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The Rent-Seeking Is Too Damn High

This is In Real Terms, a new column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!


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Imagine you run a barbershop and you learn that someone is planning to open a rival business down the street. What do you do?

One option, of course, would be to compete the old-fashioned way by offering lower prices or better service. But the old-fashioned way is hard! Wouldn’t it be nice if you could keep your competitor from setting up shop in the first place? There’s evidence that a growing number of businesses in the U.S. are trying to do exactly that. And while that may be good for them, it’s bad for entrepreneurs, workers and the economy as a whole.

On Tuesday, a Senate subcommittee held a hearing on “occupational licensing” laws, which require government-issued licenses to perform certain types of work. Such laws have long existed for doctors, lawyers and others in highly skilled professions, but they are increasingly spreading to low- and mid-skill jobs as well. A White House report last summer found that occupational licensing requirements have increased fivefold since the 1950s, covering more than a quarter of all workers in 2008. Cosmetologists, tree trimmers and even interior designers need licenses in some states.

Defenders of occupational licensing typically argue that the rules help protect consumers and workers, and that’s undoubtedly true in some cases. I want the people filling my cavities to know what they’re doing. But it’s hard not to suspect that in many cases, these rules serve another purpose: to make it harder for new competitors to enter the marketplace. In Nevada, according to Politico, barbers need more than two years of training to qualify for a license; that’s a high bar to anyone looking to break into the business.

Economists call this kind of behavior “rent-seeking,” which is another way of saying “gaming the system to make more money than you’ve earned.” (A company that wins a no-bid contract through political connections is a rent-seeker. So is a CEO who gets a raise by stacking the board of directors with friends.) Occupational licenses are good for existing businesses, which face less competition, and for workers who already have licenses, who according to one study earn roughly 15 percent more than they would in a free market. But they’re bad for everyone else. Research has found that occupational licenses inhibit entrepreneurship, especially among low-income workers. They also raise prices, lower productivity and limit workers’ ability to change careers or cities. One recent study estimated that licensing laws cost the U.S. as many as 2.85 million jobs.

Occupational licensing is just one example of rent-seeking. For another, see this Aruna Viswanatha story in The Wall Street Journal on the rise of noncompete agreements in fields such as journalism and fast food. Yes, fast food: The sandwich chain Jimmy John’s has had some employees sign contracts barring them from working at any other sandwich shop near its locations. University of Maryland economist Evan Starr has found that such policies inhibit workers from changing jobs, hurting their bargaining power and thereby benefiting companies at the expense of their employees.

There is evidence that rent-seeking, in various forms, is becoming more common in the U.S. economy. In a recent paper, economist Dean Baker argued that rent-seeking has driven much of the recent increase in income inequality. And while Baker is a liberal, conservatives are also concerned about rent-seeking, such as land-use restrictions that make it hard to build housing in high-priced coastal cities. The White House is worried about occupational licensing, but it was Mike Lee, one of the Senate’s most conservative members, who called Tuesday’s hearing.

I’ve written previously about the long-term decline of dynamism in both labor and business — Americans are changing jobs less often and they’re starting fewer companies. Incumbent businesses, meanwhile, are thriving — the U.S. economy has never been as dominated by big corporations as it is today. Rent-seeking behavior isn’t the only explanation for those trends, and perhaps not even the main one, but it may be the one most easily addressed by policymakers.

The everything store

After spending 20 years convincing us that, yes, it really does make sense to order our cat litter, peanut butter and frying pans online, Amazon.com might be about to start telling us to (gasp!) go to the store.

The details here are a little fuzzy. On Tuesday, The Wall Street Journal reported that General Growth Properties, a big mall owner, said Amazon plans to open 300 to 400 physical bookstores in coming years. General Growth backed away from those comments the next day, but only partway; Amazon, for its part, hasn’t commented.

Moving from virtual to bricks-and-mortar might seem counterintuitive, but there is precedent for the move. Sears, Roebuck began as a mail-order catalog, the 19th century version of the World Wide Web. It wasn’t until the 1920s that Sears began opening retail stores to serve urban consumers who wanted to browse products before buying.

That same logic holds today. Amazon is already great at selling us all the things we know we need and want. But physical stores are still better at letting us browse and discover things we never knew about. Be sure of this much, as Miriam Gottfried wrote Tuesday: Amazon might start with books, but it won’t end there.

The politics of the middle class

Last week I wrote about the economic fears underpinning support for anti-establishment presidential candidates from both parties. Monday night’s Iowa caucuses didn’t turn into the Donald Trump landslide that some polls predicted, but voters’ desire for a new direction was clear nonetheless. Trump and fellow outsider Ted Cruz together dominated the Republican race and Bernie Sanders more or less tied Hillary Clinton on the Democratic side.

A new poll from the Pew Research Center released Thursday gives some more perspective on voters’ anxieties. Nearly half of those polled said their family incomes aren’t keeping up with the cost of living; among those identifying as lower class, two-thirds said their incomes weren’t keeping up. And despite the improving job market — the latest jobs numbers will be released this morning — 58 percent of middle-class respondents said good jobs are difficult to find. (Among the lower class, 73 percent said this.)

So Americans agree on the challenges. Solutions, though, are another matter. For example, 30 percent of Republicans surveyed said the federal government does “too much” to help poor people; just 5 percent of Democrats agreed. On the other hand, 77 percent of Democrats said the government does too much for the rich; only 44 percent of Republicans felt the same.

Number of the week

According to a new report from the Center on Budget and Policy Priorities, 87 percent of state job growth is homegrown, meaning it comes either from new startups or from companies that are expanding their existing operations in a state.

The report is an indictment of state economic-development policies that use tax incentives to lure business from out of state. That strategy quickly turns into a race to the bottom, leaving governments with less tax revenue but few new jobs.

To the extent state governments do try to help in-state businesses, it’s often through tax breaks that target small businesses. But it isn’t small businesses that drive job growth, it’s new businesses, and in particular the small subset of new businesses that rapidly grow into big companies. If they want to promote job growth, the report argues, states should focus on promoting high-growth entrepreneurship. Just one problem: We really don’t know how to do that.

More from me

On Monday, Andrew Flowers and I wrote about new research showing that Americans who are born rich tend to stay that way.

On Wednesday, I warned that state unemployment systems aren’t ready for the next recession.

Speaking of unemployment, it’s jobs day! I’ll have coverage of the monthly jobs numbers later this morning.

Elsewhere

Ana Campoy says Latin America is outpacing the U.S. and Europe at moving women into corporate management roles.

Alex Tabarrok explains why you should think twice about buying a house.

Cora Lewis says the end of tipping is nigh.

New research from Robert Hall and Nicolas Petrosky-Nadeau of the San Francisco Fed finds that it’s rich people who are leaving the labor force.

Jose Canseco doesn’t like Japan’s new negative-interest-rate policy. As the economics writer for an ESPN-owned website, I’m pretty sure I’m required to link to this.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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