In Pasadena, CA in the 1970s, a married mother-of-two in my neighborhood began a daycare service out of her house. What was interesting at the time was that not long after starting her business she was visited by local government officials. It seemed she needed a license if she wanted to continue operating.
License requirements are but one way that those with close ties to government secure for themselves a supposed advantage.
It didn’t register at the time (I was very young), but looking back, this was very odd. Parents are nothing if not overly careful when it comes to their children. Most would never put their child in the care of someone whom they didn’t trust, who was irresponsible, incompetent, or all three. As such, when it comes to daycare, the very idea of a license requirement reads as superfluous. But what was odd back in the 70s became increasingly common, and is very common today.
As William “Chip” Mellor and Dick Carpenter, respectively chairman/founding general counsel and director of strategic research at the essential Institute for Justice report in their recently released book Bottleneckers: Gaming the Government for Power and Private Profit, “Some criminals begin at a young age” by virtue of “conducting business without a license.” While in the 1950s roughly 5 percent of U.S. workers needed a “government-issued license to work,” the authors cite estimates that what used to be one in twenty is “almost one in three today.” Odds are if you start a business, you’re breaking some kind of licensure law based on your lack of “a government-issued permission slip” allowing you to work.
Mellor and Carpenter attach an adjective to those individuals and industry groups who use government to limit the entrance of new competition. They call them “bottleneckers,” and a bottlenecker is “a person who advocates for the creation or perpetuation of government regulation, particularly an occupational license, to restrict entry into his or her occupation, thereby accruing an economic advantage without providing a benefit to consumers.” License requirements are but one way that those with close ties to government secure for themselves a supposed advantage. And they do so in surprising ways.
The Swedenburgs vs. The Bottleneckers
Juanita Swedenburg and her husband retired from the Foreign Service in the 1970s, only to buy land in Middleburg, VA. They knew that no less than Thomas Jefferson had observed that Virginia’s soil had qualities similar to the dirt in France, and would thus likely be conducive to the grape growing necessary for winemaking. What became Swedenburg Estates Winery soon enough attracted a local, then national following.
The late-in-life entrepreneurs were eventually selling their wares nationally only for Swedenburg to one day realize she was breaking the law. Dating back to the Prohibition era, there were still rules on the books limiting cross-border trade in alcohol products. Though the laws were wrapped in sanctimony about protecting young people from alcohol, this bottleneck was more realistically about distributors throughout the U.S. protecting their turf. The laws meant that no upstart vintner in Middleburg could simply (and perhaps logically) approach a wine store owner or major retailer in Dallas (or anywhere else) with the goods. Instead, people like the Swedenburgs would have to find distributors possessing the right (or license) to sell wine in Dallas. Cosmetology licenses in Utah didn’t come cheap. They required “two thousand hours of training and the successful completion of a licensing test.”
To show the readers the power behind this bottleneck, consider what happened when the Swedenburgs filed a lawsuit in New York courts to secure their right to simply conduct business in the Empire State: the authors recall that “the state’s four largest liquor distributors, whose combined revenues exceeded $1 billion annually, intervened to help defend the bottleneck.” Again, this wasn’t about the health and safety of the eternal political prop that we call children; rather it was about the erection of barriers to trade. The authors cite a Virginia liquor distributor who admitted, presumably in a weak moment, that “People we represent all over the world might just decide they want to sell directly to big retailers – Wal-Mart, Sam’s Club, and Costco – without us.” This matters simply because distributors can enjoy mark-ups on alcohol in the 15-25 percent range.
For the Swedenburgs, their story comes with a happy ending care of the U.S. Supreme Court. Before striking down laws that “deprive [ed] citizens of their right to have access to the markets of other states on equal terms,” the Middleburg vintners faced the rather expensive prospect of being forced to purchase or erect warehouse space in New York in order to conduct business there. So while the Courts came out in favor of the Swedenburgs, Mellor and Carpenter provide the reader with a book full of unfortunate instances of trade restraint that comes care of bottleneckers possessing influence over the powers-that-be in government.
A Widespread Problem
Consider some of the examples within Bottleneckers:
- Families nowadays don’t just suffer potentially heavy taxation when a loved one dies. It turns out that for the longest time casket makers had amassed – and maintained - substantial influence over legislators such that sales of same could only take place courtesy of casket sellers who had to have “a funeral director’s license." Accession of license required attendance at an approved school that, according to Mellor and Carpenter, could take many months to complete, and at costs of $10-$12,000 dollars. Luckily the Supreme Court stepped in once again in 2013, and ruled that the monks of Saint Joseph Abbey (in a part of Louisiana rich with the wood that lends well to making these empty boxes) “had committed no sin in creating plain wood caskets and selling them to their Louisiana neighbors.”
- Justina Clayton grew up in desperate circumstances in war-torn Sierra Leone only to get the chance to immigrate to the United States. Married, with a family, and also working toward a college degree, Clayton got into the business of hair-braiding; the latter something she’d developed expertise in while still living in Sierra Leone. All was well, her family was able to attain a higher standard of living thanks to her entrepreneurialism, but then she received a letter telling her that “It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license.” Having advertised her services, the note asked her to “Please delete your ad, or you will be reported." The problem, as readers might expect by now, was that licenses in Utah didn’t come cheap. They required “two thousand hours of training and the successful completion of a licensing test.” Cost of classes: $18,000.
- In the state of New Mexico, while those with a bent for interior design were long able to offer their services, it turns out they were only legal so long as they didn’t self-refer as an “interior designer” without a license. The rules were much the same in normally non-interventionist Texas. Vickee Byrum built what became a national interior design business out of Austin, and “although she could do her job, she could not tell people what it was, as a result of the state’s titling laws.” Byrum eventually took legal action to fight “the restriction on her right to speak truthfully about what she did for a living.”
As readers can probably imagine by now, the stories of government getting in the way of what is a simple right to offer up one’s skills and services in return for compensation are many. Furthermore, many can no doubt imagine that while most of the restraints discussed in Bottleneckers are of the “crony” variety, sometimes government has been used with race very much in mind.
Competition forces us to constantly improve what we’re offering the public in order to remain in business.
In particular, the authors write about Montgomery, AL during the Martin Luther King/Rosa Parks era, and about how King and other Civil Rights activists instigated a bus boycott in order to force the end of hideous government-instituted rules requiring blacks to sit in the back of busses. In order to make the boycott effective, King et al convinced black cabdrivers to simulate bus pricing by charging boycotters in need of transportation to work the ten-cent bus fare. Unsurprisingly, Montgomery city officials intervened, only to require that they charge the normal 45 cent cab fare.
Considering taxis modernly, it was just announced last week that New York City might require Uber to allow tipping of its drivers. The authors would no doubt have a field day with this bit of faux government compassion. Though it will surely be billed as evidence that city officials are out to protect “exploited” Uber drivers, the not-so-opaque truth is that such an imposition is plainly a creation of the City’s powerful, and expensively licensed taxi lobby; one that’s seen the value of those licenses plummet thanks to the entrance of lower-priced transportation options like Uber. The proposed requirement is a naked attempt by city officials to "equalize" the traditional New York cabdriver with Uber drivers via through government decree. Thinking about Uber, one addition to the book the authors might have considered would have been a chapter on how an “app” downloaded onto smartphones has broken taxi cartels nationwide, and around the world. The latter in mind, do they foresee similar app-like disruptions of other bottlenecks?
Beyond the ridiculous nature of the bottlenecks, barriers invariably created by political pull, it’s hard to forget that one of the greatest attributes of free trade concerns the ability of individuals to choose whom they transact with. This right invariably fosters competition among many to serve our needs; the competition expanding the value of our paychecks. Conversely, restraints on trade benefit the very few at the expense of many, though even there it could be argued that licensure ultimately harms the protected too. Figure that competition forces us to constantly improve what we’re offering the public in order to remain in business, plus it can’t be forgotten that businesses frequently cluster with good reason: the bigger the number of competitors in a certain goods or services space, the bigger the market. If readers doubt this, they need only consider how rare it is that Burger King, McDonald’s, and Whataburger open up stores in locations bereft of other restaurants.
Bottlenecks and Service Quality
Interesting and sad at the same time about the myriad bottlenecks past and present is how ineffective they’ve ultimately proven to be. Though defended as evidence that government is looking out for our best interests, the authors cite a series of studies that invariably revealed an inconvenient truth that sanctimonious bottleneckers would rather not acknowledge: whether the studies were of television repair people, dentists, plumbers, optometrists, sanitarians, real estate agents, health professionals, veterinarians, physicians, teachers, and electricians, they all revealed “the same thing: that there was no improvement in quality from licensure.”
What’s important is that the studies shouldn’t in any way surprise us. The problem with licenses is that those who possess them likely have an enhanced ability to do harm to consumers thanks to a piece of paper that essentially lengthens the amount of time that they can foist their incompetence on the public. If investors invariably miss what will most serve the needs of the people, can we really believe that functionaries in government can do better?
But the main thing is that markets ultimately work. We quite simply don’t require licensing in order to enjoy abundant markets offering myriad goods and services simply because market forces on their own are quite able when it comes to saving consumers from the inept. Whom would we trust? Individuals in government in possession of limited information, or the marketplace itself; the latter representing the collective wisdom of everyone. After that, we can’t ignore the basic truth reminding us that even the profit-motivated regularly miss when it comes to deciding whom to direct capital toward. Though they’re global brands today, the list of wise investors who passed on Amazon, Facebook and Nike could fill many books. If investors invariably miss what will most serve the needs of the people, can we really believe that functionaries in government possess a greater ability to decide who can and can’t serve us?
All of which brings us back to parenting, and parenting advice. Toward book’s end, the authors tell the story of John “Bo” Rosemond, a North Carolina-based psychologist who had developed quite the following around the U.S. thanks to a popular parenting column run in over 200 newspapers. As anyone who is a parent knows, or better yet anyone who has been around parents knows in often nauseating detail, mothers and fathers are nothing if not enormously protective of their invariably “perfect,” “especially cute,” “borderline genius” offspring. As such, they’re often obnoxiously careful about the advice they abide when it comes to raising their future Harvard and Stanford grads. Despite this, Rosemond received a letter on May 7, 2013 which said he was violating Kentucky law by “operating as an unlicensed psychologist” in Kentucky. Yet Rosemond wasn’t operating in the Bluegrass State; in truth the Lexington Herald-Leader had run his parenting column. Ok, but come on! Parents, or at least the ones this writer knows, don’t need government’s help as it applies to protecting their well above average creations. More to the point, we generally don’t need the government’s help at all when it comes to protecting our interests in the marketplace.
Changing for the Better
And that’s the good news in what is ultimately an optimistic book. Things are changing. Mellor and Carpenter’s stories of government overreach generally have happy endings whereby the courts (thanks to Institute for Justice) have stepped in to defend the right of individuals to offer goods and services free of government meddling. Mentioned earlier was that one of the greatest aspects of free trade is that it means we have many more people – local and global – aggressively competing to serve us. But the best part of free trade is that it maximizes the possibility that we individuals will get to pursue the kind of work that most animates our individual talents. With the freedom to “import” from across the street or around the world, and with the freedom to serve others regardless of education or license, the odds of individuals doing that which elevates them the most increases.
Governments that are allowed to get in the way of individuals expressing their talents in seemingly smaller marketplaces invariably don’t stop there.
Almost as important, the policies are changing. The authors point to Florida Governor Rick Scott’s challenge directed at Florida legislators “to identify and repeal ‘job-killing regulations.’” Perhaps more surprisingly, they report that in a 2015 speech given at the Brookings Institution, then Vice President Joe Biden backed licensing reform “that makes it easier for workers to start businesses and begin careers.” Not to be outdone, in the same year, then President Obama, in a speech before the National Governors’ Association, lauded states that “are leading the way in removing unnecessary licensing requirements so workers can start filling up some of the jobs that they already have the skills for.” While what’s ridiculous seemingly can’t last forever, it’s worth pointing out that the Institute for Justice which Mellor and Carpenter are closely associated with has been instrumental in the changing of the conversation as it were.
As for weaknesses, or quibbles, there were a few. In their chapter on the funeral home/casket cartel, it was as though lefty economists George Akerlof and Robert Shiller briefly entered the authors’ bodies when they criticized funeral director schooling meant - gasp - "to persuade people to buy high-priced ones [caskets].” According to the authors, “Lavishly decorated display rooms were organized to make the most expensive caskets easily seen.” Ok, but all businesses generally pursue transactions that are high margin.
In their chapter on interior designers, they cite a Kenyon College study which revealed, among other things, that “in states where the interior design profession is regulated, consumers pay higher prices for design services.” But is there a correlation? It’s possible that states with the most stringent interior design regulations are also among the wealthier ones full of the kind of people who would regularly purchase those high-end services.
Other readers might struggle with the idea that protecting the right to hair-braid, build caskets and offer parental advice will move the proverbial economic growth needle. It’s a fair point - sometimes the bottlenecks discussed did seem small - but arguably one that misses the point. Governments that are allowed to get in the way of individuals expressing their talents in seemingly smaller marketplaces invariably don’t stop there. Bureaucracies are ever in search of an expanded purpose to our broad economic detriment, and that’s why Mellor and Carpenter have written such an important book, not to mention how important is the Institute for Justice itself. An economy is not a blob as much as it’s a collection of individuals. Economies grow the most when individuals are free. All of this in mind, Mellor, Carpenter and the Institute for Justice deserve our praise and gratitude for their tireless protection of the individuals who are the source of our abundant prosperity.
Republished from RealClearMarkets.