Government Licensing = Incumbent Protection

I have written on this topic quite a bit, but via Cato comes another great example of how licensing and regulation, while promoted as consumer protections, much more frequently are incumbent protection against new competitors.  Cato has a video of some folks in Oregon who started a moving business, only to find that sate law effectively requires them to get permission of current moving companies before they can operate  (apparently, someone in Oregon is enamored of medieval guild systems).

How the law works is that when a new mover submits his application for a business license, existing movers can file an objection (which apparently is pro forma).  The new company must then justify to the state why another moving company is justified by the marketplace.  Of course, absolutely no guidance is given how such a thing might be proven.

I would have found this unbelievable, had not my company faced the exact same requirement in another context.  In Shasta County, California, we wanted a liquor license to sell beer at the store we run at McArthur-Burney Falls State Park.  We were told that we could not have a license until we had proven to the County that there was enough demand for another liquor outlet.  It was for our protection, they told me -- we wouldn't want you to get in a situation where you might fail.

I have written about liquor licensing before - if ever there was a regulatory regime whose time was long past, this is it.  The extensive fingerprinting and background checks one must go through to get a license are outdated remnants of a concern for the return of organized crime, a problem that was obviated by legalization  (so that, as usual, the government regulatory regime to fix a problem was instituted at the same moment the problem went away).  Now, the liquor licensing process is used as a club by existing competitors to keep new entrants out.  My bet is that organized crime is now on the other side of the fence, using the liquor licensing process to hammer honest competitors.  And if you really want to see abuse, read the whole Rack 'N Roll saga by Radley Balko.

I bet you are just overcome with suspense wondering if we got our license.  In Shasta County, we eventually succeeded, mainly because the store was in a gated park with an entrance fee, and we could make the argument that competition did not really cross the gates of the park.  Years later, we lost a similar battle in Lake Havasu City, AZ, where a group of local business people have really organized the town to their benefit and use every tool they can, from zoning to licensing, to keep competitors out.

  • mahtso

    With respect to liquor licenses: Arizona law has a provision related to the convenience of the new store/bar; I have been told that it is intended to mean convenience for the customers and more stores is better (i.e., the intent was to make it easy to get to a licensed establishment). The reason is that when prohibition ended all the business went to illegal operations and the plan was to put them out of business by making it convenient for people to go to a licensed store.

    You are spot on as to licenses being a method to restrict competition.

  • ben

    The endless evil of government. Breathtaking.

  • http://www.quadrant.org.au/blogs/warby Lorenzo

    Posner discusses somewhere the medieval common law requirement that someone planning to build a new flour-mill had to essentially buy customers from existing mills. In a situation where capital was very scarce, it was a way of discouraging wasteful investment of capital and protecting those who had invested capital.

    Note, however, it was a direction transaction between those affected. A straightforward buy-and-sell with an available mediator (the judge: which were rather more common in medieval society).

    Modern licensing laws which regulate entry numbers (rather than merely specifying standards) lack such a "bottom line". What is supposed to make transactions easier (deal with one centralising body rather than separate negotiations with local provides) tends to lack any clear bottom line.

  • http://www.quadrant.org.au/blogs/warby Lorenzo

    The should be "who were more common" and "local providers", but you get my drift.

  • http://www.thelibertysmith.com Rod Smith

    Excellent article - consistently outstanding posts from this blog.

  • bill steigerwald

    According to Pa. state Public Utility Law, set up in the hideous heyday of the New Deal and, of course, enforced faithfully to this day, regulations here require any new taxi company to get the OK of the existing one or two cab companies who were given monopoly or near-monopoly privileges in Pgh. and Philly etc. during the mid 1930s; the largest company, which controls probably 95 percent of the taxi biz in Pittsburgh, is Yellow Cab. Yellow Cab is notorious for lousy service, crummy cabs and racism; most of its cabs go back and forth all days from Downtown to the Pgh airport, which costs about $35 a trip for 20 miles. Poor people, with their need to get back and forth to grocery stores and doctors, are the natural clientele for cabs. But in Pittsburgh (and elsewhere), the poor or carless are woefully underserved -- which is why Pgh has a healthy, free-market solution to taxi service that is completely illegal and unlicensed and unregulated -- jitneys. Think August Wilson, who based his play "Jitney" on his hometown of Pittsburgh's thriving and valuable jitney industry. This black market (literally) service is cheaper than Yellow Cab and it serves the poorer (mainly black) parts of town from which if you called a Yellow Cab because you were pregnant and your water broke, your child would be in pe-school before a taxi showed up. About 14 years ago a black guy -- i won't call him an entrepreneur because though he was a jitney driver he was using a bunch of government grant money -- tried to start a new legal cab company to serve primarily black neighborhoods; Yellow Cab, as allowed by law because the new company was a threat to its business, tortured him; YC, using the PUC regs, forced him to prove that there was a need for his two or three cab company. The guy had to get lawyers, waste time, etc., in an administrative proceeding that took almost a year, if I recall. The PUC law clearly was designed to protect existing monopoly providers, and it worked as intended; the new guy, miraculously, but probably because he was both tiny and black, got the PUC's OK -- but he could only serve two black wards and could only drop off people at the airport, not pick up anyone there. The guy lasted maybe a year -- until his government money ran out, i suspect, and disappeared. The PUC law here is a living relic of the fuedal New Deal mentality that competition is confusing and not good for consumers; it is also a text book case of how regulators are captured by the people/industry/occupation they are supposed to be regulating; Yellow Cabs many special state-provided privileges and sins against consumers (high costs, bad service, which date back to the mid 1930s) -- continue to this day in Pittsburgh. The Institute for Justice, god bless it, broke up a similar PUC-taxi racket in Denver and won the OK for new cab companies to get into the biz. But it's a city by city or state by state set up. So backwater places like Pa., where in 2009 liquor and wine can still only be bought in "state stores" (state govt-owned and operated outlets) not supermarkets, will continue for eternity to use bad, stupid laws to privilege pet monopolies while consumers and entrepreneurs quietly get screwed.

  • Larry Poe

    I think you and your readers will appreciate a little tale about government I lifted from a blog by an English sci-fi writer with a distinctly libertarian bent, Neal Asher (blog at http://theskinner.blogspot.com/):

    A Lancashire Farmer is overseeing his animals in a remote part of the County when suddenly a brand-new BMW advances out of a dust cloud towards him. The driver, a young man in a designer suit, Gucci shoes, Ray Ban sunglasses and YSL tie, leans out the window and asks the farmer, 'If I tell you exactly how many cows and calves you have in your herd, will you give me a calf?'

    The Farmer looks at the man, obviously a yuppie, then looks at his peacefully grazing herd and calmly answers, 'Reet, why not?'

    The yuppie parks his car, whips out his Dell notebook computer, connects it to his Cingular RAZR V3 cell phone, and surfs to a NASA page on the Internet, where he calls up a GPS satellite navigation system to get an exact fix on his location which he then feeds to another NASA satellite that scans the area in an ultra-high-resolution photo. The young man then opens the digital photo in Adobe Photoshop and exports it to an image processing facility in Hamburg, Germany. Within seconds, he receives an email on his Palm Pilot that the image has been processed and the data stored. He then accesses a MS-SQL database through an ODBC connected Excel Spreadsheet with email on his Blackberry and, after a few minutes, receives a response. Finally, he prints out a full-color, 150-page report on his hi-tech, miniaturized HP LaserJet printer and finally turns to the farmer and says, 'You have exactly 1,586 cows and calves.'

    'Wow That's right. Well, I guess you can take one of my calves,' says the Farmer. He watches the young man select one of the animals and looks on amused as the young man stuffs it into the boot of his car. Then the farmer says to the young man, 'Ey Up!, if I can tell you exactly what your business is, will you give me back my calf?'

    The young man thinks about it for a second and then says, 'Okay, why not?'

    'You work for the British Government', says the farmer.

    'Wow! That's correct,' says the yuppie, 'but how did you guess that?'

    'No guessing required,' answers the farmer. 'You showed up here even though nobody called you; you want to get paid for an answer I already knew, to a question I never asked. You used all kinds of expensive equipment that clearly somebody else paid for, you tried to show me how much smarter than me you are; and you don't know a thing about cows ....... this is a flock of sheep. Now give me back my dog.'

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