Rise Of The Licensing Cartel

February 1, 2016

Should only dentists be allowed to whiten people’s teeth? Or is this a service anyone should be allowed to offer?

This may sound like a silly question at first, but when the deeper question of occupational licensing is applied to the broader economy, it turns out that there are millions of jobs and hundreds of billions of dollars at stake.

Keep in mind that the Food and Drug Administration already regulates teeth-whitening products for safety and that virtually no one has ever been injured by someone administering these products.

But in a number of states throughout the country, dentists began losing teeth-whitening customers to non-dentists who had set up kiosks in shopping malls and were charging less money for the same teeth-whitening services.

These upset dentists then went to their state dental-licensing boards and urged those boards to add teeth whitening to the definition of “the practice of dentistry.” These state boards complied and sent letters to malls informing them that their teeth-whitening tenants (at least those who were not dentists) were in violation of state law and should be evicted. The malls did exactly that. The results were unemployed teeth whiteners, more expensive teeth whitening, and higher profits for the dentists.

This is textbook anticompetitive behavior. An organized cartel (the dentists) restrained competition (limiting teeth whitening to dentists) in a manner that deliberately reduced competition and raised prices. The only twist here is that they used the threat of government punishment to enforce their monopoly.

The number of professions requiring licenses is growing

Unfortunately, dentists are not the only professionals using government power to harm consumers and line their pockets. A 2013 study found that 25% of today’s workforce is in an occupation licensed by a state entity, up from just 5% in 1950.

And the number of licensed professionals is not growing because everyone is suddenly becoming a doctor or a lawyer. Instead, it is the number of professions requiring licenses that is growing. Security guards, florists, barbers, massage therapists, interior decorators, manicurists, hair stylists, personal trainers, tree trimmers and auctioneers work in just some of the many, many professions that state legislatures have seen fit to cartelize.

Why the boom? Was there a sudden rise in tree-trimming accidents, pulled hamstrings or floral disasters? Did government come in and save consumers from themselves?

No, of course not. According to a study by University of Minnesota Professor Morris Kleiner, “Occupational licensing has either no impact or even a negative impact on the quality of services provided to customers by members of the regulated occupation.”

Occupational licensing has grown not because consumers demanded it, but because lobbyists recognized a business opportunity where they could use government power to get rich at the public’s expense.

Established professionals (who are almost always exempt from new licensing requirements) get state-sanctioned monopoly profits, lawmakers get campaign contributions from those licensed professionals, and lobbyists get a little taste from everyone involved.

Everyone wins but the American public.

An artificial weight on consumers

Consumers end up paying $200 billion in higher costs annually, prospective professionals lose an estimated three million jobs, and millions more Americans find it harder to live where they want due to licensing requirements that vary by state.

It doesn’t have to be this way.

In his 1862 message to Congress, President Abraham Lincoln said the role of government is “to lift artificial weights from all shoulders, to clear the paths of laudable pursuit for all, to afford all an unfettered start and a fair chance, in the race of life.”

Occupational licensing laws have become an artificial weight on far too many American shoulders.

This week, the Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights will hold a hearing on state occupational licensing laws. Among other things, we will consider the relationship between the antitrust laws and cartels formed under the auspices of state authority, but controlled by active market participants.

There are certainly competing values at stake, and the important role of the States in enacting licensing requirements to protect public health – not to mention federalism and state sovereignty – is not to be gainsaid.  But I hope our discussion can raise awareness of a major obstacle to economic mobility that has proliferated across the country to benefit special interests and disadvantage the least fortunate.