"Certificate of Need" laws are stifling free market innovation...
ONCE UPON a time in America, the free market determined which products and services reached consumers, writes Jennifer Fry for Bill Bonner's Daily Reckoning.
Aspiring entrepreneurs could test out new ideas to see whether consumer interest justified their production. "Good ideas" — i.e. for things people were willing to pay for — could flourish and evolve while "bad ideas" — i.e. for things no one wanted — could die quietly and unobtrusively.
Today, by contrast, government regulation too often chokes this process by protecting existing businesses against competition and thus preventing new products and services from ever reaching the market. "Certificate of necessity" or "certificate of need" laws are perhaps the most pernicious of such anti-capitalist intrusions because they require that someone wishing to enter an industry must first demonstrate an existing "public need" for a new business before marketing a product or service.
To illustrate the absurdity of this concept, take the "cheesehead," — the garish yellow/orange wedge-shaped foam hat that Packers fans don every football season. The term "cheesehead," although originally a derisive term for Packer fans, became a term Packer fans embraced. These Wisconsinites, proud of their state and its cheese-making tradition, turned a slur into a statement of pride.
Ralph Bruno, inspired by this sentiment, came up with the idea for cheesehead hats while reupholstering his mother's couch. He cut the leftover foam into a wedge-shaped hat, painted it yellow, and wore it to a 1987 Brewers-White Sox game. According to Bruno, "I just had to put something on my head that said, 'Yeah, I am a Cheesehead.'" Others clearly felt the same way as they snapped up his homemade creations, which he began selling out of trash bags at games.
Eventually, he started his own business to manufacture cheeseheads…and the rest is history. But imagine what would have happened had Bruno been required to obtain a certificate of necessity requirement before marketing his idea. And imagine further that obtaining such a certificate required him to prove the existence of a public necessity for the product before being able to produce it. According to Bruno, developing the cheesehead was "like charting new land" because "there was nothing like that out there." So how could he have demonstrated a public necessity for his product when nothing like it existed?
Originally, "certificate of necessity" laws applied only to "common carriers," such as railroads, and public utilities like gas and electric companies. The rationale was that because these industries were so heavily regulated, government needed to encourage private investment. In addition, shielding these types of service providers from competition was considered appropriate, given that they were prohibited from discriminating against consumers. Railroads, for example, were often required to serve out-of-the-way, unprofitable routes.
But over the course of the twentieth century, certificate of necessity laws spread to encompass industries where neither the rationale of "encouraging private investment" nor the rationale of "compensating service providers for regulatory burdens" made any sense. Today, these laws often apply to taxicabs, moving companies, car lots and hospitals.
In 2006, for example, Adam Sweet and his brother were unable to operate their moving business in Portland, Oregon, because in order to get a license, they had to first face objections from existing moving companies and to prove that there was a "public need" for their business. A similar Missouri law, giving existing moving companies the right to object to the issuance of new licenses, prevented entrepreneur Michael Munie from expanding his business.
Unfortunately, not only do certificate of necessity laws stifle economic opportunity, they also block consumer access to essential services, including healthcare. On the Hawaiian Island of Maui, for example, development of a private hospital was held up for years because a state agency refused to issue a certificate of need. Even though the island's only existing, state-run hospital was too small to care for the island's residents and visitors, the agency denied approval because a new hospital would negatively impact the existing hospital's business. A free society should not tolerate such blatant, government-mandated economic protectionism. As Pacific Legal Foundation attorney, Timothy Sandefur, explains in his recently-published law review article:
These laws bar entrepreneurial opportunity, stifle the creativity and industry of those who might otherwise be productive innovators in our society, and lead to bitterness and resentment against the hypocrisy of a nation that claims to care about economic opportunity, social mobility, and the "natural aristocracy" of "virtue and talents," and which rewards merit instead of political influence.
As Sandefur and others also point out, it is difficult to measure the damage that these protectionist regulatory schemes cause. "It is impossible to assess the economic costs that these restrictions impose," he writes, "since they are what economists call 'unseen': they take the form of the countless businesses that nobody ever starts, the productivity that is never begun, the wealth that is never created."
It can, therefore, be hard to convince people that business-licensing schemes are harmful. It is like asking folks to imagine a world in which their favorite product or business does not exist because it was never created in the first place. In other words, it is like trying to imagine an America without the cheesehead.
Thankfully, the cheesehead exists in our world as the result of one man being able to pursue an idea without government interference. But it's easy to imagine that many other products and services — both whimsical and vital — will never advance from concept to implementation, simply because certificate of necessity laws will block them from ever reaching the market.
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