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Loosening the Law's Stranglehold Over Economic Liberty
By Clint Bolick
Hoover Institution PressCopyright © 2011 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
THE SORRY STATE OF ECONOMIC LIBERTY
IN ONE OF THE FIRST economic liberty cases I argued, the judge lamented that the oppressive regulatory barriers that my clients faced sounded more like Russia than the United States. I replied that in fact we might have to seek economic asylum for our clients in Russia, because these days there are fewer barriers to entry in Russia than in our country. The judge laughed ruefully. And then, shortly thereafter, he ruled against us — not because he wanted to, but because the weight of case law against economic liberty was too great.
Such was the state of economic liberty jurisprudence as we entered the millennium. Economic rights are consigned to the lowest level of judicial scrutiny — the so-called "rational basis" test. As most courts have applied it to economic regulations over the past eighty years, there are two features to the rational basis test. First, the regulation doesn't have to be rational. Second, it doesn't have to have a basis.
It's not much of a test, and almost no contested regulations ever flunk it. As a consequence, law students are taught that when the rational basis test applies to a particular controversy between an individual and the government, the government always wins.
Leroy Jones had never heard about the rational basis test, much less the privileges or immunities clause, when the government tried to destroy his dream in the early 1990s. Jones was a cab driver in Denver, working for the ubiquitous Yellow Cabs. He and some of his fellow drivers noticed an oddity in the Denver taxicab market. Cabs were abundant at downtown hotels and the airport. But if someone needed a cab in the low-income Five Points neighborhood, it was tough to get one.
Jones and three of his colleagues saw opportunity in this. They decided to form a new taxicab cooperative, named Quick-Pick Cabs, that would primarily serve Five Points and other taxicab-scarce neighborhoods. They already possessed the requisite experience. They assembled the necessary capital. They collected hundreds of signatures from Five Points residents attesting to the need for additional taxicab service.
Indeed, the aspiring entrepreneurs had everything they needed to launch a profitable enterprise that would provide a valuable service — everything, that is, except for a piece of paper from the Colorado Public Utilities Commission called a "certificate of public convenience and necessity." No problem, reasoned Jones and his colleagues — their business was both convenient and necessary. But after the agency completed its review, it delivered to Quick-Pick Cabs the same verdict as every other applicant for a taxicab permit since World War II: application denied.
It turned out that the rules of the game were rigged decisively in favor of the three existing taxicab companies. A new applicant had the burden of showing not that there was a market need that was unserved, but that there was a need that could not be met by the existing companies. It was an impossible burden, exacerbated by the fact that the existing companies could intervene in the proceedings and literally bleed their aspiring competitor to death with massive and endless documentation demands.
Jones and his partners were denied the opportunity to pursue their business for the most arbitrary and protectionist reasons. One could hardly imagine a greater injustice. Yet when they went to federal court, they lost. Once again, there simply was not enough case law for the judge to render a favorable ruling. Having now been fired from Yellow Cabs, Leroy Jones ended up selling cold drinks under the hot sun at Mile High Stadium, his dream of starting his own company crushed by his own local government. (Lest the reader get too depressed, this story has a happy ending — but I won't reveal it until later.)
Most of the stories in similar circumstances, however, do not have happy endings. One of the saddest and most frustrating cases I ever litigated was on behalf of Junie Allick, a native Virgin Islands sailor. He made a living shuttling tourists to the beautiful coral reef at Buck Island. He was the only sailor in the business skillful enough to operate only with sails, as opposed to the gasoline engines that polluted the reef. But after the National Park Service assumed jurisdiction over Buck Island, it instituted an "attrition" policy to reduce the number of boat trips to Buck Island. For the first time, Allick had to navigate not only the waters off St. Croix but a sea of bureaucracy as well. Though Allick was a skilled sailor, he had never learned to read or write, and he failed to fill out forms required by the Park Service, which consequently shut his business down. Before long, not a single native sailor was left in the Buck Island excursion business.
Yet when we brought Allick's case to court, the federal judge was incredulous that someone would waste the court's time over a business that netted only $15,000 a year. He dismissed the case, thereby destroying the only livelihood Allick had ever known.
The barriers encountered by Leroy Jones and Junie Allick are only the tip of the regulatory iceberg. In all, at least five hundred occupations, representing 10 percent of all professions, require government licenses. Frequently, the government boards that determine the standards are comprised of members of the regulated profession, who are invested with the coercive power of government and often wield it not for public health and safety purposes but to thwart competition. Similarly, government-imposed monopolies in businesses ranging from trash hauling to transportation to the transmission of renewable energy have the same effect.
The economist Walter Williams, in his classic book The State Against Blacks, explained that occupational licensing laws and entry-level business restrictions have the pernicious effect of removing the bottom rungs of the economic ladder for people who have little education and few resources. "The laws are not discriminatory in the sense that they are aimed specifically at blacks," he explains. "But they are discriminatory in the sense that they deny full opportunity for the most disadvantaged Americans, among whom blacks are disproportionately represented."
A good illustration of Williams's point was provided in Stuart Dorsey's study of Missouri's cosmetology licensing regime. Like most cosmetology licensing laws, Missouri's law requires a practical "hands-on" examination and a difficult written test. Dorsey found that blacks passed the performance portion of the examination at the same rate as whites, but failed the written portion at a much higher rate than whites. Thus were black candidates disproportionately excluded from a profession for which they were demonstrably qualified. In an economy that demands ever-greater educational qualifications for even the most basic jobs, there simply are not nearly enough avenues for legitimate entry-level businesses or occupations to sustain arbitrary regulatory obstacles. Those hurdles cast otherwise legitimate businesses into the underground economy, and many of their would-be participants into crime or welfare dependency.
Lurking behind most of these regulatory obstacles are special interests — usually labor unions, competing businesses, or both — who invoke the regulatory power of the state to keep newcomers out. In New York, for instance, the powerful transit workers union manipulates the City Council to maintain a ban on dollar vans, which operate mainly in the underground economy to carry scores of passengers in Jamaica, Queens, over fixed routes for a low price. Frequently, professions turn to the state to fix high barriers to entry, then gain control over the licensing process. In the early part of the twentieth century, for instance, cosmetologists fought valiantly to free themselves from control by barber licensing boards — only to turn around, once they succeeded, to lobby for cosmetology licensing boards that they would control. Today, even professions that trigger few public health and safety concerns, such as interior designers, florists, and yoga instructors, seek shelter from marketplace competition through licensing schemes. As a consequence, government-enforced cartels now are abundant throughout the land.
Professions requiring more advanced skills, such as law and medicine, typically persuade lawmakers to forbid para-professionals, who offer their services at much lower cost, forcing them to become fully licensed even though they seek to engage only in a small specialized part of the profession. As a result, legislators penalize both the would-be para-professionals and the consumers who might wish to procure their services.
Perhaps the most troubling example in that regard is my own profession. Lawyers operate state bar associations that rigidly control entry into the profession. And they expansively define the unauthorized practice of law so as to prevent skilled paralegals from making low-cost legal services available to people for routine transactions such as tenant evictions, simple wills, divorce decrees, and bankruptcies. The arbitrary barriers raise the cost and limit the supply of the most basic legal services. Surely regulation is sufficient to weed out incompetent para-professionals, but the bar typically opts instead for prohibition, the better to protect its cartel.
Equally pernicious are teacher certification schemes. As a certified teacher, I can attest that none of my required classroom instruction (all of which was state-required) enhanced my core subject-matter competence. Despite the fact that they often turn out ill-trained teachers, schools of education fiercely defend their monopoly status over teacher certification, resisting alternative certification and entry into teacher ranks by professionals who are demonstrably competent in their subject matter. The scheme ensures that many bad teachers enter the school system while many good teachers are kept out.
Not only in the teaching profession, but in many others, licensing is not a proxy for competence. However, because licensing typically requires many hours of prescribed training, it is an effective means of limiting entry into professions. Licensing requirements are lucrative for schools that teach the prescribed courses, and insulate licensed practitioners from competition. But they result in higher prices and fewer choices for consumers while destroying economic opportunities.
Such special-interest legislation greatly concerned the framers of our Constitution, who sought to prevent it. James Madison argued in The Federalist No. 10 that one of the strongest arguments for republican government is "its tendency to break and control the violence of faction." By "faction," Madison meant what today is called a special-interest group: "a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community." One means to limit the evil of faction, Madison observed, would be to control its liberty of operation (as we see today in the form of campaign contribution limits and other devices), but Madison denounced such cures as worse than the disease. The better course in dealing with the problem of faction, he offered, was "controlling its effects" by "rendering it unable to concert and carry into effect schemes of oppression."
The constitutional mechanisms designed in part to control the evils of faction were many, including the establishment of a federal government with limited and defined powers; the requirement that congressional action may be taken only to promote the general welfare; separation of powers; an independent judiciary empowered to strike down unconstitutional laws (as described by Alexander Hamilton in The Federalist No. 78); specific limitations of government power such as prohibiting the impairment of contracts; and the Bill of Rights, including the protection of unenumerated rights in the Ninth Amendment. Madison's argument also provided a philosophical foundation for the privileges or immunities and equal protection guarantees of the Fourteenth Amendment a century later.
Specifically, the framers understood that two of the principal objects of factions were to gain power over the property of others and to restrict their liberty. Thus the Fifth Amendment prohibited Congress from infringing liberty or property without due process of law and from using the power of eminent domain except for public use with just compensation. The Fifth Amendment's due process guarantee later would be replicated in the Fourteenth Amendment, aimed in that amendment at curbing the power of state governments.
One of the foremost liberties threatened by the evil of faction was economic liberty. As Timothy Sandefur explains in his recent book, The Right to Earn a Living, American law inherited from its British forebears the principle that "people have the right to work for their subsistence, to open their own businesses, and to compete against one another, without government's interceding to confer special benefits on political favorites." Dating back to the sixteenth century, British courts refused to enforce monopolies because they violated rights granted by the Magna Carta. As Sir Edward Coke observed in The Case of the Tailors of Ipswich in 1615, "at the common law, no man could be prohibited from working in any lawful trade," and "the common law abhors all monopolies, which prohibit any from working in any lawful trade."
Adam Smith likewise extolled the importance of freedom of enterprise in his Wealth of Nations:
The property which every man has in his own labor ... is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of the poor man lies in the strength and dexterity of his own hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper.
Embracing that tradition, Thomas Jefferson wrote, "Every one has a natural right to choose for his pursuit such one of them as he thinks most likely to furnish him subsistence," and a "first principle" of rightful government is the "guarantee to every one of a free exercise of his industry, and the fruits acquired by it." Likewise, Madison declared, "That is not a just government, nor is property secure under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations."
Those principles were embodied in the Virginia Declaration of Rights in 1776, which in turn influenced the Declaration of Independence and the Bill of Rights. The first article of the Virginia Declaration of Rights provides that "all men are by nature equally free and independent, and have certain inherent rights," which include "the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing happiness and safety."
Economic liberty was expressly protected in the U.S. Constitution by such provisions as the due process clause, which protects life, liberty, and property; the contract clause, which forbids state interference with contracts; the privileges and immunities clause, which gives to anyone traveling to other states the same rights as citizens of those states; the commerce clause, which prohibits protectionist trade barriers among states; and the prohibition against the taking of property through eminent domain except for public uses. The right to pursue a trade or profession also was one of the "unenumerated rights" protected by the Ninth Amendment.
The promise of opportunity and its protection by the rule of law propelled American enterprise and made our nation a beacon of opportunity, luring to our shores countless newcomers hoping to earn a share of the American Dream. One would think that such principles would protect a man like Leroy Jones in pursuit of his livelihood. After all, the regulations he faced brought about a government-created taxicab oligopoly, closed to entry or competition from outsiders. It was procured and maintained by the existing companies, not for the protection of the public but for their own benefit. Those factors would place the regulations squarely within the crosshairs of the constitutional provisions designed to prevent special-interest groups from using government power to serve their interests through the erection of monopolies. And yet when he went to court to protect the freedom of enterprise that is every American's birthright, Jones came away empty handed — just like countless other entrepreneurs who have unsuccessfully sought to invoke judicial protection for their economic liberty.
Excerpted from Death Grip by Clint Bolick. Copyright © 2011 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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