Topic: Regulatory Studies

The Institute for Justice Exposes the Plague of Occupational Licensing

Today, the Institute for Justice released a 200-page, comprehensive study on occupational licensing in the United States. The report details the plague of occupational licensing that has swept the country over the past 60+ years. According to the study, “In the 1950s, only one in 20 U.S. workers needed the government’s permission to pursue their chosen occupation. Today, that figure stands at almost one in three.”

Fifty years ago, in Capitalism and Freedom, Milton Friedman warned against the dangers of professional licensing. At that time, Friedman quoted a previous study on licensure by Walter Gellhorn:

By 1952 more than 80 separate occupations exclusive of ‘owner-businesses,’ like restaurants and taxicab companies, had been licensed by state law; and in addition to the state laws there are municipal ordinances in abundance, not to mention the federal statutes that require the licensing of such diverse occupations as radio operators and stockyard commission agents. As long ago as 1938 a single state,North Carolina, had extended its law to 60 occupations. One may not be surprised to learn that pharmacists, accountants, and dentists have been reached by state law as have sanitarians and psychologists, assayers and architects, veterinarians and librarians. But with what joy of discovery does one learn about the licensing of threshing machine operators and dealers in scrap tobacco? What of egg graders and guide dog trainers, pest controllers and yacht salesmen, tree surgeons and well diggers, tile layers and potato growers? And what of the hypertrichologists who are licensed in Connecticut, where they remove excessive and unsightly hair with the solemnity appropriate to their high sounding title?

The Institute for Justice’s study found that licensing has only become more wide-spread and more absurd. But an increase in licensure is expected when interest groups are allowed to capture government and violate our economic liberties. Public choice theory predicts a growth in licensing if the anti-competitive interests of trades are not checked by constitutional rights. As Friedman observed,

In the absence of any general arrangements to offset the pressure of special interests, producer groups will invariably have a much stronger influence on legislative action and the power that be than will the diverse, widely spread consumer interest. Indeed from this point of view, the puzzle is not why we have so many silly licensure laws, but why we don’t have far more.

There are significant real-world effects to these laws. In a world of nine percent unemployment, barriers to work should be the last thing we want, particularly if those barriers do not make us safer or better off. The study found that the average license forces would-be workers to pay an average of $209 in fees, take one exam, and complete nine months of training. In the four places in which they are licensed (three states and DC), interior designers have the highest barriers to entry, apparently to save us from shag carpeting and misuses of the Pottery Barn. In the face of such requirements, particularly the months of training, it’s easy to see how someone can be discouraged from even looking for a job.

In addition, out-of-control licensing has other, more human costs, such as the monks of Saint Joseph Abbey, who were prohibited from building caskets in their monastery unless they obtained a funeral director license. The Institute for Justice won that case. Here’s hoping the new study gives IJ’s attorneys the data they may need to defeat other unconstitutional licensing regimes.

Below is the video announcing the study:

Obama Labor Department Won’t Ban Kids’ Farm Chores

Farm families, along with the cause of liberty, won an important battle last week when the Obama administration scrapped plans to prohibit kids from doing a wide range of jobs in agriculture, even on farms belonging to their own family members. The rules would have barred youngsters under 16 from working with animals, storage bins, power-driven equipment, and various other things found on farms; perhaps most significant, they took an exceedingly narrow view of the so-called parental exemption provided by the law, so that (in the rules as proposed last year) kids would have been forbidden to work on an uncle or grandparent’s farm, or any farm less than “wholly” owned by their own parents. The Department of Labor was inundated by upwards of 10,000 comments, overwhelmingly negative, from farmers and ranchers; playing out in press outlets like the Custer County, Neb. Chief, the controversy was mostly ignored by the Eastern press, though NPR did do a report in December.

Commentator Ira Stoll has connected the dots about the Obama administration’s tendency to press ahead on extreme regulatory measures, then back off after a public outcry builds:

Examples include the mandatory automobile back-up camera rule, the ban of all cellphone use, even hands-free, while driving, the ban on 100 watt incandescent light bulbs, the NLRB’s action preventing Boeing from opening a factory in South Carolina, a right-to-work state, and the IRS’s cumbersome Form 1099 requirement as part of Obamacare.

Last fall I noted the same pattern, including retreats on EPA standards on dust, smog, and cross-state air pollution, and a misbegotten rule on lead abatement that could have made it prohibitively expensive to rehabilitate older homes. As I said at the time:

This, then, seems to be the new Obama administration compromise position …: they’ll hold off for now on saddling the economy with at least some potentially ruinous regulations – but they’ll make sure you know they’re not happy about having to take that stand.

More on the Obama administration and regulation here.

Wal-Mart, FCPA and Mexico

Last fall in this space I described the Foreign Corrupt Practices Act as “a feel-good piece of overcriminalization” that Congress should never have passed. Over the weekend a front-page New York Times investigation alleged that Wal-Mart’s Mexican subsidiary had paid millions in bribes to local officials for permission to build stores around the country. Worse, when executives in America learned of the payments, they chose to sweep the matter under the rug rather than pursue an investigation, and that choice may have implicated high-level company execs in FCPA violations. [WSJ summary; Wal-Mart written statement and video]

I’m writing up a longer piece on the controversy. In the mean time, a few points:

  • The original payments to Mexican officials are said to have exceeded $24 million; meanwhile, $12 billion in stock market value, or 500 times that sum, was vaporized in one day on Monday. Wal-Mart’s high legal exposure arises through the interaction of various FCPA provisions with each other and with other federal and state laws, including possible liability under state corporate law and Sarbanes-Oxley. Collateral costs, such as executive distraction and probes into its operations in other countries, could debilitate the largest U.S. retailer for some time.
  • A good place to begin on the legal issues is Mike Koehler’s FCPA Professor with coverage here and here.
  • According to Peter Henning at NYT DealBook, it may be too late for the feds to file criminal charges against individual defendants over the original payments because of FCPA’s five-year statute of limitations. On the other hand, DoJ will have various theories to go after the company itself: it can claim that later financial results are misstated, or that there was a conspiracy at least one step of which was taken within the last five years, or that records were destroyed which could serve as an obstruction of justice charge under Sarbanes-Oxley. If the original wrongdoers wind up walking free while managers who arrived on the scene later take a full legal hit, well, that wouldn’t be the first time.
  • Some proponents of the FCPA are claiming vindication: how can the Cato types be right in calling this law vague and punitive when it failed to deter a cover-up at a company as big and image-sensitive as Wal-Mart? UCLA corporate law specialist Stephen Bainbridge has a nice riposte: “In other words, the FCPA imposes huge burdens and liability risks on honest companies, but fails to deter dishonest ones, so we’re going to leave it on the books as is. I’m left scratching my head in wonderment at the folly of it all.”
  • Daniel Fisher at Forbes scores an interview with the eminent Yale management professor Paul MacAvoy whose analysis of the case follows:

    …all large U.S. corporations operating abroad must play a dangerous game in order to obtain the permits and permissions they need. MacAvoy, who has served on the boards of Chase Manhattan, American Cyanamid and Alumax, said Wal-Mart’s mistake was steering all the payments to a pair of lawyers who allegedly were friends of the company’s Mexico counsel. That concentrated the risk and the likelihood of a big, crater-the-company scandal instead of a series of small ones.

    From my experience, he said, most companies have “local representatives involved in negotiations and they pay the local reps a fee for the representation without asking how that fee gets redistributed.”

    “The consultant does the dirty work,” he said. “This case went wrong by the concentration of the funds and the coverup of the process.”

Plain Language Regulation?

Now where have we seen this before? S. 2337 would require that federal regulations use plain writing that is clear, concise, well-organized, and appropriate for the subject matter and intended audience.

Well, according to the “Plain Writing Association,” efforts to produce plain writing in government go back as far as the 1977 issuance of a report on federal paperwork. President Carter commanded simple and clear regulations in 1978.

Twenty years later, President Clinton issued a memorandum calling for “Plain Language in Government Writing.”

There’s even a “PlainLanguage.gov” Web site already. Because the last Congress passed Public Law 111-274, the Plain Language Act of 2009.

Maybe passing another law will do it. Maybe the search for locution that provides a level of clarity sufficient for public consumption comes from alternate changes in public policy than to amend the expression of their societal impact. (ahem)

World Bank: Anti–Money Laundering Rules Hurt the Poor

I’ve complained many times about the pointless nature of anti–money laundering laws. They impose very high costs and force banks to spy on their customers, but they are utterly ineffective as a weapon against criminal activity. Yet politicians and bureaucrats keep making a bad system worse, and the latest development is a silly scheme to ban $100 bills!

It also seems that poor people are the main victims of these expensive and intrusive laws. According to a new World Bank study, half of all adults do not have a bank account, with 18 percent of those people (click on the chart below for more info) citing documentation requirements—generally imposed as part of anti–money laundering rules—as a reason for being unable to participate in the financial system.

But this understates the impact on the poor. Of those without bank accounts, 25 percent said cost was a factor, as seen in the chart below. One of the reasons that costs are high is that banks incur regulatory expenses for every customer, in large part because of anti–money laundering requirements, and then pass those costs on to consumers.

Here are some of the key points in the World Bank report:

The data show that 50 percent of adults worldwide have an account at a formal financial institution… Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy.

…The Global Findex survey, by asking more than 70,000 adults without a formal account why they do not have one, provides insights into where policy makers might begin to make inroads in improving financial inclusion.

…Documentation requirements for opening an account may exclude workers in the rural or informal sector, who are less likely to have wage slips or formal proof of domicile. …Analysis shows a significant relationship between subjective and objective measures of documentation requirements as a barrier to account use, even after accounting for GDP per capita (figure 1.14). Indeed, the Financial Action Task Force, recognizing that overly cautious Anti–Money Laundering and Terrorist Financing (AML/CFT) safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system, has emphasized the need to ensure that such safeguards also support financial inclusion.

One would hope leftists, who claim to care about the poor, would join with libertarians to roll back absurd anti–money laundering requirements. Heck, one would hope conservatives, who claim to be against pointless red tape, would join the fight as well.

Here’s the video I narrated on the general topic of money laundering laws. I think it makes very good points, but I wish these data had been available when I did the video so I could explain in greater detail how low-income people are the main victims.

Last but not least, I should point out that statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

‘May Cause Drowsiness, Use Caution Around Machinery’

Frank Harty of the Iowa law firm Nyemaster Goode describes a new kind of employer headache arising from the Obama administration’s hardline enforcement efforts on the Americans with Disabilities Act (ADA) front:

…Common sense dictates that any medication that carries with it a warning that it “may cause drowsiness” or that the patient should “use caution” if operating machinery may pose a risk in the workplace. It is for this reason that many employers adopt a policy requiring employees to self report the use of prescription pain killers. This is especially important in potentially dangerous workplaces such as manufacturing and construction.

In a recent action that defies common sense, the Equal Employment Opportunity Commission has taken the position that such policies are unlawful under the Americans With Disabilities Act. The ADA prohibits an employer from conducting “medical inquiries” without a business reason to do so. In EEOC v. Product Fabricators, Inc., an action in federal court in Minnesota, the EEOC required a manufacturing employer to abandon its policy of encouraging employees to inform supervisors if they are under the influence of narcotic pain killers such as Vicodin. The EEOC took the position that an employer cannot ask about prescription pain killer usage unless it has “objective” evidence that an employee is impaired on the job.

This places employers in a very difficult position….

In particular, it puts employers to a choice between waiting until there is an actual accident caused by an employee’s nodding off or zoning out – thus at last providing “objective” evidence of risk – and the risk of a large judgment payable to an employee who has not yet gotten into accidents and whose lawyer will claim that there was no objective evidence to support a suspicion of impairment.

The Eighth Circuit upheld the agency’s stance earlier this year and an EEOC press release from February notes that the company agreed to pay $40,000 to settle the dispute. Harty notes that one “thing is certain: it will be employers, not the Equal Employment Opportunity Commission, who deal with the fallout from the loss of life and limb in the workplace.”

How Tech Can Render Regulations Uber Obsolete

In the most recent issue of The Atlantic, Megan McArdle looks at the regulatory travails of Uber, the innovative smartphone-enabled car service that has found itself in the crosshairs of competition-averse taxi commissions from D.C. to San Francisco. For the uninitiated, Uber is the answer to the question that has occurred to every harried commuter with a smartphone at some point: If these things have GPS chips, and cabs have GPS, shouldn’t I be able to use my phone to find a cab, rather than just hoping I’m in the right place when one passes? In other words, it’s the Electronic Thumb from The Hitchhiker’s Guide to the Galaxy. Uber’s plush sedans come at a premium price, but for those in need of a pickup outside a high-traffic area, it’s the convenience factor that justifies the markup. Users register their credit cards with the service in advance, and when they need a ride, fire up a slick app that shows all the Uber cars in service on a realtime map, with an estimate of how long the closest free driver will take to reach your location. At the end of the journey, the fare and gratuity are charged automatically, with a receipt and travel map delivered via email, and the app gives passengers an opportunity to rate each driver—allowing the company to ensure that it only contracts with those who are consistently safe, reliable, and courteous. By most accounts, users adore it.

Naturally, regulators hate it. DC Taxi Commissioner Ron Linton has condemned the company as a scofflaw—and seems hell bent on finding some rule they’re violating, even though his initial complaint against Uber seems to have been legally confused. Most of Linton’s public comments on the matter leave the distinct impression that these are secondary details for him: What’s outrageous is that some upstart would dare to do something new without first coming to kiss the Don’s ring and beg permission. There’s also the inevitable element of regulatory capture: Conventional cab companies would rather not face an innovative competitor, so they’re asking the government to ensure consumers don’t have the option of taking their business elsewhere. So far, a familiar story that could be told about dozens of industries. What even many of Uber’s defenders seem slow to recognize, however, is that the company’s business model doesn’t just require regulators to catch up with the tech and the times: It eliminates the rationale for having a regulator.

The default in a free society is that you can start most kinds of business, and charge whatever rate the market will bear for your services, without the approval of some municipal bureaucrat. The argument for treating cabs differently rests on the idea that, on the conventional model, they’re not as effectively regulated by normal market pressures. Comparison shopping isn’t particularly feasible when you hail a cab the old fashioned way: You just flag down the first one that happens to pass, with the understanding that when the ride’s over, you’re unlikely to ever do business with that particular driver ever again. If you’re from out of town, odds are you won’t ever do business with the company again either, and barring an exceptionally unpleasant experience, most passengers aren’t going to take the time to call the dispatcher with a review. The opportunistic, one-off nature of traditional cab transactions, in short, makes a standardized price structure more attractive, and diminishes the reputation-based incentives to compete on price and quality. So goes the usual argument, anyway.

Uber—or rather, the Uber model—changes all of that.

You accept a price structure in advance, when you sign up for an account, and can be clearly notified of any price changes. The app’s  review system makes it easy for the company to monitor driver quality without demanding too much effort from passengers. Customers automatically get a full and instantaneous accounting of when and where they were picked up and dropped off, and how much they paid. Because the company expects, and strives for, lots of repeat business—and on word of mouth from satisfied customers as a growth strategy—all the normal market forces and incentives that apply to any other online business are in full effect. Which means the question isn’t whether the regulations need to be updated to accommodate a new kind of cab service: It’s why this kind of service needs a regulator at all.

Judging by Linton’s own assessment of the conflict in the Washington Post, the commissioner at least vaguely understands that Uber makes him superfluous. His attempt to justify a continuing need for regulation—for consumers to be “protected” from a company they’re overwhelmingly flocking to defend—is a small masterpiece of incoherence:

[A Post contributor] suggest that taxis or limousines arranged for via smartphone technology be allowed to charge whatever they want in an all-out price war. He should be careful what he wishes for. It isn’t just riders and drivers who would be affected if such a system became the norm. Given the congestion, confusion and pedestrian hazards likely to result, those using private vehicles, buses, bicycles, trucks and even sidewalks to move about the city would be sure to share their unhappiness with public officials, leading us right back to what? Regulation, of course.

To which the sane reader can only say: What? At the risk of stating the obvious: What Linton calls “all-out price war” to make it sound radical and anarchic is what the rest of us call “competitive pricing,” and is the normal way businesses operate in this country. Absent extraordinary circumstances, which smartphones obliterate here, it turns out it works pretty well. As for congestion, confusion, and pedestrian hazards… what, exactly, makes these likely to result? And how does Linton know? Is there even one scintilla of evidence that this has happened in other cities where Uber operates? Why would anyone think professional drivers—especially ones being rated on each ride—create more “pedestrian hazards” than other motorists? Why would buying a service online at clearly posted rates yield more “confusion” when the service is transport than it does for every other type of service people can purchase online? Wouldn’t greater adoption of smartphone-enabled cabs yield less congestion by efficiently matching drivers with fares?

The answers to these questions are obvious enough: On the Uber model, any rationale for subjecting driving services to a special regulatory regime—beyond the rules that apply to every business—simply evaporates. With smartphones on a fast track to the kind of ubiquity cell phones already enjoy, that model seems likely to become the norm rather than the exception over time. But as Upton Sinclair famously said, “it is difficult to get a man to understand something, when his salary depends on his not understanding it,” which means bureaucrats like Linton are sure to keep clutching at any pretext to justify their jobs.