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I want to stay for a moment on the particular topic of government overregulation sometimes hurting younger and smaller businesses more than they hurt bigger and more established ones. Here’s another excerpt from Wheelan:

The key to thinking like an economist is recognizing the trade-offs inherent to fiddling with markets. Regulation can disrupt the movement of capital and labor, raise the cost of goods and services, inhibit innovation, and otherwise shackle the economy. […] And that is just the regulation inspired by good intentions. At worst, regulation can become a powerful tool for self-interest as firms work the political system to their own benefit. After all, if you can’t beat your competitors, then why not have the government hobble them for you? University of Chicago economist George Stigler won the Nobel Prize in Economics in 1982 for his trenchant observation and supporting evidence that firms and professional associations often seek regulation as a way of advancing their own interests.

Consider a regulatory campaign that took place in my home state of Illinois. The state legislature was being pressured to enact more stringent licensing requirements for manicurists. Was this a grassroots lobbying campaign being waged by the victims of pedicures gone terribly awry? (One can just imagine them limping in pain up the capitol steps.) Not exactly. The lobbying was being done by the Illinois Cosmetology Association on behalf of established spas and salons that would rather not compete with a slew of immigrant upstarts. The number of nail salons grew 23 percent in just one year in the late 1990s, with discount salons offering manicures for as little as $6, compared to $25 in a full-service salon. Stricter licensing requirements—which almost always exempt existing service providers—would have limited this fierce competition by making it more expensive to open a new salon.

Milton Friedman has pointed out that the same thing happened on a wider scale in the 1930s. After Hitler came to power in 1933, large numbers of professionals fled Germany and Austria for the United States. In response, many professions erected barriers such as “good citizenship” requirements and language exams that had a tenuous connection to the quality of service provided. Friedman pointed out that the number of foreign-trained physicians licensed to practice in the United States in the five years after 1933 was the same as in the five years before—which would have been highly unlikely if licensing requirements existed only to screen out incompetent doctors but quite likely if the licensing requirements were used to ration the number of foreign doctors allowed into the profession.

He continues:

Consider [also] the case of teacher certification. Every state requires public school teachers to do or achieve certain things before becoming licensed. Most people consider that to be quite reasonable. In Illinois, the requirements for certification have risen steadily over time. Again, that seems reasonable given our strong emphasis on public school reform. But when one begins to scrutinize the politics of certification, things become murkier. The teachers’ unions, one of the most potent political forces in America, always support reforms that require more rigorous training and testing for teachers. Read the fine print, though. Almost without exception, these laws exempt current teachers from whatever new requirement is being imposed. In other words, individuals who would like to become teachers have to take additional classes or pass new exams; existing teachers do not. That doesn’t make much sense if certification laws are written for the benefit of students. If doing certain things is necessary in order to teach, then presumably anyone standing at the front of a classroom should have to do them.

Other aspects of certification law don’t make much sense either. Private school teachers, many of whom have decades of experience, cannot teach in public schools without jumping through assorted hoops (including student teaching) that are almost certainly unnecessary. Nor can university professors. When Albert Einstein arrived in Princeton, New Jersey, he was not legally qualified to teach high school physics.

The most striking (and frustrating) thing about all of this is that researchers have found that certification requirements have virtually no correlation with performance in the classroom whatsoever. The best evidence on this point (which is consistent with all other evidence that I’ve seen) comes from Los Angeles. When California passed a law in the late 1990s to reduce class size across the state, Los Angeles had to hire a huge number of new teachers, many of whom were uncertified. Los Angeles also collected classroom-level data on the performance of students assigned to any given teacher. A study done for the Hamilton Project, a public policy think tank, looked at the performance of 150,000 students over three years and came to two conclusions: (1) Good teachers matter. Students assigned to the best quarter of teachers ended up 10 percentile points ahead of students given the worst quarter of teachers (controlling for the students’ initial level of achievement); and (2) certification doesn’t matter. The study “found no statistically significant achievement differences between students assigned to certified teachers and students assigned to uncertified teachers.” The authors of the study recommend that states eliminate entry barriers that keep talented people from becoming public schoolteachers. Most states are doing the opposite.

Mr. Stigler would have argued that all of this is easy to explain. Just think about how the process benefits teachers, not students. Making it harder to become a teacher reduces the supply of new entrants into the profession, which is a good thing for those who are already there. Any barrier to entry looks attractive from the inside.

I have a personal interest in all kinds of occupational licensure (cases in which states require that individuals become licensed before practicing certain professions). My doctoral dissertation set out to explain a seemingly anomalous pattern in Illinois: The state requires barbers and manicurists to be licensed, but not electricians. A shoddy electrical job could burn down an entire neighborhood; a bad manicure or haircut seems relatively more benign. Yet the barbers and manicurists are the ones regulated by the state. The short explanation for the pattern is two words: interest groups. The best predictor of whether or not a profession is licensed in Illinois is the size and budget of its professional association. (Every profession is small relative to the state’s total population, so all of these groups have the [advantage of not being quite big enough to draw much public scrutiny]. The size and budget of the professional association reflects the extent to which members of the profession have organized to exploit it.) Remarkably, political organization is a better predictor of licensure than the danger members of the profession pose to the public (as measured by their liability premium). George Stigler was right: Groups seek to get themselves licensed.

Small, organized groups fly under the radar and prevail upon legislators to do things that do not necessarily make the rest of us better off. Economists, particularly those among the more free-market “Chicago school,” are sometimes perceived to be hostile toward government. It would be more accurate to describe them as skeptical. The broader the scope of government, the more room there is for special interests to carve out deals for themselves that have nothing to do with the legitimate functions of government.

Jerusalem Demsas gives the decisive rundown of the subject:

In Louisiana, it takes $1,485 and roughly 2,190 days to become an interior designer. In Washington, it takes $319 and 373 days to become a cosmetologist. The District of Columbia requires $740 to become an auctioneer, and a college degree to watch children for someone else. (Having and watching your own children continues to be an unlicensed affair.) In Kansas, you have to cough up $200 to work as a funeral attendant. And Maine requires $235 and 1,095 days to become a travel guide. Want to move states? That could mean you have to relicense, as if, say, cutting hair is materially different in Massachusetts than it is in New York.

This is absurd, and not just to me. Last week, New Hampshire Governor Chris Sununu announced that he would seek to “fully remove 34 different outdated licenses from state government” and eliminate “14 underutilized regulatory boards.” He also said that he would seek to make New Hampshire the next state to adopt universal recognition: “If you have a substantially similar license and are in good standing in another state, there’s no reason you shouldn’t have a license on Day One in New Hampshire.” He joins a number of governors in embracing universal recognition but is going one step further by pushing to fully delicense certain professions.

The usual argument in favor of strict and pervasive licensing is that the system helps ensure high standards for consumer welfare. Of course we can all think of several professions where some form of licensing makes sense: doctors and nurses, operators of dangerous machinery, handlers of hazardous materials. But the assumption that barriers to entry, no matter their form, will necessarily increase the quality of services provided is flawed.

The Institute for Justice looked at state licensing requirements for 102 low-income occupations across the country and found that 88 percent of those professions were unlicensed in at least one state, suggesting that the system is fairly arbitrary. It also found that a high licensing burden does not mean a high-risk occupation: “Workers in 71 occupations, including all the barbering and beauty occupations we study, face greater average burdens than entry-level emergency medical technicians.”

Nor does licensing necessarily translate to high standards for health and safety. A report by the Obama White House in 2015 concluded that “most research does not find that licensing improves quality or public health and safety” and that “stricter licensing was associated with quality improvements in only 2 out of the 12 studies reviewed.”

So the benefits of excessive licensing are unsubstantiated, theoretical, or minimal. But the drawbacks? Those are very real for workers and consumers alike.

Certifications and educational requirements come at a literal cost, both in the form of direct payments for the license or test fees and in the forgone wages during years of college or training. These costs shape the demographics of professional life. The composition of licensed occupations is significantly weighted toward those with a college degree. Many people are not fighting their way through a torrent of regulations; they’re simply giving up. One study of immigrant workers found that additional training significantly reduces the number of Vietnamese manicurists. (An average county could expect a 17.6 percent decline in Vietnamese manicurists per capita for every 100 extra hours of required training).

Onerous licensing costs don’t fall just on the workers who have to deal with the requirements but on us all in the form of higher prices and declining interstate migration. When people realize that moving states, even for a better job, means recertifying themselves for a profession they’ve already been practicing for years, they may decide to stay put in a suboptimal location. The 2015 White House analysis found that interstate-migration rates for workers in the most licensed occupations are significantly lower than those in the least licensed occupations. For within-state moves, the difference between licensed and non-licensed professions was much smaller.

Another study, published by the Federal Reserve Bank of Minneapolis, indicated that licensing does raise wages but reduces employment. Important to note is that—at least in the model proposed by the economists—the increased wages don’t fully compensate workers for licensing costs.

So why are licensing rules so pervasive? A recent American Economic Association working paper looked at what caused states to implement such requirements from 1870 to 2020 and found that trade associations played a key role: “We find that the formation of [state-level professional associations], which facilitate political organization, increases the probability of regulation by approximately 15 percentage points within the first five years after their establishment.”

Once these regulations are put in place, trade associations for the professionals who already paid the cover charge want to keep them in place. They want to keep the bar to entry high, because fewer newcomers means less competition means higher wages for their members. Even when some kind of bar makes sense—as with medicine—professional associations may shape requirements around benefits for their members rather than the public interest. The American Medical Association has lobbied against allowing nurse practitioners to expand their duties, and the Niskanen Center’s Robert Orr told me that “whenever states consider legislation to recognize residency training completed in other countries with comparably advanced medical systems, groups lobbying on behalf of physicians come out in force to ensure that this legislation never makes it into law.”

Or take a look at the American Society of Landscape Architects’ website, which implores members to fight against attacks on licensing. It argues that these rules are necessary to prevent “physical injury; property damage; and financial ruin.” The organization does not cite any research in support of this claim or at any point explain why in New Hampshire, for instance, a bachelor’s degree in environmental science, geography, engineering, architecture, or garden design, among others, qualifies you for a career in landscape architecture. These degrees are not interchangeable. If a four-year degree is more than a barrier to entry, one would expect significant overlap in the required coursework.

Occupational licensing springs from a permission-slip mentality that has infected American political institutions of all sorts. Permission slips to braid hair, permission slips to build affordable housing, permission slips to put solar panels on your roof … a country full of adults raising our hands waiting for someone to let us use the bathroom!

Although pro-licensing forces would have you believe that we must choose between permission-slip governance and peril, this is a false choice. The question is not whether a particular industry poses risks but what kind and how they can best be reduced. Our current licensing regime has not rid American society of risk; heavily licensed industries continue to present safety issues. Instead it has exacerbated labor shortages in crucial industries, encouraged artificially high prices, and created unreasonable barriers to employment and mobility.

I don’t need government workers to ensure that a restaurant is aesthetically pleasing by licensing interior designers; I need them to certify that the food is safe by regularly inspecting establishments. I don’t need the government to decide who’s qualified to work as a locksmith; I can ask my neighbors or check Yelp for advice. And although a test may be appropriate to guarantee that someone can operate a forklift, a college degree most certainly isn’t.

None of this amounts to an argument against government. Permission-slip governance reflects not the government’s strength but its weakness. A strong government well staffed with experts would write clear regulations and enforce them. The government we actually have imposes permission-slip requirements pushed by interest groups and industry, then relies on consumers to pursue private legal remedies if anything goes wrong. This is a legacy of Republican attacks on Big Government, which not only constrained the size of the state but diminished its efficacy. Those attacks did not really limit government intrusion, however, because people still want protection against health and safety risks. When the government can’t provide that well and quickly, it provides that poorly and slowly. Rethinking occupational licensing is a start, but the project of building effective government requires more than deregulation.

Whatever your opinion might be of government more broadly, one thing seems clear enough: These kinds of regulations aren’t really helping anybody, aside from the entrenched interests using them to protect themselves from competition. And of course, occupational licensing isn’t the only area where they try to do this, either. Pretty much anything firms can do to increase barriers to competition – any new rules or requirements they can come up with a plausible-sounding justification for, any new hoops they can force new competitors to have to jump through – they will aggressively push for, typically under the guise of wanting to be “socially conscious” and caring about the safety and well-being of their customers and workers. And I don’t want to completely demonize them here, because it’s not like none of them genuinely do care for the safety and well-being of their customers and workers. Plenty of them do. It’s just that this isn’t typically the main factor driving their actions (at least, not to the extent that they claim it is); more often, the biggest reason they push for these kinds of regulations is because they know they can absorb the costs of complying with them more easily than their smaller competitors can – meaning that eventually, more of those small competitors will be forced out of business by those prohibitive costs.

Here’s Alexander again:

I sometimes worry that people misunderstand the case against bureaucracy. People imagine it’s Big Business complaining about the regulations preventing them from steamrolling over everyone else. That hasn’t been my experience. Big Business – heck, Big Anything – loves bureaucracy. They can hire a team of clerks and secretaries and middle managers to fill out all the necessary forms, and the rest of the company can be on their merry way. It’s everyone else who suffers. The amateurs, the entrepreneurs, the hobbyists, the people doing something as a labor of love. Wal-Mart is going to keep selling groceries no matter how much paperwork and inspections it takes; the poor immigrant family with the backyard vegetable garden might not.

And Tyler Cowen affirms this with some real-world figures:

One recent study shows just how important regulation is in contributing to monopoly. Since 1970, increased regulation can explain 31% to 37% of the subsequent increase in market power.

Upon reflection, it is obvious that larger firms are better able to deal with regulatory burdens. They have more employees, bigger legal departments and are better suited to deal with governments. Startups are generally leaner and more nimble, but these aren’t necessarily advantages in dealing with Washington or state and local agencies. As regulatory costs rise, the comparative advantage shifts to the larger firms — exacerbating market power problems.

Once you become aware of this tendency, you start seeing it everywhere. Does your local electric power utility have too strong a monopoly, due to its legally favored advantage in supplying your house or business with electricity? Well, permitting reform would ease the path for constructing solar, wind and perhaps someday nuclear and geothermal alternatives. Fortunately, permitting reform is currently an issue before Congress, though it remains to be seen what will happen.

Do you think your hair stylist or athletic trainer is charging too much? Well, relaxing or eliminating occupational licensure in those areas is a policy recommended by most economists, on a bipartisan basis, and it would increase competition and reduce prices. Once again, deregulation would limit market power.

[…]

As you might expect, this logic is no mystery to the larger firms, which are typically politically well-connected. The result is that they push for more government regulations as a kind of entry barrier. According to researcher Shikhar Singla, regulation costs an average of $9,093 per employee for a typical small firm, compared to $5,246 for a large firm. It is no surprise that, according to the data, smaller firms invest relatively less in more highly regulated areas.

Based on a study of regulatory comments, Singla also found that large firms oppose regulation in general, but push for regulation when such rules and laws damage the interests of smaller firms. Singla also finds that regulatory costs have increased significantly since the late 1990s.

Protectionism and tariffs are other examples of how market barriers can increase market concentration by limiting competition and privileging domestic producers. From this perspective, it is unfortunate that both of major political parties in the US have moved toward mercantilist ideas and trade restrictions.

Not everything can or should be deregulated, of course. Carbon emissions and bank risk-taking are two areas where current regulations might be improved rather than eliminated. But if the concern is market power, and diminished living standards for the working class, then deregulation should be near the top of the political agenda.

Adding to this, Alexander points out that naturally, some level of regulation is necessary and important to ensure that these small-time operations are able to even get a foothold in the market in the first place; if there were no regulation at all, customers would be unable to trust in the safety and quality of the products they bought from smaller, less familiar businesses, so they would tend to avoid those businesses altogether:

In the absence of government regulation, you would have to trust corporate self-interest to regulate quality. And to some degree you can do that. Wal-Mart and Target are both big enough and important enough that if they sold tainted products, it would make it into the newspaper, there would be a big outcry, and they would be forced to stop. One could feel quite safe shopping at Wal-Mart.

But suppose on the way to Wal-Mart, you see a random mom-and-pop store that looks interesting. What do you know about its safety standards? Nothing. If they sold tainted or defective products, it would be unlikely to make the news; if it were a small enough store, it might not even make the Internet. Although you expect the CEO of Wal-Mart to be a reasonable man who understands his own self-interest and who would enforce strict safety standards, you have no idea whether the owner of the mom-and-pop store is stupid, lazy, or just assumes (with some justification) that no one will ever notice his misdeeds. So you avoid the unknown quantity and head to Wal-Mart, which you know is safe.

Repeated across a million people in a thousand cities, big businesses get bigger and small businesses get unsustainable.

Clearly, then, there’s a balance to be struck here. We do want some level of regulation. We just have to be mindful that it’s always possible to have too much of a good thing; if the level of regulation becomes too burdensome for smaller businesses to comply with, they’ll ultimately be forced out of the market altogether, and the only ones left will be the monopolistic mega-corporations – an outcome that I don’t think anyone (aside from the mega-corporations themselves) particularly wants.

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