By Tim Shea
There’s no such thing as a free regulation. It doesn’t matter how much societal benefit they bring, or how popular they are, or how necessary they’re perceived to be. Every regulation—big or small, federal or local, legislative or bureaucratic—they all come with an economic burden attached. The compliance requirements and enforcement mechanisms in their myriad forms essentially function as a web of implicit and explicit taxes. And, just like taxes, there’s no way of guaranteeing those burdens won’t be passed onto consumers.
That’s not to say this fact automatically makes all regulations bad. As noted previously, many regulations provide benefits far in excess of their compliance costs. But it does mean that process of creating new regulations or the continued ratification of existing rules should not be taken lightly. Regulations should be the result of careful deliberation, a thorough evaluation of costs and benefits designed to maximize societal utility via the least costly means possible. They should not be a knee-jerk reaction to every conceivable downside to an economic or social transaction.
Unfortunately, as we’ve explained over the past two weeks, this often isn’t the reality. In the realm of occupational licensing in particular, many state rulebooks create a system that brings substantial costs to consumers with few tangible benefits. Even worse, there is considerable evidence that these rules are in place not to protect the public, but to concentrate economic benefits towards existing businesses at the expense of the broader economy. Not that they are framed that way. The typical case for occupational licensing comes steeped in language about “harm to consumers” whether or not such harm is real.
So how are lawmakers supposed to separate the good from the bad? How are economic development organizations supposed to know whether they are advocating against a law that protects entrenched business interests or against a law that could legitimately save lives? Again, there is no easy answer. We cannot provide a magic formula that automatically spits out the best solution. What we can do is provide a list of key questions to frame the debate, from an economics perspective, about the decision to impose a regulation. And that’s exactly what we’ve done.
Does There Exist a Negative Externality (or Other Market Failure)?
One of the core tenets of economic philosophy (and also one of its more controversial) is the notion that economic players behave rationally. Broadly speaking, economists believe that individuals know better than anyone else how to spend their own money to maximize their own utility. This is why economic academics increasingly tend to support some form of universal basic income over wealth transfers that stipulate how the money must be spent.
Alright, so what does this mean for occupational licensing or other regulations? It means that if the economic consequences of a transaction are limited to the consenting parties involved, the government should be wary about getting involved. To put it another way, if someone wants to save some money and risk a bad haircut by paying their friend instead of the reputable barber at the corner, they should be allowed to. Even if it might not seem like the brightest decision to an outsider. Where the government does have a compelling interest to get involved is in transactions that create significant negative externalities, i.e. air pollution causing lung disease in children or a family getting hit by a drunk driver.
This is of course a broad framework rather than a hard-and-fast rule. Other factors, such as extreme cases of asymmetric information or the fact that elderly dementia patients are likely not rational economic players, must be taken into account. With that said, assuming that consumers are acting irrationally should be the exception, not the rule. Economic regulations should reflect this.
Can the Business Be Made to Cover the Costs of Poor Outcomes?
Even if the possibility of negative externalities does exist, that is not necessarily an indication that an industry needs regulating. At that point, it becomes a matter of can the business cover the cost of the externality (and can they be made to pay it without a swarm of lawyers getting in the way). If the answer is yes, then regulation may not be necessary because a rational business will be incentivized to take steps to prevent incurring those costs. What’s more, they’ll do so in the most economically efficient manner possible. It’s like crowd-sourcing regulation. It’s only when a business can’t or won’t pay that government intervention might be needed to prevent the externality.
Is the Juice Worth the Squeeze?
There is something on the order of 30,000 automobile-related deaths in the United States every year. There’s also a simple two-step legislative plan that could cut that number to a fraction of what it is: ban alcohol and restrict the speed limit to 5 mph nationwide. Wait, that sounds ludicrous? Of course it does. Even if such laws could be enforced (they can’t), the economic burden would vastly outstrip the benefits. Yes, such logic is cold, and calculating, and even inhuman. It’s also reality, and it should be the mindset of every lawmaker and rule-maker as they consider whether or not regulation will actually benefit the public.
Follow the Money
So, fair enough, this isn’t a question. But there is one final point that needs making, and that point is this: regulations cost businesses money. Lobbying costs businesses money. So if businesses lobby legislatures asking for their own industry to be regulated—an act that hurts their bottom line—there’s probably a reason. And that reason probably isn’t (entirely) that they’re great, altruistic people looking out for the good of society. That doesn’t automatically make any rule proposed by an industry bad; maybe industry interests align with societal interests, or maybe there is a dose of altruism at play. But it should at least raise eyebrows. And it should raise questions as to who really is going to benefit if a new regulation goes into place.