When Licensing Isn’t Worth The Cost

By John Hood

RALEIGH — When economist and Hoover Institution scholar Thomas Sowell famously observed that “there are no solutions, only tradeoffs,” the North Carolina native wasn’t suggesting that public-policy analysis was useless. Sowell has spent much of his lengthy career engaged in it.

To say that doing X to achieve Y will inevitably cost Z is not to throw up one’s hands. It is merely to frame a series of questions for which there are at least partial answers. For example, what are the projected values of Y and Z? And can it be reasonably projected that doing X will actually accomplish Y?

Every dollar a government spends on, say, education or public safety is a dollar than cannot simultaneously be spent by government on, say, health care or transportation — or spent by the taxpayer who originally earned the dollar on something of his own choosing. Unless you are an anarchist, you must grant that there are, indeed, circumstances in which it passes the cost-benefit test to collect those dollars as taxes and expend them on public services. And unless you are a socialist or deeply confused (I’ll distinguish the two as a gesture of good cheer), you must grant that there are circumstances in which it’s better to leave the dollar in private hands, either because the proposed program won’t work at all or because its benefits are too small to outweigh its costs.

The same principle applies to government regulation. While it compels private households or businesses to spend money rather than confiscating the money for government expenditure, tradeoffs are still inescapable. Every dollar spent installing scrubbers on smokestacks or taking classes to obtain a credential is a dollar that can’t be spent on something else with its own potential benefits. Similarly, every hour of time spent complying with regulation represents something not done during that hour.

Assessing the relevant tradeoffs can be very difficult. Agencies, regulated parties, and interest groups spend gobs of time and money attempting to quantify costs and benefits. So do think tanks and academic scholars. They could all be doing something else, so that’s another tradeoff! I happen to think sound policymaking is worth the expense.

For example, my John Locke Foundation colleagues and I have spent many years urging North Carolina lawmakers to scale back state-mandated licensure of occupations. Limiting the number of people allowed to deliver a particular good or service, or requiring the expenditure of much time and money to acquire such a permit, will necessarily impose significant costs on both consumers and prospective workers. Those with licenses face fewer competitors and can charge more. Consumers shoulder the cost either by paying more or choosing less-desirable alternatives. Those excluded from licenses are forced into other occupations that pay less or that they value less.

Are these costs worth paying? Perhaps. If licensing physicians ensures safer, better-quality medical care, it might be worth it. If licensing barbers ensures fewer nicks or chemical burns, ditto. I suspect you probably agree with me that the former is a far likelier scenario than the latter.

Skeptics of North Carolina’s extensive occupational-licensing regime see more barbers in the story than we do physicians. We spotlight studies showing not just that licensing raises costs but that it often fails to deliver measurably better quality, safety, or protections against fraud.

The most recent example is a paper just released by the National Bureau of Economic Research. Taking advantage of a “natural experiment” — Uber drivers must be licensed as cabbies in New York City but not in neighboring New Jersey — the researchers found “no consistent evidence that occupational licensing improves consumer outcomes.” Licensed drivers didn’t have lower accident rates or earn higher ratings from consumers. The authors also examined the case of Houston, where Uber drivers had to be licensed until a state law ended the requirement in 2017. “Deregulation changed the composition of the driver pool,” they concluded, “without changing measured performance.”

Tradeoffs are inevitable. Bad policy choices are not.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).