Licenses granted to individuals create a structure of implicit grants in the same way as licenses attached to property, although their incidence may be less serious, mainly because people are often less durable and more mobile than property. Thus, professional licensing — whether of doctors, nurses, teachers, podiatrists, hairdressers, barbers or plumbers — tends to create implicit grants in their favor. The restrictive practices of medical associations undoubtedly raise doctors’ incomes above what they would be if those restrictions did not exist. It is argued that these restrictions are necessary in order to protect the public from unqualified practitioners, and there is some truth in this claim.
However, the temptation to extend these restrictions beyond what is strictly necessary to protect the public seems almost irresistible, and a structure of implicit grants develops almost inevitably. One solution that has been recommended for this problem, although it is not universally applicable, is that wherever licensing is regarded as socially necessary, licenses should be auctioned. In that case, the value of the implicit grants they involve would be captured by the state and, therefore, their incidence would be broadly distributed throughout society.
Of course, this means that the state would lose much of its control over who obtains the licenses, and that these licenses could no longer be used as an instrument of political power and control. For those who are suspicious of political control over individuals, this would be an advantage rather than a disadvantage.
It is also argued that only the rich would be able to obtain the licenses. This is a fallacy. Only those who are most capable of using them would be able to obtain them. The fact that certain defects in the financial system might prevent those who could use the licenses well from bidding for them because of the absence of credit facilities is, so to speak, another part of the forest, since the problem of justice and the democratization of credit is something that must be dealt with separately.
In reality, the structure of implicit grants within the credit and financial system is a problem of great interest that has received little attention. There may be a system of informal quotas and licenses, both in the private and public banking systems, that favors one group of potential consumers at the expense of others. Financial markets are so imperfect simply because the goods with which they deal, such as creditworthiness, are so poorly standardized that the rationing of bank loans is almost inevitable.
A bank does not adjust the total amount of its loans through daily adjustments of its interest rates in order to drive away enough potential customers until it reaches the desirable volume of loans. At existing lending rates in times of prosperity, there are generally more borrowers than the bank wishes to favor, and fewer during depressions.
In both cases, the bank must exercise discretion based on its judgment of the applicant’s creditworthiness, and this discretion easily leads to restriction. Rationing of this kind, however, always leads to some form of implicit grant, since those who have access to credit benefit partly at the expense of those who do not.
The democratization of credit is perhaps one of the most noteworthy phenomena of the last hundred years, although it has received very little attention, both with regard to its causes and to its effects. We have seen a gigantic increase in the proportion of the population that has access to different types of credit, and the inevitable result has been to reduce the implicit grants involved in the credit system.
Nevertheless, these grants still persist, and because they are so difficult to identify, it is very difficult to do anything about them. A much-neglected field of discussion in economics is the redistributive, or implicit-grant, effects of monetary and fiscal policies.
By monetary and fiscal policy we generally mean those regulations or actions of the state designed to prevent unemployment and inflation through operations that affect the amount of money and public debt, or the composition and nature of its various types.
By monetary policy we generally mean those actions or regulations that operate mainly through the banking system and financial markets: for example, variations in the central bank’s rediscount rates, in banks’ reserve requirements, or in a central bank’s direct open-market operations, through which it increases or decreases the total amount of bank reserves, thereby modifying the lending policies of the banking and financial system.
By fiscal policy we generally mean those manipulations of the tax structure and public expenditure, and also, to some extent, the manipulation of the structure of public debt, that alter the amount of money and other treasury assets held by the public. Thus, if the state runs a deficit — taking in less money than it pays out — this obviously produces an increase in the public’s balances. If it purchases public debt, it reduces the amount held by private individuals, and so on.
