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Obama's economics team is taking on one of America's most underrated economic problems

Occupational licensing rules, which require government approval (typically by a state government) before a person can practice a given profession, are one of the most under-discussed aspects of the American labor market. A new report from the White House Council of Economic Advisers argues that the way licensing is applied in practice often leads to higher prices, reduced opportunity, and more macroeconomic fragility.

Regulating entry into certain kinds of professions on the grounds of health and safety makes sense, but once a process is set up to exclude people from doing a job, incumbent practitioners have a strong economic incentive to use the licensing board as a means to eliminate competition. Today, more than a quarter of American workers need a license to do their job, representing a fivefold increase relative to the 1950s.

You can tell from the enormous state-to-state variation that rules are often going well beyond what's needed for safety. For example, the report notes that "South Dakota, Iowa, and Nebraska require 16 months of education to become a licensed cosmetologist, while New York and Massachusetts require less than 8 months." If you heard your friend was going to get a manicure in Boston, would you fear for her safety or tell her to go to Des Moines instead? Of course not.

The report also notes that licensing has in some cases become a cudgel with which to punish the already disadvantaged. Over a dozen states have rules that can make non-payment of student loans into grounds for license revocation — turning state licensing boards into debt collectors. And rules barring people with felony convictions from obtaining licenses are widespread, which tends to exacerbate all the problems with racial and socioeconomic disparities in the criminal justice system.

Subject regulations to cost-benefit analysis

The CEA has a long list of recommendations for state legislatures considering licensing. That includes making sure that the rules are closely aligned with actual safety concerns and easier for experienced practitioners to move from one state to another. The problem with these recommendations, of course, is that the anti-competitive aspects of licensing regimes don't get there by accident.

That's why the CEA argues that states should set up an independent, credible agency that conducts cost-benefit analysis of new licensing rules before they can be put in place. Maine has had such a process in place since 1995, and over the past 15 years only one proposed new license has actually passed muster.

The federal government could do more

The CEA report ultimately does not recommend much in the way of federal action. The administration already requested the creation of a small grant program to help states study the impact and implications of their licensing regime. But licensing is overwhelmingly done by state governments, so there's nothing for Congress to repeal or undo.

That said, an administration that wanted to go further probably could devise meaningful federal steps to reduce problems with anti-competitive licensing.

One very heavily licensed set of occupations, for example, is in the health care space. And between Medicare, Medicaid, the Affordable Care Act, and the federal tax subsidy for job-based health insurance plans the federal government is footing the tab for an awfully large share of health spending in America. Some or all of that funding could be made conditional on states' willingness to conform to the full set of best practices from the CEA report, at least as regards health occupations.

Room for bipartisanship

(Council of Economic Advisers)

Excessive licensing practices have spread with little regard for conventional political geography. But the Obama administration's interest in the topic highlights its potential as grounds for bipartisan moves toward reform. For conservatives, making licensing less burdensome offers a basic deregulatory appeal. For liberals, shaking up insider-dominated cartels offers a form of antitrust appeal and a path to upward mobility for the socially marginalized.