I want to share some excerpts from R.W. Grant’s The Incredible Bread Machine, a “study of Capitalism, Freedom, and the State” published in the 1970s:
Every enterprise imaginable — dry cleaning, trucking, beauty parlor, grocery store, and on and on — is today under the thumb of the politician. ….
For those who already have capital, experience and education, the numberless “barriers to entry” erected by the state [ie – licensing, regulatory requirements] can be overcome, but to the under-capitalized poor, often with little experience and scant education, these barriers are virtually insurmountable. The illegal immigrant selling oranges at the off-ramp of the Los Angeles freeway is a truer capitalist than those businessmen who are constantly running to government for this-or-that favor or restriction.
Regulation is a necessary evil, but onerous or punitive regulation is a genuine evil in that it distorts natural relations and market activity, typically to the greatest detriment of the “under-capitalized poor.”
[T]he barriers are more complex today than they were then. For example, suppose a person in a poor area saw the need for a low-cost barber shop. One might suppose that with a few hours practice, a $15 set of clippers, a chair and a willing customer, he could go into business. Then, if her were industrious, and were truly able to provide a service of value to his neighbors, he would prosper. Perhaps one day he could open a bigger shop and hire two of his relatives. That is the way things are supposed to be in a “land of opportunity.” But that is not the way things are. In California, this is what the law says he must do.
The first step for an aspiring barber is a barber’s license granted by the state Board of Barber Examiners. But this requires either two years as an apprentice working for someone else or 1500 hours (!) at a state-licensed barber school at a cost upwards of $3,500. … Then, it costs $50 to register for the state test. And then, if the test is passed, there’s another $50 for the two-year state license. But there’s still more, for the new shop must now be inspected and approved by the Board — for another $50. Then, a city business license ($106.43 in Los Angeles). …
Now, assuming he were still in business, suppose the new proprietor hires an assistant. Deductions, contributions and fees must be accurately computed and paid. Just for starters there’s Worker’s Compensation and unemployment insurance (around 1.3% of the first $7,000 in wages) paid for by the employer. Then, in California there’s something called the Employee Training Tax, 0.1% of the first $7,000. Then there is a Federal Unemployment Tax, $56 per year per employee.
Now come the payroll deductions. State Disability Insurance (SDI) is 15% of the first $31,767 in wages. Then there’s State Withholding Tax (variable). Then come the federal calculations which include Withholding plus Social Security/Medicare (7.65% matched by the employer).
The paperwork for all this represents a severe burden even to people with a fair degree of schooling; to the person with only a meager education and perhaps only a scant familiarity with the mysteries of bookkeeping, these artificial barriers to business survival are simply overwhelming. But there is still more: most states enforce — or try to enforce — minimum price schedules. But a poverty area shop forced to charge these inflated rates would go out of business in a week!
The decision a few years ago to give the FDA power to regulate tobacco demonstrates the way in which regulation can be used to insulate existing interests from competition. Who came out on top in that case? Marlboro. Flush with cash, and with an army of lobbyists, they successfully convinced the FDA to ban flavored tobacco cigarettes on the grounds that they appealed to children. Okay…
A big maker of flavored cigarettes (a competitor) was Djarum, an Indonesian company that was effectively eliminated from the U.S. market by that protectionist regulation.
And most interestingly, Marlboro’s menthol flavored cigarettes were exempted from the flavored tobacco ban. Critics have dubbed this change in law the “Marlboro Monopoly Act of 2009.” (Black Americans are a large percent of menthol sales, and a ban including menthols would have dealt a heavy blow to Marlboro’s market share.)
It seems as if bureaucracy and regulators function well when promoting a principle, but often stumble when enforcing specific policies.