August 26, 2010

Is there such a thing as “smart regulation”?

By Is there such a thing as “smart regulation”?

Author: Timothy Sandefur

My friend Ed Brayton, blogging at Dispatches from The Culture Wars, argues that when talking about government regulation of the economy, “The issue should not be one of regulation vs no regulation, it should be one of smart regulation. Regulations well designed to achieve the goal of protecting consumers…without diminishing the beneficial aspects of behavior in a market.” Ah, if only it were that simple.

Of course, if things could be that way—if we could just ban bad things and have only good things—everyone would be better off. But there are three problems that make it not only difficult, but virtually impossible to design regulations to protect consumers without diminishing the beneficial aspects of behavior in the market.

1) Rent-seeking. Brayton rightly notes that when government can stifle entrepreneurship by imposing a licensing law, those who already operate businesses will try to exploit the law to protect themselves against competition. But they don’t do it openly—they nearly always claim, and often actually believe, that the rules they’re imposing protect the consumer! You and I might think it ridiculous that interior decorators have to be licensed, but some people really believe that untrained decorators are a danger to the public. Or untrained horse-teeth-floaters. Or untrained barbers. And since every business can, in theory, harm a consumer, you can’t draw any kind of clear line between reasonable consumer protection laws and laws that protect established companies from fair competition. There are extreme cases, of course, but those are pretty rare.

There is no solution to the rent-seeking problem. None. You cannot have a bureaucracy that does the right thing, and is not swayed by lobbyists. It’s not that bureaucrats are bad people—it’s that they respond to incentives like the rest of us, and the incentives are shaped by the economic interest groups that grow up around these kinds of laws. Attempts to create a scientifically pure, unbiased, objective group of bureaucrats who will just protect us from bad things without abusing their power have never worked—all they’ve done is insulate the bureaucracy from the kind of democratic accountability to which they ought to respond. (That’s what campaign finance regulation is about, in part.)

Even the most disinterested, scientific regulatory authority will respond to the people who show up at their meetings, or who participate in the discussions—and the people who do that are going to be the people with a large economic stake in the outcome. And this is aside from the fact that any bureaucracy is going to devote substantial time and energy to protecting its own interests and expanding its own budget, rather than responding to consumers who, after all, have no real authority over the career civil servants who staff OSHA, the CPSC, and other bureaucratic agencies.

2) The knowledge problem. Bureaucrats, no matter how pure their motives, simply cannot know all of the details necessary to respond to the true needs and desires of consumers.

3) Value judgments. Remember, people don’t want perfectly safe products and services, or a perfectly clean environment. What people want is products and services that are safe enough, or an environment that is clean enough. In other words, all of life is a tradeoff. In exchange for safer products or more skilled practitioners, you get fewer products and fewer practitioners, which means that goods and services are more expensive. And if they’re more expensive, that means some people won’t get the products and services that they need, or will resort to a dangerous black market. In many poor neighborhoods, the cost of getting licensed for a trade is so expensive that consumers simply have to go with untrained, unlicensed, illegal practitioners instead.

Now, here’s the million dollar question: given that there must be a tradeoff between safer products and services on one hand, and, on the other, higher prices (which means, some people going without), who should make that choice? Maybe an unlicensed barber or plumber really is so dangerous that you’re better off going without a haircut or a working sink. But who should choose? The government? Or the consumer himself? Since I believe people should be free to make their choices for themselves, I think it’s best to let consumers decide—and, yes, run the risk if they make unwise choices (as, of course, they already do).

There are two ways to choose how resources are used in an economy: either the political way, or the economic way. In the political way, some politician whom my neighbors voted for appoints a guy that nobody voted for to write a law that makes the choice for me. In the economic way, I get to choose for myself, weighing the costs and benefits, the possible dangers and possible rewards. I may make the wrong decision and suffer, or I may make the right decision and hit the jackpot.

The only thing we know is absolutely impossible—impossible as a logical necessity—is for regulations to be designed solely to protect consumers without diminishing the beneficial aspects of behavior in a market or being used for rent-seeking purposes.

That’s why I think the answer is, indeed, to abolish as much of these laws as possible and to allow consumers to decide for themselves. That alternative is obviously not perfect—but of course, neither is government regulation. Given two imperfect alternatives, the question is, which alternative leaves people with the opportunity to make the choices they consider important? Or leaves them with the power to figure out better solutions for themselves? Even in our very heavily regulated economy, consumers do a better job of protecting themselves than regulators do in protecting us. Consumers check out reviews in Consumer Reports or Amazon.com, or check for a seal of approval or listen to their friends when deciding what business to shop from. A free market would not leave consumers without protection. On the contrary, there is good reason to believe that consumers would be far safer—and have a much wider choice of alternatives—than they do now.

For more, check out the classic episode 7 of Milton Friedman’s Free to Choose, entitled “Who Protects The Consumer?”

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