Occupational Licensing Versus the American Dream

Imagine: You’re one of the 6.1 million unemployed Americans. Try as you might, you can’t find a job. But you’ve always been great at something—cutting hair, giving manicures, or maybe hanging drywall—so great, in fact, that you reckon you could actually make some real money doing it. What’s the first thing you do?

If your answer was something other than, “Find out how to obtain the state’s permission,” you’re in for a surprise.

A shocking amount of occupations require workers to seek permission from the government before they can legally practice. This includes not just the obvious, like doctors and lawyers, whose services, if rendered inadequately, might do consumers life-threatening harm, but also barbers, auctioneers, locksmiths, and interior designers.

This phenomenon is known as occupational licensing. State governments set up barriers to entry for certain occupations, ostensibly to the benefit and protection of consumers. They range from the onerous—years of education and thousands of dollars in fees—to trivialities like registering in a government database. At their most extreme, such regulations make work without a permit illegal.

As the United States transitioned from a manufacturing to a service-based economy, occupational licensing filled the “rules void” left by the ebb of labor unions. In the past six decades, the share of jobs requiring some form of license has soared, going from five percent in the 1950s to around 30 percent today. Put another way: over a quarter of today’s workforce requires government permission to earn a living.

There’s little proof that licensing does what it’s supposed to. For one, the potential impact to public safety seems wholly incidental to the burden of compliance for a given job. In most states, it takes 12 times as long to become a licensed barber as an EMT. In a 2015 Brookings Institution paper, University of Minnesota Professor Morris Kleiner, who has written extensively on the subject, states: “…economic studies have demonstrated far more cases where occupational licensing has reduced employment and increased prices and wages of licensed workers than where it has improved the quality and safety of services.”

Ironically, the presence of strict licensing regulations also seems to encourage consumers to seek lower-quality services—sometimes at great personal risk. When prices are high or labor is scarce, consumers take a DIY approach or forego services entirely. A 1981 study on the effects of occupational licensing found evidence for this in the form of a negative correlation between electricians per capita and accidental electrocutions.

A less morbid, but perhaps more salient, observation is that licensing often creates burdens that are unequally borne. Licensing requirements make it difficult for immigrants to work. In many states, anyone with a criminal conviction can be outright denied one, regardless of the conviction’s relevance to their aspirations. These policies, coupled with the potential costs of money and time, can make it harder for poorer people, in particular, to find work.

But surely, you might say, there must be some benefit to licensing. And technically, you’d be right.

Excessive licensing requirements are a huge boon to licensed workers. They restrict the supply of available labor in an occupation, limiting competition and in some cases raising wages. There’s little doubt that occupational licensing, often the result of industry lobbying, functions mainly as a form of protectionism. A 1975 Department of Labor study found a positive correlation between the rates of unemployment and failures on licensing exams.

Yet even licensed workers can’t escape the insanity unscathed. Because licenses don’t transfer from state to state; workers whose livelihoods depend on having a license face limited mobility, which ultimately hurts their earning potential.

Though licensure reform is typically thought of as a libertarian fascination—the libertarian-leaning law firm Institute for Justice literally owns occupationallicensing.com—it also has the attention of more mainstream political thinkers. The Obama Administration released a report in 2015 outlining suggestions on how the states might ease the burden of occupational licensing, and in January of this year, Labor Secretary Alexander Acosta made a similar call for reform.

Thankfully, there seems to be some real momentum on this issue. According to the Institute for Justice, 15 states have reformed licensing laws to “make it easier for ex-offenders to work in state-licensed fields” since 2015. Louisiana and Nebraska both made some big changes this year as well. That’s a great start, but there’s still much work to be done.

This article originally appeared on Merion West

Americans Aren’t the Ones Who Should Be Mad about Chinese “Dumping”

One of the few issues upon which Clinton and Trump seemed capable of agreement in the second debate was that cheap steel from China was hurting America. Given how alarming Sunday’s exhibition was, it might have been a nice respite. That is, if they had not both been so wrong.

China produces about as much steel as the rest of the world combined. This is due partly to cheap labor and strong domestic demand, but mostly to heavy government subsidies. Now that China’s economic growth has slowed, markets are awash with cheap Chinese steel.  This has led China’s trading partners to accuse China of “dumping” steel.

Dumping, for those not familiar with the term, refers to the act of selling a good in a foreign market for less than the cost of production. It’s against WTO rules and is penalized by tariffs implemented by importing nations. The United States recently levied a 522% tariff on Chinese cold-rolled steel, which is used for construction and to make shipping containers and cars.

The general consensus, dutifully embraced by both candidates, is that dumping is bad for the importing country and an act of aggression by the exporter. But if you think about it, this is pretty absurd.

First of all, countries don’t trade with each other. The United States doesn’t buy wine from Portugal; American companies buy wine from Portuguese companies. We’re not “getting killed” on bad trade deals as Donald Trump fears; there isn’t even a “we” in the sense that he suggests. There are only people, and people don’t habitually engage in voluntary exchanges at a loss. It should be obvious that importers (American companies, in this instance) are the ones benefiting from cheap steel from China. That’s why they prefer to buy it over more expensive steel made domestically.

It’s true that China’s not a market economy in the same way that America is; their government owns and subsidizes far more than ours. That might sound like an advantage for the Chinese, but it’s really not.

Chinese producers are able to sell steel for less because of large subsidies from their government. The people who benefit from this are the people buying and selling steel–importers and Chinese steel companies, respectively. The people who lose are non-competitive firms and those paying for the subsidies…which would be the Chinese taxpayers.

Subsidized exports are really a transfer of wealth from within a country to without. Importing parties are able to be more profitable and productive, which is precisely why Donald Trump builds with Chinese steel and why we’re all better for it. Yes, it hurts American steel companies, but whatever resources are devoted to domestic steel production can be diverted to other areas with better returns.

Conversely, import tariffs are paid by the importer, and ultimately the consumer. In other words, in order to protect us (read: domestic steel companies) from what amounts to discounted steel, our government taxes the hell out of it so that we end up paying more. Saying that this helps our economy is like claiming that rolling up your sleeves makes your arms warmer. Remember that any jobs or income generated by such tariffs comes directly at the expense of American consumers who are being forced to forgo savings or purchases they would have made with the money they saved on steel.

If millions of tons of steel fell from the sky would we draft legislation to tax the heavens? No, we’d take the free steel and build things with it. If China wants to take money out of its citizens’ pockets and use it to make steel for the rest of the world, Chinese citizens should be outraged. But why should the rest of us complain? When someone gives you a gift, the correct response is: “thank you.”

This Essay is Not FDA Approved

Last Thursday, Nicholas Kristof penned an article for the New York Times entitled “Drugs, Greed and a Dead Boy.” The piece provides a dismal account of an industry rife with predatory marketing schemes, ineffective treatments, and captained by covetous sociopaths who care more about making money than they do about public health and are prepared to circumvent FDA regulations in order to do so. Whatever your convictions, Kristof makes a compelling case for regulation based on historical evidence. It’s not until the last paragraph that he writes something that makes me pause:

So if you agree with today’s politicians thundering against regulation, or if you think that pharmaceutical companies should enjoy a free speech right to peddle drugs, then talk to a family fighting opiate addiction. Or a parent of a thalidomide child. Or consult the grieving family of Andrew Francesco.

I certainly have no problem admitting that the pharmaceutical industry, much like any industry, doesn’t always act in the best interest of the public. Nor do I have a problem accepting that parents are probably over-medicating their children (and likely themselves) in today’s hypersensitive world. What I take issue with is his thoughtless, implicit dismissal of regulation reform advocates who are seeking to improve a poorly designed system.

I make a point of not agreeing with any thundering politicians, however, as someone who finds fault with the regulatory structure of the FDA, I feel that the argument for reform warrants some defense. The following argument isn’t exactly original–I’ve heard it made by others before, probably better than I am going to make it now–but it is a concept worth defending.

The first thing to realize is that nobody is arguing against regulation (well, some might be, but I’m not) or a vetting process for new drugs. I would find it hard to believe that anyone seriously believes drugs should be less safe for consumers and would fight to craft policies that reflect such a notion. The real point of contention here is who should be doing the regulating, and how.

Kristof appears to be falling victim to a false syllogism: The FDA is a regulator; people want to get rid of the FDA; therefore, people want to get rid of regulation. Not so. What those who challenge the FDA process are protesting is a monopoly on regulation that invariably leads to an inefficient process by which drugs are taken to market, and thus eliminates less human suffering than would otherwise be possible.

To understand why this happens, you have to understand the unique predicament of an organization like the FDA and what kinds of incentives that predicament creates.

There are basically two ways in which the FDA can be said to be performing its function optimally (granted, this is probably an oversimplification). Scenario number one–it takes a good drug to market quickly and efficiently after ensuring that the product is safe for consumption. Scenario number two–it stops a bad drug from making it to market after determining that it is not fit for human consumption. When either of these scenarios are realized, that’s great, and we are all better off for it.

Similarly, there are two ways in which the FDA can be said to be underperforming. In the first, it takes a bad drug to market and risks the lives of consumers. In the second, it engages in an unduly lengthy regulatory process that delays the emergence of new drugs, also risking consumers’ lives. This is where things get tricky. While both outcomes result in human loss and are undesirable, one of these is far less appealing to the FDA.

Moving bad drugs to market is a sure way to shake faith in the regulatory body and create a panic. More importantly, the negative effects of such a screw-up are overt and blame is easily assigned to the organization responsible.

Delaying good drugs due to overly cautious behaviour, although potentially just as deadly, is not nearly as conspicuous. It’s much harder to measure the patients that hypothetically would not have died had the regulatory process been more efficient than the patients that did die due to bad drugs, but that doesn’t mean the effects are any less real. For example, if drug x saves 1,000 lives per year, and spends 4 years tied up in the regulatory process when it could have passed in 2, one could very easily make the argument that 2,000 lives were lost to this inefficiency.

Given the choice between the two, it’s not hard to understand why the FDA would opt to take the path that obfuscates the negative consequences of their decision making. At least in some cases, this must lead to an overly stringent approval process for good drugs. Because they have a monopoly on the regulatory process, there is no one to pressure the system to be more efficient.

A little competition might go a long way in solving these problems. Private regulatory companies might sound strange, but the idea is actually quite logical. This might work something like this:

  1. Drug companies develop drugs and submit them to a regulatory company for quality assurance: a service for which they pay.
  2. The regulatory company tests the drug to its standards by its processes. If it doesn’t pass, the story ends here.
  3. If it does pass, however, the regulatory company approves it and affixes their logo to the medication, much like the FDA does now.
  4. The drug goes to market where consumers use the logos as signals of quality. The more they trust the logo, the more they trust the drug. Logos gain trust by screening accurately and lose clout by rushing drugs to market with bad consequences.
  5. The most trusted logos are in higher demand by people making (and consuming) good drugs, because they want consumers to trust that they’re safe. This in turn re-enforces the incentive to provide strict testing.
  6. Furthermore, drug companies would be willing to pay a premium to have their testing done quickly as well as accurately. This remedies the inherent flaw in the FDA’s design: the zero-sum game between accuracy and timeliness. From the consumer side of things, that means more lives saved/improved.

This solution would do a lot to align incentives within the process of getting safe drugs on shelves, so to speak. If the point of the FDA is ultimately to save lives and improve the quality of medicine–and we should presume it to be such–then why not create a system which could save and improve more lives? If it can be done by private companies, so much the better. All this is not to say that the FDA should be dismantled, but if we are able to admit that allowing for a competitive space can improve services to consumers, then what might be the benefit of having the FDA remain in such a position?

Perhaps it could serve in some overseer capacity–ensuring that no fraud or collusion occurs. Again, the point is not to eliminate the FDA or regulation; the point is to improve the regulatory process and save lives.

There is a semantic problem with Kristof’s (and many others’) understanding of regulation in that he understands it to be inherently and exclusively a purview of the government. Evidently, he has never paused while using Yelp, Uber, or Rotten Tomatoes to consider that these too are forms of regulation that let us know when something is fit for consumption.

Kristof and other “pro-regulators” usually understand the negative impacts of monopolies–inefficiency, unresponsiveness to consumers–and call for regulations to break them up. Competition is the way things get better–no industry is immune to this reality. Ironically, people who want to reform drug regulation for the same reason are met with staunch criticism by regulatory enthusiasts.

Once again, semantics plays a part in obscuring the fact that having a singular body in an industry is a monopoly, even if that body is a government entity. Monopolies are for private corporations; regulations are for governments. Again, not so.