Tag Archives: regulation

How not to justify deregulation

Costs are subjective.

This alone is a strong argument against coercive regulation. If a justifiable regulation is one that passes a cost-benefit analysis, we can never justify a regulation because costs are inherently immeasurable.

Sure, regulators can (and do) assign monetary values to perceived costs. The annual per capita cost of foodborne illness in the United States, say, might be said to equal $250—the average total medical bill balance charged due to foodborne illness.

This seems reasonable, but it doesn’t fully capture all costs associated with foodborne illness. What about lost income? Certain life-long side-effects? Physical pain that some victims might value far higher than the balance of their associated medical bill?

These might seem trivial, but they’re anything but. All money costs arise from subjective costs like these.

Additionally, how are regulators supposed to fully account for the cost of implementing a particular rule? Certain controls on food production designed to limit the incidence of foodborne illness might cost food manufacturers just $1,000 per month in the form of equipment and wages. But this added cost might drive a young, small firm out of business that would otherwise have thrived, or deter entrepreneurs from entering the market in the first place. Associated compliance costs might raise food prices enough to put a healthy dinner out of reach for some family sometime—a time when dinner would have made the difference between sick or healthy children, married or divorced parents, a happy or unhappy evening.

The analysis also cannot not account for psychic costs to those who might, for whatever reason, despise the regulation and suffer psychologically. This cost may seem insignificant, but isn’t being happy priority number one? Indeed, even the most financially-efficient regulation only makes things worse if its net result is to decrease total happiness.

For these reasons, many people take issue with regulation. Regulators cannot possibly know the true cost of their rules—who are they to think transgressing on property rights is all good and well without guarantee of a net-positive outcome?

But there’s flipside to this argument that undermines its usefulness as a criticism of regulation: The same logic applies to deregulation.

If regulators cannot know costs because costs are subjective, they cannot justify new regulation in terms of costs and benefits. Likewise, they cannot justify deregulation in terms of costs and benefits, given that those affected by the proposed deregulation have adjusted their behavior in accord with the regulation under review. Deregulation, like regulation, changes things in ways that might be undesirable for some people—ways that might have real economic costs.

So opposing regulation because costs are subjective and therefore cannot be measured or justified from a cost-benefit perspective undermines arguments for deregulation, too, for neither can its costs be measured.

But this is not the only way to justify deregulation. Regulation imposes costs on unwitting, and often unwilling, people, which might be unfair. It weakens property rights, which itself has a cost. Even if a deregulatory initiative cannot be justified from a cost-benefit perspective, it still might be worth doing. But merely citing the subjective nature of costs as a reason to oppose regulation is not a justification for deregulation. If anything, it’s an argument against any further regulatory action whatsoever—even deregulation.

The risky business of regulation

I got published today at The Freeman. Topic is risk and regulation—why using statistical aggregates on risk exposure to fashion regulations in response necessarily imposes higher costs on people who already take measures to mitigate the risk under review.

But that’s a complicated explanation. My bottom line here is that many regulations designed to mitigate some risk of harm benefit the reckless at the expense of the careful. Those who already take measures to mitigate certain risks in their lives (the careful) pay twice when government piles on regulations that increase the cost of whatever was causing that risk. They give up whatever they paid pre-regulation to achieve enhanced safety, and they pay post-regulation for the extra resources required for a product or service to pass muster.

I use food safety regulations as an example. Regulations designed to enhance food safety to mitigate risk of E. coli, for example, will raise food costs for everyone, but will only help those whose diet includes foods susceptible to E. coli.

Still don’t get it? Read the article here.

A quick note on regulation

I’m taking a class on regulation this fall. I’ve heard from some awesome economists who are trying to reform the regulatory system, from both the inside-out and outside-in. Specifically, they want to beef up the “regulatory impact analyses” (RIAs) agencies are required to submit alongside all proposed rules with an anticipated impact of over $100 million. Think of them as cost-benefit analyses of the proposed regulation.

Believe it or not, RIAs are relatively new—regulatory agencies operated for decades without any consistently robust assessment of their proposed rules’ economic costs and benefits. Only in recent years has much attention been given to RIAs. The very nature of most regulation makes RIAs pretty damning for their accompanying rules. By my read, economists constructing RIAs are often hard-pressed to justify many of the rules that cross their desks. The RIAs are therefore lacking in some big ways. But to their credit, RIA authors at least give the public something to look at when evaluating proposed regulations. This can only help to deter bad rules.

Here’s a “report card” from the Mercatus Center that grades the quality of these analyses. Worth a look.