Before I explain the purpose of my post, let me start with two seemingly unrelated stories.
First, a rather old joke. I have heard it told in dozens of forms, with the details changed, but basically it goes something like this. A man walking through Washington sees an old man sprinkling bread crumbs in a huge circle around the Washington monument. Going up to him he asks "Feeding the birds?" The old man, very serious, shakes his head. "No, keeping the tigers away." The man is puzzled. "Tigers?" The old man nods. "As long as I lay down this circle of crumbs every day, the tigers stay away." The man smiles. "But there are no tigers in Washington." The old man smiles back, even more broadly. "See how well it works?"
My second example is not an old joke, but perhaps it should be. Let us imagine a town somewhere in Europe. In the center of town is an old statue. The locals claim that it is lucky, it has been endowed with special powers. Thanks to the statue, the town has survived every fire that took place so far. However, one night, while everyone slept, lightning struck a roof, and the fire spread rapidly. Almost the entire town was destroyed. A stranger, coming to the town after the fire, and hearing the tale of the statue, went up to a town person and asked "So, guess your statue will be coming down, huh?" The towns person looked surprised. "Why?" The stranger gestured around him. "Because of all... all this. The whole town burned up!" The towns person just shook his head. "Yes, but imagine how much worse it would have been had the statue not been here!"
So, what is the point in telling those two stories? Besides giving a tiny and somewhat pathetic outlet to the frustrated story writer inside me? Well, I think between the two of them, those stories paint a pretty clear picture of the effect of many government regulations. Some are more like the man spreading crumbs, saving us from threats that were never there, while others are more like the statue, doing nothing to prevent very real threats but getting credit for success, but in very few cases, if any, do regulations actually manage to protect us from very real threats.
I know this has been something of a fixation for a while now. Starting with "To Correct Debra Saunders", "When Help Hurts", "Professional Education", "Business Licensing and Regulation", "Saving Us From Lower Prices", "Utopianism and Disaster" and "The Inherent Disappointment of Authoritarianism", or even as far back as "Medical Regulations" and "Medical Regulation II", then running through "Bad Economics Part 2", "Bad Economics Part 3", "Bad Economics Part 5", "Bad Economics Part 6 ", "Bad Economics Part 10" and "Bad Economics Part 12", and recently with "Gun Control, The FDA and Regulating the Law Abiding", "Insider Trading", "A Strange Industry, or, When the Market "Breaks Down"", "The Wrong Reform", "Bureaucracy Revisited" and "In Praise of Contracts", I have been spending a lot of time writing about the many problems of regulatory agencies. However, there is a reason, or two reasons.
First, because, as shown in "Redefining Insurance... To Actually BE Insurance", "The Insurance Sham""Government Efficiency", "High Cost of Medical Care", "Medical Reform, An Overview", and "My Health Care Plan", the government is preparing to take between 10% and 20% of our economy and subject it to one of the most massive regulatory schemes in history. While they claim it is just about paying for care, the government never simply pays for something, they first establish guidelines, rules about who can and cannot be paid, and for what they can be paid, and at what rate. In short, they regulate through payment. And, in this case, it doesn't stop there. In addition to payment, the government is admitting they also want to control precisely what will and will not be covered by insurance, as well as examining the "cost effectiveness" of various treatments. In other words, they will be enacting tremendous amounts of regulation.
Second, because, even ignoring medical matters, regulation is seeing a renaissance. The left knows they have lost on the subject of outright redistribution. Reagan warned them, and the 1994 elections convinced them, that that, for the present, blatant redistributionist policies will not succeed. So, rather than attempt to rail against wealth, they have started hunting "abuses", anything they can turn into a populist cause, and then try to push through regulations to fix. It is nothing but a backdoor effort at expanding government and redistributing property, but it is an effective one. And one which seems to be enjoying a great deal of success, even among many nominal conservatives. ("Misplaced Blame and A Power Play", " Smaller Government , Fair Weather Friends and Special Cases", "Deadly Cynicism", "Don't Blame the Politicians", "What We Deserve", "Who Is To Blame?", "What is Wrong with Us", "A Conservative Energy Policy? What's Next? Conservative Welfare?, "Of Wheat and Doctors")
But enough of the reasons why. I doubt anyone coming to my blog needs me to explain why regulatory agencies deserve our most critical attention. Whether the readers agrees with my perspective, or has come to scoff, he doubtless knows that my position is that regulation, by its very nature, is a violation of individual rights to contract and property rights, and as such needs a pretty strong justification in order to be seen as anything but an improper extension of government power. However, even if the reader does not agree with me on that point, I think what follows will help to convince him that in many cases the government is accomplishing no more than that accomplished by the old man or the statue in the stories above.
So, without any more introduction, I shall proceed to give a few examples, and explain how they illustrate the principles which make regulation so pointless.
One of my favorite examples must be the SEC and the countless regulations surrounding the sale of stocks. According to those who promote such things, without these protections, we would be subject to the predations of countless stock swindlers like Madoff, or unstable companies like Enron. And perhaps those examples show the problem with this theory. Despite all the claims, I can see no evidence that the creation of the SEC caused any decline in outright fraud, nor any improvement in stability.
Similarly, the FDA is supposed to protect us against fraud and ineffective medicine, yet every year medical recalls proliferate, and many web pages are dedicated to listing fraud after fraud perpetrated by those who would sell false hope.
Both of which show the problems.
First, the problem of the fire protection statue. All our regulatory agencies will do nothing to stop criminals. Real criminals do not care whether their acts have official approval or not. So, whatever regulations are passed, they will not stop a criminal, who will continue in his fraud the same regardless of government measures. Likewise, because fraud has always been illegal, we could have always prosecuted outright fraud, so regulation gives us no more safety.
The second problem, the tiger repellent problem, comes from legitimate sellers, those who are stopped by regulators. The government claims that regulation helps by keeping firms form selling something questionable, be it bogus medicine or a bad stock. But, firms make money by offering a legitimate product. A few may try to get rich quick, but for the most part, establishing the reputation to be able to execute such a scheme takes so long, you would be better off pursuing legitimate business rather than trying to get rich quick. In other words, the market itself discourages trying to sell bogus goods.
On the other hand, regulation has two downsides, unlike the old man's bird crumbs. As I mentioned elsewhere, regulators have institutional pressures to be excessively cautious, and so, as a result, they tend to deny drugs that should have been approved, disallow stock issues that should have been allowed and so on. Because they are excessively cautious we may be spared a few small risks, but we miss out on far more benefits we might have enjoyed.
Second, and more damaging, because people believe the government regulators protect them, firms gain instant credibility once licensed. And so, what I said above, about taking so long to establish a reputation, no longer applies. With government licensing, once you can qualify, you can execute that get rich quick scheme. In other words, in some ways, regulation makes fraud easier. Where the free market meant those committing fraud had to spend decades building up their name, only to waste it for one quick "score", now they can simply play the game with federal regulators, get a license to sell or produce the good or service in question, make their cash, and repeat. By adding legitimacy, regulation makes fraud easier in some ways.
I could go on and on, give examples, show how little impact regulation has, but I think this is enough. Once you start to look for it, you can find the examples on your own. Just ask yourself "has fraud stopped because of regulation" and you will notice how much our regulatory infrastructure looks like that statue I invented above. For all the talk of protection, it seems that regulation has mostly managed to employ a number of civil servants, remove individual freedoms, make doing work much harder and generally impoverished everyone, all while giving no sign of having prevented even one case of fraud or kept one bad product, stock or service off the market that would not have been prevented by the free market. (Though it has likely kept any number of effective and valuable goods, services and stocks off the market thanks to bureaucratic inertia.)
All of which is a rather round about way of answering the question I imagined my readers posing at the start, why do I complain so much about government regulation?
Originally posted in Random Notes on 2010/03/01.