Reining in the Executive Branch Bureaucracy, Part 2: Regulatory Benefits? Maybe Not

Since the Federalist Papers, America has debated “Energy in the Executive.” But President Obama’s 2014 agenda framed by his State of the Union address heralds a class warfare agenda, one fusing an “income inequality” theme with federal industrial policy.

“When I can act on my own without Congress, I’m going to do so,” Obama promises. This spend-and-transfer fixation makes Americans poorer and dependent except for the lucky few running things.

Others have argued for federal budget rationality as essential to a true anti-poverty agenda. This series proposes a greater prosperity enhancing opportunity, streamlining the nearly $2 trillion hyper-regulatory state and ending the uncertainty, wealth destruction and job loss it creates.

The basis of regulation is the belief, in my view discredited, that government actors are non-self-interested and that political markets are fairer than private markets. Regulations, as currently construed, often don’t work. One instance is expressed by John Tamny in Forbes:

The banking crackup from 2008 is the latest evidence that regulations are much more than worthless. We implicitly ask the charitably average people who migrate toward regulatory jobs to see the future, but if they could, they wouldn’t be regulators. Regulations on their very best day severely distract the productive while inhibiting the profit motive, and then on their worst they lead to tragedies of the Bernie Madoff variety for creating a false impression that qualified people are minding the store.

But implementation of top-down planned administration is everywhere, especially to carry out the governmental vision of what counts as safety. The Office of Management and Budget remarked in its earliest Benefits and Costs report that:

It is…difficult to imagine a world without health, safety and environmental regulation. Could a civil society even exist without regulation?

That is not the choice, of course; the question is what institutions best advance efficiency in the case of economics, discipline in the realm of safety. The question is not whether an economic order requires “regulation” or planning. The question is, Who will do that planning? (See F. A. Hayek, “The New Confusion About ‘Planning’” Chapter 14 in New Studies in Philosophy, Politics, Economics and the History of Ideas, University of Chicago Press: Chicago. 1978. pp. 232-246.)

There is always “regulation”: No firm operates in a vacuum. The choice is between political discipline, and competitive discipline and other institutions.

One may not invoke market failure without addressing political failure in the static and dynamic versions. For example, much environmental regulation is “necessary” because of the failure to define property or use rights over resources and amenities in the first place. Thus regulation perpetuates government failure rather than resolving alleged market failure. There never existed a market to fail.

Nonetheless it would be helpful to acknowledge the ease with which regulation can do more harm than good, and resort a bit less to granting benefit of the doubt to regulators. By effectively placing the burden of proof on those who would remove a rule rather than on those who would impose it in the first place, our regulatory regime systematically recommends few reductions or eliminations of rules, and only grows.

A dismantling of inefficient economic regulations (rail, air, telecommunications) happens periodically when it becomes obvious that such regulation does more harm than good and serves special interests. For example, price regulation has not been shown to work for consumers but it has been shown to increase prices.

Thus it is not even the case that, as OMB once put it, that “businesses generally are not in favor of regulation”: Business not only generally favors regulation, but often sought regulation in the first place. State regulation of utilities and antitrust laws were secured by an elite that succeeded at protecting profits and eliminating competition. (See, for example, R. Richard Geddes, “A Historical Perspective on Electric Utility Deregulation,” Regulation, Winter 1992, pp. 75-82.)

Regulation profoundly affects profits, and since economic regulatory agencies are subject to capture by special interest groups, it is no leap to conclude that much of what is considered social or health and safety regulation may likewise be something else entirely; and a bad, maybe even unsafe, deal for consumers.

For example, food labeling restrictions that limit health claims not only violate free speech, but are also corporate welfare for incumbent food producers who already enjoy positive reputations. Upstarts are less able to compete on the basis of health characteristics thanks to restrictions, and thus may emphasize features like convenience, microwave-ability, and taste. Such “regulation” makes the health characteristics of newly introduced food products decline — the opposite of regulation’s alleged intent but perfectly in line with the interests of the already established.

Butter producers portrayed margarine as unsafe and dirty at the dawn of the margarine industry (See Celia Bergoffen, “Margarine Wars,” Audacity: The Magazine of Business Experience, Summer 1995, Vol. 3, No. 4, pp. 52-61.). “Environmental” regulations transfer substantial wealth.

Here are a few bullets on why regulatory benefits may be less stellar than claimed:

  • Agencies incentives are to overstate benefits (the flip side of the incentive of businesses to overstate costs).
  • Benefits are selectively expressed: for example, structurally safer cars may induce some to drive more recklessly, placing others at risk (the moral hazard problem); conversely, lighter cars may save energy, but put the driver and passengers at greater risk. The government has made it clear that it does not care.
  • Giving benefit of the doubt to bureaucracy for a moment, the benefits of a given agency rule are rarely compared with benefits that could be secured by another agency. Resources available to apply toward safety concerns are not infinite.
  • Benefits are rarely compared with the benefit of leaving resources in the hands of the public for them to personally buy fire extinguishers, safer cars, health care, insurance and other goods.
  • Regulations serve as lower bounds for safety or efficiency: once a firm is in compliance, there may be no competitive edge gained in exceeding a rule’s requirements. Such regulatory “benefits” impose costs by removing safety, or health, or privacy or some other value from competitive advance. Clearly regulators should not take credit for the benefits that business would provide anyway, and certainly not when their regime lessens competitive benefits.

The inclination to accept agency benefit claims is wrong. Moreover, environmental and social regulation is subject to the same political failure and regulatory pork barreling that permeates economic regulation.

Next Time: Make Regulations More Transparent