July 28, 2008
Jobs Lost to Legislation
Indiana is known as a state possessed of thoughtful and minimalist regulatory constraint of business. That’s why a little known law enacted in 2007, which further regulates mortgage brokers, should come as a surprise and shock to many Hoosiers.
As of July 1, 2008 when the new law became effective, roughly 600 Indiana mortgage brokers (perhaps one tenth of a percent of all small businesses in the State) are likely to be forced out of business because of ill-considered regulatory changes.
Indiana now requires additional testing and 36 months of supervised experience before an independent mortgage broker can open up shop. This is a marked change from the earlier rules (already heavily regulated). It is a bad law, and here’s why.
While mortgage brokerages are an industry ripe for fraud, it is the larger mortgage brokerages that have caused the biggest problems (think Countrywide). Even with this concern, Indiana’s bad experiences with sub-prime loans are among the lowest in the country. Our new mortgage broker law is now the most restrictive.
To understand why this is a bad law, it is important to understand how little good occupational licensing actually does. Economists have long known that licensing of occupations drives up costs. It is a very clear barrier to entry for new workers. I am sure well established mortgage brokers were among the leading proponents of this new legislation (nothing like restricting competition to boost earnings).
Much government licensing is undertaken with an argument of improved quality. That’s bunk too. In a famous national study in the 1970s two economists examined government sponsored occupational licensing across most major occupations and all states. They found (as have several since them) that the more restrictive the license, the lower the quality. So, Massachusetts, with highly regulated electrician licenses has the highest rate of accidental electrocutions. West Virginia, with its absurd restrictions on dental hygienists suffers the nation’s highest edentulous rate (that’s lost teeth).
Government enacted occupational licenses are legislatively sponsored efforts to restrict competition. By the way, there’s nothing wrong with having private organizations license or approve their services – that’s been happening pretty effectively these past 2,500 years. Government licensing simply crowds out the private sector’s efforts. That is why we have 50 different CPA tests, and only one CFA test.
Sadly too, the new restrictions will have no effect on fraud. That was illegal in the first place, and there’s no shred of evidence that small or new brokers were more likely to break the law. To place this in context, the 36 months of supervised experience is longer than about half of all medical residencies and more experience than I had when the Army entrusted me to command a company of 300 soldiers.
This legislation may have cost us 600 small businesses and perhaps 2,500 jobs. Consumers will face higher prices and less competition when trying to secure a home loan and government has more costly oversight of commerce. All legislation has unintended consequences. It’s time to reconsider this one.
About the Author
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