Thursday, May 24, 2012

Taxes Don't Kill Entrepreneurship, Crazy Licensing Rules Do

Matt Yglesias on the economic impact of unnecessary occupational licensing requirements (emphasis mine):
To hear politicians tell it, the No. 1 barrier to small-business growth is taxes…

It turns out that, when surveyed, small-business owners place relatively little weight on tax issues... They’re much more concerned with something Washington rarely talks about: the country’s spreading thicket of licensing rules.

To be charged a high tax rate on your small-business profits, you need to be turning a tidy profit in the first place. Anyone in that position would surely prefer lower taxes but is fundamentally ahead of the game. The main barrier to entrepreneurship is not that you’ll pay taxes if you succeed—it’s that you might not make any money at all.

Licensing requirements, by contrast, are by far the best statistical predictor of business-friendliness, for those subjected to them. And unlike taxes or environmental rules, these have spread like kudzu, with little scrutiny and often scant policy rationale.

A recent comprehensive survey of state licensing practices by the Institute for Justice* reveals little consistency or coherent purpose behind most licensing. Nevada*, Louisiana, Florida, and the District of Columbia, for example, all require aspiring interior designers to undergo 2,190 hours of training and apprenticeship and pass an exam before practicing. In the other 47 states, meanwhile, there’s no legal training requirement. My friends and co-workers living in D.C.’s Virginia and Maryland suburbs appear to get on fine with unlicensed interior decorators, and all across America, amateurs have decorated their own homes without imperiling public safety.

Almost all states—though not Alabama* or the anarchic United Kingdom—require barbers to be licensed, but the specific requirements seem to vary arbitrarily. New York barbers need 884 days of education and apprenticeship. Across the river in New Jersey, it’s 280. But getting one’s hair cut in New Jersey (to say nothing of England) is hardly a life-threatening gamble...

These rules correlate strongly with burdensomeness in part for the same reason that they seem so random—they’re often imposed specifically in order to create a burden and stifle competition. Once a licensing regime is in place, existing license holders have an incentive to lobby to raise the bar for entry...

But a wide range of these rules could be done away with entirely at basically no risk. Regulation is needed when it would make sense for a firm to deliberately engage in malfeasance. Dumping harmful toxins into the air is highly profitable unless it’s prohibited. Financiers can draw huge bonuses by taking on too much risk, only to wreck the economy later. In other occupations, though, shoddy work brings its own punishments. An interior decorator who can’t get recommendations from satisfied customers probably won’t remain an interior decorator for long.

In these cases, licensing rules raise the prices the rest of us pay, make it difficult for successful entrepreneurs to expand their businesses, and are often a major barrier to employment for the most vulnerable populations.
See this interactive map for how friendly each state is to small business. I am very pleased to see my state of Virginia gets an "A".

I am a licensed attorney in the state of Virginia.  While I understand that there is a reasonable rationale to requiring lawyers to have some type of license that shows minimum competence in their knowledge of the law, I do not understand why that should require three years of law school.  I feel I learned far more about practical application of the law in my bar review course than I did in law school.  Why not just allow anyone who is able to pass the bar to practice?  And why have 50 different state bars?  Does law in Maryland really operate that differently from the laws of Virginia?  Even if you pass the bar in a given state, you still won't know most of the laws there.  These licensing requirements do far more to limit competition and increase the wages of lawyers than they serve any rationale of public interest.

Below is a video from the Institute for Justice describing just how arbitrary and non-sensical many occupational licensing requirements are.  Read a full report on this here.

See more coverage on the economics of licensing issues on Marginal Revolution.

(HT Alex Tabarrok)

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