April 21, 2015

Think Licensing Laws Are Unfair? It Gets Worse

Summary

Licensing laws often block people from earning a living or starting new businesses, simply to protect politically powerful companies from competition. Licensing requirements are supposed to ensure that professionals, such as doctors or pharmacists, are qualified and honest — but these laws often do nothing more than create cartels, block the path to economic opportunity, and raise prices for consumers.

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The historian James Truslow Adams first coined the phrase "the American Dream" in 1931, to describe Americans' long-standing "belief in the common man and the insistence upon his having, as far as possible, equal opportunity in every way with the rich one." Central to that dream is the chance to start a business for oneself, be one's own boss, and maybe even make a fortune.

Sadly, eight decades later, licensing laws often block people from earning a living or starting new businesses, simply to protect politically powerful companies from competition. Licensing requirements are supposed to ensure that professionals, such as doctors or pharmacists, are qualified and honest — but these laws often do nothing more than create cartels, block the path to economic opportunity, and raise prices for consumers.

Most egregious are laws that require a type of license called a Certificate of Need (CON). Unlike ordinary licenses, CON laws do not require a person to be qualified. Instead, they prohibit anyone from starting a business if the community doesn't "need" it — which means, in reality, if the existing companies don't want competition. That may sound crazy, but it's the law in most states, and it applies to a wide variety of industries — everything from moving companies to taxi businesses to hospitals and even car dealerships.

Any entrepreneur who applies for a CON must first notify all the established firms and allow them to object to his application. The objections need not show that the newcomer is unqualified or dishonest — simply that he would increase competition. And whenever an objection is filed, the applicant must hire a lawyer and attend a hearing, to prove to bureaucrats that a new business is "needed."

It's doubtful that government officials — who typically don't conduct market research — can predict what sort of businesses are "needed," but it gets worse: Most CON laws leave it up to bureaucrats to define "need." The whole process can be expensive and time-consuming, since hiring a lawyer is a big cost for a business just starting out, and there's no way to ensure one will get a license.

Economists have long warned that when government can block economic competition or redistribute wealth, that power becomes a prize in a political contest — a contest in which experienced lobbyists have the advantage over unknown entrepreneurs.

In my new paper published by the Mercatus Center, I explain how CON laws restrict economic opportunity — not to protect the public, but to benefit existing businesses that know how to manipulate the system. I focus on the case of Raleigh Bruner, who tried to start a moving business in Kentucky but didn't have the required CON. In the five years before his company started, 19 applicants for CONs had been protested by movers who openly admitted that they objected solely to block competition. Knowing a hearing would be expensive and take months to resolve, all but three of the 19 applicants simply abandoned their applications or bought CONs from existing companies. (The existing companies never objected to that.)

The three applicants who persisted were refused CONs, regardless of their qualifications, because bureaucrats deemed current moving services "adequate." In one case, officials refused to issue a CON to a man who had been in the business for 35 years, even though the same companies that protested against him testified that he would "make a great mover."

The Constitution's guarantee of "due process of law" prohibits states from using licensing laws solely to benefit cronies. That guarantee, as the Supreme Court has explained, "forbids arbitrary deprivations of liberty," but a law that blocks some people from practicing a trade merely to increase the profits of those with more political clout arbitrarily violates the right of those less privileged to earn a living. That's why the Court declared in 1957 that licensing laws "must have a rational connection with the applicant's fitness or capacity to practice" the trade. My colleagues at the Pacific Legal Foundation and I sued on Bruner's behalf, arguing that Kentucky's CON law deprived him of his constitutional right to earn a living. Last February, a federal judge struck down the law, labeling it a "Competitor's Veto" that allowed established firms to "essentially 'veto' competitors ... for any reason at all, completely unrelated to safety or societal costs."

That victory was only the first step. As part of our nationwide campaign against Competitor's Veto laws, my colleagues and I are now challenging CON requirements in Montana, Nevada, and other states, and previous cases persuaded Oregon and Missouri to repeal similar restrictions. Such laws make no pretense at protecting the public; they exist to protect businesses who don't want to compete economically and want to outlaw entrepreneurship instead.

Yet entrepreneurship is central to the American Dream, and to the Constitution's guarantee of liberty. Abolishing unjust and unconstitutional Competitor's Veto laws would be an important step toward vindicating our nation's promise of equal opportunity for the common man.