Learning from the Pandemic: A Case for Deregulation

A nurse works at a drive-thru coronavirus testing site at North Shore University Hospital in Manhasset, N.Y., May 6, 2020. (Brendan McDermid/Reuters)
The coronavirus pandemic has highlighted the harms of red tape.

NRPLUS MEMBER ARTICLE E arly this year, the United States faced a conundrum. Understanding and controlling the spread of the coronavirus outbreak required a massive scale-up in the ability of the country to test individuals suspected of carrying the virus, but the rules and procedures put in place by the Food and Drug Administration (FDA) and the Centers for Disease Control and Prevention (CDC) meant that this couldn’t happen.

The problems began in January. Germany developed a test for the virus; the World Health Organization approved the test and began to distribute it; the CDC refused to authorize it. Instead, there would be an official American test, developed by the CDC. Labs around the country would be sent a copy of the test, asked to validate it, and then could get on with the business of testing for the virus.

The problem was that the tests didn’t work. Of more than 100 public-health labs engaged in testing, only three produced valid results. And even they had to send positive samples back to Atlanta for verification. Around the United States, capacity sat idle while an overwhelmed CDC worked around the clock to send test results back, and the coronavirus took hold.

Because test numbers were so limited — at one point, the United States had managed to test only 459, at a time when South Korea had tested 65,000 — they were rationed out on a strict set of criteria, meaning that most symptomatic Americans could not get tested. The CDC refused to test the first probable case of community transmission in California because the patient had not recently traveled to China.

The frustrating thing is that developing a test is not an impossible task; labs at universities and hospitals around the USA have the capacity to do so. When the government gave up its stranglehold and the FDA decided that labs that developed and validated their own tests could use them without official authorization, testing numbers rocketed.

In normal times, regulations dissuade innovation, hold back production, and raise prices. The coronavirus pandemic handed the U.S. a stark reminder that these costs are not merely financial.

And yet these costs are often invisible to us. They’re things that don’t happen rather than things that do, and an absence of change is hard to notice. If we could witness the destruction of wealth, then we would have a far sharper sense of the burden of red tape. As it is, the counterfactual of cheaper food or better testing is generally something of which only insiders are aware.

A silver lining of the coronavirus outbreak is that it is stress-testing government systems across the board. The need for industries to rapidly adapt to changing circumstances highlights the difficulties added by red tape. And with the Atlanta Fed’s GDPNow estimate showing an annualized drop in GDP of 48.4 percent (or about 15 percent for those of us who use sensible numbers), any competent regulator would be looking to cushion the blow to businesses and workers.

The best way of doing that is to scrap the regulations.

Many companies will not survive the pandemic. Firm-specific human capital built up over years of employment will be lost, and there will be a painful process of adjustment as people start new businesses and find new jobs. Why would we make any of this harder than it needs to be?

There are already calls for the government to speed up the processing of M&A approvals, allowing failing firms to survive in a new form, and the Trump administration is continuing its drive to remove unnecessary regulations.

These moves will help companies survive. But for the workers who lose their job, there is more to be done. It’s long past time to review the use of occupational licensing across this country; the rules that say people who are eminently capable should not be allowed to practice their trade or earn a living, and that customers who can quite happily judge the quality of service for themselves must be protected from having to do so.

If you want to become a cosmetologist in America, you need to complete an average of 386 days of training. If you want to become an Emergency Medical Technician, you need 34. There is nowhere in the United States where you can cut hair without a license. In Nevada, you need 900 days of experience, four exams, and $165 in fees to call yourself a barber. Louisiana even requires florists to pass an exam. And, of course, pay a fee.

Yes, some of these examples are amusing, but more than anything they are harmful. State-level licensing differences mean that Americans can’t pick up their trade and move to a different state. These regulations prevent immigrants from using their skills or starting new businesses, driving them into lower-paid work. They limit the number of foreign doctors available to fight the coronavirus outbreak. They block the low-paid from starting new businesses. They even ruin the chances of those released from prison, increasing recidivism as offenders unable to find work fall back into criminality.

Time and time again, studies on occupational licensing confirm the same core findings: Licensing requirements raise prices, lower supply, and do nothing to improve quality. The best part is that these studies often demonstrate these effects by exploiting differences across state borders; what is deemed safe and sensible in one state requires a license in another. It is hard to think of a reason why this should be so other than that these regulations have the interest of existing professionals in mind, rather than that of the public.

The economic road to recovery is likely to be long and painful. People who lose their job will need a new one. Many of them will need to relocate. Putting additional barriers in their way through unnecessary regulation is not just economically unwise, it is cruel. The first priority for government around the country should be helping people get back on their feet, and that means letting Americans work. It’s time for a more sensible approach to licensing; sometimes, that means scrapping licensing altogether.

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