George Will on Rent Seeking

This article by George Will on rent seeking is a little old, but it is still worth the time to read. Will lays out a text book definition of rent seeking and then provides an interesting example.

This [legally mandated certification] is done in the name of “professionalization,” but it really amounts to cartelization. Persons in the business limit access by others — competitors — to full participation in the business.

Being able to control the number of one’s competitors, and to dispense the pleasure of status, is nice work if you can get it, and you can get it if you have a legislature willing to enact “titling laws.” They regulate — meaning restrict — the use of job descriptions. Such laws often are precursors of occupational licensing, which usually means a mandatory credentialing process to control entry into a profession with a particular title.

And a cartels primary goal is to act like a monopoly. From here everybody should see that cartelization of an industry is generally a bad thing and should only be done in very rare cases. The only justification for such a move is when such certification, licensing, etc. actually improves the quality of a product or service by so much that the losses due to rent seeking and market power is offset by the welfare gains due to improvements in quality. In practice however, this is rarely if ever the case. After all, if one is really serious about maintaining quality then tests would be periodic not a one-shot deal. Lawyers should have to take a follow-up bar exam to demonstrate that they are up-to-date on the latest case law in their field. Doctors would have to renew their license and show that they are keeping up on the latest procedures. The same goes for plumbers, carpenters and any other profession/job that requires licensing or certification.

So what example does Will give us?

Consider the minor — but symptomatic — matter of the government-abetted aggression by “interior designers” against mere “decorators,” or against interior designers whom other interior designers wish to demote to the status of decorators. Some designers think decorators should be a lesser breed without the law on its side.

Those categories have blurry borders. Essentially, interior designers design an entire space, sometimes including structural aspects; decorators have less comprehensive and more mundane duties — matching colors, selecting furniture, etc.

In New Mexico, anyone can work as an interior designer. But it is a crime, punishable by a fine of up to $1,000 and up to a year in prison, to list yourself on the Internet or in the Yellow Pages as, or to otherwise call yourself, an “interior designer” without being certified as such. Those who favor this censoring of truthful commercial speech are a private group that controls, using an exam administered by a private national organization, access to that title.

Anywhere and everywhere that a barrier to entry is put in place competition is reduced and incumbents in that industry now enjoy more market power. This market power translates into higher prices. Those higher prices are basically the suppliers in that market transferring some of the value to the consumers to their pockets. These kinds of things are quite wasteful. Not only is there the waste associated with reduced competition (the deadweight loss), but there is also the loss associated with rent seeking and rent protection. That is, you have to go out and lobby for your rents. This costs resources that are now not being productive (the resources are being used to “re-cut” the economic pie), and once you have those rents you’ll have to expend additional resources to keep them. And since there is usually more than one side involved in rent seeking these losses can actually be the most significant since they can approach a level equal to twice whatever profits the rent in question generates.

And while one can make the case that the restriction for doctors and engineers is reasonable since peoples lives depend on their skills meeting at least some level of sufficiency, what is the harm done if an un-lincensed interior decorator/interior designer comes up with an ugly color scheme? Not much. Will’s example is basially an example of greed combined with the political process that will make most people worse off.

FILED UNDER: Economics and Business, ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Bill H says:

    Doctors would have to renew their license…

    Actually, in part they do. It’s called continuing education unit requirements to maintain the license. This makes your point stronger. I’ll bet interior decorators don’t have ceu’s.

    The NASCAR racing circuit is sponsored by Nextel (now Sprint), and their contract doesn’t allow any other cell phone company to advertise on an individual race car. But the race cars are not owned by NASCAR, they are independently owned. Pretty cool deal for Nextel/Sprint. Money talks.

  2. Rent seeking? In New Mexico? Whoda thunkit.

  3. Alex Knapp says:

    After all, if one is really serious about maintaining quality then tests would be periodic not a one-shot deal. Lawyers should have to take a follow-up bar exam to demonstrate that they are up-to-date on the latest case law in their field.

    We don’t have to take tests, but lawyers do have continuing education requirements. Where I’m at, it’s 15 hours a year.

  4. Alex Knapp says:

    After all, if one is really serious about maintaining quality then tests would be periodic not a one-shot deal. Lawyers should have to take a follow-up bar exam to demonstrate that they are up-to-date on the latest case law in their field.

    Lawyers, like doctors, have continuing education requirements. Additionally, one can argue that a lawyer’s knowledge of the law is tested in the courtroom.

  5. M. Murcek says:

    Doctors and lawyers, probably the two worst examples to give. If I am sick or at threat of incarceration, I want the best practitioner, not the best test taker…

  6. Dave Schuler says:

    And while one can make the case that the restriction for doctors and engineers is reasonable since peoples lives depend on their skills meeting at least some level of sufficiency…

    Barbers, cab drivers, truck drivers, teachers, pharmacists, animal trainers, etc. etc. Is there any job on which somebody’s life, sometime does not depend?

    Actually I’m completely in favor of physicians being required to demonstrate competence. Why is competence construed as “having been to med school”? Why do we allow physicians to cap the number of medical schools and the number of medical graduates? The stated goal of the medical profession for generations has not been demonstrated competence. It’s been the 15,000 “most competent” graduated from med school every year.

    And, finally, why is it not reasonable for, in jobs in which the numbers and competence of those in the job are determined by the state, the state to be restricted from limiting the compensation for those in the job, too?

  7. Steve Verdon says:

    And, finally, why is it not reasonable for, in jobs in which the numbers and competence of those in the job are determined by the state, the state to be restricted from limiting the compensation for those in the job, too?

    You mean aside from the fact that these kinds of things wherever they’ve been tried have been dismal failures (Poland, Romania, former USSR, DPRK, etc.), you got me.

  8. tom says:

    If I am sick I want the best doctor possible, but the problem is that there is only one best doctor and hundreds of thousands of patients. The second problem is the best doctor is probably the most expensive doctor and I cannot afford the most expensive doctor. The same with a lawyer: the best lawyer is probably out of my price range. It would be nice if everyone had access to the best of the best of the best, but most cannot afford that and is not physically possible.

    What is the cost of only having very expensive, top notch doctors? Well, I would think medical costs would be very high and people with out a lot of money could not afford heath insurance. People probably would not go to the doctor as much as they might want because of the expense or only go to the doctor for medical emergencies where preventative medicine would have been more cost effective if medical costs had been lower.

    By having only the Cadillac of medical care available some people are forced to go with no care when they probably would have been better off with the Toyota of medical care.

  9. Dave Schuler says:

    Steve, with that comment you are officially defending the status quo. Explain how you plan to finance Medicare. Or repeal it.

    Our choices are limited. Either we must do the politically impossible (repealing Medicare), reduce the cost of healthcare by fiat, or use market forces to do so. I’m for the latter but that means, as I’ve written ad nauseam that we’ve got to break the monopoly of the physicians’ guild.

    Reducing the demand side simply won’t cut it. That implies that physicians and hospitals will voluntarily take a pay cut. They won’t. They’ll raise rates to compensate for the reduced demand until a public health catastrophe develops.

  10. Dave Schuler says:

    You mean aside from the fact that these kinds of things wherever they’ve been tried have been dismal failures (Poland, Romania, former USSR, DPRK, etc.), you got me.

    This is simply not true. For every example you can give me I can give a counter-example. France, Germany, Italy, Denmark, and the Netherlands all limit physicians’ incomes in one way or another. All have better outcomes than we do and don’t have the nightmare wait times that most opponents of “socialized medicine” point to.

    Don’t get me wrong. My first choice would be a market system. My second choice would be a system in which physicians were licensed based on some evaluation scheme but that the supply was able to rise without the permission of the physicians’ guild i.e. a complete overhaul of our system of medical education AND reforms aimed at reducing demand. I don’t believe that demand-side only solutions will achieve cost savings without severe public health implications. I don’t believe that a single-payer system without cost controls will achieve much of anything. And I don’t believe that the present course is sustainable.

  11. Steve Verdon says:

    Dave,

    I am not defending the status quo with that comment, I am rejecting your notion that the government should be allowed to restrict compensation, or as I like to put it price controls. Generally, I find them to be distortionary and bad.

    I am also rejecting the notion of licensing and certification in general as well. I don’t like the idea that there are gate keepers to certain professions that have a government blessing. Such gatekeeping limits supply, raises prices and the impact on quality are dubious at best.

    As for breaking the medical professions strangle hold on the profession, I agree. Of course, how this is done is quite open ended. Simply voiding the existing institutional structures might not be the best solution. And some policies towards achieving this end might be even worse than doing nothing. Still, I agree that is the direction we need to move in.

    As for reducing health care costs via fiat, I think that will produce results similar to what we saw in the former Soviety Union and Eastern Europe and are seeing in England today. Personally, I don’t see that as much of an improvement, although health care costs would certainly decline.

  12. Steve Verdon says:

    This is simply not true. For every example you can give me I can give a counter-example. France, Germany, Italy, Denmark, and the Netherlands all limit physicians’ incomes in one way or another. All have better outcomes than we do and don’t have the nightmare wait times that most opponents of “socialized medicine” point to.

    I’m not convinced of this. Some of the statistics people cite I think are of dubious value when used in cross-country comparisons such as infant mortality statistics. What constitutes a “live birth”? Radley Balko, I think, had a post on partial birth abortions and how in one country if the baby is born it is accidentally born it isn’t considered a live birth. What they do then I don’t know…and frankly I’m not sure I want to know because it could start to get appallingly close to infanticide.

    And I bet there are lots of people in France who have sucky health care. For example, all those people living in those poor areas that were burning cars and so forth; do they have good health care? So, I’m just not convinced on that one.

    Price controls are generally a really bad idea. They do have their occasional uses, but they have to be intelligently designed and even then shouldn’t be used as a long term policy. And considering that we are talking about politicians the first part (intelligently designed) is going to be the hardest hurdle to clear.

  13. Dave Schuler says:

    France is an interesting case. They’ve got a hybrid system in which there’s a mandatory government health insurance plan that covers basic care and most people also carry supplemental insurance, in many cases paid by their employers. It’s the model lots of people point to when they want to show how great a single-payer system is (although it’s not a single-payer system).

    However, how a system in which 60% of the total healthcare bill is paid by the government (the U. S.) is a market system and a system in which 80% of the total healthcare bill is paid by the government (France) is socialized medicine eludes me.

    Docs make roughly a third in France of what they make here.

  14. Dave Schuler says:

    IMO you and I are in agreement on our first and second choices. And I think we’re both realistic enough to recognize that we’re not going to get either of those. Where we differ is in the unpalatable alternatives after that. I want to give docs more security in exchange for control (they’ve been making their decisions along those lines for 40 years).