The case against more regulation 

Cries for “more regulation” are, quite predictably, going up as oil continues to seep into the Gulf of Mexico. It’s tempting. As frustrations rise, the urge to control soon follows. If you’re a linear thinker, regulation is the obvious solution: Accident happens; we must prevent future such accidents; and the government should do the preventing. A-to-B-to-C goes in a nice straight line. Unfortunately, the world is not so tidy.

The BP accident is being used not only to bludgeon the philosophy of limited government, but to support a blanket case for more regulation everywhere. “See what happens when you don’t regulate?,” they say. Then insert “financial crises,” “oil spills,” or the problem du jour as examples of a free market run amok. But the inconvenient truth is that all of these represent examples of regulated industries. Indeed, the government’s fingerprints are on many of these problems, even if indirectly. Then we need more regulation!, they’ll say. Not so fast.

This kind of linear thinking is linked to what I refer to as a “government-as-God” worldview -- where all risks can simply be banned, regulation is low cost, government isn’t fallible and there are only angels in any Administration. I could go into the idea that regulation is the wrong prescription in the case of potential oil spills, but folks have already made plenty of good arguments that liability, lawsuits and market incentives are superior approaches.

Instead, I want to offer five major reasons why expanding the regulatory state - in general - is a bad idea.

 

  1. Regulatory Capture - Political economists have observed that a major problem with regulation is that regulators are human. In other words, given regulation, firms will naturally focus energy and resources onto game the system in their favor. Groups with a high-stakes will try to get a preferred policy -- especially one that will put the competition at a disadvantage. You and I, each with no significant stake in the outcome, will ignore any potential regulation. “Capture” means that interest groups have been successful at gaining influence on the staff or members of a regulatory agency. The preferred policy of the successful interest group gets implemented. (Some have argued that the MMS was a captured agency.) See also Bootleggers and Baptists, or watch the following

 


  1. Hidden Taxes and Deadweight Loss - Regulations are like a hidden tax. The costs of regulatory compliance are approaching the point beyond which we may not be able to grow as an economy. According to a recent policy brief, though it’s difficult to calculate, “A very rough extrapolation from an evaluation of the federal regulatory enterprise by economist Mark Crain estimates that annual regulatory compliance costs hit $1.187 trillion in 2009.” Of course, compliance is not productive economic activity. It wastes resources. (Entrepreneurs operating at slim margins will die.) And don’t forget: every dollar a special interest group spends trying to steer regulation in his or her favor is a dollar of unproductive activity. As special interests bid for the rents, resources are wasted. It’s just a fact.

 

  1. New Entrants and Unborn Entrepreneurs - In the interests of eliminating the possibility that anything might ever go wrong (bad things), we often miss the opportunity costs -- that is, the good things that never come into existence due to the regulatory state. Every time you increase the cost of starting a business through higher barriers to entry (regulation), you decrease the likelihood a new business will start. Of course, businesses are in business to create value for you and me. When they never start, they never create that value. They are stillborn.

 

  1. Local Knowledge and Bad Incentives - Bureaucrats seldom have local knowledge. That’s the kind of knowledge required to specialize and to make critical adjustments that will help businesses thrive. Entrepreneurs, generally speaking, have both this knowledge and the incentive to act on it. They specialize. Regulators do not. They are hired to take a birds-eye-view and, since they are regulators, their mission is to regulate. They not only have few incentives to see the unintended consequences of their actions, but they are often having to implement legislation created by folks - i.e. legislators - who are even less expert and further away from the action. These bad incentives and lack of knowledge mean that regulators tend not only to become captured, but their actions can steamroll over new, delicate economic ecosystems. (Regulation also crowds out the court system’s ability to deal with problems.)

 

  1. Regulations and prohibitions produce cartels - Whether alcohol prohibition creates Al Capone, high cigarette taxes create black markets, or carbon regulation create strong “clean energy” cartels -- consumers lose and politically chosen players win. This can lead to intimacy - even collusion - between business and government that lies at the source of so many problems that most assume to be so-called “market failure.”.



We have to stop being so naive about the government’s ability to solve all the world’s problems. We need to look at a system that doesn’t treat people as guilty till proven innocent. We need to return to a society that identifies and settles harm in court - and to some extent in the court of public opinion - but not in legislative sausage-grinders run by special interests.

Just because cascades of information on the giant oil spill are gushing before our eyes every day doesn’t mean we shouldn’t try to imagine the harm done by a larger, more intrusive government. Cooler heads should prevail. Regulation as a principle of government is one of the most destructive ideas ever perpetrated on mankind. For as the ghosts of dying or unborn companies flutter away unseen into the night, government grows and grows and grows...

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Max Borders

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