists?

Well, no. Mostly, these regulations benefit folks who are already plying the trade. They get helpful state legislators to protect them from competition by instituting tough licensing requirements. Their income goes up; the consumer's wallet suffers. And people who want to follow their dreams into the industry get shut out if they lack the time to study for the licensing exams, the capital to pay the licensing exam fees (which can run into the hundreds of dollars), or the social capital to know how to work the system.

I am not inexorably opposed to licensing certain occupations. (I am not really inexorably opposed to anything except National Socialism and recipes involving canned soup or condensed milk.) There are situations in which I can see real benefits to licensing -- when there's a huge information asymmetry between the buyer and the seller, and there's a large threat to consumers from having the job done badly. It's hard for me to know whether my neurosurgeon actually knows anything about what's inside a skull; if the doctor is "board certified," that's some comfort. Pilots probably also fall under that heading.

But even the case for licensing professionals like these is probably weaker than it first seems. If the entire District of Columbia regulatory apparatus vanished tomorrow, five years hence I would still feel pretty safe walking into Georgetown University Hospital, simply because the institution itself has a reputation to protect that would quickly disappear if it became known as a great place to die during routine procedures.

But most people get the shakes when you start talking about relaxing medical licensing, so let's leave that aside. How many of the professions on the Institute for Justice's list really require licensing to protect consumers from disaster?

Not really all that many. Sure, consumers may be at risk that they'll pay a lot of money to someone who does a bad job, and then have a hard time getting their money back. They might have to go around with an ugly haircut, or live with their imperfectly sanded floors. But as most of us can probably personally testify, licensing does not inoculate the industries against those dangers.

We can see just how little protection these laws provide by noting that in the 1950s, only about 5 percent of workers required an occupational license; now that number is closer to one in three. Yet few histories of the 1950s record epidemics of mass child death at the hands of unlicensed babysitters, or poisoning in the hands of unlicensed bartenders.

Moreover, there is still a great deal of variation from state to state. We free citizens of DC have managed to live surprisingly happy and healthy lives despite the fact that there is no government agency to protect us from predation by incompetent florists. This suggests that perhaps the folks of Louisiana could do the same.

What these licenses are really good at is excluding competition. And in an era when we're worried about mobility, that's a problem.

Much as I love Silicon Valley, its cultural dominance has disastrously corrupted our sense of what entrepreneurship is. Talking about starting your own business, and too many people think the measure of success is whether you can sell the thing for at least a couple of hundred million dollars. Most entrepreneurship is considerably more humble than that; it is individuals with some talent, or a willingness to work hard, who want to sell their services to the public. They may never employ another person; they may not even work full time themselves. And these people never buy gracious mansions, or endow scholarships, or get buildings named after them. They just make their own lives a little bit better, hopefully, in the process of doing the same for their customers. We are artificially stopping that process, in order to protect insiders who already have the job.

That's great for the insiders, who get above-average job stability and wages. But it's terrible for the folks who are outside. And the more industries we put under the control of such regimes, the more the outsiders will show up in our economic data as people permanently stuck at the bottom.

We can do better than that. The problem is that such regimes are politically very stable, because the benefits are highly concentrated, while the costs are diffuse. Every licensed interior designer is passionately interested in shutting out unlicensed competitors, but their potential customers probably have better things to do than phone up their senators to demand to know why they can't hire this chap they just met who has absolutely splendid taste in early Chippendale.

So how do we fight that dynamic? One approach is to do what the Reagan administration did with tax reform in the 1980s: take on all the special interests at once. Put all the occupational licenses on the chopping block at the same time, so that the politicians simply don't have enough bandwidth to listen to the wailing of all those lobbyists and trade associations. Some of the lobbyists will still get a hearing, and some of the special favors will still survive the process (just as the deduction for mortgage interest survived Reagan's tax reform). But most of them will meet a much-deserved, and long-overdue, death.

There are other alternatives, like creating a federal agency to make recommendations on occupational licensing, and giving the thumbs up only to regimes that meet strict criteria having to do with public safety.

But doing any of these things would require some visionary politician to make this a central plank of the policy platform. That would attract the ire of the one-third of folks currently enjoying licensing protection, without necessarily getting a corresponding benefit from the two-thirds who can enjoy lower prices, greater variety and the opportunity to start their own business if the mood strikes.

Short of that, it's going to be long, hard guerrilla warfare, of the sort that the Institute for Justice already does, taking on bad licensing regimes one at a time. Let's start with the interior decorators.


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Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of "The Up Side of Down." McArdle previously wrote for Newsweek-the Daily Beast, the Atlantic and the Economist.