Can Cutting Red Tape Generate $200B For Low-Income Families?

With partisanship de rigueur in Washington, rare moments of compromise are refreshing. One area ripe for bi-partisan reform is occupational licensing. President Obama’s proposed budget reportedly includes $15 million for states to examine rules governing business formation and certification. Though a substantial expenditure of taxpayer money, this might generate a return on investment of some $203 billion in economic activity, according to a new Brookings Institution study by University of Minnesota economist Morris Kleiner. Kleiner’s research also shows that carefully trimming occupational licensing mandates does not adversely impact quality or safety. And the most likely beneficiaries are low-income families.

However, most occupational licensing occurs at the state and local levels. The $15 million is meant to help states run cost-benefit analysis for excising needless and harmful rules. It could also help states coordinate on license portability for citizens who move to a new area.

“This is a big issue, it’s growing, it’s grown dramatically as a result of the move from the manufacturing to the service economy,” Kleiner said in an interview. “Occupational licensing is a way of restricting entry. Consumers lose and also innovation loses. The group that gains the most are relatively high-income individuals … It’s a reallocation of resources from the bottom to the top.”

Some lawmakers, like Rep. Paul Ryan, R-Wisc., have advocated for occupational licensing reform; Ryan included it in his anti-poverty plan released last summer. Poor families are hardest hit by mindless licensure since they’re least likely to overcome regulatory hurdles to open shop and hire workers. Lower-income consumers are most likely to get priced out of purchasing goods and services, further constricting economic growth. Licensing requirements inflate the cost of wages by 18%, according to earlier analysis by Kleiner and Alan Krueger.

A compelling first-person documentary from Honest Enterprise of the Charles Koch Institute illustrates the human impact of these laws. Melony Armstrong, an aspiring hair braiding entrepreneur, struggled with excessive licensing in the high-poverty area of Tupelo, Miss. She also wrote of her experience at The Huffington Post.

“It’s not totally surprising—people on every point of the political spectrum have been getting increasingly, and correctly, agitated about the burdens of occupational licensing in the past few years,” said Robert McNamara, senior attorney at the Institute for Justice, which extensively studies the issue and its impact on poor families (his colleague is featured in the documentary above). “People can quibble about occupational licensing at the margins, but the only fair way to describe the burdens licensing imposes on low-income workers is to call them enormous.”

McNamara acknowledged the difficulty of implementing reforms from the federal level, though he said monetary incentives for states are one possible avenue. Looking at the states, if Republicans are serious about empowering entrepreneurs and consumers, they have the power. As Gerald Seib of The Wall Street Journal reports, following November’s elections, Democrats hold just 18 of the nation’s 50 governorships and just 30 state legislative chambers (Republicans control 68). In lower houses of state legislatures, Republicans hold 3,039 seats; Democrats just 2,342.

So while Obama’s $15 million could be money well spent, state Republican lawmakers are now best positioned to bust out the scissors and cut red tape.