The licensing of occupations—a very forceful intervention in markets—is pervasive and growing in modern economies. Yet the attention paid to it by economists and economics textbooks has been small. Highly welcome, therefore, has been the extensive and intensive work on this subject by Morris Kleiner. Kleiner’s latest book, titled Stages of Occupational Regulation: Analysis of Case Studies (2013), explores the progression of occupational regulation, from mere registration to certification to outright licensing—three distinct stages. Kleiner carefully selects for his analysis a series of occupations representing the stages of regulation, devoting a chapter to each occupation. He uses a variety of statistical approaches to tease out, from numerous databases, what the impact of mild to heavy regulation on labor markets appears to be.
Kleiner’s work leads him to call for a pervasive review of occupational regulation in the United States, with a view towards replacing occupational licensure, which introduces the most inefficiency and welfare loss, with mere certification of occupations. That recommendation gains plausibility in an age where cheap computation and data mining makes it possible to protect consumers from low-quality and possibly dangerous services by providing robust, user-friendly information on the quality of services delivered by competing occupations, such as doctors and nurse practitioners.
You can access the full article here. I may need to add Kleiner’s book to my list of fun-things-to-read-when-I-get-a-chance.
Occupational licensing is an interesting phenomenon. Governments (state and local) create certification boards (typically made up of industry participants) that set licensing standards and qualifications for persons wanting to work in those occupations. Ostensibly, these restrictions are intended to correct for the information asymmetry between consumers and professionals, where consumers may not be able to assess the quality (or ability) of the professional independently before hiring them. Think medical associations for doctors and bar associations for lawyers at the state level, or licensing for plumbers and electricians at the local level.
But occupational licensing also serves as a way of restricting competition in a profession by limiting the number of people who are able to provide the goods or services under the board’s purview. And as we know, reducing supply in the market increases the prices consumers pay (and the professionals receive). For instance, a medical board may limit the number of doctors who will be “board certified” in a given year. A private investigator licensing board may set standards to reduce the number of licensed (and legal) PIs. Or a state dental board might prohibit non-dentists from performing teeth-whitening services in competition with dentists.
That last one is the basis of a case coming before the US Supreme Court next week. The US Federal Trade Commission (FTC) brought antitrust charges against the North Carolina Board of Dental Examiners for conspiring to restrain competition in the teeth whitening business. The Dental Examiners board asserts they are exempted from antitrust law under the “state action doctrine.” The Supreme Court is being asked to determine if–and under what circumstances–state occupational licensing boards are exempt from antitrust laws. Eric Fraser offers a nice preview of the arguments in the case over on SCOTUSblog.
This could be an important case for licensing boards across the country. It should be fun to watch and interesting to see how the Court delineates the lines of necessary government oversight and the degree to which an overwhelming public interest needs to be justified.
The Supreme Court of the United States (SCOTUS) surprised even veteran court watchers this week by refusing to hear a set of cases involving state-level bans (and reversals of those bans) of same-sex marriage. One lawyer offers a pretty convincing argument on why the Court decided not to weigh in on an issue that has such important consequences for large groups of people (and employers). At its heart, it’s all about individual justices’ incentives and the cost-benefit calculation justices had to make in the face of an uncertain outcome:
So why is the Roberts Court, not normally shy in jumping into controversial issues such as affirmative action or campaign finance law, ducking this one?
The answer may lie in the incentives facing the individual Justices rather than the approach of the Court as a whole. When you look at the choices available from the three different perspectives on this issue – liberals, swing votes, and conservatives – it becomes much easier to see why there weren’t the four votes required (out of the nine Justices) to hear this issue now. With no camp assured of victory if the court decided to hear the cases, the uncertainty may hold the key to the Justices’ thinking.
You can read the full blog post with the details of the explanation here. Regardless your position on the issue, this analysis of the justices’ likely reasoning in passing on the opportunity to settle the issue (at least for a period of time) illustrates how understanding individuals’ incentives helps to explain the expected–and not-so-expected–outcomes that shape the laws and institutions that help structure society at-large.
There’s what looks to be an interesting workshop next month (10 September) in Belgium on the organization and behavior of cartels in different legal environments. From the workshop webpage:
Economists and policy analysts know very little about the conditions under which cartels are formed in different legal environments, how they behave against outsiders, how they behave against deviating insiders, and how they react to changes in the economic environment. This event will provide a space to discuss these aspects, based on two projects funded by SEEK.
One of the projects studies cartel organization – a topic on which there is little information to date – through the lens of legal cartels. While such cartels did not have to fear detection and prosecution, they faced the same internal organizational challenges as illegal cartels. The focus is on comparing empirically, in specific sectors, the organizational forms of legal cartels in countries with different legal regimes. The project has collected data on Austrian, Finnish, Norwegian, Swedish and American legal cartels.
The other project has developed new theoretical insight into the anatomy of hard-core cartels and combined it with a rich data set on the recent German cement cartel. The results of this project will be presented to the audience attending the event. The private data set comprises about 340.000 market transactions from 36 customers of German cement producers and encompasses most of the period during which the cartel was functioning, as well as a period after the collapse of the cartel.
The conference is jointly sponsored by Bruegel and SEEK. For more details on speakers or if you’re close enough to be able to attend, check out the website for details.
When I taught my first agricultural economics class, it happened to be at the peak of the 1998-99 hog industry crisis. I told my students, “Your parents don’t have a Constitutional right to raise hogs.” It was true then, is now, and should continue to be. But largely not for the reasons opponents of Missouri Amendment 1 claim.
You see, a Constitutional right implies an obligation, either positive or negative or both, on the government. For instance, the right to vote requires the government to make it possible for every adult to vote (a positive obligation) and prohibits the government from doing things that impede persons’ rights to vote (a negative obligation). The US Constitution’s 1st Amendment rights to religious freedom, free speech, etc., and the 2nd Amendment are expressed in the Constitution as negative obligations; e.g., “Congress shall make no law…,” or “the right of the people to keep and bear arms shall not be infringed.” But ultimately, the role of the Constitution is to put limits on what the government can, can’t–and must–do.
The text of Constitutional Amendment 1.
CONSTITUTIONAL AMENDMENT #1 Section 35. That agriculture which provides food, energy, health benefits, and security is the foundation and stabilizing force of Missouri’s economy. To protect this vital sector of Missouri’s economy, the right of farmers and ranchers to engage in farming and ranching practices shall be forever guaranteed in this state, subject to duly authorized powers, if any, conferred by article VI of the Constitution of Missouri. – See more at: http://www.mofb.org/KeepMissouriFarming.aspx#sthash.fca5gKo6.dpuf
The first problem with Missouri Amendment 1 is that it is not clear what obligations it imposes on the government, whether positive or negative. Opponents have argued, with rather disingenuous scare tactics, that the Amendment creates a negative obligation that would prohibit the State from regulating the agriculture industry in any way, leaving agricultural producers with free rein to abuse the animals they produce and the land and watersheds they work. Not only is that a grossly unfair and inaccurate characterization of the agriculture industry, it is also clearly not true. As with any other Constitutional right, the ability to exercise those rights is balanced against the public welfare interests of the State. Yes, the standard is higher in considering what limits are appropriate, but the State clearly would still have a role in prohibiting the Armageddon-like outcomes opponents warn against.
What has not been asked is what positive obligations Amendment 1 creates. If farmers and ranchers have a Constitutional right to engage in farming and ranching practices, what is the obligation of the State to affirmatively protect that right? Does it mean the State must further subsidize farmers and the farm industry, which is already one of the most heavily subsidized industries in the US? Does it mean the State must guarantee that farmers can continue to be farmers no matter what economic conditions might dictate? Does it mean contracts to foreclose on farming operations would become unconstitutional? Is it an individual right entitling each specific farmer to be a farmer forever, or is it a group right that protects farming as a productive operation. The language of the amendment itself provides no clear answer.
And what would be the consequences of the kinds of protections possible under the proposed amendment? Opponents have focused on anti-corporate bigotry and xenophobic scare tactics. However, more meaningful questions could be raised about the consequences for innovation in agricultural practices that improve food quality and supply but that might disrupt or challenge current practices and threaten to displace some producers. Or about the incentive for the agriculture industry to be innovative in its environmental practices and technologies—not in the sense that waterways would become toxic, like opponents suggest, but that there may be less incentive to developing new technologies and practices that do an even better job than current practices. Or about the incentive of the agriculture industry—and individual producers—to be sensitive and responsive to neighbors’ (and voters’) interests and concerns.
Finally, does it make sense to single out one profession or one sector of the economy as being worthy of Constitutional protection? Especially when there are already laws that provide the kinds of protections proponents of Amendment 1 want? Why is farming special compared to nursing, teaching, childcare, or any number of “socially valuable” industries (as if other professions are any less meritorious)? Proponents of Amendment 1 will rightly argue that agriculture has been under attack by special interest groups that take advantage of a voting public that lives in romanticized ignorance of the industry that produces their beloved burgers and bacon. However, the solution to that problem is not to further insulate the industry from the voting public, but to be more vigilant in educating the public and State officials in the face of anti-farming interests.
The Missouri Constitution is not the place for industries or professions to hide from competitive pressures—whether economic or ideological.
Last week I posted at Truth On The Market about an attempt by some Missouri legislators and the Missouri Auto Dealers Association to sneak by language in an unrelated bill to effectively ban Tesla Motors from selling their cars directly to Missouri consumers. Never mind that Tesla already invested in a service facility in St. Louis and claims to have plans for one in Kansas City, creating at least a couple dozen jobs or so. Using the standard Missouri legislature economic multiplier, and that’s got to be worth at least another 1,000 jobs created! (just kidding)
In my post, I wrote that the auto dealers’ ploy “is classic rent-seeking regulation at its finest”. A reporter from Law360.com asked me what I meant by rent-seeking. There are various definitions, but it all boils down to seeking or taking advantage of political privilege or regulatory favoritism to generate extra profits (typically at the expense of disadvantaged competitors or consumers). In this case, it’s seeking regulations that would eliminate competition from automakers selling directly to consumers, thereby forcing the automakers to use independent dealers who could then take their cut from the sale of the vehicle…and, in all likelihood, increase the cost of new cars (and therefore, used cars as well) to consumers.
But the costs of rent-seeking go beyond just the increased cost to consumers due to reduced competition. It has a much more pernicious effect. When policy makers (legislators or bureaucrats) dole out rent-creating laws and regulations, it creates even more demand from other companies or industries that want their own political perks, tax breaks, subsidies, and other such regulatory favoritism. In other words, it creates a whole culture of crony capitalism–where policy makers sell and businesses buy laws and regulations that tilt the capitalist playing field to benefit the favorites, rather than letting market forces sort out the most efficient, most productive, and most desired by consumers.
As political humorist P.J. O’Rourke quipped, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”
Regarding Tesla, my colleague from the MU Law School and fellow TOTM blogger, Thom Lambert, and I published an op-ed in the Kansas City Star this week calling out the Republican-dominated Missouri legislature to live up to their claims to support innovation and entrepreneurship in the state and to put a stop to the rent-seeking crony capitalism. Check it out.
I’m no fan of the industrial favoritism Tesla has received via it’s government bailout or consumer subsidies (like so many other alternate-energy car makers). But two wrongs don’t make a right. And while Tesla Motors is the immediate target of this ban, the ban is really on a business model that threatens traditional auto dealership networks. As we explain in the letter, shutting down consumer access to innovative automotive products as a protectionist measure for brick-and-mortar dealerships is simply bad policy.
Head over to TOTM to see Geoff’s post and to read the full letter.
