Transcription
Regulation and EconomicOpportunity: Blueprints for ReformEdited by Adam Hoffer and Todd Nesbit
Regulation and EconomicOpportunity: Blueprints for ReformEdited by Adam Hoffer and Todd Nesbit
Copyright 2020 the Center for Growth and Opportunity at Utah State UniversityAll rights reservedPaperback ISBN 978-1-7348561-2-5eISBN 978-1-7348561-3-2Cover design and typesetting by Brooke JacquesThe Center for Growth and Opportunity at Utah State University3525 Old Main HillLogan, UT 84322www. thecgo.org
This book is dedicated to Jerry Ellig. A thoughtfulcolleague, friend, and mentor. He made invaluablecontributions to the field of regulatory studies andinspired countless scholars. He will be missed.
F orewordWilliam F. Shughart IIErrors are not what men live by or on. If an economic policyhas been adopted by many communities, or if it is persistently pursued by a society over a long span of time, it is fruitful to assume that the real effects were known and desired.Indeed, an explanation of a policy in terms of error or confusion is no explanation at all—anything and everything iscompatible with that “explanation.”1On the same page as the passage just quoted, the late Nobel laurateGeorge Stigler instructs students of regulation “to look, as precisely andcarefully as we can, at who gains and who loses, and how much,” whena regulation is contemplated or already has been imposed. In seekingto explain why a particular regulatory policy is adopted and persists,especially in the face of evidence that its actual effects are “unrelatedor perversely related”2 to its announced goals, Stigler’s seminal theoryof economic regulation teaches that “the truly intended effects should bededuced from the actual effects.”3Good intentions—the road to hell is paved with them—are notenough to justify government interventions into the private sector’saffairs. A decision to intervene requires careful analysis of the problem
William F. Shughart II vi(the ostensible “market failure”) to be corrected. Before any regulationis adopted, the analysis likewise must conclude that the public sector’sintervention actually will improve somehow on the outcomes observedin a status quo, unregulated market, avoiding what Harold Demsetzcalls the “nirvana fallacy”: comparing actual market processes (the“naturally occurring world”) with some ideal, unobtainable alternative.4 What is most important, however, is to be a “good economist” inthe sense of Frédéric Bastiat,5 who grasps not only the obvious, visibleeffects of regulation (“what is seen”), but also the second- and third-order effects that emerge only after a regulation has been promulgated(“what is unseen”) and therefore must be anticipated.Far too often the effects of a regulatory intervention that conflict with,or undermine, its announced goals are excused as “unintended consequences” of the public sector’s benevolent attempts to change thebehaviors of individual producers and consumers in directions thatgenerate benefits for society as a whole. Consequently, the politiciansresponsible for regulatory statutes and the employees of the regulatory agencies that enforce them are much like Adam Smith’s “man ofsystem,” whois apt to be very wise in his own conceit; and is often enamoured with the supposed beauty of his own plan of government, that he cannot suffer the smallest deviation from anypart of it. . . . He seems to imagine that he can arrange thedifferent members of a great society with as much ease as thehand arranges the different pieces upon a chess-board. Hedoes not consider that the pieces upon the chess-board haveno other principle of motion besides that which the hand impresses upon them.6In reality, however,in the great ‘chess-board’ of human society, every singlepiece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress
Foreword viiupon it. If those two principles coincide and act in the samedirection, the game of human society will go on easily andharmoniously, and is very likely to be happy and successful.If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degreeof disorder.7Social and economic interactions in the real world are multifaceted,and so it should be no surprise that regulatory interventions often produce consequences that are “unintended.” But if those consequencesbecome known—that is, obvious even to the most casual observer—andare not corrected, then, as Stigler concludes, the actual effects of regulation, no matter how perverse or counterproductive, must be intentional.They cannot be explained as unforeseen “mistakes.”The book now in your hands, Regulation and Economic Opportunity,supplies a catalog of regulatory failures across the spectrum of industries and economic activities subject to myriad federal, state, and localregulatory rules. The spontaneous orders emerging from the interactions of autonomous adult human beings in voluntary and mutuallybeneficial market exchanges are displaced by the edicts of politiciansand their bureaucratic agents, who lack access to knowledge about thespecial circumstances of time and place8 necessary for operation of the“invisible hand” that guides buyers and sellers pursuing their ownparochial interests toward collective prosperity.What is much more important is that the volume’s contributorsexplain why government failure often is more problematic than themarket failures to which intervention supposedly serves as a salutarycorrective. Chief among the explanations is one of the principles ofpublic choice: the same model of rational individual behavior applies toboth the private and the public spheres of action. Politicians and policymakers are not selfless pursuers of the “public’s interest,” the “generalwelfare,” or any other such fuzzy goal. Like anyone else, they want toadvance their careers by being reelected to office or promoted, by getting paid more, or by gaining positions that allow them to manage morepeople and control more-generous organizational budgets.
William F. Shughart II viiiSecond, to return to Stigler’s seminal contribution to the economictheory of regulation,the state—the machinery and power of the state—is a potential resource or threat to every industry in the society. Withits power to prohibit or compel, to take or give money, thestate can and does selectively help or hurt a vast number ofindustries.9The state’s massive legislative power and its administrative machineryhave expanded exponentially since the New Deal. They have grownand been reinforced by the public sector’s responses to the crises of the20th century’s two global wars,10 to the financial meltdown of 2007–2008, and, more recently, to the pandemic-justified lockdowns causedby SARS-CoV-2. An enlarged and much more potent government meansthat many individuals and groups will mobilize to gain access to thebenefits or to avoid the costs – the helps and hurts – delivered by selective regulatory interventions. The logic of collective action11 teaches thatsmall, well-organized special interest groups will tend to dominate thepolitical process that creates and enforces regulations constraining economic and social interactions, thereby successfully capturing rents.12Those factions’ gains predictably come at the expense of less-well-organized groups, such as the consumers of the regulated industry’sproducts and the general taxpaying public, who must finance the regulatory agencies’ operations.The rents created by regulatory interventions are transitory, leading to a hopeless and socially costly trap.13 Restrictions on entry into amarket (and sometimes on exit from it), ceilings or floors on the pricesregulated firms can charge, controls on the qualities of the goods andservices offered, limits on allowable days and hours of business operation, health and safety rules for employers and their employees, andeven directives designating some businesses as “essential” (and othersnot)—all can generate economic benefits for the owners of the affectedfirms, at least in the short run. But in the long run, regulatory rents arecapitalized into asset prices (as when a regulated firm is sold by its
Foreword ixoriginal owner) or competed away by nonprice or service quality rivalryamong the regulated entities. The consequence is that the new ownersof regulated firms no longer earn extraordinary returns on their investments. Meanwhile, consumers continue to pay regulatorily elevatedprices and perhaps suffer deteriorations in product quality because ofregulated producers’ weakened incentives to innovate.The transitional gains trap leads to the worst of all possible worlds:high prices for customers and low (or no) profits for suppliers. Rent-seeking does not create wealth; it merely redistributes the wealth existingwhen regulation is adopted. The trap also helps explain why deregulation is such a rare event.14 Rent-seeking costs incurred in the past tocapture regulation’s transitory gains are sunk. To the extent that theyare not, dismantling a regulatory regime triggers rent-defending effortsbecause of the threat of capital losses faced by the owners of regulatedfirms. Society is permanently poorer. Since rent-seeking activities areubiquitous, the only sure way of evading the trap is to avoid promiscuous regulation in the first place and to follow the lessons taught inRegulation and Economic Opportunity.A third feature of most regulatory regimes is that the same rules applyto all affected parties: “one size fits all.” Uniformity can be justified asa way of reducing the costs of administering regulations by requiringcompliance by everyone subject to them. Although exceptions are possible if one or more of the affected parties can bring sufficient politicalinfluence to bear on the legislature that enacts a regulatory statute or theagency that enforces it, such exceptions complicate the regulatory process and force regulators to accept responsibly for apparently unequaltreatment of the individuals, organizations, or companies they supervise. So regulatory rules tend to be inflexible, requiring compliance byall firms, by all consumers, and by all employees. Such inflexibility,along with the frequently high costs of regulatory compliance, whichplace heavier burdens on small firms than on large ones able to spreadfixed compliance costs over larger volumes of output, means that regulation often has regressive effects. It drives smaller firms out of business(or into the arms of their larger rivals through mergers) and priceslow-income households out of regulated markets. The rigidities of
William F. Shughart II xregulatory regimes contrast sharply with more decentralized common-law processes, which allow for “contracting around” the decisionsof courts when their rulings interfere with economically efficient, mutually beneficial exchanges.15One reason that the administrative state has expanded by leaps andbounds over the past century, displacing more decentralized, democratic market processes, can be found in the deference increasinglyconceded by courts to the supposed expertise of specialized regulatory agencies. A showing of due process—that a regulation has beenreviewed by some legislative or administrative body and deemed tobe in the “public’s interest” and to fall broadly within the state’s policepowers—is all that normally is required nowadays for the judiciary toallow a regulation to stand. Long gone is substantive due process, in whichcourts require more than just the following of proper procedures.16Under that older doctrine, regulations were reviewed on the basis oftheir consistency with certain rights and liberties of a free and prosperous society, such as those of employers and employees to contract onmutually beneficial terms. Minimum-wage laws, for example, would berejected on substantive due process grounds. The sanctity of contractsbetween buyers and sellers likewise would doom regulatory labeling of some businesses as “nonessential” during public health panics.Regulation and Economic Opportunity is an indispensable guide to botholder and more contemporary theories of economic and social regulation, in realms running the gamut from entrepreneurship to the marketsfor labor, land, energy, tobacco, vaping, and alcohol, and from the internet to K–12 schooling. The volume’s contributors take seriously Stigler’sinstruction to deduce the intended effects of regulation from its actualeffects, and in doing so they take advantage of the fine-grained information that recently has become available for measuring regulation’sscale and scope. The actual effects of many regulatory interventionsdiscussed in the volume impede entrepreneurship, burden small enterprises with heavy compliance costs, slow innovation, and deny manypeople opportunities to raise their standards of living.At present, public discourse on government intervention often echoesa mantra to “follow the science.” But science never is settled. Even if it
Foreword xiwere, though, the proponents of regulation and the scholars who studyit must acknowledge that applying provisional scientific findings inpractice requires navigating political processes wherein special interests exercise decisive influences on policy outcomes. Recognizing thatpolitics frequently trumps science, including economic science, is themost important lesson the readers of Regulation and Economic Opportunity ought to take away.
ContentsFOREWORDWilliam F. Shughart IIINTRODUCTIONAn Introduction to RegulationxivAdam Hoffer and Todd NesbitSection 1Regulation, Entrepreneurship, and Opportunity1CHAPTER 1Regulation and Entrepreneurship: Theory, Impacts, and Implications2Russell S. SobelCHAPTER 2Regulation and the Perpetuation of Poverty in the US and Senegal18Steven Horwitz and Magatte WadeCHAPTER 3Social Trust and Regulation: A Time-Series Analysis of the UnitedStates44Peter T. Calcagno and Jeremy JacksonCHAPTER 4Regulation and the Shadow Economy83Travis WisemanSection 2Regulation and Labor Market Outcomes99CHAPTER 5An Introduction to the Effect of Regulation on Employment andWages100James BaileyCHAPTER 6Occupational Licensing: A Barrier to Opportunity and Prosperity116Alicia Plemmons and Edward TimmonsCHAPTER 7Gender, Race, and Earnings: The Divergent Effect of OccupationalLicensing on the Distribution of Earnings and on Access to theEconomy149Kathleen M. Sheehan and Diana W. ThomasCHAPTER 8How Can Certificate-of-Need Laws Be Reformed to Improve Access toHealthcare?166Alexander Ollerton and Christopher KoopmanSection 3Land Use and Energy Standards185CHAPTER 9Land Use Regulation and Housing AffordabilityEmily Hamilton186
CHAPTER 10Building Energy Codes: A Case Study in Regulation and Cost-BenefitAnalysis203Matthew J. HolianCHAPTER 11The Tradeoffs between Energy Efficiency, Consumer Preferences, andEconomic Growth221James BroughelSection 4Energy Markets and Environmental Regulations246CHAPTER 12Cooperation or Conflict: Two Approaches to Conservation247Jordan K. Lofthouse and Megan E. JenkinsCHAPTER 13Retail Electric Competition and Natural Monopoly: The ShockingTruth277Jerry ElligCHAPTER 14Governance for Networks: Regulation by Networks in Electric PowerMarkets in Texas303Michael Giberson and L. Lynne KieslingSection 5Divisive Cases of Regulating Products and Services337CHAPTER 15Net Neutrality: Internet Regulation and the Plans to Bring It Back338Ted BolemaCHAPTER 16Unintended Consequences of Regulating Private School ChoicePrograms: A Review of the Evidence361Corey A. DeAngelis and Lindsey M. BurkeCHAPTER 17“Blue Laws” and Other Cases of Bootlegger/Baptist Influence in BeerRegulation386Stephan F. Gohmann and Adam C. SmithCHAPTER 18Smoke or Vapor? Regulation of Tobacco and Vaping406James E. PriegerCONCLUSIONMoving Forward: A Guide for Regulatory Policy442Adam Hoffer and Todd NesbitEndnotes458
I ntroductionAn Introduction to RegulationAdam Hoffer and Todd NesbitRegulatory expansion has been stunning. The Code of Federal Regulations (CFR)—the accumulation of rules imposed by the departments andagencies of the federal government—now exceeds 180,000 pages.1 At areading speed of two minutes per page, the average American wouldneed more than 250 days of consecutive, around-the-clock reading towade through the comprehensive list of regulations promulgated byfederal government agencies.The CFR has gotten so long that no individual can possibly comprehend the full set of federal regulations. The CFR does not even includethe additional regulations imposed by executive orders, state governments, and local municipalities.Regulation matters. Functional, evidenced-based regulation canprovide significant public benefits, such as protecting uninformed consumers, limiting the effects of monopoly power, improving public healthand safety, safeguarding civil rights, and protecting the environment.Poor regulation can be devastating. Interest groups can convince thegovernment to use its coercive powers to their own benefit and profitat the expense of everyone else. The financial and time costs of complying with regulations can drastically outweigh the benefits. Evenregulations created with the best of intentions can have such perverse
Introduction xveffects in the form of eroding the fundamental market processes thatunderpin the remarkable level of economic development those in theWest enjoy, leaving in its wake poverty and civil unrest.The goal of this volume is to study regulation. We ask fundamentalquestions that lead us to study not only the actual effects of regulation,but also how regulations are created.Regulations are not born in a vacuum. Rather, regulation is theresult of exchanges taking place in the political marketplace. The participants in this marketplace—namely, politicians, bureaucrats andparties interested in regulatory outcomes—are not benevolent socialplanners. Volumes of research point to the conclusion that politiciansand bureaucrats respond to incentives just as other human beings do.Sometimes these incentives lead the politicians and bureaucrats topromote regulation in the broad public interest. At other times, theseincentives lead the same individuals to pursue personal objectives,such as reelection, job security, larger budgets, and more influence.The entire regulatory process is plagued by imperfect information andunchecked self-interest.Proponents of regulation often point to a distrust of free enterpriseand provide anecdotes of “market failures” as justification for a largerregulatory, administrative, or managerial state. Free markets are astonishingly effective at allocating scarce resources in the most efficientmanner. Sometimes members of society are not satisfied with that finaldistribution of resources. Some market characteristics, such as externalities, public goods, market power, and asymmetric information, mayindeed lead markets to produce less than efficient results.The question we must ask is whether we can trust government regulators to create rules that improve on market outcomes. All data point toone answer: no! Americans do not trust “the government” or “electedofficials.” Opinion surveys showing a deep lack of trust in the UnitedStates government are rich and robust (for an example, see table 1).According to a Pew Research Center poll, trust in the US governmentis at an all-time low. Only 17 percent of respondents in 2019 reportedthat they “trust the government in Washington always or most of thetime,” down from 73 percent for a similar poll in 1958.2
Adam Hoffer and Todd Nesbit xviTable 1. Trust in US Public FiguresProfession% of US adults who have a great deal of or a fair amount ofconfidence that will act in the best interest of the publicThe military85Scientists84Principals(K–12)84Police s58Business leaders46Elected officials39Source: Lee Rainie, Scott Keeter, and Andrew Perrin, “Trust and Distrust in America,”Pew Research Center, July 22, 2019.Approval of Congress (“Do you approve or disapprove of the wayCongress is handling its job?”) was 22 percent in March 2020.3 The congressional approval rating has not exceeded 30 percent in the 11 yearspreceding the publication of this book.When government institutions are put head to head with specificproduct brands and companies, Americans clearly trust private companies more than they do the US government.4 When people wereasked whether they trusted the following (e.g., company, brand, person,institution) “a lot to do the right thing,” tech companies like Amazon,Google, PayPal, and the Weather Channel scored among the highestof all surveyed companies, with 35 percent of respondents placing alot of trust in the company about which they were asked. The UnitedStates government earned a lot of trust only from 7 percent of respondents. Seven percent! Roughly 14 out every 15 people do not place muchtrust in the government.The bottom line of these findings is stunning. Americans have littlefaith in elected officials or the government. Yet the same governmentofficials that Americans distrust control the ever-growing regulatorylandscape designed to “solve” our problems. Regulatory policymaking
Introduction xviiproceeds with little oversight, and most policymakers and citizens havelittle idea about what is written into a regulation.We need a clear understanding of regulation and its effects to drawconclusions about its contributions to economic well-being and to createbeneficial public policy. Unfortunately, regulation’s scope is notoriouslydifficult to quantify. Broad empirical studies of federal regulations havebeen impractical until only recently.Technological advances in machine learning facilitated the creationof RegData,5 a revolutionary and evolving dataset that quantifies regulatory restrictions and identifies the specific industries affected bythem. For the first time, researchers are able to employ this new dataset to build on the existing literature consisting of individual event andcase studies. The empirical findings can now provide to the public andpolicymakers more reliable estimates of the direct and indirect effectsof regulatory policy.The present volume collects scholars to answer essential empirical questions related to how regulations are created and the effects ofa growing regulatory state. The goal of the book is to increase awareness of the consequences of regulatory policies and encourage a moreinformed debate about such policies. It is important to evaluate publicpolicy outcomes as they are rather than as proponents might wishthem to be.Outline of the BookWe organize Regulation and Economic Opportunity in five sections:Section I: Regulation, Entrepreneurship, and OpportunityWe begin our examination of the effects of regulation with a look atentrepreneurship, given the critical role that it plays as a driver ofinnovation, economic prosperity, and overall economic growth. Inchapter 1, Russell Sobel examines not only how regulations affectthe market economy, but also how the political process influences thenature of the regulations promulgated. Sobel, using the public choicemodel of regulation, goes on to show that the incentives inherent inthe political process generally lead to inefficient regulations that tend
Adam Hoffer and Todd Nesbit xviiiboth to stay on the books and to encourage unproductive rent-seeking. Given the substantial costs involved in rent-seeking, the politicalenvironment tends to favor large, established firms at the expense ofnew start-ups that otherwise might have brought about more innovation, competition, and cost reductions. Sobel’s key takeaway is thatthe current regulatory environment is costly—much more so than itsuperficially appears.In chapter 2, Steven Horwitz and Magatte Wade expound on oneof those costs, which is often overlooked by many others: that regulation blocks at least some entrepreneurial upward mobility and thusperpetuates poverty. The authors explore the role that regulatory restrictions play in causing two outcomes: (1) many households, particularlynonwhite households, in the West persistently fall below the Westernpoverty line, while others enjoy greater income mobility, and (2) thatmany households and even entire countries in the Global South, particularly in Africa, have been unable to achieve anything close to Westernlevels of material comfort.Regulation, particularly for those who are poor and marginalizedin the political process, has stood in the way of the market innovationand creative destruction that was instrumental in the Great Enrichment.The effect of regulation in the United States has been highly regressiveand tends to trap many people in poverty. In Senegal, regulatory burdens, in terms of both time and financial resources, are so heavy thatit is nearly impossible to start a small business. Consequently, manyentrepreneurs choose to remain in the extralegal sector with no legalrights or protections. Furthermore, large multinational firms in Senegal are able to use their financial advantages and influence not onlyto better navigate the regulatory environment but also to gain specialexemptions unavailable to small entrepreneurs. The result is an underdeveloped legal small business sector and an economic climate rife withdistrust and corruption.Chapter 3 extends and generalizes the discussion of regulation anddistrust of market exchange. As mentioned earlier in this chapter, amajor motivation for government interventions is the absence of trustin other market participants. For example, if consumers do not trust
Introduction xixsellers not to defraud them, they may appeal to government to imposeregulations to prevent such fraud. However, chapter authors Peter Calcagno and Jeremy Jackson suggest that regulation also can, in theory,degrade social trust by magnifying economic and political inefficiencies.They test the causal relationship between social trust and regulationempirically. While they present some evidence that less social trustcauses regulation, the evidence that regulation reduces social trust ismore convincing. That finding is important because other research hasindicated that countries with more social trust tend to experience fastereconomic growth. Calcagno and Jackson’s results likewise offer additional support for the finding that regulation hinders entrepreneurialactivity, discussed in chapter 1.Horwitz and Wade mention in chapter 2 that regulatory burdens have,in part, encouraged many Senegalese entrepreneurs to operate outsidethe legal sector. That observation is far from unique to Senegal. In chapter 4, Travis Wiseman explores how overregulation leads to perverseincentives encouraging individuals to engage in socially unproductive activities and in the shadow economy. Wiseman, expanding onWilliam Baumol’s distinction between productive and unproductiveentrepreneurship,6 argues that in the face of an increasingly overregulated economic environment, otherwise productive entrepreneursrespond by engaging in rent-seeking to influence future regulations andby moving some of their activities underground or offshore in order toengage in productive, unproductive, and sometimes destructive activity.Many labor-market regulations discussed in section II, such as occupational licensing, scope-of-practice restrictions, and minimum wages,commonly lead to participation in the shadow economy. Although thesize of the shadow economy is sometimes difficult to gauge accurately,it can be a reliable indicator of the onerousness of public policy as itrelates to earning income or making a business profit.On the one hand, the existence of the shadow economy serves asan escape valve or a substitute for legal markets, permitting trade inmany items that would be too costly or offer too low of a profit inthe legal sector. On the other hand, operating in the shadow economy increases the risk of being defrauded, undermining social trust.
Adam Hoffer and Todd Nesbit xxMoreover, investments in both human and physical capital are abridgedin shadow economies, leading to slower growth as well.Section II: Regulation and Labor Market OutcomesWe begin our analysis of labor market regulations in chapter 5. JamesBailey provides a broad analysis of how regulation affects labor markets by answering two questions: Does regulation kill or create jobs,and does regulation raise or lower wages? Consistent answers to thosequestions are not easy to find in the literature. To find answers, we mustfirst acknowledge that many types of regulations affect labor marketoutcomes and that their effects vary substantially. Bailey categorizesregulations into seven types: (1) cost-increasing regulations, (2) bans,(3) entry barriers, (4) occupational licensing, (5) minimum wages, (6)mandated employment benefits, and (7) make-work regulations. Afterwalking through the consensus about regulation’s effects on jobs andwages for each type of regulation, Bailey acknowledges that we stillhave a lot to learn regarding the overall consequences of regulatorygrowth on employers and employees.In chapter 6, Alicia Plemmons and Edward Timmons provide a moredetailed introduction to occupational licensing, expounding on theresearch addressing the expansion of such regulations since the early20th century. Support for occupational licensing has its roots in protecting and promoting individual liberty; licensing therefore should notnecessarily be viewed as bad policy. Plemmons and Timmons’s analysis is consistent with arguments made by Christopher Tiedeman, the19th-century classical liberal author and student of constitutional law:the legitimate purpose of licensing is to limit the frequency of injurious trade by restricting from the market incompetent traders who seekto defraud consumers.Plemmons and Timmons show that the number of occupations requiring licenses and the stringency of the requirements for obtaining thesel
the sense of Frédéric Bastiat, 5 who grasps not only the obvious, visible effects of regulation ("what is seen"), but also the second- and third-or- . mon-law processes, which allow for "contracting around" the decisions of courts when their rulings interfere with economically efficient, mutu-
