Regulating Better, Not Regulating Less: Occupational Licensing Edition

Today, I came across an interesting-looking NBER working paper on occupational licensing, Relaxing Occupational Licensing Requirements: Analyzing Wages and Prices for a Medical Service by Kleiner et al. The paper, which I have only skimmed, examines the consequences of relaxing restrictions on what kinds of services nurse practitioners can offer to patients (as compared to services offered by doctors). Here’s a big chunk of the abstract summarizing their findings:

We find that when only physicians are allowed to prescribe controlled substances that this is associated with a reduction in nurse practitioner wages, and increases in physician wages suggesting some substitution among these occupations. Furthermore, our estimates show that prescription restrictions lead to a reduction in hours worked by nurse practitioners and are associated with increases in physician hours worked. Our analysis of insurance claims data shows that the more rigid regulations increase the price of a well-child medical exam by 3 to 16 %. However, our analysis finds no evidence that the changes in regulatory policy are reflected in outcomes such as infant mortality rates or malpractice premiums.

So, to summarize: letting nurse practitioners do more decreased the cost of care to patients without sacrificing quality. Assuming for a moment that the results hold up, this paper clearly strikes a blow against the current system of occupational licensing which puts such restrictions on nurse practitioners. Keen.

I posted the above paper to Facebook and was amused to see quick responses from two libertarian friends who read my posting of the paper as an endorsement for a general end to occupational licensing (as called for e.g. here).* But this paper contributes virtually nothing to our understanding of the possible consequences of eliminating licensing. The point of the paper is that some kinds of care can be done by a larger set of licensed professionals than currently do them – there’s not much evidence here (for or against) abandoning licensing entirely. And I think it’s telling that this paper drew such a reaction, where evidence of a regulatory imperfection is read as strong proof that the entire idea is flawed, even when the proposed alternative (i.e. no licensing) has not actually been tested.

More generally, to make social democracy work means regulating better, not (necessarily) regulating less.** It’s very much in keeping with social democratic principles to argue that particular rules should be reformed, and even better, to draw on evidence to make those arguments. But that’s a far cry from abandoning a whole class of regulation because we have evidence that they’re not perfectly implemented, especially when we’ve just been given tools to make those regulations work better.

*Some of this may have been in mocking jest, i.e. “Dan <3s neoliberal schemes for deregulation:-)".
**Regulating better has been made especially difficult lately by the performative insistence of half the political class that government as a whole must be incompetent.

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  1. I jest! I jest! But seriously, how would one go about testing whether the elimination of licensing would increase total welfare (however defined)? How is the social democratic blanket response of “Tweak it!” any different from the libertarian response of “Repeal it!” (or the Marxist response of “Overthrow it!”) in regard to the evidence presented?

    And I take major issue with the idea that we can attribute government incompetence to performativity of some sort. It’s not some rightwing idea pulled out of a hat. Ask any public choice economist (Tullock) or political sociologist (Skocpol) and they’re give you all sorts of institutional arguments on why the US administrative state sucks beyond “because Republicans want it to suck”. Libertarians are probably wrong that all state administration sucks by definition but they’re perfectly justified when talking about the US state. This is my main problem with arguments that the US could become a social democratic state if we willed it (I picture Lane Kenworthy giving the Blade of Glory “If you dream it, you can do it” pep talk). It focuses on economic realities/possibilities (the country won’t fall apart if we moved toward the Nordic model) but totally ignores the political realities/possibilities (ought implies can) notwithstanding some crazy exogenous shock.

    • A partial response: Reacting to this paper with “tweak it!” makes more sense because this paper tests the effect of a tweak. So, to me, in the case of this particular evidence, it doesn’t seem like a knee-jerk reaction.

      That said, this paper also isn’t evidence against the proposition that just eliminating occupational licensing entirely would be a good idea. It says almost nothing for that debate, because the alternative it tests (allow two licensed professions vs. one to offer certain forms of care) is well within the space of “strong and pervasive occupational licensing.”

      You may well be right that I am downplaying the importance of the political economy factors for the broader argument about the importance of occupational licensing (and other strong sorts of regulation like this); but the point of this post was that the evidence presented offers a route towards making licensing work better but not evidence that licensing itself is flawed – and yet it was and will be read as evidence against licensing in general.

      • Put another way: making social democracy works means regulating better, but that doesn’t mean I’m optimistic that we can actually do so!

      • Hmm. I think the “actually doing so” the other half of the picture which opponents of licensing implicitly take into the picture when reading the study. A straight economic analysis might point us toward “tweak” but a fuller political economy analysis would point us toward that or “Repeal it” or “Overthrow it” depending on your perspective. I think this is the most important contribution of public choice economics.

  2. Matt Sullivan

     /  March 5, 2014

    Never underestimate the confirmation bias! My favorite Dewey quote, from The Public and Its Problems, directed at the libertarian ideal: “No man and no mind was ever emancipated merely by being left alone.” Libertarians, in my experience, have a negative orientation — meaning a lack of regulation allows and enables our natural capacity to thrive. They say littlle to nothing of positive regulation since it all looks bad to them. The problem I see with this is that there will never be a regulatory vacuum (perhaps (human) nature abhors it). If, however, there is no governmental licensing then other established bureaucracies will effectively govern and regulate. Furthermore, they will do so without any input from you. For example, as an individual consumer you can’t affect much about your insurance policy other than choosing another company. If there are no other choices, though, like Comcast’s monopoly on broadband, then you effectively have no agency. As a citizen you can, theoretically at least, affect it through representatives who change insurance regulation, licensing, etc. It is better to fix regulatory mechanisms, however flawed, than throw them away wholesale.

    Not to get too far afield, but it reminds me of the evolution of our brains. Your brain is too important to throw anything away. So as we’ve evolved our brain has stacked new capacities onto the old (Carl Sagan wrote on this long ago in Dragon’s of Eden but I’m sure there’s more recent work). All of the old brain is still there because it’s too dangerous to throw it all away and start over (ignoring the fact that evolution is an unguided process that couldn’ do that anyway). Given the hundreds of millions of people that depend on regulations, even flawed ones, I find the libertarian goal of re-designing society to function without regulations as dangerous as re-designing the brain from scratch with only our incrediby flawed understanding of it. Because, to quote Dewey once more about technology “Man, a child in understanding of himself, has placed in his hands physical tools of incalculable power. He plays with them like a child, and whether they work harm or good is largely a matter of accident.”