Tuesday, April 5, 2011

Regulation--Too Much of a Bad Thing

From time to time my son Political Sphere has suggested that every regulation that the government undertakes could be better done by the private sector through free enterprise. Since I grew up with a conventional public school education, that seemed kind of heretical to me at first. What about food and drug safety? What about preventing monopolies? But I’ve been thinking about it, and I’m slowing being convinced.

There’s a chapter of Rollback, Thomas Woods’ most recent book, where he outlines the failures of government regulation. I thought it might be instructive to briefly go through a few.

Let’s start with monopolies. Supposedly robber barons are lying in wait, ready to undercut the smaller competition until they can dominate by monopoly and raise prices to gouge the consumer. The thing is, that pretty much never happens (outside of government-enforced monopolies). As Woods points out, “When economics professor Thomas DiLorenzo actually examined the data, something economic historians had not actually bothered to do, he found that the industries that were accused in the late nineteenth century of being dominated by ‘monopolies’ were in fact lowering prices and increasing output—the opposite of what the textbooks tell us monopolies are supposed to do. In the 1880s, output in the alleged ‘monopolized’ industries grew seven times faster than the rest of the economy” (Rollback, p. 142). So, maybe regulation against monopolies is in fact unnecessary.

As for health and safety issues, free enterprise is a lot more efficient. This is true with airlines, financial institutions, workplace safety in the spectrum of industries, and even highway safety and food and drugs. In every case Woods cites, free enterprise tends to improve its own conditions sooner and better than government regulators can. And in many cases the regulators do a worse job than the private sector.

Remember when safety belts became required? The decrease in fatalities per mile since then has been 3.5% per year. Great! Except that the decrease in fatalities from 1925 to 1960, prior to the regulation, was 3.5% per year. The decrease is from better safety features provided by the industry, and greater consumer demand for those features—not from the government regulation.

What about OSHA? That had to help, right? Not exactly. In the 25 years prior to OSHA, the decline in frequency of workplace fatalities was 70% larger than in the years following implementation of OSHA. Positive effects of OSHA are negligible, but costs have been significant. According to professors Thomas Kniesner and John Leeth, “The most optimistic figures show OSHA currently creating three times more costs than it generates in benefits” (Rollback, p. 150).

That doesn’t mean there should be no quality and safety standards. But Woods suggests that private organizations, such as Underwriter Laboratories, can give their seal of approval. Many of us turn to Consumer Reports for unbiased information before making a major purchase. Such independent organizations could do a better job than government for a wide array of industries.

So why is it that industries are often the ones lobbying for more regulations? Good question. Years ago I attended a graduation ceremony with economist Milton Friedman as the speaker. There were a lot of great nuggets in that speech that I’ll probably pull out from time to time. This is one: “The two greatest enemies of free society are intellectuals and businessmen—for opposite reasons. Intellectuals want freedom for themselves but no one else. Businessmen want free enterprise for everyone else, but special consideration for themselves.”

When a business, usually a large business, asks for more government regulation, it is asking for additional shackles to be put on its smaller competition. It is forcing the upstarts to use capital on details (often unnecessary but costly details) that the large corporation can absorb now that it is big but didn’t have to when it was small. It allows the big business to win or keep market share not by competing with better products or more efficient service, but by placing roadblock in the way of the competition.

One example Woods gives is the lobbying against eliminating estate taxes by such luminaries as Bill Gates and Warren Buffett. They aren’t selfless benefactors for taking this position. “For one thing, the estate tax will never hit Microsoft, since, as a publicly held corporation, its owner will never die. Moreover, if repeal of the estate tax were to be made revenue-neutral, additional taxes to make up the shortfall would likely fall on corporations. So if you head a large corporation, you might not want to see the estate tax repealed” (Rollback, p. 157). As for Buffett, he specializes in buying up successful small businesses. Estate taxes often put inheriting owners in the position of being desperate to sell—just the situation Buffett thrives on.

The word “regulation” does indeed appear in the Constitution: “to regulate Commerce with foreign Nations, and among the several states…” as well as “To coin Money, regulate the value thereof…”  It meant to make standard, or regular. In other words, it was to be the rule (not the exception) that there would be commerce between and among the states. Somewhere along the way it took on the current meaning of “control every detail directly or indirectly related to any sort of commerce.” With the original meaning, the federal government would simply settle any dispute between, say, Virginia and North Carolina, if one of them were to refuse to trade with the other.

If we limited the federal government to the actual powers granted to it in the Constitution, the free market would do its job of raising the standard of living for all of us.

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