Regulation and Growth
For a government setting the level of how much to regulate is seen, on the right as something of a tighrope, and on the left, mostly as something which is required but which has little if any downside … the only question for them is how much and will it be enough to do what they hope (if not of course, more will be needed). This is unfortunate because, there is a very significant downside to setting to high of a regulatory burden, namely it can slow or in some cases completly stifle growth. First off, a little clarfication is needed. The term regulation can be widely interpreted as any government law or prescription. Some regulations then, might be conducive to growth like the regulations establishing tech corridors, which can by local proximity allow synergies to develop between neighboring firms. The common meaning of regulations when discussed in the context of business and growth are restrictions and rules of conduct and practice and licensing requirements. This latter meaning is the one I will adhere to in the following. I should also make clear that there are other private and government protocols which are similar to regulations, but not the sort of thing I mean to discuss here. Those protocols (sometimes government enforced, but more often (?) just agreed upon by industry groups) also are called standards. Standard voltages, connectors, or other specifications (consider the plethora of Internet RFCs for examples). These are protocols which when enforced by law and the government are (again) by definition regulations but serve a different purpose. They are different in kind from emmision limits, testing requirements, minimum price/wage laws, and so on.
Different industries in the past decades have been differently regulated. One might suggest that going from a scale of highly to lightly regulated industries one might include nuclear power which might be the most stringently regulated industry we have and the power and oil industries which are tightly regulated to mostly unregulated industries like electronics and electrical engineering products to the almost completely unregulated industries like software publishing (although the large corporations have their dueling over patent and other such rights).
This issue has been brought up in a variety of context, but I think a more useful approach in discussion is to move to a little more abstraction. Consider an action (in an economic/business perspective) {X} you with to take. In business, each action or endeavor you undertake has an expected return. If the return is not greater than the (anticipated) cost then it isn’t undertaken. Regulations all add additional requirements on your action, your action will require additional paperwork to be filed (at the very least), it may require a fee, additional time, additional requirements to be completed before the action is taken or be prohibited entirely. So {X} then, through regulation has added to it additional external (regulatory) costs. This means that at any given time there are a subset of possible actions to take, in a regulated business environment, which are not feasible due to regulation.
Regulation on the other hand has expected benefits. Nuclear, financial, and medical regulations are in place in the attempt to prevent or minimize the chance of certain outcomes from happening. Financial regulation, for example, attempts to ward off fraud as well as minimizing the chance finicial melt-downs (like in 2009). It is pretty clear what the aims of most regulation is attempting to do. However, by slowing (or stalling completly) innovation the goal of regulation is often only a short term realization. For example, the regulation to prevent nuclear disaster on the one hand has held releases of radiation (in the West) to astoundingly low levels, but all the reactors in service are of a 50 y/old design and are more than 20 years old. If, for example, the Japanese reactors struck by the tsunami of a 30 y/old Westinghouse design but a newer intrinsically safe reactor (say a He cooled pebble bed or one liquid sodium cooled) the problems being dealt with in the wake of the tsunami would be trivial in comparison to today. But the only way that in turn could have ever happened would be to allow a looser regulatory environment that allows new building, new construction and innovation to take place. So regulation is a way to acheive in the short term what might be cheaper and far better reached in for long termin the absence of that same regulation. The same holds true for healthcare. Global healthcare gains in the long term will be far better realised through innovation than redistribution, greater effectiveness and safety might also be found in the long term by reducing regulation to hold to those things in the present.
The difference between right and left regarding regulation, as I see it, is that the left tends to minimize or even ignore the existence of the (often quite high) costs of regulation, e.g., regulation has entirely killed of innovation in the Nuclear power industry. The right on the other hand, sees the high costs clearly and is skeptical about the effectiveness of regulation to perform its appointed tasks.
What has been surprising to me in conversations about regulation with those on the left fail to even consider or admit that there are any costs at all, high or not, due to regulation. The point is this is a subtext of the debate over healtcare, the new financial regulations, and other issues in Congress. The left’s strategy has been to ignore or deny any suggestion of costs to regulation, they seem to take that as both negiligble and irrelevant to policy discussion for the most part.
To put this in context. Suppose an effective cure for an illness, say AIDS is 24 years off … and that regulation is slowing innovation by 50% at this time (this is very conservative, I’d think that regulation is slowing innovation far more). If the regulatory burden was halved, doubling the rate of innovation that 24 years would be twelve. The regulation making innovation safer in just this one instance would cut out 12 years of people’s suffering. The question at hand really is whether the personal injuries resulting from the release of some of the regulatory burden would be greater or less than the benefits from finding cures that much faster.
This latter point, that the costs of healthcare regulation for example is negligible would be laughable if ignoring or not was unimportant. Recently one of the booming new avenues in healthcare has been the rise of companies whose sole purpose is to “handle” for either your doctor’s office or for individuals navigation of the maze of regulations. In fact the existence and advances in effectiveness of such companies has been cites as a “savings” that the new healthcare bill wishes to exploit. The problem is of course that the entire need for this bill is one manufactured by regulations, for which new regulations are creating agencies that will assist with the same. Yossarian would be proud. We however are left with no pride in that, and fewer options.
Filed under: Government • Mark O.
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