[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BARRIERS TO OPPORTUNITY: DO OCCUPATIONAL LICENSING LAWS UNFAIRLY LIMIT
ENTREPRENEURSHIP AND JOBS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 26, 2014
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 113-063
Available via the GPO Website: www.fdsys.gov
_______
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Richard Hanna............................................... 1
Hon. Grace Meng.................................................. 2
WITNESSES
Ms. Melony Armstrong, Owner, Naturally Speaking, Tupelo, MS...... 4
Mr. Timothy Sandefur, Principal Attorney, Pacific Legal
Foundation, Sacramento, CA..................................... 6
Ms. Patti Morrow, President, Interior Design Protection
Consulting, Greer, SC.......................................... 7
Ms. Rebecca Haw, Assistant Professor of Law, Vanderbilt Law
School, Nashville, TN.......................................... 9
APPENDIX
Prepared Statements:
Ms. Melony Armstrong, Owner, Naturally Speaking, Tupelo, MS.. 24
Mr. Timothy Sandefur, Principal Attorney, Pacific Legal
Foundation, Sacramento, CA................................. 28
Ms. Patti Morrow, President, Interior Design Protection
Consulting, Greer, SC...................................... 159
Ms. Rebecca Haw, Assistant Professor of Law, Vamderbilt Law
School, Nashville, TN...................................... 164
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
BARRIERS TO OPPORTUNITY: DO OCCUPATIONAL LICENSING LAWS UNFAIRLY LIMIT
ENTREPRENEURSHIP AND JOBS?
----------
WEDNESDAY, MARCH 26, 2014
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Richard Hanna
[chairman of the subcommittee] presiding.
Present: Representatives Hanna, Meng, and Nunnelee.
Chairman HANNA. The hearing is called to order.
First, I want to thank the witnesses for being with us
today as we discuss an issue that relates to economic
opportunity for our citizens: the proliferation of state
occupational licensing laws and the effects these have on
entrepreneurship and job creation.
As the private economy continues to struggle to create a
sufficient number of jobs to replace those lost in the
recession, many unemployed and underemployed Americans are
taking it up on themselves to use whatever skills or talents
they have to start their own business and earn income.
Unfortunately, for many of these would-be entrepreneurs,
they may need some sort of government approval in order to do
so. One of the most difficult forms of that approval is an
occupational license. While the intent of occupational licenses
are to protect public health and safety or to protect consumers
from bad actors, the scope and complexity of occupational
licensing has grown considerably in recent years.
Yet, as these trends develop, there is mounting evidence
that many of the public benefits arguments used to justify
occupational licenses are tenuous at best. Instead, some
licensing laws appear to be designed not to protect life,
safety, or property, but to protect existing businesses from
competition. For example, while many Americans would not be
surprised to know that doctors and lawyers need a state-issued
license to practice their trade, they may be surprised to learn
that it is illegal for a person to braid hair, work as an
interior decorator or operate an obedience school for dogs
without a state-issued license, and they may be more shocked to
learn what obtaining such a license entails.
In a recent report, the Institute for Justice found that
the education and training requirements for many of these
professions to obtain a license exceed those needed to become
an emergency medical technician, an occupation where lives are
at risk. The cost of such excessive licensing requirements can
be measured in reduction in new business startups, job loss,
higher prices for consumers or increased income inequality.
According to another study, job creation in certain
professions is 20 percent lower in a licensed state versus
unlicensed state. Many of the entrepreneurial opportunities
lost to excessive occupational licensing are in jobs most
likely to be pursued by the economically disadvantaged. The
issue of state and local occupational licensing raises several
questions for Congress. While the federal policymakers have an
interest in promoting the principles of economic liberty and
preventing discriminatory practices that limit opportunity,
especially for the disadvantaged, we must also respect the
principle of federalism, which gives states the right to
regulate activities that take place within their borders.
Our purpose today is not to answer the question of whether
states should or should not regulate; it is to examine how
certain occupational licensing laws have become excessive and
discuss options for reform to enhance economic opportunity and
help our economy and its people grow jobs and prosper.
I now yield to the ranking member for her comments.
Ms. MENG. Thank you, Mr. Chairman.
Licensing is a process by which the state makes it illegal
to do a certain job unless one completes a series of mandatory
requirements. The requirements are usually set by a licensing
board made up of members of the profession or by legislatures
with significant input from current professionals. The origin
of these limits have promising goals and was intended to
protect the safety and well-being of residents, but since the
1950s, the number of licensed workers has jumped from just 5
percent of the workforce to nearly 30 percent today. In total,
roughly 1,100 occupations now require some sort of license by
at least one state. Much of the time these licenses require
fees to be paid, training of some sort, and written
examinations. While the requirements serve a functional
purpose, they are also a barrier for entrepreneurs to enter an
occupation.
Today's hearing will give us the opportunity to learn more
about the genesis of professional licensing and its evolution.
Though this issue is one for the states to take up, it is
nevertheless important for us to bring it to the forefront.
Licensing requirements have exploded to new fields, some that
merit regulations and others that raise the question of whether
there is too much licensing. States have broad powers to
regulate their workers and have a duty to protect their
residents. Requiring certain professions to meet strict
licensing rules only makes sense in that regard.
However, we must look at the implications licensing has on
entrepreneurs. They are the backbone of our economy and we rely
on them for innovation and growth. Requirements for training
fees and examinations can keep qualified individuals from
starting a busy profession, and a lack of uniformity among the
states and their licensing rules impact many entrepreneurs
attempting to move to another market where they see an
opportunity for business growth. States should not be hindering
growth in these viable markets for business expansion or
creation. They should be fostering these self-starters.
Encouraging competition for small firms is critical to job
creation and economic growth. The Sherman Antitrust Act was
created to do just that--protect consumers and business owners
from anti-competitive behavior. We will hear from witnesses
about how antitrust law applies to cases involving licensing
boards and what approach is best for ensuring qualified
individuals can enter an occupation without fear of excessive
costs.
Despite the fact that this topic belongs on the state
level, the well-being of American entrepreneurs is a concern to
the nation as a whole. That is why I am glad we are holding
this hearing. It will give us a chance to hear some personal
experiences of those who have successfully navigated state
regulations and what insights they can provide to reform the
system. As more Americans begin to take risks and start their
own businesses, it is vital to bring licensing requirements to
their attention. Balancing the need for market competition with
the need for consumer protections will give small firms the
certainty they require.
We are here today to learn more about licensing rules and
how to address the possibility of over-licensing. In order to
ensure the success of our self-employed, we must understand the
challenges and benefits these laws hold for entrepreneurs.
I thank all the witnesses for being here today, and I look
forward to your comments.
Thank you, and I yield back.
Chairman HANNA. Thank you.
If Committee members have an opening statement, I ask that
they submit them for the record.
I will just take a minute to explain to you the lights. It
is a little bit like your stewardess explaining the seatbelt.
You have five minutes. We will be lenient. You will see the
yellow light go on. That is a minute left.
And with that I will yield to Mr. Nunnelee from Mississippi
who will introduce our first witness. Go ahead. You may begin.
Mr. NUNNELEE. Thank you, Mr. Chairman.
It is my privilege to be before this Committee, even though
I am not on the Committee. I thank you for allowing me to be
here with my constituent and friend, Melony Armstrong.
I met Melony five years ago when she was a small business
operator, and I was serving in the state Senate. I was her
senator. And Melony was attempting to grow a business helping
to teach other people how to be small business operators, and
she was restrained by the process of state regulation. And she
came to me as her legislator. Before she came to see me, she
had attempted to get relief through the administration, the
regulatory process, and had not been successful. She then went
into the courts and that process was dragging on too long. And
I think if I would ask this Committee to take anything away
from my part of this hearing, it is when Melony Armstrong came
to the state legislature, she found a willing ear to listen and
we responded, and within 90 days we fixed the problem, we put
legislation on Governor Haley Barbour's desk that he signed
into law. And I would ask the Committee to reflect if she had
come to the Congress asking for similar relief, how long would
it have taken and would we still be debating the issue that we
solved in 90 days at the state level. I think there is a real
reason the states are known as the great laboratories of
democracy.
So with that, Melony Armstrong from Tupelo, Mississippi, we
are glad to have you here today to testify before this
Committee.
Chairman HANNA. Ms. Armstrong, you may begin.
STATEMENTS OF MELONY ARMSTRONG, OWNER, NATURALLY SPEAKING;
TIMOTHY SANDEFUR, PRINCIPAL ATTORNEY, PACIFIC LEGAL FOUNDATION;
PATTI MORROW, PRESIDENT, INTERIOR DESIGN PROTECTION CONSULTING;
REBECCA HAW, ASSISTANT PROFESSOR OF LAW, VANDERBILT LAW SCHOOL
STATEMENT OF MELONY ARMSTRONG
Ms. ARMSTRONG. Thank you, Mr. Chairman, and members of this
Committee. My name is Melony Armstrong.
Every day, hundreds of low-income families are housed
because of my work, but I do not run a shelter. They are
clothed through what I have done but I do not run a second-hand
clothing store. They are fed because of what I achieve, but I
do not run a soup kitchen. I have transformed the lives of
hundreds of poor women in my state of Mississippi, not because
I sought out government assistance; rather, because I asked the
government to get out of my way.
I demanded that the government get out of my way so that I
could provide for myself and for my family and so other women
around me could do likewise in peace, dignity, and prosperity.
And if a lone braider in Tupelo, Mississippi could have such a
transformative impact helping to change the law to free so many
around to earn an honest living, imagine what could happen
across our nation if state and local governments followed that
example.
Not every entrepreneur is a Bill Gates or Henry Ford. Some
are and will remain more humble in the scope of their impact,
but each day we all demonstrate the power of one entrepreneur.
African hair braiding is a skill that has been passed from
one generation of women to another for the past 3,000 years of
recorded history. For the vast majority of human history, women
like me have practiced this craft with no government oversight,
with no government-issued license, and with no government-
imposed demands. We learned from the previous generations by
doing, and in so doing we were free to earn a living for our
families.
But even with that history to open my hair-braiding salon,
Naturally Speaking in Tupelo, Mississippi in 1999, I had to
file a lawsuit and lobby the state to change the hair-braiding
law in my state so I could get to work. To get paid to braid
hair, many states demand braiders to obtain a cosmetology
license or other similar license, typically requiring up to
2,100 hours of coursework. That is more than a year's worth of
work study, 40 hours a week taking classes that do not teach
braiding. Let me say that again. The government in many states
requires would-be braiders to take thousands of hours of
classes that have literally nothing to do with the trade they
want to practice. To teach others to braid hair in Mississippi
required me to take more than 3,000 hours of classes and apply
for a school license, hours I could use more productively
running my own business. And the 3,200 classroom hours it would
have taken for me to earn a license to teach hair braiding, I
could have instead become licensed in all of the following
occupations in Mississippi--emergency medical technician,
emergency medical technician as a paramedic, ambulance driver,
law enforcement officer, firefighter, real estate appraiser, a
hunting education instructor, and that would have all taken
more than 600 hours less than obtaining a license to teach hair
braiding.
The cosmetology establishment benefitted most from
Mississippi's regulations. Practicing cosmetologists made up
the State Board of Cosmetology and they did their best to keep
competition to a minimum and to ensure cosmetology schools
enjoy captive customers in the form of students.
It was in August 2004 I joined two aspiring hair braiders
and the Institute for Justice, a public interest law firm that
represented us for free. We filed a lawsuit to break down the
regulatory walls barring potential entrepreneurs from entering
the field. In the months that followed, I took weekly trips to
the state capital of Jackson. It was a seven-hour roundtrip
trip from Tupelo, working to convince legislators to change the
law. We did not go to the government seeking a handout;
instead, we asked the government to get out of our way.
In 2005, our efforts paid off. Mississippi's governor
signed legislation enabling hair braiders to practice without
the burdensome government-mandated classes. The only
requirements now are that hair braiders must pay a $25 fee to
register with the state and abide by all relevant health and
hygiene codes. Since the restrictions were lifted, more than
800 women provide for themselves as hair braiders taking once
underground businesses legit and opening new enterprises in a
place where customer demand was once unmet. And because of the
change in Mississippi's laws, aspiring hair braiders are moving
here from nearby states, including Tennessee, Alabama, and
Arkansas.
Free from the needless government-created barriers, I have
gone on to teach more than 125 individuals how to braid hair.
No longer blocked from putting industrious individuals to work,
I have employed 25 women, enabling them to provide for
themselves and their families. For many of these women, the
money they earn from braiding represents the first steady
paycheck they have earned in their entire lives.
Thank you for holding this hearing to alert the public to
this problem. I hope lawmakers in every state across this
country are paying attention and will heed our calls to remove
the laws that do nothing to prevent honest competition in
trades from coast to coast.
Thank you.
Chairman HANNA. Thank you, Ms. Armstrong. Eloquently said.
Our next witness is Tim Sandefur, principal attorney at the
Pacific Legal Foundation. Mr. Sandefur has successfully
challenged various state laws that unfairly inhibit
entrepreneurship in California, Oregon, and Missouri. In
addition to his work with the Pacific Legal Foundation, he is
author of three books that examine how government regulation
inhibit economic liberty.
Mr. Sandefur, thank you for being here. You may begin.
STATEMENT OF TIMOTHY SANDEFUR
Mr. SANDEFUR. Thank you very much.
You know, we are here discussing the right to earn a living
without unreasonable government interference which is the most
neglected civil right in America. The right to earn a living
without unreasonable interference from the government was
protected by English and American courts as far back as William
Shakespeare's day, but unfortunately, today, lawmakers and
judges typically turn a blind eye to this right and it gets
sacrificed by agencies that are acting often in the best
interest of established firms. Today, one-third of all
occupations requires government permission in order to go into
a business. Even a business like being a florist in Louisiana,
you have to get government approval before you can do this.
Now, licensing laws were originally invented to protect
consumers against shoddy or incompetent or dishonest practices,
and research shows that they are not really that effective at
doing that, but even so, that is at least legitimate.
Unfortunately, these laws are frequently abused by established
insiders to prevent competition by raising educational
requirements, raising the costs of examinations, increasing
continuing education requirements, forcing people to get
college degrees before they are allowed to take the application
examination, and other kinds of requirements that lower access
to services to consumers, raise prices to consumers, and what
is most important to me, restrict economic opportunity
typically to those who need it the most.
For example, you have to have a college degree to be an
interior designer in Florida. Well, 47 percent of blacks and
Hispanics have college degrees in Florida, and 66 percent of
whites do. So not surprisingly, a restriction like that tends
to have a racially disproportionate impact and a class
disproportionate impact, restricting economic opportunity for
precisely those people who most need entry-level employment and
what we used to call the American dream.
Even more absurdly, people do not really rely on
occupational licenses that much to protect themselves as
consumers. More often they rely on reviewing websites, like
Yelp or Angie's List or word of mouth from friends who have
gone to a business and been treated well or badly there. So
they are not really very effective in the first place at
protecting the public. But these restrictions limit people from
entering into trades unless they receive high education
requirements. Or I mentioned testing costs. A lot of the times
these examinations to get a license are held in inconvenient or
distant places. The examination to get a license as a florist
in Louisiana, for example, is offered only once quarterly in
Baton Rouge. So if you live somewhere else in Louisiana and you
want to be a florist, you have to pay for travel and lodging
expenses in addition to the cost of taking the examination just
because you want to arrange flowers.
Another kind of licensing restriction that does not get
enough attention is the Certificate of Public Convenience and
Necessity law. This is a licensing law that on its own terms is
not intended to protect consumers against dangerous or
dishonest business practices but exists explicitly for the
purpose of protecting established firms against legitimate
competition.
Just last month, I won a lawsuit challenging the
constitutionality of Kentucky's licensing law for moving
companies. That state, like 22 other states, says if you want
to go into the business of being a mover you first have to get
permission from all of the existing moving companies in the
state. You file your application to run a moving company. All
the existing movers are notified and allowed to file objections
against you getting a license. And guess what? They typically
do. The government then, once an objection is filed, decides
whether there is a ``public need'' for a new moving company.
How do you determine this? Nobody really knows. The statute
does not explain. No regulation or case law defines the terms.
It turned out that between 2007 and 2012, 39 people had applied
for licenses to run companies; 19 of those had received
objections and every single objected application had been
denied by the state, including license applications from fully
qualified movers. One guy who had worked as a mover for 35
years before seeking his own license to start his own company
was denied in a written opinion that said you are fully
qualified but you would compete against existing movers;
therefore, denied.
And we were very fortunate that Pacific Legal Foundation
was able to secure a court decision declaring that
unconstitutional, but that is certainly not the final word.
Other courts have upheld these kinds of restrictions and there
is no Supreme Court precedent on it since the 1930s.
These restrictions are costly. In fact, to prove that there
needs to be a new moving company you were required to hire an
attorney to attend this hearing. You are not allowed to
represent your own company. There are restrictions on economic
freedom that do not protect the public, often on their own
terms and are unnecessary.
In my written testimony, I explain some routes of what the
Federal government could do to protect economic liberty more
than a new federal civil rights legislation which is badly
needed to protect the right to earn a living; using Congress's
spending power to require states to respect the constitutional
right to earn a living, a right Supreme Court Justice Douglas
once called ``the most precious liberty that man possesses.''
Thank you very much for this opportunity.
Chairman HANNA. Thank you.
Our next witness is Patti Morrow. She is president of
Interior Design Protection Consulting, a public affairs firm
that assists small businesses in fighting state occupational
licensing laws for interior designers. Prior to starting her
firm, she owned and operated her own interior design business
in New Hampshire before moving with her family to Greer, South
Carolina.
Thank you for being here, Ms. Morrow. You may begin.
STATEMENT OF PATTI MORROW
Ms. MORROW. Good morning, Mr. Chairman, and members of the
Committee. Thank you so much for allowing me to speak here
today.
Like many other interior designers, I entered the field as
a second career. In 2004, when my children were 10 and 13, I
enrolled in a two-year program at the New Hampshire Institute
of Art. It was an interior design program. There were about 25
women in the class and we were all second career changers.
As I was nearing the end of the interior design program, a
licensure bill was introduced in the New Hampshire legislature.
If enacted, this bill would have destroyed my dream of having
my own interior design business. In order to legally practice,
I would have had to go back to school, earn another four-year
bachelor's degree in interior design from an expensive,
privately accredited college. Well, number one, there were no
such schools in New Hampshire. And then not only that, but
since I was going part-time it would have taken me about eight
years before I could have completed that program. Also, I would
have had to pass the burdensome NCIDQ (National Council for
Interior Design Qualification) exam. This exam has historically
had a less than 40 percent passage rate for all three sections
taken at the same time, and it can cost over $2,000 to take
once you consider the cost of the exam, the cost to travel to
take the exam, and the cost of study materials. I would have
also had to complete a lengthy internship under one of these
NCIDQ-certified designers. Well, there were only 25 in the
whole state and there was really no guarantee that even these
25 wanted to or were financially able to hire an intern. This
bill would have put not only me but most of all of the other
interior designers out of business in that state.
And why? Well, the bill claimed it was to protect the
public, but I was not buying that. So I did my own research.
And do you know what I found? There is not a shred of evidence
to warrant a conclusion that the unregulated practice of
interior design places the public in any form of jeopardy. In
fact, 13 state agencies have already looked at this issue, they
issued reports, and without exception, every single one
concluded that interior design regulation would not add
anything to protect the public beyond measures that were
already in place.
Since 1907, only 52 lawsuits have been filed against
interior designers in the entire country. That is over 100
years, and nearly every single one of those involved contract
disputes, not safety issues. That New Hampshire bill had
nothing to do with the public good but had come about solely
through the efforts of industry insiders who were asking the
legislature to eliminate their competition and grant them a
monopoly.
I was not going to just sit back and let this small
interest group dictate who could and who could not practice
interior design. So I organized a grassroots group of interior
designers. We attended the hearing. We testified against the
bill and we soundly defeated it in March of 2007.
Then two years ago I moved to South Carolina, and it was
dejavu all over again. In the last two years, I have had to
travel to the state capital multiple times to meet with
legislators, to testify at hearings, all this time taking time
away from my business. As of right now that bill has been
tabled, but for how long?
Licensing interior designers is a job killer. For the last
eight years, because I am passionate about this, I have been
helping interior designers all over the country protect their
right to practice. Eighty percent of interior designers are
small business owners. Forty percent are sole practitioners.
Eighty-four percent of interior designers who are practicing do
not have a degree in interior design, and licensing
disproportionately excludes minorities and second career
switchers.
If there is a happy ending to this story it is this--since
2007, over 150 state bills which would have expanded or enacted
new interior design regulations have been defeated. But like
zombies they just will not stay dead.
In conclusion, Mr. Chairman, members of the Committee, let
me just say that when Barack Obama was elected president, he
did what many other presidents did before him--he redesigned
the living quarters of the White House. Now, the District of
Columbia does have full-blown licensing laws for interior
designers. But who did he hire? He hired Michael Smith, an
unlicensed designer from California to do this work.
Now, I submit to you if the most protected person in the
entire world can hire an unlicensed interior designer, should
not everybody else be able to?
Thank you very much.
Chairman HANNA. Thank you. You are welcome to move to New
York anytime you like.
For the next witness I yield to Ranking Member Meng.
Ms. MENG. Thank you. Actually, New York, the state laws for
interior designing are more lax, so I welcome you, too.
It is my pleasure to introduce Professor Rebecca Haw, a law
professor at Vanderbilt Law School. She is a specialist in
antitrust law and is focused on changes in professional
licensing. She has recently released an article focused on
licensing and the Sherman Antitrust Act. She was previously a
fellow at Harvard Law School and also clerked for Judge Richard
Posner on the U.S. Court of Appeals for the Seventh Circuit.
She has degrees from Yale, Cambridge University, and Harvard
Law School. Welcome, Professor Haw.
STATEMENT OF REBECCA HAW
Ms. HAW. Thank you, Chairman Hanna, Ranking Member Meng,
and members of the Subcommittee. Thank you for inviting me here
today.
To someone who studies antitrust, the state of professional
licensing in this country is shocking. Licensing requirements
are created mostly by boards that are dominated with
competitors. They get together and agree on how many
competitors they will face; they agree on who those competitors
will be. Essentially, these boards are cartels with one
important and dangerous exception--they are much more powerful.
They do not have to worry, as most cartels do, about entry from
competitors; they control that entry. They do not have to worry
about cheating on the cartel since their rules are backed by
the police power of the states.
Since states have basically given professionals the reigns
to their own competition, one should not be surprised that
self-dealing results. Yet, some of the licensing restrictions
are shocking as my fellow panelists have illustrated.
I want to speak a little bit about what the economists have
said about licensing because that is just as shocking as some
of the restrictions we have heard about today so far.
Economists say that licensing is huge and it is getting bigger.
It used to be in the '50s that one in 20 people needed a
license to legally perform their profession; now that number is
more like one in three. And licensing tends to raise prices to
consumers. So, for example, in some states, dentists must hire
a maximum of two hygienists. This is at the peril of losing
their license. In states where the number of hygienists that
may work with a dentist are restricted, dental exams are 7
percent more expensive. Economists have estimated that this
results in hundreds of millions of dollars that every year
could be in consumers' pockets.
Consumers, of course, are not the only ones who lose out.
Licensing makes it impossible for many would-be practitioners
to enter the market, effectively reducing their wages and
deterring entrepreneurship.
But is licensing a bad thing? Certainly, not all licensing
rules are harmful. Some improve service quality and public
safety enough to justify the costs. These are the licensing
restrictions that tend to solve the information issues and
other problems that make a totally free market for professional
services dysfunctional.
But there is a lot of economic evidence that many licensing
restrictions have no effect on service quality. And the way
that professional licensing is currently done through
practitioner-dominated boards with the fox guarding the
henhouse, no one has the tools or incentives to balance
licensing's economic costs against its benefits.
Here is where I see a role for federal law. Federal
antitrust law as it exists now is designed to balance these
economic considerations, and there are many antitrust
precedents striking down similar restrictions when they are
passed not by a board in a licensing context but by purely
private cartels. Antitrust law could be a powerful tool against
the excessive of state-level licensing. But most jurisdictions
have interpreted the antitrust statutes to shield licensing
boards from antitrust liability. The law here is complex, and I
would be happy to go into it in the questions, but suffice it
to say that most courts have allowed licensing boards to
operate immune from antitrust liability and that has meant
carte blanche to regulate to their own benefit at the expense
of the consumer and the excluded professionals.
But last year, the Fourth Circuit became the first
appellate court to deny a licensing board immunity and to
declare that one of its licensing restrictions violated the
Sherman Antitrust Act. That created a circuit split, and the
Supreme Court will review the case next term. It has granted
cert in that case. I feel strongly that the court should affirm
the Fourth Circuit's opinion and make it clear that because of
the self-dealing that inevitably happens when you give
competitors the reigns to their own competition, practitioner-
dominated licensing boards should have to answer to the Sherman
Antitrust Act, and that is because I think antitrust is not
only an appropriate but the best way to balance the economic
costs and benefits of licensing restrictions.
Thank you.
Chairman HANNA. Thank you.
Mr. Sandefur, part of what has not been talked about today
is the effect this has on the growth of government. I am
assuming that for every license there is someone behind a desk
someplace that is managing the testing, the whole process
through that. Can you, anyone, give me an idea of how you feel
that affects the overall growth and scope and cost of
government?
Mr. SANDEFUR. Yes. Thank you very much, Mr. Chairman.
The public choice economics predicts that when existing
firms have the opportunity to inflict burdens on entry and
impose costs on their potential competitors, they are going to
exploit that opportunity whenever it is worth it financially
for them to do so. And so what you find is not only do
licensing agencies employ a lot of people--inspectors and so
forth to make sure that people are complying with these laws
and running sting operations and things like this, but you find
that existing firms will also waste their money in policing
their rivals. They will watch what the other firms are doing or
potential competitors are doing with money that could be spent
on helping consumers and producing a better product.
As I mentioned sting operations, we see police departments
setting up sting operations for unlicensed movers in order to
arrest people for running a moving company without a license
when these police officers could be out there actually solving
real crimes. And these kinds of costs, if you put them together
and consider what they are nationwide, they must be tremendous.
But I do not know of any actual numbers that have ever been
done on that.
Chairman HANNA. Ms. Haw?
Ms. HAW. Yeah, I have something to add to that. I
absolutely agree with everything that Mr. Sandefur has said,
but also I think the real question is how does this affect the
scope of regulation, not so much the scope of government,
because to me these boards are not government; what they are is
a bunch of private competitors getting together to agree on
entry and agree on rules. So what I am worried more about than
the expansion of government is the expansion of regulation in
this area.
Chairman HANNA. Thank you very much.
Let me ask you a bit--or anyone who wants to answer this--
but implicit in all of this is that somehow there is some
public good attained. And we have something called ``free
enterprise'' that clears cut its own market. Bad actors get in,
people find out about their reputations, good or bad, they grow
or leave the market. So the assumption under all this to me is
that somehow government intervention improves that process,
keeps people out who otherwise should not be in and helps
people enter the system who are somehow better or likely better
at whatever it is they want to do. I do not buy that
personally, but I am interested in how you feel about it, Ms.
Haw. How you feel about letting the market be the market
versus--things like Angie's List, et cetera--versus government
trying to figure out that market in advance of free enterprise
doing it on its own.
Ms. HAW. So economists tell us that there are two possible
reasons why a free market for professional services will not
work, and that is information asymmetries, which means that I
as a consumer have less information than I really ought to have
in purchasing a service. And then something called
externalities, which means that when I purchase this service
and it turns out badly for me, I am not the only one who
suffers. So this is why we license engineers. So if I purchase
engineering services to build a bridge and that bridge
collapses, well, maybe I got a cheap engineer, maybe I got low
quality service, but the real problem is that I do not
internalize the cost when it collapses.
So what this suggests is that a licensing restriction needs
to address only serious problems of externalities and
information asymmetries. When we think about professions like
interior design or hair braiding, we have a lot of information
about these services with the advent of things like Angie's
List and other services on the Internet, and it is hard to
imagine a really terrible externality story where if you did
not like the decorating that you had done to your house or you
were not happy with that particular hair service, it somehow
proves to be a disaster for society. So certainly, I think
there are some professions that ought not to be licensed, and
even within the professions that ought to be licensed for the
reasons that I said, sometimes they go too far.
Chairman HANNA. Mr. Sandefur, that is an interesting
outline of where the limits begin I guess for you. And what
would you say to that?
Mr. SANDEFUR. First, the problem with the information
asymmetry argument in favor of government regulation is that it
presumes that the government has more information, which it
generally does not. Government officials do not know how to run
a moving business, for example. So what the government agencies
then do is they then recruit existing firms to give them that
information in theory, and that is just what leads to the
antitrust problems that Professor Haw was talking about, is
that then these entities get taken over by the industry in the
name of getting the kind of information to protect the
consumer. And, in fact, information asymmetry problems can be
solved better by private certification routes and private
review alternatives, like Yelp or Angie's List and so forth.
As for externalities, externalities are taken care of by
health and safety regulations that are routine already that say
anybody doing this business, whether you have a license or not,
if you hurt somebody you are liable for that. Plus, the
information asymmetry and externalities, those are not the only
two considerations. The more important and usually ignored
consideration is rent seeking, that is the exploitation of
government power by established firms to exclude their
competition. And this all sounds all very technical and
economic and modern but it is actually very old, and it goes
back to one of my favorite cases in the law, a case called
``The Case of the Upholsterers.'' Now, Ms. Morrow was talking
about licensing of interior decorators. There was a case about
licensing of interior decorators, in I think it was 1615,
called ``The Case of the Upholsterers'' where there was a law
that said you could not practice upholstery without permission
of the Upholstery Guild. And it was challenged in court, and
one of my great heroes, the Judge Sir Edward Coke, declared it
unconstitutional under the British Constitution. He said, ``No
skill there is in this for a man might learn it in six hours.''
And people said, ``Well, but it protects the consumers.'' And
he said, ``Unskillfulness is sufficient punishment.'' That is
perhaps my favorite line from any court opinion.
``Unskillfulness is sufficient punishment.'' If you are bad at
your job, people will not hire you. They will not shop from
you. That is a far better protection of the consumer than
creating a government apparatus that gets taken over by
established firms who use it to exclude competition, hurt
consumers, and bar entrepreneurs who need economic opportunity.
Chairman HANNA. Although government may be the one place
where you are protected when you are not good at your job.
Mr. SANDEFUR. Or with government power. That is right.
Chairman HANNA. Thank you.
Ms. Armstrong, you mentioned that there are hundreds of
people who become independent, become entrepreneurs, have that
sense of pride. Maybe give us a couple cases, because at the
end of the day, that is what this is all about, unleashing the
energy, the enthusiasm, the entrepreneurial nature of human
beings to become self-reliant, to be able to engage their own
juices and their own success. And government is holding that
back. Your own story is remarkable. I give you a lot of credit,
but other people who you know, maybe one or two examples for
the Committee.
Ms. ARMSTRONG. Sure there is Nina Lyons. And Nina Lyons,
when she graduated from high school wanted to be a professional
hair braider but learned quickly that without the cosmetology
license she was going to not be able to do that. And so she
chose instead to go work in a factory. I happened to meet Nina
Lyons around about the time this was all taking place, and
after the law was passed, she then came out of the factory, not
wanting to be there anyway, and came and worked in my salon.
And she is a very talented, gifted hair braider. And so she was
able to pursue what she had wanted to pursue 20 years prior.
There is also Loveeta Warren. She is down on the coast of
Mississippi, and she owns a braiding salon called Braid Baby.
As a matter of fact, she had opened a second location and this
is something that as a result of the law being passed enabled
her to be able to do this.
Chairman HANNA. These are taxpayers. I mean, these are the
people we need.
Ms. Morrow, do you want to add anything to that? I wonder,
implicit in all this regulation is somehow somebody is being
protected. Maybe you would like to push back on that, if you
want to. Because the suggestion is somehow there is bad
interior designers out there creating ugly homes or something;
I do not even know. But is there any reality in any of that?
Ms. MORROW. Well, to paraphrase Oscar Wilde, ``No one ever
died over the wallpaper.'' And there is no evidence whatsoever
that unregulated interior designers are harming the public.
There are three states that actually have full-blown licensing
laws, and this is after more than 30 years of the proponents
trying to get licensing laws. And after all that time there is
only three states. There was a fourth one. Alabama's was struck
down, declared unconstitutional. If interior designers were
being harmed or killed, certainly, we would have laws in far
more than three states. The 47 states that do not have
licensing would at least have some. And the licensing laws, the
bills that are introduced, you would not believe how far-
reaching they are.
I will just read you a couple of things that if you do not
have the right credentials, you cannot do designs, drawings,
diagrams, studies. You cannot consult with clients. You cannot
offer space planning. You cannot recommend furnishings. You
cannot draft contract documents. You cannot research or analyze
a client's requirements. How do you do interior design without
those things? You could not even give customers a
recommendation as an employee of Home Depot if some of these
laws were to pass.
Chairman HANNA. Ms. Haw?
Mr. SANDEFUR. And for me, add to that, Mr. Chairman, that a
lot of these laws are backed up by criminal penalties. Is that
the case in your situation?
Chairman HANNA. You can be jailed for bad floor design or
something like that?
Ms. Haw, so to get this straight, more harm is done with
these laws than without them. Can we say that in certain cases?
And I am interested. You seem to have a pretty clear idea of
where you would draw the line in terms of who should be
licensed and who should not. I think all of you probably do to
some degree. Could you generalize that? I mean, at what point
would you would say, or maybe there are a couple of industries
that are examples, but--go ahead. What do you think?
Ms. HAW. So this is why I think antitrust is such a great
tool for this particular question because to me it really is an
economic argument that the markets fail. And if the markets
fail, then maybe we need regulation and maybe we need
licensing. So if we back it up and we ask the question to begin
with, is a free market in this area filing, I think you will
find that for a lot of the currently regulated professions that
is not true. I think you will find for the professions in which
a truly free market may fail, a lot of the restrictions go too
far and they address market failures that are not there.
So the question that I would ask is, is this the kind of
industry in which we are likely to see a lot of information
asymmetries? Is this the kind of industry in which we have a
big problem with externalities? Then the second question would
be, does the restriction that we are considering, not just
licensing generally but this particular licensing restriction.
So let us say you want to license dentists. Well, how many
hours of schooling are you going to require? What level of
education are you going to require? What is the exam going to
look like? Every one of these questions should be answered with
the market failure in mind, and it should be allowed only if
that particular regulation addresses that market failure.
Ms. MORROW. Mr. Chairman, the free market works very, very
well in the interior design industry. Consumer are very savvy
these days. They have many means to investigate the
qualifications of interior designers, and not only that but
there are many private organizations that do different
credentialing. And if an interior designer wants to be
distinguished from his or her peers, they can certainly take
one of the exams and after it is passed they can market those
credentials, and if they get the job based on that, then they
have put that work into their own career.
Chairman HANNA. People build a body of work, they build a
reputation in the community they live in, and people can decide
to hire them or not.
Ms. MORROW. Exactly.
Chairman HANNA. So the fundamental piece of this is, is
government better at deciding who you want to have as an
interior designer or are you in your own market? And clearly,
failure clears out the market that the government is assuming
it is doing by not licensing certain people but may in fact be
limiting competition in a way that could actually encourage
less qualified people who are able to get over those hurdles to
have access where people that are equal might not. Is that
fair, Mr. Sandefur?
Mr. SANDEFUR. Yes, Mr. Hanna. I almost called you, Your
Honor.
Yes, Mr. Chairman, that is exactly right. And the Supreme
Court has made clear in every decision on this issue that
restrictions on entry into a trade must be related to a
person's fitness and capacity to practice the trade of
profession. The first Supreme Court decision on the
constitutionality of occupational licensing laws was Dent v.
West Virginia in 1883. I think it was about medical doctors.
And that was written by Justice Steven Field, who declared that
licensing laws on the entry into a profession are
constitutional if they are related to the trade and they are
attainable by reasonable study and practice. But otherwise,
they would violate a person's constitutional right to earn a
living.
The most recent decision on the question, Schware v. Board
of Examiners in 1957, struck down the effort of New Mexico to
bar members of the Communist Party from practicing law. And the
Supreme Court again said licensing laws can be used to protect
consumers but they must rationally relate to a person's fitness
and capacity to practice the profession. Unfortunately, I
mentioned the Certificate of Public Convenience and Necessity
laws for the moving laws have no relationship whatsoever, even
on their own terms, to a person's capacity to practice the
business of moving. They are written in such a way as to deny
qualified movers the opportunity to enter simply because there
are already enough movers in the minds of bureaucrats. Now, how
do bureaucrats determine how many movers there ought to be in a
market? They do not even do consumer assessments or research or
surveys or anything. The entrepreneurs often do but that is not
enough to persuade the bureaucracy. And a lot of these laws are
written in very vague terms.
Nevada, their licensing law for movers is the most
anticompetitive licensing law in the country. It says you can
only practice the trade of moving if it would ``foster sound
economic conditions.'' What does that mean? Well, last year I
was at a hearing in front of the Nevada State Senate
Transportation Committee. The head of the Department of
Transportation was asked, ``What does that mean?'' And he said,
and I quote, ``You know it when you see it.''
Now, that kind of discretion in the hands of bureaucrats
means it is going to restrict opportunities, it is going to
raise prices, it is going to availability of services, all
solely for private interest of those politically powerful
movers who do not want competition. It is unconstitutional and
it is unfair.
Chairman HANNA. Thank you. I appreciate your indulgence in
me, Ranking Member Meng. Thank you.
Ms. MENG. No problem.
Piggybacking off that question, and anyone is free to
answer, much of the application of antitrust law and licensing
cases falls on whether the licensing board is an entity of a
state. Can you please explain how the makeup and structure of
various licensing boards could be changed so that antitrust law
would apply to them? And how could simply reforming the
structure of a board help entrepreneurs gain access to more
occupations?
Ms. HAW. Well, I actually think that the way that boards
are currently comprised as they are right now, in most cases
they are subject to antitrust law. So this is where we get into
the controversy that is at play in the Supreme Court case, the
North Carolina State Board of Dental Examiners.
So most boards--we did some research into boards in
Tennessee and Florida--are dominated, which means there is a
majority of members holding seats on the board, are of the
profession, licensed people of the profession. I think it is 93
percent in Tennessee and in Florida it is 90 percent of boards
are this way. Under a correct interpretation of the state
action immunity that I referred to, those boards should be
subject to antitrust law. This is what I believe from my
research. It is what the FTC believes, and now a circuit court
has decided that. What we need is a Supreme Court case to come
in and say these boards, as they are currently comprised, are
subject to antitrust liability. So you would not need to change
the way the boards are organized in order to get that antitrust
liability.
Now, likely, if the boards as they are comprised now start
seeing more antitrust suits when these floodgates open, as they
would in the case of we got a favorable decision from the
Supreme Court, it may be true that the states will alter how
they do their regulation. They may actually change the
composition of those boards, and to my mind that is a good
thing because what they would have to do is they would have to
remove--at the very least they would have to remove that
majority on each board of the practitioners.
Ms. MENG. Besides the legal and health fields, what are
some of the most common licensed professions that you have seen
around the country that are overregulated? Where can states
ease regulations in some of these fields?
Mr. SANDEFUR. It is hard to answer what trades are the most
commonly regulated because you find that typically all the
states impose regulations and then there are some that are
contentious, like florist is only in Louisiana, and then there
are varieties of licensing requirements, like with interior
designers. It is only a violation of your First Amendment
rights and not of your Fourteenth Amendment rights. That is, it
only says you are not allowed to call yourself what you are but
you are still allowed to do that practice, for example.
So it is hard to answer that question, but industries like,
in my business running the Economic Liberty Project at Pacific
Legal Foundation, we have focused a lot on the moving industry
because this is an entry-level industry that has low startup
costs, it is a great opportunity for people who do not have
much work experience or education, and yet they are licensed in
the same way that natural gas pipelines and railroads are
licensed, which is absurd. And that is in, as I said, 22 states
in this country regulate the moving industry in that way. And
then there are lots of cities and counties that impose similar
kinds of regulations.
I think the way I would answer your question is that the
Certificate of Public Convenience and Necessity law for
ordinary competitive markets should be abolished entirely.
There is no rational justification for allowing existing firms
to veto their own competition in a perfectly normal competitive
market like moving or taxicab operations. Or these laws even
apply to hospitals. If you want to start a hospital, you cannot
start a hospital if the existing hospitals do not want you to.
Or buy medical equipment. We are talking about people's lives
now.
The island of Maui a few years ago, it only had one
hospital operating on the island run by the state, which meant
if you were injured far away from that hospital, you would have
to endure a long ambulance ride to the hospital. So some people
got together and said let us start a second hospital. The state
denied them a certificate of need to open a new hospital for
several years. It has since been granted. But when you consider
the fact that in an emergency every second counts, that means
that it is very likely that there is somebody who is dead today
who would not be dead if the state of Hawaii had not decided
that it was more important for them to prevent economic
competition against their state-run hospital.
So my answer to you would be that the Certificate of Public
Convenience and Necessity law should be radically scaled back
or abolished entirely, and the Federal government can do that
either as a condition of spending costs budgetary matters or
through federal civil rights legislation, which as I said, is
sorely needed in this area. The first federal civil rights law
in 1866 was primarily focused on protecting the right to
contract and the right to private property, and we have lost
sight of the importance of those rights in just the past few
decades. And I think it is really important for Congress to
consider that that hurts precisely those minorities who most
need that civil rights protection.
Ms. HAW. So Mr. Sandefur provides some shocking testimony
there, and I can shock it maybe in a different way.
So there are 1,100 different professions that are licensed
in at least one state, and I could be here for the rest of this
hearing listing these but I will just give you a few.
Locksmiths. This means it is illegal to do this unless you
have a government-issued license. Locksmiths, beekeepers,
fortune tellers, tour guides, shampooers. This list goes on and
on.
Mr. SANDEFUR. Fortune tellers. Even though it is literally
impossible to be a competent fortune teller.
Ms. MENG. I think we need to have another hearing to
determine if that is true.
Just to play devil's advocate, in New York City, many
areas, for example, you talk about moving companies. We have
heard lots of stories where moving companies will sort of prey
on people within certain communities. They will come and move
and steal people's furniture so people never see them again.
They will park, taking up parking spaces, and there is no way
to contact them or to hold them accountable, parking illegally.
And so how do you balance the interest of consumer protection
overregulating moving companies, for example?
Mr. SANDEFUR. The reason I am smiling is not because that
is a bad question but because I am actually in a dispute with
my moving company which just started yesterday, and it is quite
tense for me and stressful, and I am having to deal with this
exact problem myself. And there are perfectly normal remedies.
I could have hired a different company. I can review them badly
on Yelp. I can sue them if they break or steal my things. We
can call the police department if they steal my things, and so
forth and so on. There are plentiful regulations. You are never
going to have a regulatory system that will stop all harm. And
these Certificate of Public Convenience and Necessity laws have
no connection to that.
It is true. You have to satisfy the bureaucracy that you
would comply with the law in order to get a license, but that
does not prevent you from breaking the law if you choose to. So
these kinds of laws are not effective at protecting the public,
and protecting the public is more effectively, although not
perfectly, done through other avenues of the law.
Now, as far as New York City is concerned, you are almost
certainly aware that in the 1930s the city of New York capped
the number of taxicab licenses at I think it is something like
30,000, 13,000. I do not remember the number. Anyway, capped
the number of available taxicab medallions so that today there
are many cabs or fewer almost in New York City than there were
in the 1930s so that today a medallion to operate a single
taxicab in New York City costs a million dollars. Now, it is
not rich white guys driving taxis; right? So if you want to run
a taxi company, what you have to do is lease your license from
the few wealthy people who are able to afford them. And that
means that you are working from Monday until Thursday or so to
pay off the hundreds of dollars a week that you have to pay for
the lease of the license on your taxicab and then you get to
keep the money that you earn otherwise.
Is it any wonder that these licensing laws, not only do
they harm the poor and entrepreneurs, but they push people into
the underground economy or even deter them from getting a job
in the first place because it is just too hard and they cannot
imagine themselves getting that.
Ms. MENG. Several states have begun to offer better
reciprocity between their licensing regulations to enable
workers to start working immediately following moving to a new
state. This is especially beneficial for military families.
Besides offering portability to increase worker mobility across
state lines, what else can be done to reign in licensing laws?
Mr. SANDEFUR. Well, I would say that legislation that makes
clear--I would suggest something modeled on the Religious
Freedom Restoration Act or the Religious Land Use and
Institutionalized Persons Act that would say that restrictions
on the right to earn a living must satisfy a high threshold for
constitutionality. Another one would be what is being called
sunrise legislation. It is similar to sunset legislation.
Sunset legislation says a bill will expire unless it is
renewed. Sunrise legislation says to the legislature you have
to satisfy these standards in order to impose a new licensing
restriction.
There is a bill like this in Missouri right now. I just
testified in a committee there just a couple weeks ago. And
they are not binding. They do not actually prohibit the
legislature from restricting or imposing a new licensing
restriction, but they include certain factors that have to be
proved before the legislature will impose these restrictions.
And there are significant ones. They say prove that there is no
free market alternative available, and so forth and so on. I
think those are good ideas for reform.
Ms. HAW. What I would like to see is the correct
interpretation of the State Action Doctrine prevail in the
Supreme Court. And what that would mean for probably around 90
percent of boards in the U.S. is that they would be subject to
the antitrust laws and would have to balance the
anticompetitive effects against the pro-competitive effects.
Ms. MENG. Thank you. I yield back.
Chairman HANNA. A couple of quick questions.
What do you think this costs the economy in terms of job
creation? We have an example. A relatively small community of
hundreds, right, and in general, job creation--anybody? You
have talked to economists, Ms. Haw, maybe----
Ms. HAW. Yeah, you know, I know that--so some of the
figures that float around are licensing costs $100 billion to
consumers. That does not directly address the question of job
creation but it is going to be related to that; right? So
another statistic that I think is relevant here is licensing
tends to raise wages for the incumbent professionals. The
figure used to be 10 to 12 percent. Modern day to now says more
like 18 percent. So if we want to think about that as how it
would affect job creation, you can think about that as raising
the minimum wage or something. There are only so many places
these dollars can go. So that is going to constrict the labor
supply as well.
Mr. SANDEFUR. It is really impossible to answer that
question any more clearly than that because of what economists
call the ``broken window fallacy.'' The kind of costs that are
being imposed by licensing restrictions are in the form of jobs
that just never appear. So how do you measure that? How do you
measure the number of people who say, oh, I would like to start
a moving company but it is impossible to get permission so I am
not going to. And it is impossible to measure that.
The reason it is called the ``broken window fallacy'' is it
comes from an old story about a baker who arrives at his work
one day to see that somebody has shattered his window in the
middle of the night. And as he is sweeping up the glass, a
friend says to him, ``Well, do not worry. It is good for the
economy because now you will buy a new window to replace the
broken window.'' Well, that is nonsense because he was going to
spend that money on a new coat, and then he would have had both
a window and a coat. But now he only has a window. What you
never see is the unseen cost of this vandalism is the coat that
is never made and never appears.
And so what we have with economic restrictions like
licensing laws is how do you measure jobs that are never
created, or the innovation that might have occurred. The hair
braiding is a great example of this because licensing boards
define the scope of their practice as broadly as possible to
protect themselves from competition. Well, an entrepreneur
comes along and says, well, you know, I am not going to be a
barber. I have got an idea. I am going to just braid hair.
Well, then the barber and cosmetology board says, ``No, no. You
have to have one of our licenses.'' Now, this is an innovative
new business model. This is a new idea for a business that has
never been around before but is being forced into this category
of barbering that it really was not designed for it and was
imposed decades ago.
Well, we do not know the kinds of costs in terms of
innovation and creativity that these licensing restrictions
impose. It is literally incalculable.
Chairman HANNA. Well, what we do know from Ms. Morrow and
Ms. Armstrong is that there are literally thousands of people
who are held back from doing what they want to do because of
restrictions, barriers to entry that are so burdensome, either
do not try it or they try and they quit. We know that within
that, that lack of competition by its nature is a cost push.
Clearly no one would be interested in limiting the number of
moving companies if it were not something they thought moved to
their own bottom-line.
Mr. SANDEFUR. That is right. And you could try to measure
the costs of these licensing restrictions by measuring how much
time and energy the existing firms put in to restricting their
possible competition. In the interior design field, they put in
millions and millions of dollars to try and obtain licensing
laws that will restrict entrepreneurs from competing against
them. In the moving industry the existing firms would hire
lawyers and spend hours in the process of the hearing and
filing objections and these sorts of things in order to block
competition. So you could measure those kinds of costs and say
that that is more or less the cost of the license.
Chairman HANNA. If someone is going to tens of thousands of
dollars to keep someone out of their business, you can be darn
sure that it is for a reason.
Mr. SANDEFUR. That is right.
Chairman HANNA. And it is profit.
Yes, ma'am.
Ms. MORROW. Mr. Chairman, in the interior design business,
it is one national trade association that has spent allegedly
$8 million trying to get every state regulated. And not only
that but this same trade association, they created the exam
that you have to take and then spun it off and they created the
accreditation for the colleges that you would need to take,
spun that organization off. So there are these three
organizations that have been working together for over 40 years
to regulate the whole industry. We call that a cartel.
Chairman HANNA. Sure. Sure.
Ms. HAW. We do, too.
Chairman HANNA. So these manufactured requirements by
people who are already in the industry are designed to keep
other people out of whatever that is, raise prices, limit
competition, limit job creation.
What about innovation? I mean, what do you think of that? I
mean, that is just a though.
Ms. HAW. So Mr. Sandefur brought this up a minute ago, and
I think that is absolutely right. So you are seeing a lot of
this activity on the part of established boards of broadening
the definition of what their practice is. And this, of course,
is going to stifle innovation because any time you come up with
a new business model that is to the side of a profession,
suddenly you might find yourself receiving a cease and desist
letter that says, ``Oh, no, no. That is in our profession.''
So we are seeing this with teeth floaters. I guess horses
teeth do not naturally wear down and so you have to file them.
And it has traditionally been done by, you know, relatively low
level of education, just sort of you learn how to do it from
your family business-type thing. Well, suddenly, veterinarians
have decided that this is part of veterinary practice and
cannot be done unless you have a veterinary license which, of
course, as we know, is many, many years of education and
passing an exam. And guess what? They do not teach horse teeth
floating in vet school.
So the case that is actually before the Supreme Court is
about teeth whitening. So it was the Dental Board of North
Carolina saying, ``Oh, teeth whitening in all its forms is part
of dental practice.''
So as you see, the definition, not just more and more
professions coming under licensing, but the established
licensed professions becoming bigger and bigger, you are going
to be able to see less innovation on the margins of those
professions.
Chairman HANNA. My sister was a farrier and did that often,
filed teeth. And you are right. They just grow forever. They
are like rats.
So free markets work best. Consequences of what we are
describing here today are good and bad. There are good and bad
outcomes. But markets have a way of dealing with that. People
do not need the government to tell them every little thing they
need to know about who they are hiring. And like you said, in
terms of moving vans in New York City, just because you have a
license does not mean you are not a thief, no more than it
means you are not good at what your job is. So with that,
unless--we have a little time if anyone would like to----
Mr. SANDEFUR. I do have one other point I would make in
terms of economic costs, and that is what economists call the
``Cadillac effect.'' The ``Cadillac effect'' is when government
regulation makes it such that you can buy a Cadillac or nothing
at all. Right? A restriction that says if you want a car it
must be a Cadillac. And that is often what happens in terms of
regulation of professions that say if you want to hire a
lawyer, it has to be a lawyer who has gone through this many
hours of continuing legal education. Or if you want to hire a
hair braider, actually, you have to hire a barber. And this
prices people out of the market and that is what causes a lot
of black market problems.
Chairman HANNA. Would you like to comment on Tesla?
Mr. SANDEFUR. Or UBER are other examples of the recent
headlines in which new and innovative business models have been
excluded from the market by really obsolete licensing
restrictions for taxicabs or car dealers.
Ms. HAW. Yeah. And can I just say a lot of the stuff we
talked about today is kind of shocking but it is also
completely mundane. If you asked competitors, ``Who do you want
to compete with?'' they are going to say as few people as
possible. If you are going to ask dealers, you know, do you
want Tesla to direct market their cars, they are going to say
no. So on the one hand this is all surprising; on the other
hand to me it seems really unsurprising.
Mr. SANDEFUR. And it is not new. I mean, I mentioned the
17th century cases. Lord Coke, when talking about licensing
laws, said that the people who advocate for licensing laws are
like a man rowing a boat. They look one way but they row the
other. They pretend public benefit but intend private.
Chairman HANNA. You are a man without lack of anecdotes.
I want to hit one other theme because I think it is very
important. And that is that minorities and women who--I have
friends who sell Mary Kay. You have friends who do braiding and
other things. These are cottage industries that can be done
within the confines of someone's existing lifestyle if they can
find the time. If they have children, stay-at-home mother. So,
I mean, I find it compelling that in your case, Ms. Armstrong,
that people are able to become independent through being
entrepreneurs and able to probably stay home with their
children while they do this. The same with you, Ms. Morrow. So
we are really hurting a class of people, women and minorities--
and I will just throw this out there, if you can confirm it or
not--it disproportionately affects people trying to manage in
let us say marginal circumstances, that we have an opportunity
to help them be transcendent and through these licensing laws
we are actually hurting the people we are pretending to help in
some cases with these laws.
Any comment about that?
Ms. MORROW. Yes. And you really hit on something because
that is one of the main complaints that the cartel uses. They
say anyone can hang out a shingle and be an interior designer.
And yes, in 47 states that is true. But, you know, as I said
before, consumers are very savvy and the needs of the person
who is practicing are different, too. And you have the person
who wants to do a lower level of design and you have the person
who wants to do a hospital. And the thing is the person who is
responsible, the administrator of the hospital is not going to
hire the person who hung out their shingle yesterday. They are
going to very vigorously vet the interior designer who is going
to design.
So there are different levels. And there are consumers for
all levels. And if only the wealthy or only the big businesses
could hire an interior designer, I do not think that is right.
I think everyone should have good interior design. And it is
such a diverse field that anyone can come into it. They can
create their own little niche for customers that like what they
are selling and, you know, for as many hours as they want to
work and support their family.
Chairman HANNA. So free enterprise works best, government
interference is often the law of unintended consequences which
creates more dislocation and damage economically than it
intends, and people use government to protect their own self-
interests in a way that keeps others out, and in particular, in
Ms. Armstrong's case and yours, stay-at-home moms and
minorities and a whole class of people that really are not in a
position to climb over those hurdles that the government has
thrown at their feet.
I want to thank you all for being here today. You have
provided great input and done a wonderful job, all of you.
If there are on further questions, I ask unanimous consent
that members have five legislative days to submit statements
and supporting materials.
Without objection, so ordered.
That is it. Thank you.
[Whereupon, at 11:15 a.m., the Subcommittee was adjourned.]
A P P E N D I X
Testimony of Melony Armstrong
African Hairbraider
Owner of ``Naturally Speaking'' Salon, Tupelo, Miss.
Before the U.S. House of Representatives
Committee on Small Business
Subcommittee on Contracting and Workforce Hearing
Thank you, Mr. Chairman and members of this committee.
My name is Melony Armstrong.
It may surprise members of this committee to learn that,
not too many years ago, the State of Mississippi demanded that
I register my hands with the government.
No, I'm not a secret agent.
But my work has had a powerful impact in the fight for
freedom.
Every day across Mississippi, hundreds of low-income
families are housed because of my advocacy and hard work. But I
don't run a shelter.
They are clothed through what I've done. But I don't run a
second-hand clothing store.
They are fed as a direct result of what I have achieved and
continue to achieve. But I don't run a soup kitchen.
I have transformed the lives of literally hundreds of poor
women in my state of Mississippi not because I sought out
government assistance for them; rather, because I demanded that
the government get out of my way so I could provide for myself
and for my family, and so other women around me could do
likewise in peace, dignity and prosperity.
What I achieved and what each of these women is now
achieving across the American Southeast is happening because of
one simple fact: We demanded the government respect our
economic liberty--the right to earn an honest living in the
occupation of our choice free from unnecessary government
regulation.
I am an African hairbraider.
And if a lone braider in Tupelo, Miss., could have such a
transformative impact helping to change the law to free so many
around me to earn an honest living, imagine what could happen
across our nation if state and local governments followed that
example.
Not every entrepreneur is a Bill Gates or a Henry Ford.
Some are and will remain more humble in the scope of their
impact. But that doesn't mean the impact is not significant in
the lives of those around them.
Imagine the creative forces that would be unleashed if
government respected the rights of other would-be entrepreneurs
who want to braid hair, or drive cabs, or sell flowers by the
roadside, or pursue any of a hundred or more occupations that
would otherwise be easy to pursue if only the government didn't
needlessly stop entrepreneurs from doing so for no better
reason than to protect the politically powerful from
competition.
Each day, I work to demonstrate the power of one
entrepreneur.
As my story demonstrates, the power of one entrepreneur can
transform not only a life, or an industry or a community; the
power of America's entrepreneurs can transform our nation.
African hairbraiding is a skill that has been passed from
one generation of women to another for the past 3,000 years of
recorded history. For the vast majority of those 100-plus
generations, women like me have practiced this craft with no
government oversight, with no government-issued license, with
no government-imposed demands. We learned from the previous
generations by doing, and in so doing, we were free to earn a
living for our families.
But even with that history, to open my hairbraiding salon--
Naturally Speaking--in Tupelo in 1999, was no easy task; it
took not only persistence and hard work, it also took a lawsuit
and lobbying. It took all this even though I wanted to practice
an occupation that is perfectly legal and perfectly safe.
To get paid to braid hair, many states demand hairbraiders
obtain a cosmetology license or other similar license--
typically requiring up to 2,100 hours of coursework.
That is more than a year's worth of study, 40 hours a week
taking classes from educational institutions that more often
than not don't teach braiding in their curriculum.
Let me say that again: the government in many states
requires would-be braiders to take thousands of hours of
classes that have literally nothing to do with the trade they
want to practice.
When I first opened my doors as a hairbraider, I had to
earn a ``wigology'' license (yes, there is such a thing), which
required 300 hours of coursework, none of which covered
hairbraiding.
To teach others how to braid hair, however, which was my
ultimate goal, the state of Mississippi required me to obtain a
cosmetology license (another 1,200 hours of classes in addition
to the 300 I completed for wigology), then a cosmetology
instructor's license (another 2,000 hours of classes) and then
apply for a school license--hours I could use more productively
running my business, teaching others about braiding,
volunteering in my community or nurturing my family. Again,
none of the required instruction actually spent any time
teaching the student how to braid hair.
In the 3,200 classroom hours it would have taken for me to
earn a license to teach hairbraiding, I could instead have
become licensed in all of the following occupations in
Mississippi:
Emergency medical technician-basic (122
hours plus five emergency runs),
Emergency medical technician-paramedic
(1,638 hours),
Ambulance driver (8 hours),
Law enforcement officer (400 hours),
Firefighter (240 hours),
Real estate appraiser (75 hours) and
Hunting education instructor (17 hours).
And that would all take more than 600 hours less than
obtaining a license to teach braiding.
The group that benefited most from Mississippi's regulatory
regime was the cosmetology establishment. Practicing
cosmetologists made up the State Board of Cosmetology and could
set the bar for entry to their occupation high (and thereby
keep competition to a minimum), and cosmetology schools enjoyed
captive customers.
I was not about to submit to such naked economic
protectionism. Instead, I decided to take on both the political
establishment and the cosmetology regime, which had convinced
lawmakers to limit entry into the trade.
In August 2004, I joined with two aspiring hairbraiders,
who wanted to learn the business from me, and with the
Institute for Justice--a public interest law firm that
represented us for free--to file a lawsuit against the state to
break down the regulatory walls barring potential entrepreneurs
from entering the field.
In the months that followed, I took weekly trips to the
state capital of Jackson (a seven-hour round-trip from Tupelo)
working to convince legislators to change the law.
We didn't go to the government seeking a handout. Across
the board, braiders are independent individuals who take great
pride in providing for themselves and their families through
their own handiwork.
In 2005, all of our efforts paid off: Mississippi's
governor signed legislation enabling hairbraiders to practice
their occupation without the burdensome government-mandated
classes. The only requirement now are that hairbraiders must
pay a $25 fee to register with the state and abide by all
relevant health and hygiene codes.
It is rewarding to know that the influence of my work is
felt beyond the Tupelo area. Since the restrictions were
lifted, more than 800 women provide for themselves as
hairbraiders, taking once-underground businesses ``legit'' and
opening new enterprises in places where customer demand was
once unmet. And because of the change in Mississippi's laws,
aspiring braiders are moving here from nearby states, including
Tennessee, Alabama and Arkansas.
One of the greatest benefits of our success is that it
moves aspiring entrepreneurs from the ``underground economy''
into the ``formal economy.'' In the underground economy,
braiders are forced to operate off the books and out of sight
of intimidating and sometimes ruthless regulators who are often
out to shut them down to protect the status quo.
Regulators often don't care about people's dreams; they
only care about enforcing codes, laws and regulations that
justify their existence. And as they drive around, looking for
the next ``scofflaw'' to shut down, those lawbreakers (who are
nothing more than people trying to work hard to support
themselves and provide an otherwise perfectly legal service)
must fear that next knock on the door, which could mean losing
what they've worked for, paying steep fines and, in some cases,
even going to jail for practicing their trade.
Freed from needless government-created barriers, I have now
gone on to teach more than 125 individuals how to braid hair.
No longer blocked from putting industrious individuals to work,
I have employed 25 women, enabling them to provide for
themselves and their families. For many of these women, the
money they earn from braiding represents the first steady
paycheck they have earned in their lives.
For years, the government tried to stop me from doing all
this good--stop me from reaching my full potential and from
helping others to do likewise through the dignity of honest
enterprise. In too many states and in too many occupations
across the country, these kinds of government-imposed barriers
to earn an honest living still exist.
Thank you for holding this hearing to alert the public to
this problem. I hope lawmakers in every state across the
country are paying attention and will heed our calls to remove
those laws that do nothing but prevent honest competition in
trades from coast to coast.
Thank you.
--------------------
Melony Armstrong is the owner of Naturally Speaking, a
hairbraiding salon in Tupelo, Miss. For more information on
economic liberty, visit: www.ij.org/PowerOfOneEntrepreneur.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. House Committee on Small Business
Subcommittee Hearing on Contracting and Workforce
Testimony of Patti Morrow
March 26, 2014
My name is Patti Morrow; I live in Greer, SC:
Interior Designer/President - Juxtapose
Interior Design
Certified in Residential Design (RIDE)
Certified Aging in Place Specialist (CAPS)
Board of Directors, Design Society of
America (DSA)
Founder of Interior Design Protection
Consulting (IDPC)
Like many other interior designers, I entered the field as
a second career. When my children were 10 and 13, I enrolled in
a 2-year interior design program at the New Hampshire Institute
of Art (I was living in New Hampshire at the time). There were
about 25 women in the class, all second-career changers.
As I was nearing the end of the interior design program,
HB-881 was introduced in the New Hampshire legislature. If
enacted, this bill would have become the most restrictive
interior design law in the country and would have prohibited me
from my dream of having my own interior design business.
In order to legally practice, an interior designer would
need to have the ``proper'' credentials, aka ``Three E's:''
1. Education. Graduate with a 4-year Bachelor Degree
in Interior Design from an expensive, exclusive,
privately accredited college. There are no such schools
in the entire state.
2. Exam. Pass the National Council for Interior
Design Qualification (NCIDQ) exam, an extremely
burdensome private exam, which
a. Historically has had a less than a 40%
passage rate for all three sections taken at
the same time;
b. Can cost well over $2,000 to take
$1,200 just to apply for the
test
Add in the cost of study
guides and prep classes
Travel and accommodations to
take the 2-day exam.
Each time a part of the test
is failed, there's another fee to be
paid
c. Is not under the purview of the state
legislature, so anytime the exam is changed, it
would result in defacto legislation, changing
New Hampshire law without the knowledge or
consent of the state legislature.
3. Experience. Complete an internship under one of
the proposed licensed (NCIDQ-certified) designers which
could take anywhere from 2 to 15 years. There were only
25 NCIDQ-certified in the entire state, and there was
no guarantee that they:
a. Supported the licensing scheme
b. Were in a financial position or had enough
work to hire an apprentice
c. Would be willing to pay vs. just offering
a free internship
d. Would want to train a new designer who
would eventually become a competitor
This bill was well in excess of what is needed to practice
interior design, and would have put not only me, but the
overwhelming majority of interior designers in New Hampshire
out of business.
But why? What logical reason could there be for putting so
many small business entrepreneurs out of business and creating
a barrier to entry for anyone wishing to enter the field?
The bill asserted that interior design licensing was
necessary to protect the health and safety of the public. But
after doing my own extensive research, I found some very
important facts:
There's not a shred of evidence which would
warrant a conclusion that the unregulated practice of
interior design places the public in any form of
jeopardy.
13 state agencies have studied the need for
interior design regulation (sunrise and sunset reviews,
Federal Trade Commission investigations, etc.) and
without exception, all recommended against any type of
regulation on the basis that it would add absolutely
nothing to protect the public beyond that which is
already in place (building inspectors, Certificate of
Occupancy requirements, architects/engineers, fire
marshals, construction code enforcement officials,
consumer affairs actions, etc.).
According to the Better Business Bureau and
other data, since 1907, only 52 lawsuits have been
filed against interior designers in the entire country.
And nearly every single one of those involved contract
disputes, not safety issues.\1\
---------------------------------------------------------------------------
\1\ Designing Cartels, Dick Carpenter II, Ph.D., http://www.ij.org/
designing-cartels-economic-liberty
It seemed to me that monopoly and the denial of free
enterprise was the true objective of HB-881. This bill had come
about not through public outcry or legislative determinations
that regulation was necessary for the public good, but solely
through the efforts of industry insiders who were asking the
legislature to eliminate their competition for their own
---------------------------------------------------------------------------
personal monetary gain.
This is obviously not a legitimate goal of good government,
and I was not going to just sit back and let this small special
interest group dictate who could and who could not practice
interior design!
I contacted every interior designer and student I knew and
organized a grassroots group to attend the hearing and testify
against this bill. That bill was mercilessly defeated at that
hearing in March of 2007 and has never reared its ugly head
again.
Two years ago, I moved to South Carolina, and it was deja
vu, all over again. In 2012 and 2013, I had to take time away
from my business to drive to Columbia multiple times to speak
with legislators and testify at hearings. As of right now, the
latest bill has been tabled.
But for how long?
Licensing this industry is nothing more than restraint of
trade and is a JOB KILLER.
Interior design is a dynamic profession that celebrates
innovation, creativity and diversity. Imposing a one-size-fits-
all licensing scheme on the profession could not be more
contrary to those values.
Because I am passionate about this topic, for the last
eight years I have been networking and helping interior
designers all across the country to help them protect their
right to practice.
80% of interior designers are small business
owners \2\ and according to the Bureau of Labor
Statistics, 40% are actually sole proprietors.\3\
---------------------------------------------------------------------------
\2\ Icon, American Society of Interior Designers, 3/2014 http://
browndigital.bpc.com/publication/?i=199326
\3\ The Interior Design Profession: Facts and Figures, American
Society of Interior Designers, 2007.
---------------------------------------------------------------------------
84% of practicing interior designers do not
have a degree in Interior Design \4\
---------------------------------------------------------------------------
\4\ Ibid
---------------------------------------------------------------------------
According to a study done by Harrington and
Treber (Kenyon College), interior design regulations
disproportionately exclude Hispanics, African Americans
and second career-switchers.\5\
---------------------------------------------------------------------------
\5\ Designed to Exclude, Harrington & Treber, 2009 http://
www.ij.org/images/pdf--folder/economic--liberty/
designed-to-exclude.pdf
---------------------------------------------------------------------------
Licensing prevents potential entrepreneurs
of low income means from entering the work force,
because they may not be able to afford the tuition of a
four year college, the burdensome exam costs, or
working for several years as an apprentice at little or
no pay.\6\
---------------------------------------------------------------------------
\6\ The Myth of the ``Three E's,'' Patti Morrow, 2010, http://
www.idpcinfo.org/THREE--E--s.pdf
Where do you draw the line? If you don't have the ``right''
credentials, you would be restricted from offering the
---------------------------------------------------------------------------
following:
Designs, drawings, diagrams, studies
Consultations with clients
Offering space planning services
Recommend furnishings
Drafting contract documents
Researching and analyzing a client's
requirements
These licensing bills are incredibly far reaching. You
could not even give customers a recommendation as an employee
of Home Depot!
And consumers lose, too. The Federal Trade Commission
concluded that interior design regulations result in higher
costs and fewer choices to consumers.\7\
---------------------------------------------------------------------------
\7\ United States of America, Federal Trade Commission, Dallas,
1987 and 1989
If there's a happy ending to this story, it's this....
Since 2007, over 150 state bills which would have expanded or
---------------------------------------------------------------------------
enacted new interior design regulations have been defeated.
But like zombies, they just won't stay dead!
Conclusion
When Barack Obama was elected President, he did what many
Presidents before him did--he redesigned the living quarters of
the White House. Now, the District of Columbia is one of only
four places in the United States that has full restrictions on
practicing interior design without a license. So who did he
hire? Michael Smith, an un-licensed interior designer from
California. I'm sure he did not for one minute think he was
placing the health and safety of his little girl in jeopardy.
If it's okay for the most protected person in the world to
hire an unlicensed interior designer, shouldn't it be okay for
everyone?
THE COST OF EXCESSIVE OCCUPATIONAL REGULATION AND WHAT ANTITRUST
LIABILITY FOR LICENSING BOARDS CAN DO ABOUT IT
By Rebecca Haw
This testimony reflects only my views on the subject and
not that of Vanderbilt Law School or Vanderbilt University. It
draws from Aaron S. Edlin & Rebecca Haw, Cartels by Another
Name: Should Licensed Occupations Face Antitrust Scrutiny?, U.
Pa. L. Rev. (forthcoming 2014), a draft of which is available
at http://ssrn.com/abstract=2384948.
Introduction
Although often overlooked, state licensing boards have
become a significant exception to the Sherman Antitrust Act's
ban on cartels. Boards are largely dominated by active members
of their respective industries who meet to agree on ways to
limit the entry of new competitors. But professional boards,
unlike cartels in commodities or consumer products, are
sanctioned by the state--even considered part of the state--and
so are often assumed to operate outside the reach of the
Sherman Act under a doctrine known as state action immunity.
The cost of the cartelization of the professions is on the
rise. In the 1950s, only about five percent of American workers
were subject to licensing requirements; now nearly a third of
American workers need a state license to perform their job
legally, and this trend is continuing.\1\ Some recent
additi8ons to the list of professions requiring licenses
include locksmiths, beekeepers, auctioneers, interior
designers, fortune tellers, tour guides, and shampooers. And
even the traditionally-licensed ``learned professions'' are
seeing a proliferation of licensing restrictions and
regulations.
---------------------------------------------------------------------------
\1\ See Morris M. Kleiner & Alan B. Krueger, Analyzing the Extent
and Influence of Occupational Licensing on the Labor Market, 31 J. Lab.
Econ. S173, S198 (2013).
The excesses of professional licensing are easy to
illustrate, Cosmetologists, for example, are required on
average to have ten times as many days of training as Emergency
Medical Technicians (EMT). In Alabama, unlicensed practice of
interior design was a criminal offense until 2007. In Oklahoma,
one must take a year of coursework on funeral service
(including embalming and grief counseling) just to sell a
casket, while burial without a casket at all is perfectly
legal. And in some states, nurse practitioners must be
supervised by a physician, even though studies show that nurse
practitioners and physicians provide equivalent quality of care
where their practices overlap.\2\
---------------------------------------------------------------------------
\2\ Morris M. Kleiner, et al., Relaxing Occupational Licensing
Requirements: Analyzing Wages and Prices for a Medical Service, NBER
Working Paper No. 19906 (February 2014).
Labor economists have shown that the net effect of
licensing on the quality of professional services is
unclear.\3\ What is clear, according to their empirical
studies, is the effect of licensing on consumer prices. Morris
Kleiner, the leading economist studying the effects of
licensing on price and quality of service, estimates that
licensing costs consumers $116 to $139 billion every year.\4\
And consumers are not the only potential losers, since more
licensing means fewer jobs. To be sure, not all licensing rules
are harmful. Some improve service quality and public safety
enough to justify the costs, but many do not.
---------------------------------------------------------------------------
\3\ See Carolyn Cox & Susan Foster, Bureau of Econ., FTC, The Costs
and Benefits of Occupational Regulation 21-27, 40 (1990).
\4\ Morris M. Kleiner, Licensing Occupation: Ensuring Quality or
Restricting Competition? 115 (2006).
Despite wide recognition of the potential for economic harm
associated with allowing professions to control their licensing
rules and define the scope of their art, real reform is
elusive. Part of the reason is that, in the professional
licensing context, the most powerful legal tool against
anticompetitive activity appears unavailable. Most
jurisdictions interpret the Sherman Act to shield licensing
boards from antitrust liability despite the fact that the
boards often look and act like antitrust law's principal
target. Other avenues for reform, including constitutional
suits asserting the rights of would-be professionals, have done
little to slow or reverse the trend towards cartelized labor
---------------------------------------------------------------------------
markets.
Last year, in North Carolina State Board of Dental
Examiners v. FTC,\5\ the Federal Court of Appeals for the
Fourth Circuit upheld an FTC decision finding a state licensing
board liable for Sherman Act abuses, becoming the only
appellate court to expose a licensing board to antitrust
scrutiny and thereby creating a split between circuit courts.
The Supreme Court has now granted certiorari, and one hopes the
Court will take this opportunity to hold boards composed of
competitors to the strictest version of its test for state
action immunity.
---------------------------------------------------------------------------
\5\ 717 F.3d 359 (4th Cir. 2013).
In this testimony, I will cover three topics. First, I will
sketch the economics of licensing, and the forces that gave
rise to our system of professional self-regulation. Then I will
discuss antitrust law as what I consider the most effective
federal intervention in this otherwise state-level issue.
Finally, I will briefly explain the legal landscape that gave
rise to the circuit split over state action immunity for
licensing boards and explain what I consider the Court's best
course of action in next term's North Carolina State Board of
---------------------------------------------------------------------------
Dental Examiners.
I. Occupational Licensing Boards: The Road to Cartelization
A. The Scope of Professional Licensing: Big and Getting Bigger
Once limited to a few learned professions, licensing is now
required for over 800 occupations.\6\ And once limited to
minimum educational requirements and entry exams, licensing
board restrictions are now a vast, complex web of
anticompetitive rules and regulations. The explosion of
licensing and the tangle of restrictions it has created should
worry anyone who believes that fair competition is essential to
national economic health.
---------------------------------------------------------------------------
\6\ Kleiner, supra note 4, at 5.
The expansion of occupational licensing has at least two
causes. First, as the U.S. economy shifted away from
manufacturing and towards service industries, the number of
workers in licensed professions swelled, accounting for a
greater proportion of the workforce. Second, the number of
licensed professions has increased. Where licensing was once
reserved for lawyers, doctors, and other ``learned
professionals,'' now floral designers, fortune tellers, and
taxidermists are among the jobs that, at least in some states,
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require licensing.
Since boards are typically dominated by active members of
the very profession that they are tasked with regulating, this
dramatic shift toward licensing has put roughly a third of
American workers under a regime of self-regulation. A study I
conducted with my co-author Aaron Edlin revealed that license-
holders active in the profession have a majority of 90% of
boards in Florida and 93% of boards in Tennessee. Given this
composition, it is not surprising that boards often succumb to
the temptation of self-dealing, creating regulations to
insulate incumbents rather than to ensure public welfare.
B. The Anticompetitive Potential of Occupational Licensing
The anticompetitive potential of licensing is best
illustrated with actual regulations passed by practitioner-
dominated boards. What follows is by no means a complete list
of excessive regulations, but it serves as a sample.
1. The New ``Professions''
In Louisiana, all flower arranging must be supervised by a
licensed florist, a scheme successfully defended in court as
preventing ``the public from having any injury'' from exposed
picks, broken wires, or infected flowers.\7\ Minnesota (along
with several other states) now defines the filing of horse
teeth as the practice of veterinary medicine, a move that has
redefined an old vocation as a regulated profession subject to
restricted entry and practice rules despite the fact that many
consider the practice to be low-skill and low-risk. Similarly,
state cosmetology boards have responded to competition from
African-style hair braiders and eyebrow threaders by demanding
that braiders and threaders obtain cosmetology licenses before
they can lawfully practice their craft, even though practice
requires no sharp instruments or chemicals, and involves no
significant risk of infection.
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\7\ Meadows v. Odom, 360 F. Supp, 2d 811, 824 (M.D. La. 2005),
vacated as moot, 198 F. App'x 348 (5th Cir. 2006).
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2. Old Professions, New Restrictions
In many states, dental licensing boards restrict the number
of hygienists a dentist can hire to two, a practice the FTC
argues raises price but has no effect on quality of dental
care.\8\ Similarly, the advent of nurse practitioners and
physician assistants has ignited a turf war between these
``physician extenders'' and doctors, resulting in a national
patchwork of regulation related to physician supervision
despite the fact that outcome studies reveal that unsupervised
extenders' services are as safe and effective as that of
supervised extenders. Lawyers, too, use licensing to limit
competitions: advertising restrictions insulate lawyers from
competition from other lawyers who can claim better average
outcomes for clients. Moreover, each state has its own bar exam
and licensing procedure, which reduces lawyer mobility across
state lines. The justification for this is colorable--a
different exam is necessary for each jurisdiction because of
differing state laws--but it fails to account for practices
such as California's requirement that lawyers qualified in
other states retake the multistate portion of the exam when
sitting for the California bar.
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\8\ J. Nellie Liang & Jonathan D. Ogur, Bureau of Econ. Staff Rep.
to the F.T.C., Restrictions on Dental Auxiliaries: An Economic Policy
Analysis 44-47 (1987).
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C. How We Got Here: Why License, and Why Self-Regulate?
1. The Economics of Licensing
The past twenty years have witnessed an explosion of
empirical work on the effects of licensing restrictions on
service quality and price. Economists agree that a licensing
restriction can only be justified where it leads to better
quality professional services--and that for many restrictions,
proof of that enhanced quality is lacking.
a. The Costs of Licensing: Higher Consumer Prices
Studies that have the statistical power to identify a
relationship between licensing and wages tend to suggest that
licensing requirements raise wages by 10% to 18%, which has an
obvious effect on consumer prices.\9\ Likewise, most studies
examining practice restrictions show that when a licensing
board is more heavy-handed in dictating hours, advertising, or
levels of supervision within a profession, the consumer prices
are higher. For example, restricting the number of hygienists a
dentist may employ increases the cost of a dental visit by
7%,\10\ and in optometry, restrictions on advertising have been
shown to inflate prices by at least 20%.\11\ Geographic
restrictions--like nonreciprocity between states--also tend to
increase consumer prices.\12\
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\9\ Morris M. Kleiner, Regulating Occupations: Quality or
Monopoly?, Emp't Research (W.E. Upjohn Inst., Kalamazoo, Mich.), Jan.
2006, at 2 tbl.1, available at http://research.upjohn.org/
empl--research/vol13/iss1/1.
\10\ Liang & Ogur, supra note 8, at 40, 43.
\11\ John E. Kowka, Jr., Advertising and the Price and Quality of
Optometric Services, 74 Am. Econ. Rev. 211, 216 (1984).
\12\ One study estimated that universal reciprocity between states
for dentists would result in a geographical reallocation of dentists
generating $52 million (in 1978 prices) in consumer surplus. Bryan L.
Boulier, An Empirical Examination of the Influence of Licensure and
Licensure Reform on the Geographical Distribution of Dentists, in
Occupational Licensure and Regulation 73, 94-95 (Simon Rottenberg ed.,
1980).
But to get a complete picture of the economic harm from
professional licensing, one needs a theory of how efficiently
an unrestricted market would function. Advocates of licensing
argue that the free market would do a poor job of efficiently
allocating professional services to consumers because service
quality would be too low without licensing. To the advocates of
professional licensing, measuring the value of licensing by
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observing its effect on prices misses the point.
The notion that a free market would result in too-low
quality service rests on two possible sources of failure in the
market for professional services. First, absent licensing, the
asymmetry of information between professional providers and
consumers about the quality of service would create what
economists call the ``lemons problem.'' Second, free markets
for professional services would result in sub-optimal quality
because the market participants (providers and consumers) do
not internalize all the costs of bad service. In other words, a
free market for professional services creates negative
externalities. But if licensing has any effect on the market
failures it is designed to address, then it should improve
service quality.
b. The Benefits of Licensing: Improved Quality?
The economic research on quality of service as a function
of licensing paints a murky picture. Some studies show modest
increases in quality, at least for some kinds of consumers, but
other studies do not find that same effect. A few studies even
claim to show that licensing reduces quality.\13\
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\13\ For a comprehensive discussion of this research, see Aaron S.
Edlin & Rebecca Haw, Cartels by Another Name: Should Licensed
Occupations Face Antitrust Scrutiny?, U. Pa. L. Rev. (forthcoming
2014), a draft of which is available at http://ssrn.com/
abstract=2384948.
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2. The Durability of Our System of Professional Self-Regulation
If licensing can at least theoretically benefit consumers,
why do we see so many obviously harmful licensing restrictions?
The answer may lie with our current system of professional
self-regulation, and its striking durability in the face of
wide-spread criticism. When it comes to professional
regulation, states have largely handed the reins of competition
over to the competitors themselves. States justify this move by
arguing that expertise is essential to creating efficient
regulations, but it creates an obvious temptation of self-
dealing. In any other context, antitrust law could be used to
prevent combinations of competitors from maximizing their own
welfare at the expense of consumers. But because the dominant
interpretation of antitrust immunity holds boards immune from
Sherman Act scrutiny, antitrust law has until now had little
impact on professional regulation. That leaves only
constitutional avenues of redress, which have proven to be weak
against self-dealing boards.
a. State Action Immunity Shields State Licensing Boards
from Antitrust Liability
The Supreme Court first created antitrust immunity for
``state action'' in Parker v. Brown,\14\ shielding state
governments and bodies delegated a state's authority from
federal antitrust liability. In holding that the Sherman Act
does not apply to state government action, the Court found the
identity of the actor--the state or private citizens--essential
but provided no guidance on how to draw the line. This created
serious problems for lower courts trying to apply Parker
because states rarely regulate economic activity directly
through a legislative act. Rather, states delegate rulemaking
and rate-setting to agencies, councils, or boards dominated by
private citizens.
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\14\ 317 U.S. 341 (1943).
The Court responded in 1982 with California Retail Liquor
Dealers Ass'n v. Midcal Aluminum,\15\ which provided a test to
distinguish private action from state action. To enjoy state
action immunity, the Court held, the challenged restraint must
be ``one clearly articulated and affirmatively expressed as
state policy to restrict competition,'' and the policy must be
``actively supervised by the State itself.'' Since Midcal,
however, the Court has created a category of entities not
subject to the supervision requirement at all.\16\ These
entities, which include municipalities, enjoy immunity if they
can meet the clear articulation prong alone. The circuits are
split on whether state licensing boards are like municipalities
in this respect; in particular, whether licensing boards
dominated by competitors--who regulate the way they compete and
exclude would-be competitors--enjoy state action antitrust
immunity without being supervised by the state. The Supreme
Court is poised to resolve this split in next term's North
Carolina State Board of Dental Examiners. The last section of
this testimony will further explore the legal question in that
case.
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\15\ 445 U.S. 97 (1980).
\16\ See Town of Hallie v. City of Eau Claire, 47 U.S. 34 (1985).
b. The Common Route to Challenging State Licensing
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Restraints: Due Process and Equal Protection
With powerful antitrust immunities in place, the only
viable avenue for consumers or would-be professionals seeking
to challenge the actions of state licensing boards is to make a
constitutional claim. Like all state regulation, professional
licensing restrictions must not violate the due process and
equal protection clauses of the Fourteenth Amendment. Due
process prevents a state from denying someone has liberty
interest in professional work if doing so has no rational
relation to a legitimate state interest. Similarly, equal
protection requires that states distinguish licensed
professionals from those excluded from practice on some
rational basis related to a legitimate state goal. The two
analyses typically conflate into one question: did the
licensing restriction serve, even indirectly or inefficiently,
some legitimate state interest?
That burden is easy to meet, as illustrated by Williamson
v. Lee Optical,\17\ the leading Supreme Court case on the
constitutionality of professional licensing schemes. Indeed,
the Court has only once found an occupational licensing
restriction to fail rationality review, in Schware v. Board of
Bar Examiners of New Mexico,\18\ and then only because an
otherwise valid licensing requirement was unlawfully applied to
an individual. In applying Schware to the activity of state
licensing boards, lower courts have found even extremely thin
justifications for anticompetitive licensing restrictions to
suffice for rationality review. One circuit has even held that
insulating professionals from competition is itself a
legitimate state interest, making matters even more difficult
for plaintiffs alleging harm to competition.
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\17\ 348 U.S. 483 (1955).
\18\ 353 U.S. 232 (1957).
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II. Why Sherman Act Liability for State Licensing Boards is a Good Idea
A. Antitrust Liability for Professional Licensing: An Economic Standard
for Economic Harm
The Sherman Act--famously called ``the Magna Carta of free
enterprise'' \19\--protects competition as a way to maximize
consumer welfare. According to courts and economists alike,
competition is harmed when competitors restrict entry or adhere
to agreements that suppress incentives to compete. The
normative question in both traditional cartel cases and
licensing contexts should be the same: Does the combination, on
net, improve consumer welfare? To ensure that this important
question is asked and answered in the licensing context,
antitrust law and its tools for balancing pro- and
anticompetitive effects should be brought to bear on licensing
schemes.
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\19\ United States v. Topco Assocs., Inc., 405 U.S. 596, 610
(1972).
This close fit between the Sherman Act's intended target
and the economic harm of excessive licensing can be seen in the
functional equivalence of the restrictions promulgated by
occupational boards and the business practices held unlawful
under Sec. 1. The Ohio Rules of Professional Conduct prohibit
attorneys from advertising their prices using words such as
``cut rate,'' ``discount,'' or ``lowest.'' But when similar
restrictions on price advertising are imposed by private
associations of competitors, rather than as a licensing
requirement, it is per se illegal. Additionally, all lawyers
must prove their ``good moral standing'' to join a state bar.
But when a multiple listing service (a private entity not
created by the state) comprised of competing real estate agents
tried to impose a ``favorable business reputation'' requirement
on its members, a court found the requirement to violate the
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Sherman Act because the standard was vague and subjective.
Thus, licensing schemes can be similar to cartel agreements
in substance, which alone may justify antitrust liability. But
making matters even worse for consumers, licensing schemes come
in a particularly durable form. Licensing boards, by their very
nature, face few of the cartel problems that naturally erode
price and output agreements between competitors. By
centralizing decision making in a board and endowing it with
rulemaking authority through majority voting, professional
competitors overcome the hurdle of agreement that ordinarily
inhibits cartel formation. Cheating is prevented by imposing
legal and often criminal sanctions--backed by the police power
of the state--on professionals who break the rules. Finally,
most cartels must fend off new market entrants from outside the
cartel that hope to steal a portion of its monopoly rents. For
licensed professionals, licensing deters entry and ensure that
all professionals (at least those practicing legally) are held
to its restrictions.
B. Antitrust Federalism: Its Modern Justifications and Applicability to
Antitrust Liability for Licensing Boards
The most serious argument against Sherman Act liability for
state licensing boards is that it would upset the balance
between state and federal power struck in Parker and its
progeny. But an examination of the normative commitments behind
antitrust federalism, as revealed in scholarship and in the
cases, reveals that boards--as currently comprised--should not
enjoy immunity. All accounts of the purpose of antitrust
federalism agree that self-dealing, unaccountable decision-
makers should face antitrust liability. State licensing boards
fall squarely in this category when a majority of members are
competitors subject to or benefitting from the boards' rules.
For state licensing boards, the temptation of self-dealing
is especially high and the potential for holding officials
accountable especially low. First, those must hurt by excessive
professional restrictions--consumers--are particularly ill-
represented in the political process of licensure. Second, and
most important, occupational licensing is currently left up to
members of the profession themselves. When Parker is used to
protect the efforts of incumbent professionals to restrict
entry into their markets, it creates the very situation Midcal
warned against--it casts a ``gauzy cloak of state involvement
over what is essentially a private price-fixing arrangement.''
\20\
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\20\ Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445
U.S. 97, 106 (1980).
Public participation in state board activity is very low
because as our empirical study of boards in Florida and
Tennessee confirms, the typical state board is comprised of
appointed professionals, not consumers or other public members.
On one hand, practitioner dominance is inevitable. Tailoring
restrictions to benefit the public (namely, encouraging
competent practice) usually requires experience in the
profession. But the need for expertise creates a problem: those
who have the most to gain from reduced consumer welfare in the
form of higher prices are tasked with protecting consumer
welfare in the form of health and safety--the fox guards the
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henhouse.
II. North Carolina State Board of Dental Examiners and the Future of
Immunity for Licensing Boards
Because any state mandate calling for the regulation of
entry and good standing in a profession is likely to meet the
Court's low bar for clear articulation, a board's status under
Parker turns on whether it is subject to Midcal's requirement
of supervision at all. Next term, the Supreme Court will
consider this question for the first time. The case, North
Carolina State Board of Dental Examiners, is an appeal from a
Fourth Circuit case that held a licensing board to both Midcal
prongs, creating a circuit split and delivering a victory to
consumers and unlicensed professionals harmed by
anticompetitive regulation. The Supreme Court should affirm the
Fourth Circuit's decision, but also clarify, in contrast to the
concurrence in the Fourth Circuit case below, that any board
dominated by practitioners must pass Midcal's supervision
requirement, no matter how the board's membership is elected.
The legal question in North Carolina State Board of Dental
Examiners has its roots in Town of Hallie v. City of Eau
Claire,\21\ where the Court found a municipality immune under
Parker because it acted pursuant to the state's clearly
articulated policy to displace competition, despite being
unsupervised. The Court reasoned that, for municipalities,
supervision is unnecessary because there is no ``real danger
that [it] is acting to further [its] own interests, rather than
the governmental interests of the State.'' Although Hallie did
not provide a test for determining which entities, in addition
to municipalities, are entitled to this fast track to immunity,
a footnote provided a hint: ``In cases in which the actor is a
state agency, it is likely that active state supervision would
also not be required, although we do not here decide that
issue.''
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\21\ 471 U.S. 34, 47 (1985).
Many courts concluded that occupational boards are among
the ``state agencies'' to which the Hallie Court was referring,
and thus exempted them from Midcal's supervision prong. Other
courts equivocated, implying the possibility of needing
supervision without holding so squarely, at least until last
year when the Fourth Circuit decided North Carolina Board of
Dental Examiners v. FTC.\22\ This case is correctly decided
because practitioner-dominated boards are very different from
municipalities, which make decisions through elected officials
and civil servants. In the case of incumbent-dominated boards,
it cannot be said that ``there is little or no danger'' of
self-dealing. For that reason, the Court should affirm the
Fourth Circuit opinion holding licensing boards to the
strongest test for antitrust immunity.
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\22\ 717 F.3d 359 (4th Cir. 2013).
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Conclusion
Licensed occupations have been free to act like cartels for
too long without Sherman Act scrutiny. With nearly a third of
workers subject to licensing and a continuing upward trend, it
is time for a remedy. I do not propose an end to licensing or a
return to a Dickensian world of charlatan healers and self-
trained dentists. But the risks of unregulated professional
practice cannot be used to rationalize unfettered self-
regulation by the professionals themselves. The law needs to
strike a balance. That balance is the same one sought in any
modern antitrust case: a workable tradeoff between a
restriction's salutary effects on the market and its harm to
competition. Immunity from the Sherman Act on state action
grounds is not justified under antitrust federalism when those
doing the regulation are the competitors themselves, where they
are not accountable to the body politic, where they have too
often abused the privilege, and where the anticompetitive
dangers are so clear. The threat of Sherman Act liability can
provide the necessary incentives to occupational regulators
trading off competition for public safety and welfare.
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