June 2, 2010

Permits and the spirit of free enterprise

By Permits and the spirit of free enterprise

Author: Timothy Sandefur

Our friends Armstrong and Getty, the northern California radio duo, had a great segment at 7 this morning talking about building permits and other restrictions on construction and free enterprise. You can listen to it at their podcast page.

The most important point they make is how permit requirements and restrictions sap the spirit of enterprise and achievement that is so important to the vitality of our economy and rising standard of living.

It’s impossible to imagine what sorts of great undertakings and innovations are never begun because it would be too much of a hassle—or simply impossible—to penetrate the layers of bureaucracy that stand in the way. I just recently finished David McCollough’s great book on the construction of the Panama Canal, one of the greatest of all engineering achievements, and all I could think was how such a thing would not be possible in today’s world, with the National Environmental Protection Act, the Endangered Species Act, the Clean Water Act, and all the hundreds of thousands of other restrictions government has placed on private enterprise in the years since.

But there is a legitimate reason for permitting requirements: to protect innocent bystanders from injury by those who might act irresponsibly. If I’m going to build a building, it should be safe and not fall down. There are two ways to deal with this genuine problem: we can call them the tort model and the regulation model.

In the tort model, building safety (or the safety of a business practice or whatever) is ensured by the fact that an injured party can sue. If Joe builds a building and it falls down on Bill, Bill can sue Joe. So Joe makes sure his building is constructed safely. In the regulation model, safety is ensured by the fact that no construction (or whatever) can go forward unless Joe first satisfies the permitting agency that his construction will be safe.

The tort model presumes in favor of freedom: you can build whatever you want, but you do so at risk of being sued if your construction fails. The regulation model presumes against freedom: you may not do anything unless you first get permission.

The tort model is also much more individualized and nuanced. It imposes no specific rules that tell you how to construct, but only tells you that you must construct safely. It’s up to you to figure out how to do that. And you only have to construct safely enough for the people who are likely to be injured—you don’t have to conform to some bureaucratic notion of “ideal” safety. You just have to build something that is safe enough and comfortable enough—not something that is perfectly safe and perfectly comfortable. The regulation model, by contrast, is a one-size-fits-all model. The bureaucracy comes up with extremely minute restrictions that try to define the “one right way” to do the project. And it imposes restrictions based on the bureaucracy’s goals, not your neighbors’ goals. So even if your neighbors agree that your construction project is fine with them, you can’t go forward until you get permission from the bureaucracy. The regulatory approach is a clumsy device—it’s a sword, where the tort model is a scalpel.

There’s another huge difference between the two approaches: the rent-seeking problem. In the tort approach, the risks and benefits are weighed based on the needs and interests of the people who are really affected. But in the regulation model, the rules are written by a bureaucratic agency that is subject to other influences. Big business lobbies the bureaucrats to get them to write the rules in a way that benefits big business. Politicians try to get the bureaucracy to write the rules in a way that makes them look compassionate and visionary. In the tort model, the rules are written piecemeal, based on actual cases that happen between people who have specific goals in mind. In the regulation model, the rules are written wholesale, by bureaucrats who have idealized, possibly unreal ideas about making something perfectly safe. Some, like the California Coastal Commission, are explicitly used by political ideologues to bar development as much as possible.

This is not to say that the tort model is perfect and the regulation model always bad. On the contrary—there’s one big down-side to the tort model: it is essentially reactive. A person sues only after being injured, while a permit requirement is intended to prevent a person from being injured in the first place.

But the tort model can be revised to incorporate the advantages of the permit model. That’s what a “safety rating” or a “seal of approval” is all about. A company can’t promise its product will be perfectly safe, but it can tell you it got a Consumer Reports safety rating or something. And, of course, insurance companies will require that before a company builds something, it first get approval from experts. This process transforms the possibility of being sued into a proactive mechanism for preventing harms before they occur. And, of course, the regulatory model doesn’t really prevent harms from occurring. How many permits did BP have before it started drilling for oil in the Gulf of Mexico?

There’s no sure-fire way to prevent against all harms, of course. No system is perfect. But the tort model—a model rooted in the presumption that people should be free to do what they want until there’s good reason to stop them, instead of the idea that they should not be allowed to act unless they get permission—has a lot of advantages over the bureaucratic model.

For more on this subject, I highly recommend Milton Friedman’s classic Free to Choose, particularly the chapter on “Who Protects the Consumer.”

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