Public choice theory and occupational licensing.
Introduction
I. The Prevalence of Occupational
Licensing
II. A Public Policy Analysis of Occupational
Licensing
A. The Justifications for Occupational
Licensing
B. The Criticisms of Those Justifications
III. The Traditional Constitutional Analysis of
Social and Economic Legislation: Looking
Back at Lochner v. New York
A. The Police Power Before Lochner
B. The Lochner Decision
C. The Backlash Against Lochner
D. The Backlash Against the Backlash Against
Lochner
1. The Rehabilitation of Lochner
2. A New Old Fundamental Right to
Property
E. The Effort to Find a New Source for Property
Rights Protection
IV. An Alternative Approach to Judicial Review
of Social and Economic Legislation
A. Treating Political Corruption as an
Illegitimate State Interest Under the Equal
Protection Clause
1. Identifying Illegitimate State
Interests
2. Treating Rent Creation and Rent
Extraction as Bribery and Extortion
3. Proving an Illegitimate State Interest
B. Treating Occupational Licensing as a
Violation of the Private Delegation Doctrine
Under the Due Process Clause
C. The Political Justification for Heightened
Judicial Scrutiny
Conclusion
Introduction
Ask someone to identify the principal growth industries in America, and you are likely to hear responses such as software development, cybersecurity, the home health care industry, government contracts consulting, and political campaign management. What you may not expect to hear is that lines of work requiring an occupational license are among the fastest growing types of employment in the United States. (1)
Licensing is one of three basic forms of occupational regulation. (2) Registration obliges an individual to file his or her name, address, line of work, and qualifications with a relevant state or local agency, and perhaps also to pay a fee or post a bond. Certification, an intermediate form of regulation, permits anyone to practice in a particular field, but the government or a private association identifies an applicant's educational or skill level, typically based on an examination, and issues a certificate to that effect. Licensing is the most rigorous form of occupational regulation. A license is a grant of permission to enter a particular line of work. Licensing laws make it unlawful, and sometimes illegal, to practice in a particular field without first receiving the government's approval. (3) A state adopts registration, certification, and license requirements under its "police power," the inherent sovereign authority to regulate private conduct for the purpose of protecting the health, safety, and welfare of its residents. (4)
The public is familiar with the concept of occupational licensing but likely is unaware of its extent. When most people think of that term, the images that come to mind likely involve healthcare (physicians and dentists), law (attorneys and judges), or finance (stock brokers and accountants). But the world has changed markedly since The Adventures of Ozzie and Harriet was a staple on television. In the 1950s, the American economy rested on manufacturing, and only an estimated four to five percent of employees worked in an occupation requiring a license. (5) But the economy today is service-oriented, and the number of licensed positions has skyrocketed. (6) According to a July 2015 White House report, since 1950 the percentage of the domestic workforce in positions requiring licenses has multiplied five-fold to approximately twenty-five percent. (7) Part of that increase is attributable to the increase in the number of employees in the service economy, because workers who offer services are more likely to be subject to licensing than employees who manufacture widgets. (8) But two-thirds of that expansion is due to an increase in the number of occupations subject to a licensing requirement, particularly in nontraditional lines of work. (9) Occupational licensing is now one of the nation's most widespread and fastest growing forms of labor market regulation. (10)
Contemporary occupational licensing schemes have ancient roots. (11) Rudimentary forms of medical licensing existed in Germany, Naples, Sicily, and Spain in the thirteenth and fourteenth centuries. (12) Medieval guilds limited entry into various occupations. (13) The American Colonies subjected bakers, ferry workers, innkeepers, lawyers, leather merchants, and peddlers to early forms of regulation. (14) In nineteenth-century America, states and localities licensed barbers, embalmers, horseshoers, boarding house operators, insurance agents, midwives, pawnbrokers, physicians, real estate brokers, steamboat operators, undertakers, and veterinarians. (15) But the present occupational licensing system began in the last quarter of the nineteenth century. By that point more than half of the states required licenses to practice as a physician, dentist, pharmacist, or lawyer. (16)
States have developed a common licensing apparatus. Ordinarily, legislatures create licensing boards, and governors frequently appoint members to those boards from within the profession itself. (17) The legislature defines occupational qualifications or empowers the board to do so. The most common requirements involve formal education, prior experience in the form of apprenticeships or internships, examinations, and good character. (18) The board prepares qualifying exams, sets the pass rate, reviews applicants, adjudicates complaints against practitioners, and performs other ancillary tasks. (19) The process has operated in a consistent manner for more than a century.
Occupational licensing, however, has had its critics. A large number of federal government officials, (20) scholars, (21) and other commentators (22) have criticized the widespread use of occupational licensing requirements. In their view, the great majority of such programs hurt rather than help consumers. Indeed, some scholars have found that many occupational licensing schemes are the product of practitioners' self-serving political efforts, rather than a considered attempt to improve the public welfare. (23)
To know which of those two sides has the better argument, it is necessary to answer several questions: What occupations are subject to licensing requirements? Why do legislatures impose licensing requirements on those occupations? More generally, why do legislatures adopt regulatory programs, of which occupational licensing schemes are but one example, for particular fields? This Article will examine the prevalence of occupational licensing, the rationale for that form of regulation, and its costs and benefits.
The result is not uplifting. Far too many legislatures have restricted entry into far too many professions for reasons that are far too weak to justify those requirements. Legislators have often used occupational licensing programs for reasons that have too little to do with public health and safety to believe that those licensing programs serve the public. Licensing requirements have become vehicles for cronyism at the public's expense. So far, the Supreme Court has refused to squelch that enterprise, in part because ever since the New Deal, the Court has been quite reluctant to second-guess social and economic tradeoffs made by the political branches. Indeed, the Court has declined several opportunities to do just that. This Article, however, offers two new challenges that critics can raise. These claims do not require the courts to second-guess the political tradeoffs that legislatures make.
Section I addresses the extent of occupational licensing. Section II discusses the rationales offered in support of occupational licensing and the criticisms advanced against those defenses. Section III discusses the Supreme Court's 1905 ruling in Lochner v. New York, (24) the decision that has come to epitomize (rightly or wrongly) the Supreme Court's early twentieth century willingness to second-guess legislative social and economic judgments, an inclination that most academics today find misguided, if not illegitimate. Section IV then identifies and discusses several legal challenges that could be raised against occupational licensing requirements, evaluates the likelihood of their success, and outlines what steps can be taken to preserve the benefits of occupational licensing schemes while eliminating or reducing their social costs. In particular, that Section uses Public Choice Theory to examine the justifications for licensing regimes and finds those defenses quite porous.
I. THE PREVALENCE OF OCCUPATIONAL LICENSING
Occupational licensing requirements are widespread throughout our economy. (25) The core group of licensed occupations includes architecture, engineering, law, real estate, and various health-related positions. (26) But that is not all. A July 2015 White House report estimated that states regulate more than 1,100 occupations, but fewer than sixty are licensed in all fifty states. (27) A 2012 nationwide study of state occupational licensing requirements examined 102 different occupations in diverse fields. (28) Some occupations, such as ones in health care, are directly related to protection of the public health and safety. Many occupations, however, bear no credible relationship to those needs. Among them are the following: "animal breeders" (29) auctioneers, ballroom dance instructors, (30) barbers, (31) bartenders, cosmetologists, court clerks, door repair contractors, "fishers," (32) florists, funeral attendants, interior designers, (33) landscape workers, manicurists and pedicurists, (34) "milk samplers," (35) "packagers," (36) painting contractors, plumbers, "skin care specialists," (37) taxi drivers, taxidermists, tour or travel guides, tree trimmers, and upholsterers.* 38 Other observers have found additional occupations subject to licensing requirements, such as beekeepers, (39) "burial societies," cat groomers, (40) chimney sweeps, elevator operators, fortune tellers, (41) frog farmers, (42) "home entertainment installers," (43) horseshoeing personnel, jai alai "participants," junkyard dealers, locksmiths, (44) lobster sellers, makeup artists, (45) manure applicators, maple dealers, motion picture projectionists, mussels dealers, photographers, private detectives, real estate brokers and sales personnel, quilted clothing manufacturers, rainmakers, reptile catchers, shampooers, (46) sheep dealers, stallion breeders, surveyors, ticket brokers, turtle farmers, and whitewater rafting guides or operators. (47)
Some of the occupations found on that list are odd, to say the least. (48) Are the health, welfare, and safety of the community really put at risk if society allows unlicensed florists, interior designers, and frog farmers to ply their trades? (49) Is anyone's life cheapened if he or she hires an unlicensed cat groomer, home entertainment installer, or makeup artist? Why do we need to license bartenders? To ensure that they know a grasshopper from a Manhattan? To guarantee that they are good listeners? And how would anyone even go about deciding whether a fortuneteller is qualified? Do you ask, "Who will win the next Super Bowl?" "How many fingers am I holding up?" Besides, what is the passing rate? Is two-for-three good enough? And is it an automatic disqualification if the fortuneteller is not richer than Croesus?
There also appears to be no rational relationship between the stringency of the licensing requirements and the demands placed on practitioners. (50) Consider barbering, one of the first occupations to be licensed. (51) Barbering involves "cutting, trimming, shampooing and styling hair, trimming beards or giving shaves," (52) activities that any adult could perform successfully without endangering anyone. Yet, barbering is heavily regulated. Forty-nine states and the District of Columbia license barbers and require a considerable amount of education or experience to earn a license, ranging from 175 to 890 days, with an average of 415. (53) Entrants also must pass between one to four qualifying tests, with an average of two. (54) Yet, in the twenty-first century, barbers perform few services other than cutting hair, (55) so it is difficult to understand why such a lengthy period of education and training is necessary for future tonsorial specialists. As a White House report recently noted, current licensing requirements can impose "burdens on workers, employers, and consumers, and too often are inconsistent, inefficient, and arbitrary." (56)
Compare the licensing requirements in two different fields: Emergency Medical Services and Cosmetology. Emergency Medical Technicians (EMTs) are persons who "assess injuries, administer emergency medical care, extricate trapped individuals and transport injured or sick persons to medical facilities." (57) By contrast, cosmetologists "provide beauty services, such as shampooing, cutting, coloring and styling hair and massaging and treating the scalp and may also apply makeup, dress wigs, perform hair removal and provide nail and skin care services." (58) The skills demanded by the two occupations, and the importance of those professions to the health and safety of the community are obviously quite different. Because they are the first medically trained parties to reach a patient, EMTs are not only an integral part of the medical system but also are the tip of the spear. Cosmetologists are not even part of the shaft. Accordingly, the average person might assume that the education and training requirements to become an EMT would be far more rigorous than the ones necessary to become a cosmetologist. If so, that person would be wrong.
According to the Institute for Justice, all states and the District of Columbia require EMTs to be licensed. (59) The number of days of required education and training varies from zero (District of Columbia) to 140 (Alaska), with most states requiring between twenty-six and thirty-nine days, for an average of thirty-three days. (60) All fifty-one jurisdictions also require cosmetologists to be licensed, (61) but the education and training necessary is vastly different. The states demand various periods of education and training for cosmetology licensing, ranging from 233 days (Massachusetts and New York) to 490 days (South Dakota), with an average of 372 days. (62) In other words, a budding cosmetologist on average needs to complete more than eleven times the education and training necessary to serve as an EMT. (63)
That difference is stunning. We should expect to see differences among the states regarding the occupations requiring licenses and the type of requirements that entrants must satisfy. One of the benefits of a federal system is that states can explore different regulatory regimes. (64) Yet some differences are inexplicable. It is difficult to imagine a legitimate justification for caring more about whether someone's hair looks "marvelous" than whether his heart can be restarted. (65) Any state that makes it more difficult to become a cosmetologist than an EMT has clearly acted with something other than the public welfare in mind.
II. A PUBLIC POLICY ANALYSIS OF OCCUPATIONAL LICENSING
A. The Justifications for Occupational Licensing
Occupational licensing requirements are justified on several grounds. (66) The classic justification is information asymmetry. (67) Consumers lack the knowledge and expertise required to judge the qualifications of different service-providers and lack the time necessary to acquire such knowledge and expertise. Licensing requirements compensate for that shortcoming by setting a minimum qualifications floor below which no one may pursue a particular occupation.
There are additional justifications for imposing occupational licensing requirements. One is paternalism. Society's collective knowledge--the so-called "wisdom of the crowd"--exceeds the knowledge of any one individual, (68) so society is in a superior position to judge qualifications. Another justification is the need to generate positive externalities and avoid negative ones. Because consumers are generally risk averse, (69) licensing requirements may reduce consumer fear of being dissatisfied or injured by a particular service, which would enhance consumer demand, thereby benefitting an entire community as consumers purchase additional local services. Also, a licensing requirement could encourage service-providers to invest in their human capital through, for instance, additional education or training, because they will not fear being underpriced by less qualified rivals. (70) Atop of that, the exclusion of quacks, crooks, and charlatans from a particular line of work enhances its professionalism and reputation, which, in turn, increases its attractiveness not only to consumers but also to future members of that trade. Over time, therefore, licensing requirements can perhaps elevate the average skill of members. (71) Finally, licensing requirements raise revenue, (72) which the government can use to offset the cost of oversight. (73)
The original justification for regulation, known as the Public Interest or Market Failure Theory, (74) posited that government regulates in situations in which the market cannot adequately perform its allocative responsibilities due to structural imperfections such as natural monopolies, externalities, transaction costs, and collective action problems. (75) That justification was born amidst the 1930s welfare economic theory (76) and was the orthodoxy as late as the 1970s. (77) Since then, however, it has come under withering criticism. (78)
Public Interest Theory suffers from three major flaws. The first one is that it justifies government intervention on the ground that markets are imperfect without recognizing that governments also are flawed. Remedies chosen by the political process to fix market problems may be wide of the target and create more problems than they resolve. That was the reason several market sectors such as airline pricing were deregulated in the 1980s. (79) Moreover, mistaken government interventions can be more difficult to remedy than market imperfections. The Constitution makes the passage of legislation difficult, so, once enacted, laws do not fade away. Absent an expiration date, laws remain in effect until they are repealed or held unconstitutional, (80) giving rise to what has been called "the tyranny of the status quo." (81) Problems may be transient, but the statutes passed to remedy them may last forever.
Public Interest Theory also mistakenly idealizes the motives of public officials. The theory asserts that public officials always act in the nation's interest even when the evidence is to the contrary. (82) Experience demonstrates that this assumption represents "normative wishings, rather than explanations of real world phenomena." (83) Society might profit if policymakers were motivated by classical notions of civic virtue, but individual policymakers might not, and almost no one is willing to make the heroic--or Pollyannaish--assumption today that political officials always act against their self-interest. Far more likely is the risk that regulated companies will "capture" elected officials through campaign contributions and career civil servants through cajolery, offers of lucrative future employment, or bribery. (84) Moreover, only the hopelessly naive would believe that elected or appointed officials are above trading benefits to private parties for political success in "the Darwinian world of politics," a practice known as "rent creation." (85) As Professor Peter Schuck has recently noted, Public Interest Theory stands as a "vacuous and dangerously naive" account of public policymaking, both as to how public policy is adopted and how it is implemented. (86) As he puts it, "rational self-interest (as the actor perceives it) unquestionably drives most political behavior most of the time." (87)
Finally, Public Interest Theory does not explain a curious and stubborn fact: Private individuals rarely urge governments to adopt licensing regimes, but private firms often do--conduct that is the exact opposite of what Public Interest Theory predicts. That phenomenon is not an aberration caused by unique modern developments. After analyzing the history of occupational licensing, Professor Lawrence Friedman pointed out that the existence of "[f]riendly licensing" was "almost invariably suggested and drafted by groups within the affected occupation." (88)
It was economist and Nobel laureate George Stigler who first explained why that scenario was so widespread. Stigler developed a simple explanation for companies' otherwise irrational conduct: Incumbent businesses support licensing requirements because licensing protects incumbents against competition. (89) Licensing requirements thereby enable incumbents to receive "economic rents"--that is, supracompetitive profits made available by laws limiting rivalry. Any benefit that the public receives is unintended and incidental. (90)
Stigler was not the only scholar to apply economic analysis to politics. Fellow Nobel laureates Kenneth Arrow (91) and James Buchanan, (92) and scholars like Duncan Black, (93) Anthony Downs, (94) William Niskanen, (95) Mancur Olson, (96) and William Riker (97) contributed to the new policymaking paradigm now known as Public Choice Theory. (98) By applying principles of microeconomics and game theory to politics, Public Choice Theory explains why regulated businesses, not consumers, prefer and seek out licensing requirements. (99)
Public Choice Theory teaches that elected officials do not fundamentally change their character and abandon the rational, self-interested nature they display as individual participants in a free market when assuming public office. The person that is "an egoistic, rational, utility maximizer" in the market also has that nature in the halls of government. (100) Homo economicus and homo politicus are one and the same. The difference is in the goods that private parties desire and government officials dispense--statutes, regulations, funding, licenses, and so forth, rather than consumer goods or widgets. Their motivation, however, is parallel in each setting. Producers, consumers, and voters seek to maximize their own welfare; politicians, to attain or remain in office; and bureaucrats, to expand their authority. (101) The result is trade in a political market. Interest groups will trade political rents in the form of votes, campaign contributions, paid speaking engagements, book purchases, and get-out-the-vote efforts in return for the economic rents that cartel-creating or -reinforcing regulations, such as occupational licensing, can provide. Government officials are aware of interest groups' motivations and use those groups to their own political advantage. Lobbyists and associations serve as the brokers. (102)
Those officials have an additional strategy they can employ. Rather than engage in "rent creation," politicians can pursue the complementary strategy of "rent extraction." Legislators can obtain the continued support of regulated entities by threatening them with new legislation that would reduce the rents that they garner from the existing scheme. (103) This new legislation could lower a firm's profits or increase its costs by eliminating a benefit it presently enjoys--for example, occupational licensing requirements--or by imposing new, additional regulatory burdens--for example, environmental regulations. Either way, whether via rent creation or rent extraction, politicians benefit, and the public loses.
Keep in mind that a legislator does not need to pass a bill, to move it forward, or even to introduce one to gain political rents. He can merely threaten to introduce legislation or circulate a draft bill to advise the interested parties that their rents are at stake. Known in different states as "cash cows," "milker bills," "juice bills," or "fetchers," bills whose sole purpose is to extract rents from one side or the other or both of a controversy, even if rudimentary, can start the auction going. (104) Given a legislator's minatory presence, the mere threat to introduce a bill can be quite effective. (105)
Moreover, rent creation and rent extraction can be done repeatedly. Temporary tax credits, for instance, must be reauthorized or they will expire. (106) Bills that threaten to take away a program, a benefit, or a perk may not carry over from one session of the legislature to another; if so, a legislator must reintroduce the bill for it to be considered in the next legislative term. (107) Legislators therefore have the opportunity to introduce the same "cash cow" each time that a new Congress is sworn in. Private parties would prefer a long-term deal to a shorter one because it allows them to engage in long-term investment strategies. (108) But every representative must stand for reelection every two years, with every senator running for reelection at six-year intervals. Some also retire or lose their races. That turnover makes enforcement of long-term agreements politically impossible. (109) Even if it were possible to work out such a deal with an important member--such as the chairman of the House Ways and Means Committee from a safe district--such agreements are not binding legally enforceable contracts. "In other words, rent-extraction contracts are extralegal, outside the judicial system governing most other contracts." (110) No statute and no deal lasts forever, and no ally or opponent is ever permanent. For politicians, rent extraction is a gift that keeps on giving. A politician may be able to bestow a privilege on a favored group only once, but he can threaten to limit it or take it away over and over and over again.
If you find yourself wondering whether rent creation and extraction sound like crimes, you would not be the first. Professor Fred McChesney, among others, has made that point explicitly. (111) "In the economic theory of regulation, rent creation is to rent extraction as, more generally, bribery is to extortion," Professor McChesney argues. (112) "With the former (rent creation/bribery), the beneficiaries of political action compensate the politician for increasing their welfare. With the latter (rent extraction/extortion), persons whose welfare would otherwise be diminished by political action compensate the politician for not effectuating that diminution." (113) Also, as if to rub it in, in the rent extraction model politicians are "paid not to legislate," earning them, in Professor McChesney's biting words, "money for nothing." (114) Mark Knopfler could not have said it better. (115)
Public Choice Theory is controversial. Critics say that it oversimplifies the actions of politicians and has not been empirically verified. (116) Legislators may cast votes based on individual ideology, party loyalty, personal sympathy or animus, and a host of other considerations, perhaps even the futility of opposing a law supported by overwhelming public opinion. Finally, claiming that elected officials never act for betterment of the public or to help the disadvantaged ignores the reality that the government often helps the disadvantaged, such as the victims of natural disasters, without regard to whether doing so betters their chances for reelection.
Defenders of Public Choice Theory would reply that, although the interest in being reelected is ordinarily the predominant one motivating politicians, (117) self-interest is not limited to any particular form. (118) Public Choice Theory also does not teach that individuals always are the "villainous brigands that Thomas Hobbes envisions in the state of nature," (119) nor that they always promote their self-interest. Individuals and government officials do sometimes act altruistically; Public Choice Theory just puts that practice in perspective. Many Americans contribute to eleemosynary organizations, but few are like Andrew Carnegie, who gave away all of his wealth by the time of his death. (120) Similarly, many elected officials occasionally act in the public interest, but some may never do so. Recognition of that fact is not a nihilistic policy choice but only "a sad recognition of reality." (121) Supporters also point out that the theory does account for those factors and would also argue that substantial real word experience supports its claims. (122) Moreover, certainty is too demanding a standard for any economic or political theory. Proof can be sought in mathematics, but not in the social sciences. The question there is whether a theory has more predictive power than alternatives, not whether it proves correct in every case. Public Choice Theory readily passes that test. Indeed, the theory's principal strength is that it recognizes what everyone observes in today's policymaking arena: namely, individuals are primarily motivated by self-interest, rather than the public interest. (123)
It would also be a mistake to deem Public Choice Theory as little more than a dangerous, nihilistic view of policymaking that will ultimately undermine the democratic process by generating disrespect for how and why the democratic process is undertaken. (124) Public Choice Theory does not indict the political process for the mere purpose of tarring political transactions as morally impoverished. It uses economics to analyze policymaking for the same reason that a physician uses a microscope to study pathogens--as a tool to analyze a problem accurately in the hope of remedying it. As one of the originators of the theory has noted, "[P]ublic choice--the hardheaded, realistic, even cynical model of political behavior--can be properly defended on moral grounds if we adopt a 'constitutional perspective'--that is, if the purpose of the exercise is to be institutional reform, improvements in the rules under which nations operate." (125) The ultimate goal of Public Choice Theory is to describe how and why policymaking is conducted in order to improve it. Some remedies may require reform of the political process, others a change in the law governing judicial review. (126) But the goal is not just to identify the problem but also to try to fix it.
Where does that leave us? With this delightful irony--the justification for regulation has come full circle. Originally, the rationale was that government intervention would remedy economic market failures in furtherance of the public interest. Today, we see that government intervention causes political market failures in furtherance of private interests without remedying market failures. Government has become the problem, not the solution.
With that proposition in mind, it is time to re-examine the justifications for occupational licensing.
B. The Criticisms of Those Justifications
Occupational licensing requirements have been criticized on several grounds. (127) The most common has been that they hijack state power for the benefit of a few. (128) They limit the number of service providers, thereby allowing the members of a given trade to avoid competition and raise prices, (129) without supplying the corresponding service quality improvement promised to consumers. (130) The risk that licensing will generate monopoly profits for industry members is aggravated when incumbent parties can define the conditions of entry by rivals. (131) The effect of licensing is to create a cartel that supplies its members with economic rents on an ongoing basis because entry restrictions operate like a "hidden subsidy" to licensees. (132) Industries particularly benefit from licensing when the consumer demand for the service is inelastic (for example, oncology), (133) when there are few if any alternatives (for example, surgery), (134) or when the industry can define qualifications (for example, hair-cutting). (135) That expense can be considerable for individual consumers and the nation as a whole. Licensing requirements give licensees a "premium" of four to thirty-five percent above the competitive price. (136)
The combined effect of a series of local occupational licensing requirements also can be substantial. Occupational licensing restrictions can result in more than two million fewer jobs nationwide, with an annual cost to consumers of more than $100 billion. (137) Moreover, government regulators or law enforcement officials enforce licensing rules, sometimes through the criminal law, (138) and tax dollars fund the salaries and expenses of those officials. The result is that consumers lose twice from licensing requirements--through higher prices and higher tax bills--and the beneficiaries do not incur the transaction costs of enforcement.
Licensing programs also do not provide guaranteed improvements in service quality. (139) Studies show the difficulty of proving that quality enhancements offset price increases from licensing. (140) One explanation is that many factors affect the quality of a service-provider's work (such as the amount of time a professional spends with a client), and the service provider is free to adjust the inputs not controlled by licensing (by reducing that time, for example). (141) Consequently, even "a mandated increase in one or several inputs" (satisfying fixed educational or training requirements is one example) "does not necessarily imply that quality will increase." (142) Competition, by contrast, spurs quality improvements in order to retain existing customers and attract new ones. The higher prices resulting from licensing requirements also may persuade consumers to attempt "do-it-yourself" projects, a practice that can prove dangerous for the consumer as well as third parties when, for example, an untrained individual attempts to perform electrical work. (143)
What is more, microeconomic theory suggests that licensing requirements benefit higher-income parties willing to pay for increased service quality, while injuring other groups, such as lower-income parties and the young. They do so in two ways: they deny those groups the opportunity to choose an unlicensed, lower-priced service provider; and they bar them from offering services themselves as means to work themselves out of poverty. (144) Sometimes these requirements are a wise form of paternalism, as in the case of physicians. But not always. Some occupations--think barbers, cosmetologists, and the like--place very few at risk, not even the purchaser, if unlicensed individuals are free to offer their services.
Occupational licensing also injures other subgroups in the nation, such as people who migrate from one state to another to find work. (145) States do not regularly recognize a license issued in the state of origin, forcing an individual to begin anew the often-times lengthy and costly education and training process, to abandon a profitable occupation, or to practice it illegally. (146) States' refusal to credit licenses earned elsewhere in the nation as a teacher, a nurse, a dental assistant, a paramedic, and the like denies the affected parties legitimate work opportunities in their new domiciles and those who might otherwise migrate from state to state to secure more profitable work. Their refusal directly injures the affected parties and indirectly renders the national economy less efficient. This problem is particularly acute for servicemembers and their spouses. (147) Many states make it difficult for former servicemembers to find work in the private sector in fields such as nursing and truck driving even though the military fully trained them in those occupations. (148) The problem is even worse for military spouses. Thirty-five percent of military spouses work in licensed fields, and they are ten times more likely than civilians to relocate interstate. (149)
Another criticism is that cartels created by licensing requirements are far more durable than cartels born of private agreements. (150) When there are no legal barriers to entering a market, new parties can make a purely economic decision whether to compete against incumbent firms by offering a lower-priced service. If that occurs, the actual entry of new competitors would weaken the cartel's ability to charge supracompetitive prices and perhaps eventually force the cartel to disband. Either result benefits consumers. Witness the effect that the transportation companies Uber, Lyft, and Sidecar have had on local taxi services. (151) Even if no one enters a trade at a specific time, the risk of potential entry could restrain the cartel's ability to raise prices, which also benefits consumers. Occupational restrictions, however, prevent qualified but unlicensed parties from competing against high-priced service providers, perhaps by limiting the number of new entrants who can pass a licensing exam or by imposing onerous and expensive entrance requirements. (152) As noted previously, it may be far more difficult for a party to obtain the repeal or revision of a law limiting competition than it would be to enter a line of business. (153) Finally, every member of a cartel has an incentive to "cheat" by lowering prices in order to capture a larger number of buyers. A statute making it a crime to practice an occupation without a license, however, will have a considerable deterrent effect, (154) and it will shift enforcement costs from the cartel members to the government and ultimately to the public.
The information asymmetry problem justifying occupational licensing is not nearly as large a concern today as it was years ago. Consumers can obtain the necessary service quality information for large-scale service providers (for example, H&R Block) from private entities, such as Underwriters' Laboratories, or Consumer Reports, and the necessary information for local services (for example, plumbers) from the website Angie's List. (155) Licensing therefore is no longer necessary to offset the information advantage that service providers enjoy. (156) Companies also spend considerable amounts of capital to advertise the superior quality of their services and establish a brand name, money that firms will not spend if they cannot obtain a competitive advantage from the investment by allowing lower-quality service providers to claim that they, too, are licensed.
A certification process provides the informational benefits of licensing without its costs. (157) The government itself can reward superior quality service providers with the government's version of the "Good Housekeeping Seal of Approval," or, even better, the government can allow private organizations such as Underwriters Laboratories to provide that service. Producers can use a certification to inform consumers about their qualifications and credentials, allowing individuals to select for themselves the degree of competence that they are willing to buy in the market. The government also can sanction any party who falsely claims to have been certified using civil laws to fine any such service provider and to bar that party from further participation in that field. If civil remedies are inadequate in a particular case, the government can criminally prosecute a provider for fraud. (158)
Finally, licensing schemes are a classic vehicle for cronyism. (159) Only the law can create a licensing requirement, and elected officials control the gateway to the lawmaking process. Members of a trade have an incentive to create well-funded and well-run lobbying organizations to persuade politicians to adopt such restrictions, whatever their merits may be. (160) "Licensing usually emerges from occupational associations, like the American Bar Association, when they have the political clout and the organizational skills to lobby a state legislature and present a strong enough case for regulation." (161) The interests of parties seeking a licensing regime nicely complement the interests of elected officials seeking reelection support. Because the principal concern of elected officials is to be reelected, they will use whatever government power they have to assist whoever can best help them achieve that goal. (162) Accordingly, politicians can, and often do, use licensing requirements to reward favored individuals or groups and punish others. Indeed, one scholar has suggested that more often than not occupational licensing requirements serve only to exclude qualified parties, not flim-flam artists, from a particular line of business. (163)
Plumbing and barbering are classic examples of that phenomenon. (164) Plumbers do not repair broken limbs. They fix pipes, a valuable function to be sure, but not one that is comparable to fixing broken hearts. Barbers do not perform surgery. They cut hair, an activity that parents have performed for years without education, without training, and without threatening public safety or their children's health. Plus, how far can a consumer go wrong if he or she picks the wrong plumber or barber? After all, "[t]he difference between a good and bad haircut is two days." (165) Being wet or bald is not the same as being broken or diseased. Accordingly, it is not credible to defend the licensing of plumbers and barbers on the ground that licensure is necessary to protect public health and safety. Any licensing scheme that makes it more difficult to become a plumber or barber than a member of the American College of Surgeons is utterly irrational, even ridiculous. (166)
III. The Traditional Constitutional Analysis of Social and Economic Legislation: Looking Back at Lochner v. New York
A. The Police Power Before Lochner
Academic discussions of judicial review of economic legislation (such as occupational licensing) ordinarily proceed as follows: an analysis of the Supreme Court's 1905 decision in Lochner v. New York, (167) which held unconstitutional a cap on the hours that bakers could work; progression through a series of later Supreme Court decisions in the 1920s and most of the 1930s in which the Court held unconstitutional a variety of federal and state laws governing social welfare policy; (168) and then a discussion of the Supreme Court's New Deal era decisions repudiating Lochner and its offspring. (169) A common riff is that Lochner created an unprecedented and unjustifiable "liberty of contract" doctrine in order to shelter an anachronistic view of property and economic liberty that the Industrial Revolution had rendered obsolete, a proposition that the Supreme Court ultimately--and properly--jettisoned as unprincipled and illegitimate. (170) The Court's frolic and detour in the Lochner era is over, and the law applicable today is what the Framers intended it to be, the argument goes.
Yet, that proposition ignores the pre-Lochner law defining the "police power." By the time that the Supreme Court decided Lochner, it had been settled law that the police power--the government's authority to adopt reasonable regulations of life, liberty, and property "as will protect the public health and the public safety" (171)--could not be used as a tool for cronyism. (172) It was widely accepted that legislation must advance the public interest, rather than the interests of a "special" class of citizens. (173) "The idea that laws should be general rather than special, and oriented toward public rather than private interests, was central to the eighteenth-century Founders' conception of valid laws as equal laws." (174) Thomas Cooley, one of the nineteenth century's best known authorities on constitutional law, made that point quite simply, saying "[e]very legislative body is to make laws for the public good, and not for the benefit of individuals." (175) By the time of the Civil War, the principle that the legislature could adopt "regulations that were arguably neutral with respect to struggles going on among interests in society" (176) had "not only become a mainstay of constitutional jurisprudence but had also been incorporated into the constitution in virtually every state." (177) After the Civil War, Cooley reiterated that point in his treatise on the Constitution that, because "[t]he dimensions of the government's police power are identical with the dimensions of the government's duty to protect and promote the public welfare," a law adopted pursuant to the police power "cannot be purely arbitrary nor purely for the promotion of private interests. It must appear that the general welfare is to be in some degree promoted." (178)
Accordingly, there is considerable force to the argument that the Supreme Court was right to hold the New York statute considered in Lochner unconstitutional because it exceeded the police power by favoring large over small bakeries. (179) There are also recent indications that the Court is willing to call a halt to what had seemingly become the relentless growth of the government's delegated constitutional authority. In three decisions--United States v. Lopez, (180) United States v. Morrison, (181) and NFIB v. Sebelius (182)--the Court ruled that Congress lacked authority under the Commerce Clause (183) to regulate different types of conduct. Those decisions doubtless represent a new willingness to consider inherent restraints on the extent of Congress's powers, including the power to regulate interstate commerce. (184)
By and large, however, the Court's focus for most of the last seventy years has been on construing the external limitations on Congress's power, such as the ones found in the Bill of Rights, rather than analyzing whether there are internal limitations governing how far a particular grant of authority may reach. (185) In addition, the Court's decisions in Lopez, Morrison, and NFIB did not define a limitation on a state's police power. That fact is important because states (or localities) impose far more occupational licensing requirements than the federal government does. The result is that Lochner may continue to serve as the starting point for analysis for the near future.
B. The Lochner Decision
The controversy in Lochner involved the constitutionality of the New York Bakeshop Act of 1895. (186) The act sought to redress the oftentimes-squalid conditions of the highly decentralized baking industry in New York City, where new immigrants frequently ran bakeries out of tenement basements. (187)
To improve the health and welfare of members of that industry, the Act, among other things, limited the number of hours that a baker could ply his trade to sixty hours per week and ten hours per day. (188) The Supreme Court held the act unconstitutional.
Writing for a five-to-four majority, Justice Rufus Peckham started from the premise that "the right to purchase or to sell labor" is a form of "liberty" protected by the Due Process Clause. (189) The government therefore could not arbitrarily deprive someone of liberty but had to justify the statutory restrictions imposed on Lochner as a proper exercise of the "police power"--that is, a state's inherent power to regulate as necessary to protect the lives, health, and welfare of the community. (190) Justice Peckham then examined the health and safety rationale offered for the statute. (191) In so doing, he declined to accept the state legislature's defense of the statute that tighter regulation of working conditions was necessary for the benefit of bakers and the public. (192) He undertook a de novo review of the relationship between the hour limitation and its potential benefits for bakers. (193) Finding no benefits unique to the baking industry, Justice Peckham concluded that the real purpose of the law was to protect labor unions against competition. (194) Such protection was an impermissible application of the police power, Justice Peckham argued, because it unreasonably favored one group (bakery unions, their members, and large, unionized baking companies) over another (nonunion bakers and small, nonunionized baking companies). (195) Accordingly, the Court found that the New York statute unconstitutionally deprived Lochner of the liberty to enter into a contract as he and his workers saw in their own interests. (196)
C. The Backlash Against Lochner
The Lochner decision aroused little interest, let alone condemnation, when it was decided. (197) But times change. Since then, Lochner has become one of the Supreme Court's most highly vilified decisions. Lochner effectively has a black cloud enveloping it like the one that followed Joe Btfsplk of Li'l Abner fame. The academy traditionally has characterized Lochner, at best, as the nadir of the Supreme Court's mistaken decision to second-guess economic judgments made by the political branches and, at worst, as an illegitimate attempt to impose laissez-faire economics and a social Darwinian creed on the nation as a matter of constitutional law. (198) For the three decades following Lochner, the Court continued to hold unconstitutional different federal and state examples of social and economic legislation, but Lochner has always been treated as the poster boy of the Court's willingness to engage in a vigorous judicial review of the policymaking process.
The Supreme Court ceased its aggressive judicial review of economic legislation during the New Deal. A doctrinal explanation why the Court did an about face is that the Court finally realized that its decisions had created a Bermuda Triangle-like body of case law where federal and state legislative efforts to combat the Great Depression went to die. (199) The federal government could not regulate wages, prices, and working conditions because the Commerce Clause did not permit Congress to regulate such inherently local subjects. (200) The states also could not regulate them because they could not interfere with the liberty employers and employees enjoyed to define the terms of employment. (201) Frustrated reformers trying to fight the nation's greatest economic challenge found themselves without anywhere to turn for help.
Eventually, however, the Court changed its mind about each doctrine. (202) Three decisions sent the law in a different direction. Nebbia v. New York (203) upheld a state law setting minimum and maximum milk prices. West Coast Hotel Co. v. Parrish (204) sustained a state minimum wage law and overturned a decade-old ruling in Adkins v. Children's Hospital, (205) which had held unconstitutional a different state minimum wage law. Finally, United States v. Carotene Products Co. (206) upheld a federal statute prohibiting the shipment of "filled milk" (that is, skimmed milk) in interstate commerce and announced three principles to guide future analyses. First, legislation is generally entitled to a presumption of constitutionality. (207) Second, by contrast, legislation that trespasses on a specific constitutional guarantee receives less deference. (208) Third, the Court left open the issue whether laws that hamper the ability of politically powerless, "discrete and insular minorities," also may be entitled to heightened judicial protection. (209) Over time, the result has been the development of a two-tiered standard of review. The courts strictly scrutinize the rationale offered to justify laws that fit into the last two categories, while engaging in a far more lenient standard of review for ordinary social and economic legislation. (210) In fact, some argue that the latter tier of scrutiny, the so-called "rational basis" review, amounts to no scrutiny at all. (211) Since those decisions, the Supreme Court has generally taken a "hands off" approach to judicial review of federal and state economic legislation. (212)
Commentators have consistently acknowledged that, since the New Deal, the Supreme Court has shied away from citing Lochner approvingly, and from treating the decision as if it were still good law. Some commentators have noted that proposition gladly; others, fatalistically. (213) Not every member of the academy, however, has thrown in the towel. In fact, a growing number of scholars has decided that Lochner is worth a second look.
D. The Backlash Against the Backlash Against Lochner
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| Title Annotation: | Introduction into III. The Traditional Constitutional Analysis of Social and Economic Legislation: Looking Back at Lochner v. New York D. The Backlash Against the Backlash Against Lochner, p. 209-254; Thirty-Fourth Annual Federalist Society National Student Symposium |
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| Author: | Larkin, Paul J., Jr. |
| Publication: | Harvard Journal of Law & Public Policy |
| Date: | Jan 1, 2016 |
| Words: | 7844 |
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