Licensing Is Bullshit
Most people are against special interest laws — laws that are designed to benefit a special interest group at the expense of society — in the abstract. But they love special interest laws in the concrete, that is, most particular special interest laws are popular. That’s because voters don’t recognize them for what they are, mostly because average voters are so gullible (see https://fakenous.net/?p=1604) as to swallow whatever BS the special interest group feeds them.
Case in point: licensing laws. These are laws restricting who may legally sell a good or service. You could be denied permission to sell on the grounds that you are not good enough (not educated enough, etc.), or that your community does not ‘need’ another provider. The standards are set by ‘the experts’ — who happen to be current industry insiders. Coincidentally, these experts tend to be strongly in favor of licensing restrictions, and they tend to have a very conservative view of how many providers society needs. If you don’t see any problem with this, you should probably look up “conflict of interests” in the dictionary, because you must not have ever heard of this concept.
There are many licensed industries; not just doctors and lawyers, but even hair stylists, cosmetologists, and florists are licensed in some states. Now, why might this be?
Actual Explanation
The actual purpose of licensing laws is to protect the profits of current industry insiders by reducing competition. More specifically, they are designed to place onerous burdens on anyone trying to enter the industry, which reduces the number of people who will do so, and drives up the prices that anyone who does so must charge. When licensing laws are first adopted, the existing providers are commonly grandfathered in, so the burdens only apply to new entrants. After that first generation, all members of the industry will have already borne the costs; they will therefore want to make sure that anyone else who enters has to bear the same costs, or more.
If you doubt that this is the actual purpose of licensing laws, ask yourself
Why do we exclude thousands of immigrant doctors from practicing in the U.S., including ones who have many years of experience treating patients in other countries? Why must they spend thousands of dollars to apply to a residency program, and then frequently get denied? (https://www.vox.com/2020/4/28/21238492/coronavirus-foreign-doctors-immigration-medical-licensing)
Why do you have to get a 4-year bachelor’s degree before going to medical school?
Why do you have to go through a multi-year residency program after medical school? And why do we restrict the number of slots in such programs?
Why, in most states, can’t you take the bar exam without first going to law school?
Why do you need a license to arrange flowers?
There is a very simple answer to all these questions: the purpose is to reduce competition and raise prices. By the way, there is no debate in economics about this effect — everyone agrees that licensing restrictions raise prices.
Quality
To sell this kind of special interest law to the public, industry insiders claim that they support the laws out of altruistic concern for the public — they just don’t want the poor consumers to have to experience the low quality that would result if more people were allowed to compete with them. The theory is that licensing restrictions eliminate low-skill providers (low-skill doctors, low-skill lawyers, low-skill interior decorators, etc.).
Problem: Competition generally increases quality, reduces prices, and leads to better satisfaction for consumers. That’s kind of the key point about how the capitalist system is supposed to work. The main thing that’s actually going to make a service provider strive to do a good job and satisfy customers is the fear of losing business to competitors. If you drastically cut down the number of providers, so that there is a chronic shortage of the product or service, then sellers can stay in business even with low-quality, overpriced, slow, and generally crappy service. Thus, it’s entirely plausible that licensing laws may reduce quality.
My favorite illustration of the difference between licensed and unlicensed professions: Taxicabs vs. Uber. Taxis are the licensed version; Uber, Lyft, & other ride-sharing services are the unlicensed version of the same service. Is there anyone who thinks that Taxis are better? They’re twice as expensive, much slower, and much lower quality. If the special interest group (the taxi industry) had its way, it would have banned Uber, or forced Uber drivers to get licenses, all while claiming concern for protecting consumers by upholding the high quality of taxi services. If they succeeded, most Americans would buy their arguments, too, because no one would have had a chance to see how much better Uber would be.
That’s anecdotal. But many studies have been done of the effects of licensing laws. Some find a slight increase in quality; others find a decrease in quality; and more find no effect on quality. (The effect of excluding some low-quality providers approximately counter-balances the effect of reducing competition.)
This is not just a libertarian viewpoint. In 2015, the Obama administration produced a report (jointly by the Treasury Dept., Council of Economic Advisors, and Labor Dept.) on occupational licensing: https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf
Here are two quotes from that report:
"The employment barriers created by licensing may raise wages for those who are successful in gaining entry to a licensed occupation, but they also raise prices for consumers and limit opportunity for other workers in terms of both wages and employment. By one estimate, licensing restrictions cost millions of jobs nationwide and raise consumer expenses by over one hundred billion dollars." (7)
"Moreover, in a number of other studies, licensing did not increase the quality of goods and services, suggesting that consumers are sometimes paying higher prices without getting improved goods or services." (4)
(They do not, of course, go so far as to call for an end to all occupational licensing. In the usual utopian fashion, they instead suppose that the system can be reformed so that only good licensing restrictions stay and the bad ones are removed.)
I quote that so that you know that academic economists and left-wing government economists, too, have recognized the problems I’ve pointed out. So these are not libertarian ideological points; they’re just factual observations about how the system works.
Important Professions
Most people would probably agree that cosmetologists, florists, and funeral directors don’t need to be licensed. But most would insist that of course we have to have licensing for the important professions of doctor and lawyer. Otherwise, what’s to stop incompetent people from providing those services and ruining people’s lives?
There are at least two problems with that logic:
It assumes that licensing laws increase quality. But as discussed above, they may just as well reduce quality, or have no effect on quality. If licensing actually reduces quality, then it’s especially important not to have such laws for the most important professions. It’s no big deal if the government screws up the cosmetology industry with licensing restrictions, but it’s a huge problem if they similarly screw up the medical industry.
We already have a body of law to stop people from selling you defective goods and services. We call it “tort law”. If it works for the “unimportant” goods and services, why wouldn’t it work for the important ones?
You might say that in the case of most products, there are also safety regulations governing their design and manufacture. Let’s say you think that is crucial to why most products are safe. Fine. Then why wouldn’t that work for medical, legal, or other services? There are laws governing what you can put in a sandwich, but there are not also sandwich-maker licenses that you have to get before you’re allowed to make a sandwich following those laws. Similarly, why couldn’t there just be regulations governing the way doctors care for patients, without also having special licenses that you have to get before you’re allowed to provide care following those regulations?
We know the answer. It’s because the licensing process imposes huge costs on people entering the industry. In the case of the legal profession, (in most states) you have to go to law school before you’re allowed to take the bar, which means you have to spend three years and tens of thousands, sometimes over a hundred thousand dollars, to get permission from the government to practice.
Come on. The system is obviously designed to increase prices.
Supply
I actually haven’t gotten to the main problem yet. Here is the main problem: Licensing laws stop many people from getting the service at all. This is especially egregious for the most important professions, like doctors and lawyers. Who cares about the florist licensing? It’s stupid, but it’s really no big deal if I can’t get a flower arrangement, or I have to arrange my own flowers, because of licensing laws. By contrast, it is a very big deal if I can’t get medical care, or I have to try to do it myself, because of licensing laws.
Now, you might think: “Don’t worry. Licensing laws increase prices, sure. But the government can just pay for poor people’s medical care, legal services, etc. That way, no one will be forced to do without.”
No, that doesn’t work. It doesn’t work because licensing laws essentially restrict supply. Their whole point is to exclude a bunch of people who would otherwise provide the service for which the license is needed. To quote David Friedman:
“Refusing to license the less qualified 50 percent of physicians may raise the average quality of physicians but it lowers the average quality of medical care. It does not mean that everyone gets better medical care but that half the people get no care or that everyone gets half as much.” (http://www.daviddfriedman.com/The_Machinery_of_Freedom_.pdf)
It doesn’t matter how much money you give to the poor; that can’t magically make everyone able to get the service, if the total supply is less than the amount needed. It can only cause people to be denied the service on some other basis instead of money (most commonly, willingness to wait through long lines).
Now, you might think that we could just pay doctors enough to draw enough highly qualified people away from other professions and into medicine, to provide enough medical care for everyone. If you’re thinking that, you probably don’t realize that there is a limited number of residencies available each year, so we can’t get more than that many doctors, regardless of how many extremely qualified people are prepared to do the job. There’s no way for this not to result in people going without medical care that they otherwise (without the licensing laws) would have gotten.
Another example: electricians are licensed. Because they are licensed, the supply is limited, which means that some people will not hire an electrician who otherwise would have. Those people will either not get electrical work done at all, or they will do it themselves. On the individual level, you could say they are doing this because they don’t want to pay the price of the professional electrician. But on the societal level, that’s not the explanation. On the societal level, the reason that an elevated number of people are trying to do this sort of thing themselves is that the total supply of professional services simply isn’t large enough for everyone who wants them to get them. Shuffling around who pays can’t change that.
Conclusion: If you think medical care, legal services, electrician services, or whatever are extremely important, and that people should not either go without or try to do these things for themselves, then you should be especially concerned to eliminate licensing for these professions.