I’m very sympathetic to the idea that regulation holds back growth. It’s easy to look around and find examples of regulations that protect incumbent businesses at the expense of the consumer -- for example, the laws that forbid car companies from selling directly to consumers, creating a vast industry of middlemen. You can also find clear examples of careless bureaucratic overreach and inertia, like the total ban on sonic booms over the U.S. and its territorial water (as opposed to noise limits). These inefficient constraints on perfectly healthy economic activity must reduce the size of our economy by some amount, acting like sand in the gears of productive activity.
The question is how much...If regulation is less harmful than the free-marketers would have us believe, we risk concentrating our attention and effort on a red herring...
[F]ocusing too much on deregulation might actually hurt our economy. Many government rules, such as prohibitions on pollution, tainted meat, false advertising or abusive labor practices, are things that the public would probably like to keep in place. And reckless deregulation, like the loosening of restrictions on the financial industry in the period before the 2008 credit crisis, can hurt economic growth in ways not captured by most economic models. Although burdensome regulation is certainly a worry, a sensible approach would be to proceed cautiously, focusing on the most obviously useless and harmful regulations first (this is the approach championed by my Bloomberg View colleague Cass Sunstein). We don’t necessarily want to use a flamethrower just to cut a bit of red tape.
Read the whole thing here!
Also, on Twitter I wrote a "tweetstorm" (series of threaded tweets) about the regulation debate. Here are the tweets:
1/There's been lots of discussion lately about the possible benefits of deregulation, for example this: https://t.co/lHwdb5UcKK— Noah Smith (@Noahpinion) May 7, 2016
2/It's important not to exaggerate the benefits of deregulation, since deregulation can have costs. Many regulations are there for a reason.— Noah Smith (@Noahpinion) May 7, 2016
3/For example, financial deregulation is widely blamed for the incredibly costly 2008 crisis and recession.— Noah Smith (@Noahpinion) May 7, 2016
4/And environmental regulations are what save us from having a country that looks like this: pic.twitter.com/waOBJ2FIWy— Noah Smith (@Noahpinion) May 7, 2016
5/That said, there's plenty of reason to believe lots of regulations are inefficient, resulting from capture and/or bureaucratic overreach.— Noah Smith (@Noahpinion) May 7, 2016
6/Regulation is very heterogeneous - it can't really be reduced to the number of imperative words in the Federal Register...— Noah Smith (@Noahpinion) May 7, 2016
7/...so it makes sense to approach deregulation by tackling one type of regulation at a time.— Noah Smith (@Noahpinion) May 7, 2016
8/Sensible people are doing this now. There's a big (IMO justified) focus on occupational licensing. https://t.co/8LIpdeGAIp …— Noah Smith (@Noahpinion) May 7, 2016
9/Another good area of focus is land-use regulation, especially in cities: https://t.co/1PmpxT9HqG— Noah Smith (@Noahpinion) May 7, 2016
10/Other good ones might include FDA reform: https://t.co/w5RKuEKlf6— Noah Smith (@Noahpinion) May 7, 2016
and FAA reform: https://t.co/BvBLag5pz8
11/Yet another might be a reform of the Sarbanes-Oxley act, to help companies go public: https://t.co/aZMhHN1D8I— Noah Smith (@Noahpinion) May 7, 2016
12/So there's lots to do on the deregulatory front. But in other areas, like carbon emissions, we should be *increasing* regulation.— Noah Smith (@Noahpinion) May 7, 2016
13/A single-minded blanket focus on "deregulation" will probably do more harm than good. Instead, focus on specifics. (end)— Noah Smith (@Noahpinion) May 7, 2016
The regulation issue is really a very multifaceted, complex, and important series of different issue. It's an important area of policy debate, but can't be boiled down to one simple graph - and shouldn't be boiled down to one simple slogan.
How hard did you have to grit your teeth to write "my Bloomberg View colleague Megan McArdle"? :-)ReplyDelete
Strange bedfellows indeed.Delete
Strange bedfellows indeed.Delete
Very good points, and ones that I largely agree with. Wish I could add more, as I do think you're underestimating the potential upside for de-regulation in some key areas (think about the fall in labour mobility, for one thing), but I sadly can't spare the time right now... so I'll just leave this endorsement instead.ReplyDelete
Noah, do YOU believe that deregulation caused the 2008-09 financial crisis/recession?ReplyDelete
I think that it contributed to it. But I think a general lax attitude among regulators was much more important than actual legislative changes - the problems were mostly on the enforcement side, not the policy side.Delete
as long as the "swinging door " problem goes on unabated , where the regulators and the regulated are basically part of the same elite clan, the morality of the clan is really all that stands in the way of corruption.Delete
All that stands in the way of a elite clan gone corrupt is the hue and cry of the common person working their will through their government.
Or if unable to work their way out of an arrangement that has become insufferable for them by democratic means...they will find other avenues...
History really does repeat itself.
No, the bigger problem is that we have a very rudimentary understanding of how the economy operates and consequently we don't really know what more and more regulations do. Quite apart from the fact that majority of regulations are introduced without any explicit cost-benefit analysis.ReplyDelete
Well that's true too...Delete
Please, the problem is globalization of capital markets and slow population growth as government bean counters use it. All growth in capitalism is based on debt anyway.ReplyDelete
You generate consumption economies which naturally slow growth and the factory methods of growth that drive gdp to low via personage. The myth of Japanese stagnation should drive this point home. Adjust for population, growth looks incredibly moderate.
Reading the first paragraph of your except, I got the idea that there are two kinds of regulations: those proposed to protect entrenched interests, and those proposed to protect something broader and less able to buy representation - the environment, the public at large, society, etc. - abstractions that turn out to be very real in the lives of actual people.ReplyDelete
Efficiency is a fine thing, as far as it goes. But there is often a tension with other considerations that might not be directly economic, or measurable as a first order effect.
Since I live about an hour down the road from Flint, MI, I'll posit that people's lives matter more than profitability, economic efficiency, or an ideological drive to privatize the Detroit water system. YMMV.
We need a large, professional, semi autonomous bureaucracy with a large degree of continuity over administration changes to effectively regulate an economy as large and technically complex as ours ....ReplyDelete
We should be paying "tenured "bourcarts like CEOs and give them independence approaching what we extend to judges....