The Effect of Regulation

Submitted by murph on Tue, 09/11/2018 - 08:47

For the purposes of this essay regulations are conceived of as the combination of rules and control procedures developed and administered by civil servants implementing coercive policies either embedded in law, allowed in law, or claimed to be allowed in law.

Regulation, whether positive or negative in its net effects, combines taxation with despotism in a nearly invisible way in that most of the tax cost is built into product or service pricing rather than paid directly to government, while the coercive power of law is used to force behavioral change on both consumer and provider.

Many regulatory regimes appear laudable but the "obvious to everybody" benefits are usually quantified only before the regulations becomes effective, research into the effectiveness of the regulatory regime is discouraged, and the obviousness of the claimed benefit usually hides the program's less obvious, and often counter-intuitive, costs.  Low flush toilets and reduced diameter water lines in housing, for example, self-evidently save water - but because most people simply run their taps and showers longer and water, in any case, cannot be destroyed the only saving possible is in the cost of processing (including delivery and recovery) of municipal water and those savings almost never materialize. Cities with adequately engineered water supplies, for example, invariably experience higher water delivery and sanitation costs in new areas fitted with smaller diameter piping in part because smaller lines require more significantly energy per gallon shipped and in part because smaller lines, like sewer lines run below capacity, have higher failure rates - and, of course, consumer costs in waiting longer for the sink or the kettle to fill, running the dishwasher twice, or paying nearly twice as much for a pressure assisted toilet that works with less water than a regular flush toilet are never counted.

In many cases the purpose of regulation is described to the public in terms of some core idea or value, but its effect (and thus value to those with the biggest head starts in the industry) is the exclusion of competitors, particularly start-up competitors, from the industry. The marketing of network neutrality, for example, makes it seem like a program to legislate fairness for smaller players and service users, but the effect of treating internet service providers like traditional telecom providers is illustrated by the reality that there were many telecom providers before regulation started but only a few large ones a decade later - a history that started to repeat itself during the Obama adminstration's commitment to imposing internet content regulation as many smaller internet services providers disappeared, the largest companies prospered mightly, and no major new products or services made it into the market.

In general, regulation, whether of specific immediate benefit or not, stifles the urge to ugh and implements the policy opposite of liberal belief in individual freedom and responsibility.

Scott Johnson, writing for the Powerline Blog, posted this comment and quotation from Is Administrative Law unlawful on July 4th, 2014:

In advance of the holiday weekend and late in the afternoon yesterday, the Obama administration released an 1,300 pages of new Obamacare regulations, adding to the more than 10,000 pages previously promulgated. This is the way we live now under the regime of the administrative state, subject to regulations dwarfing the laws duly enacted by Congress.

 Continuing our series of excerpts from Columbia Law School Professor Philip Hamburger's important new book on administrative law, we offer these thoughts from chapter 25 in honor of the day:

[A]dministrative governance is a sort of power that has long been understood to lack legal obligation. It is difficult to understand how laws made without representation, and adjudication made without independent judges and juries, have the obligation of law; instead, they apparently rest merely on government coercion. They therefore cannot be perpetuated on a theory of consent or acquiescence, and they traditionally would had the potential to justify revolution. Certainly when the English crown justified its absolute power as constitutional, the English and eventually the Americans engaged in revolutions against it.

Administrative law, in other words, contradicts almost all the values democrats hold dear - and yet better than nine out of every ten pages in the American Federal Register reflect real or claimed authority conferred on a regulator by democrats. Almost everything banned in the United States was banned by democrats or regulators acting under authority conferred by democrats - and almost everything Americans are required to do, from wearing bicycle helmets to buying Obamacare, was first required of them by democrats or regulators empowered by democrats.

Part of the explanation is that laws written by progressives tend to state goals and authorize bureaucrats to write rules which then take on the force of law, but are not usually subject to legislative review - and those rules tend to be extensive. Here's part, for example, of a June 23rd, 2014 story by Ali Meyer, of CNSnews.com published one week before the Obama EPA released another 1,300 pages of draft rules on June 27th:

Since President Barack Obama took office on Jan. 20, 2009, the Environmental Protection Agency (EPA) has issued 2,827 new final regulations, equaling 24,915 pages in the Federal Register, totaling approximately 24,915,000 words.

The Gutenberg Bible is only 1,282 pages and 646,128 words. Thus, the new EPA regulations issued by the Obama Administration contain 19 times as many pages as the Bible and 38 times as many words.

The Obama EPA regulations have 22 times as many words as the entire Harry Potter series, which includes seven books with 1,084,170 words. They have 5,484 times as many words as the U.S. Constitution, which has 4,543 words, including the signatures; and 17,088 times as many words as the Declaration of Independence, which has 1,458 words including signatures.

And consider this from The Daily Caller: EPA costs US economy $353 billion per year

Another important question is the size of the EPA's regulatory maze. Just how many of its regulations are there? It's a tricky question, and you won't find the answer from the agency.

Twice per year, a document called the Unified Agenda is published in the Federal Register. In it, all rule making agencies disclose what rules they have in the pipeline or are likely to propose in the near future. It's a good transparency tool. The trouble is that it doesn't keep up with agency rule making in a timely manner. Its most recent edition is the one for fall 2011. The spring 2012 edition was never published and the fall 2012 edition is now overdue.

In the last edition of the Unified Agenda, the fall 2011 edition, the EPA had 318 rules at various stages of the regulatory process. Nobody outside the agency knows how many rules it currently has in the pipeline. All in all, 4,995 EPA rules appeared in the Winter Unified Agenda from 1999-2011. Over the same period, 7,161 EPA final rules were published in the Federal Register. That means more than 2,000 final rules, which have the force of law, came into effect without first appearing in the Unified Agenda. This could indicate an important transparency problem.

That's just the EPA's annual flow of regulations. The agency has existed for more than 40 years. How many total rules does it currently have in effect? Again, the answer doesn't come from the agency. Earlier this year, the Mercatus Center's Omar Al-Ubaydli and Patrick A. McLaughlin ran text searches through the entire Code of Federal Regulations (CFR) for terms such as "shall," "must," "prohibited," and the like. The CFR Title covering environmental protection alone contains at least 88,852 specific regulatory restrictions. The number could be as high as 154,350.

Both of these quotations come from sources with axes to grind, but appear to get their facts right - so why would progressives, people who pride themselves on their unique commitment to maintaining individual rights and human freedoms, so consistently seek to reduce both through regulation?

Consider regulation in the abstract and almost everyone will agree that it can be both useful and necessary in meeting some social goals, but when you raise specific programs and issues that apparent consensus disappears very quickly - pick any regulatory regime you like and any major search engine can find you reasonable sounding people arguing either against its net usefulness or that the current state of the regulatory regime vastly exceeds its nominal scope and that the  excess negates much of the original intent or value.

You might assume, for example, that the regulations covering child proof caps on medication containers are so obviously a good thing that no one would question them - but, if so, the contrarian argument may surprise you.

Proponents of medical packaging regulation argue, for example, that the regulations represent a worthwhile market intervention because costs are negligible and the regulations save lives - i.e. they ignore cost to argue first that child poisonings were significantly reduced after the regulations came into force; second, that the regulatory regime caused the reductions; and, third, that both the effect and its consequences continue today.

Implicitly they argue that revoking the 1970 Poison Prevention Packaging Act and the regulatory apparatus its passage led to, would produce a long term increase in the number of deaths, particularly child deaths, due to accidental poisoning.

An important contrary argument is that by 1968 the courts had generally accepted the principle that companies knowingly selling unsafe products (or engaging in unsafe practices) despite access to known safer alternatives could be held liable for the consequences. Given the publicity accorded Dr. Breault's 1967 "palm and turn" patents, widespread use of child proof packaging was therefore inevitable without government action.

There is no way to know what the world would be like without the 1970 Poison Prevention Packaging Act, but it seems reasonable to speculate that competition would have driven positive change with the market rewarding innovation; and litigation, or the threat of litigation, taking dangerous or ineffective products out of the market.

In this imaginary world both customers and product developers would be responsible for their own choices and if Joe Inventor's magic seal product turned out to instantiate design or process defects the response would come through Joe's markets first and the courts second -and, either way, the punishment would come after the problem emerged, directly address the problem, and force quick and effective change.

The most significant difference between those who support regulatory mandates and those who think the market would produce better long term results is that those arguments by regulatory proponents that go beyond the initial ad hominem and "everybody knows" attacks are generally grounded in pre-enactment, and immediate post-enactment, research while those offered by their opponents generally attempt to interpret longer term economic and social change in support of their positions.

Those who support the regulation of medical packaging products claim, for example, that comparisons between the poisoning rate in the late 1960s and the mid 1970s demonstrate the validity of their position forty and fifty years later. Opponents, however, argue that everything changes, and that newer product ideas that would have provided greater benefits at lower cost would have been developed and adopted fairly quickly if the industry had been left largely unregulated.

In judging this debate we know that "palm and turn" still rules; that the the regulator stands between package producers and their customers; that the customer has no choice but to buy at prices incorporating an expected cost of error; that the medical packaging industry as a whole treats continuing product litigation as simply part of the pass-thru cost of doing business; and, that the only significant change in recent decades has been the replacement of American made packaging with products that are made in China.

In effect what we know is that regulation eliminated both the courts and consumers as change drivers while freezing pre-existing design ideas in place, left the industry to focus on cutting its production and distribution costs, and raised product prices to cover the costs of the process including its inevitable failures.

We do not know whether or not regulation has had a net positive effect on the lives of children. Although all of the numbers are highly suspect, it is generally reported that poisoning fatalities per 100,000 children fell in the United States and countries like Canada after the rules came into force. However, there appears to be no clear statistical or logical basis on which to draw conclusions about causality, with less, and differently, regulated markets claiming comparable declines, all web sources examined clearly engaging in axe grinding and special pleading, no obviously honest data broker available, and multiple seemingly sensible explanations for the reduction in fatalities on offer. For example, the number of children per 100,000 dying from poisoning seems to have fallen almost everywhere during the mid seventies but so did death rates from cardiac and vehicular trauma where medical packaging had no effect - but a general improvement in emergency protocols, including those covering child poisonings, combined with faster, and better trained, EMT response clearly did.

Thus the bottom line is that we don't know -but on net it appears believable pending better numbers- that the 1970 Poison Prevention Packaging Act accelerated the adoption of basic protective packaging (particularly outside the United States where American court decisions had little influence but the production and packaging practices of American manufacturers carried great weight) and that the early numbers might support the idea that protective packaging works to reduce accidental ingestion, but that later numbers probably don't.

What we do know for sure is that the regulatory wall placed between consumers and industry by the 1970 Act slowed or prevented industry wide adoption of new or better packaging technologies as these became available, imposed additional costs on the industry and its customers, and spread the cost of legal action against specific industry products or players across consumer pricing for all industry products. Thus the most reasonable seeming bottom line on the legislation is that it increased everybody's medication costs, would have been at least equally effective if it had expired in the mid seventies, and may well have become net negative in its effects on the lives of children and the elderly by the late 1970s or early 80s.

I picked this example because there may, or may not, be an "on-net" argument for regulation here - but that ambiguity doesn't exist in a comparison between the education and microprocessor industries during a period when one was regulated and the other was not.

Education didn't come under significant federal regulation in the United States until President Carter created the Federal Department of Education in 1979. Between 1979 and the first effects of the Pelosi 2007/8 budget in 2009 the percentage of high school graduates who grade as functionally illiterate rose from about 4% to about 18%; most non professional certifications offered by colleges and universities lost nearly all value; and, the Department of Education budget grew to about $60 billion in discretionary spending for 2008/9.

The microprocessor industries, ten years old and at the MC6502 (8 bit, 1Mhz) level in 1979, didn't see significant federal oversight until the 2007/8 Pelosi budget took effect and the incoming Obama administration set about expanding the role of agencies like the FCC in the United States while transforming many industry standards and procedures from market determined and voluntary, to government determined and mandatory through the internationalization of services previously performed by volunteers working within the American business and academic communities. During that pre-regulatory period, however, the 1979 48K Apple II became the 8GB smart phone; high speed internet and cellular services became world wide phenomena; microprocessors improved by five orders of magnitude on cost and seven on performance; and the first commercial aircraft to be designed, built, and supported almost entirely through American made hardware and software (the Boeing 757/67) flew a combined distance roughly equivalent to thirty return trips to the Kuiper belt.

An aside:

 There's a fascinating example of liberal reality denial possible here. The Discovery and History channels are progressive favorites and their explanation for the rate of development in microelectronics and related software, found in numerous programs devoted to UFOs and extra-terrestrial aliens, is that progress was driven by evil military schemers secretly reverse engineering products found in crashed alien spacecraft.

Although it seems reasonable to assume that people who think UFOlogy belongs on the History and Discovery channels account for the apparent unreliability of alien spacecraft by imagining them made by well run socialist companies like VEB Sachsenring Automobilwerke circa 1975, it's interesting to note that none of these programs report that the micro-electronics industry had, at least until about 2009, something more than outrageous success in common with the Connecticut Yankee: the near total absence of regulatory constraint on innovation.

Look at a broad range of regulated and unregulated activities and some commonalities in consequence and behavior stand out:

  1. when a formerly unregulated industry subject to American style civil law is brought under regulatory control the industry is forced into compliance, but customers and their lawyers are not. As a result the litigation that formerly helped drive change usually continues, but usually (i.e. except in extreme cases) its costs are priced into the product, spread across the industry, and largely divorced from product and process decisions.

    Note that, absent the regulator, the costs of litigation are priced into whatever the company being sued makes or sells and the frequently sued therefore eventually have to charge more than their competitors - and because both settlements and on-going suits damage reputations that price increase makes an already difficult sell harder and harder until the frequently sued either change their behavior or leave the business. With the regulator in place, however, costs are spread across the industry and non disclosure agreements become the industry norm - meaning that all consumers share the cost of the litigation, but get essentially nothing from it.

  2. when the customer's role in driving industry adaptation is absorbed by the regulator's presence between customer and producer, Japanese style incremental evolutionary change quickly replaces the periodic product and process revolutions characteristic of unregulated markets.

    Prior to 2008/9 change in the microprocessor businesses was revolutionary with each new product generation obsoleting the old, new companies entering the market with new products driving out old product lines and, often, old companies with them. During the Obama years, however,  radical innovation largely disappeared as the bigger players got bigger and focused on the evolutionary development of pre-existing technologies - and it was only the incoming Trump administration's commitment to cutting regulation that emboldened AMD to issue, in mid 2016, new processors designed in 2008 and companies like Arm, Oracle and Fujitsu to tentatively re-invest in basic processor R&D.

  3. unregulated industry produces social change expanding the middle classes in both directions largely by rewarding education, entrepreneurship, and initiative.
  4. In contrast, regulated industry favors stability, has "human resources" instead of people, and tends to reduce the role of the middle classes by making the rich richer and everyone else poorer.

  5. unregulated industry tends to focus on better - inventing new products, new services, new methods.
  6. In contrast the regulated industry tends to focus on cheaper - but usually with the focus firmly on non-administrative costs rather than pricing.

  7. most jurisdictions make both product co-ordination and price fixing among industry players illegal - but big players who succeed in getting an industry regulator to set both pricing and product standards can then use political clout with respect to appointees and the career control the revolving door between their businesses and the regulator gives them, to achieve both. This increases profitability while reducing risk by further reducing the effect the customer, the courts, and new entrants can have on the industry.
  8. change in large loosely regulated markets drives change in smaller, more heavily regulated, markets.

    For example, Canada's cellular communications market, although closely regulated and much more expensive than the American one, is continually pulled forward by customer access to information about products and services available in the American market.

    Similarly, change in private health care practice, particularly with respect to standards of care and treatment protocols in hospitals and clinics pulled VA practices along with it up to about 2009/10 when the Obama administration effectively froze positive change in the system.

    An aside:

     One odd effect of the Obama Administration's heavy handed commitment to regulation was that it enabled the VA to freeze its methods, staffing, and protocols more or less in place in 2009 while the rest of the industry initially treated compliance as independent of practice. This allowed the already significant gap between the VA and the rest of American health care to grow to the point that public protests against perceived VA excesses and failures almost certainly contributed to Trump's victory in 2016.

  9. laws written by liberal/progressives tend to state goals and require bureaucrats to develop and implement the regulations needed to achieve them, while those written by conservatives tend to specify what various stake holders must do to achieve the goals and thus leave little room for regulatory over-achievement. In both cases, however, the laws tend to be relatively static while the regulatory system evolves - meaning that the gap between intent and actuality grows over time with those written by progressives generally getting a big head start on the process.

    Most Canadian provinces, for example, established some form of tire recycling authority sometime in the 1980s or 90s. Today most have well paid staffs in expensive offices, well established processes for collecting tire recycling fees at the time of tire purchase or disposal or both, slick websites citing deep commitments to environmental stewardship, and real histories of not impeding the use of nearly all recyclable tires to fuel cement kilns.

  10. when regulators take over, the regulated tend to support the regulator - largely because the regulator protects those already in the industry from change while making their experience in the industry, particularly with respect to managing the industry's relationship with the regulator, much more valuable. As a result there's a political ratchet effect pushing regulatory growth with progressives passing new regulatory regimes into law when in office and conservatives not taking them down when it's their turn.
    An aside:

     President Reagan undid at least some regulatory and related structures imposed during the Carter Administration. He reduced, for example, the manpower allocation for the Department of Education from an initial 17,000 authorized by Congress to about 3,000. It has since grown to about 4,500.

    The current president, Donald Trump, appears likely to follow suit starting with an initial executive order requiring that all new regulations replace at least two old ones - and there is reason to think that his administration will eventually act to greatly reduce the role the department of Education plays in the disbursement of education funds not directly under its control.

  11. regulation breeds regulation. When one set of rules produces an obviously unfavorable outcome the general tendency is to add balancing rules rather than set aside the rules causing the problem. For example, in 2012 people were reporting great difficulty canceling contracts with carriers like Comcast, so now there are new regulations forcing the carriers to make this easier - but the new policies are layered on top of the ones whose consequences people objected to because these constitute a rational response to regulations covering carrier marketing practices.

    A 2015 article on The Blaze captures the bizarre contradictions implicit in the liberal response to regulation - one in which they decry regulation and government control on principle, but then demand funding for more of it to reduce its impact:

    Harvard University educated political scientist Charles Murray says there is a way to prevent the enforcement of "stupid, pointless regulations" without changing the law. As he sees it, a large fund needs to be established to vigorously defend those who run afoul of the regulations, eventually creating an environment where bureaucrats are more selective in their enforcement.

    "I call one version of it the Madison Fund," Murray said on The Glenn Beck Program Wednesday. "It would be a couple hundred million bucks, I'm talking big money. The purpose of it would not be to defend the innocent. It would be to defend the guilty, people who are guilty of violating stupid, pointless regulations. And the idea is to overload the enforcement capacity of the regulatory agencies."

    Murray, author of "By the People: Rebuilding Liberty Without Permission," said the administrative state is essentially a legal system "which lies outside the rule of law" since most of the regulations were not written and passed by Congress.

  12. because enabling legislation is difficult to change but regulations are not, regulators tend to expand their role well beyond that envisaged in the legislation while legal challenges to their authority become increasingly difficult - partly because it's true that the more liberal the judge, the more fascist they tend to be in their submission to regulatory authority, but mainly because each time a tendentious argument succeeds for the regulator, the precedent effectively stretches the law the regulator's way.
  13. in most cases there are good arguments to be made for the legislation from which the regulations arise, and in many cases the regulatory regime at least seems to achieve the legislative goals over the first few years - but after that the evidence for success becomes increasingly questionable and arguments for market adaptation as an alternative to regulation become increasingly credible.

Combine the absence of sunset clauses in enabling legislation with the judicial tendency to uphold regulators and the production of thousands of new pages of regulation every year, and the result is that we're now all directly or indirectly subject to hundreds of thousands of rules and regulations most us know nothing about, much of which bears little obvious resemblance to legislative intent, and most of which is so detached from common sense that even experts cannot claim to understand the full implications of the regulations affecting their industry or other area of expertise.

Consider this, from The Wall Street Journal in 2011:

One area of expansion has been environmental crimes. Since its inception in 1970, the Environmental Protection Agency has grown to enforce some 25,000 pages of federal regulations, equivalent to about 15% of the entire body of federal rules. Many of the EPA rules carry potential criminal penalties. Krister Evertson, a would-be inventor, recently spent 15 months in prison for environmental crimes where there was no evidence he harmed anyone, or intended to. In May 2004 he was arrested near Wasilla, Alaska, and charged with illegally shipping sodium metal, a potentially flammable material, without proper packaging or labeling.

He told federal authorities he had been in Idaho working to develop a better hydrogen fuel cell but had run out of money. He had moved some sodium and other chemicals to a storage site near his workshop in Salmon, Idaho, before traveling back to his hometown of Wasilla to raise money by gold-mining.

Mr. Evertson said he believed he had shipped the sodium legally. A jury acquitted him in January 2006.

However, Idaho prosecutors, using information Mr. Evertson provided to federal authorities in Alaska, charged him with violating the Resource Conservation and Recovery Act, a 1976 federal law that regulates handling of toxic waste. The government contended Mr. Evertson had told federal investigators he had abandoned the chemicals. It also said the landlord of the Idaho storage site claimed he was owed back rent and couldn't find the inventor -allegations Mr. Evertson disputed.

Once the government deemed the chemicals "abandoned," they became "waste" and subject to RCRA. He was charged under a separate federal law with illegally moving the chemicals about a half-mile to the storage site.

"If I had abandoned the chemicals, why would I have told the investigators about them?" said Mr. Evertson in an interview. He added that he spent $100,000 on the material and always planned to resume his experiments.

Prosecutors emphasized the potential danger of having left the materials for two years. "You clean up after yourself and don't leave messes for others," one prosecutor told the jury, which convicted Mr. Evertson on three felony counts. Prosecutors said clean-up of the site cost the government $400,000. Mr. Evertson, 57, remains on probation, working as a night watchman in Idaho.

(See also: You're (Probably) a Federal Criminal)

You'd think progressives, people who pride themselves on their commitment to principles of fairness and human equality before the law would be upset by this kind of thing - but they're not. The quotation above is from the Wall Street Journal; for committed democrats there are no regulatory excesses or injustices - the New York Times perfunctory mention of Mr. Evertson in paragraph 37 of a 39 paragraph puff piece praising Obama EPA officials for their efforts to cut down on environmental crime identifies him by first, middle, and last name to emphasis the crime beat nature of this concession to fair and balanced reporting.

So why? Why do democrats profess one thing, but practice its opposite? It's possible that Mr. Evertson really is a bad guy, but there is nothing in the public record on this, or thousands of other cases of regulatory excess, that doesn't contradict values democrats claim to hold dear - and yet the number of democrats angered at what happened to companies like Gibson Guitar, people like Evertson, or towns like Chicken (Alaska) is effectively zero.

In general, regulatory regimes have immediate effects that may be good, bad, or indifferent but the indirect effects in the market -effects on supply, on price, on innovation - are almost invariably negative, likely to grow disproportionally over time, almost always mitigate strongly against innovation and innovators, and are consequently almost always net negative in their longer term effects.

Consider, as a seemingly simple example (requiring, in reality, book length exposition), the effects of regulation on the American car. The 1956 Chevrolet pickup truck was a cheap but terrible vehicle: utterly utilitarian, under powered and uncomfortable, but tough and well suited to its purpose in hauling small loads short distances. American sedans like the 1956 Buick, in contrast, generally represented the state of the art in mass market vehicle design and were easy to drive for long distances largely because they were comfortable, powerful, and as reliable as the technology of the day allowed.

Sixty years later, that situation has reversed with the light duty pickups now largely useless as trucks but transformed into the great family highway cruisers and RV or boat tow vehicles the 1950s sedans should have evolved into, while the sedans have become little more than 90s vehicle electronics embedded in 60s Japanese vehicle designs executed with least cost modern materials and manufacturing methods. What drove this reversal was regulation; and in particular the effect of the Carter/Obama fleet fuel economy standards has been to freeze sedan evolution into exactly the light weight Japanese horrors these designs were reviled as in the 1960s, while the light truck exemptions built into the standards allowed manufacturers to meet customer demand for better vehicles by transforming their SUV and light truck lines into thinly disguised family cars.

An aside:  There is an interesting side issue here because Ford has fought the regulator since the Kennedy administration first responded to leftist demands for government intervention in automotive design and manufacturing. As a fairly recent part of this they bought companies like Aston Martin, Jaguar, and Volvo whose product technologies were largely litigation proof in U.S. markets, incorporated those technologies into their own products, and thus advanced their smaller sedans less than they did their pickups, but far more than the other two big American conglomerates did. This long term strategy hurt their gross margins in American markets but gave them greater credibility in world markets - as a result of which they're the only surviving 1950s American car maker not to have been bankrupted trying to meet Obama administration regulatory and related union agendas, the only one that has not needed a government bailout, and the only one able to ward off Obama administration attacks on their financial and management integrity.

Consider, as a more extended example, the effect of regulation on the residential building industry - just drive around comparing middle class housing areas built in the mid 1960s to those being built today to see what fifty years of increasingly stringent regulation has achieved.

The industry is dependent on technologies like central heating, roof trusses, sheetrock, municipal services, and the private automobile that haven't changed significantly since the Woodstock generation entered politics and the bureaucracy - essentially all significant change over the last fifty years has, in other words, been due to regulation. It's also dependent on markets, which have been growing consistently - and on the availability of land, which generally hasn't changed.

But industry behavior has changed. In most Canadian or American cities, for example, about half of available land is either unused or underused in some significant way - but the overwhelming majority of development work is going into exurb communities like Calgary's McKenzie towne, each of which adds thousands of new commuters to already over crowded main roads - while the housing customer pays artificially high prices for built-to-minimums boxes, long commutes, factory schools, and the wonderful combination of downtown densities with chain and strip mall shopping.

Why? because:

  1. regulation favors big players over small;

    The first barrier to building is getting development, or redevelopment, approvals. If Giganticus Corp builds 4,000 units a year, another million spent hiring ex-city staff at a premium over civil service rates or over paying per diems to get an engineering firm with the right connections on board amounts to a pass through cost of about $250 per unit. Uncle John and his merry band of builders, however, would have to tack $100,000 on for each of the ten units they build every year if they wanted to compete on that basis - and because that's not possible they either work as sub-contractors for the bigger players, or face all the delays, and all the regulatory scrutiny, needed to keep the planning department's reportable averages roughly where last year's numbers suggest they should be.

  2. regulatory barriers to entry protect bigger players from competition.

    For example, the bylaws governing development applications commonly define a process in which intervenors can demand and extend public hearings. This has little effect on big players with long planning horizons and the right connections, but poses a huge barrier to small players. If Cousin Joe, for example, scrapes together eight adjacent world war II era homes near the city's downtown and applies for a zoning change to allow a 200 unit condominium, he'll face at least a year's delay, over a million in representation and related costs, and a better than 50:50 chance of losing it all to some political appointee's no vote.

  3. regulatory barriers prevent change

    Standards are standards and rules are rules - both big and small players need to get new designs approved for construction. However, for Giganticus Corp $20,000 in fees for each of ten new designs would amount to about $50 per unit - but if Uncle John wants to get five new designs approved he'll have to add $10,000 to the price of each unit he builds.

    There's nothing to motivate Giganticus to improve its products - all the pressures its managers feel push them toward lowering their costs. Uncle John, however, has to compete on quality - but if he wants to get one up by importing a power door assembly from England, he's going to face multiple regulatory hurdles: from getting CSA approval to city inspector sign-off he's looking at costs and risks that make any form of significant innovation a non starter.

    Thus the big changes in residential construction over the last decades have been the smaller lots and higher densities the left loves to specify for other people; cheaper, made in China, sheetrock; the wider use of Chinese bamboo "wood" products and manufactured cabinets; the change to low flow faucets and showers imposed by regulatory fiat; the replacement of oil based paints with plastizers imposed by regulatory fiat; and the use of euro-harbor paint schemes imposed by people who have no intention of living anywhere nearby when those start to peel off.

  4. regulation produces apparently irrational economic adaptation

    As one adaptation, many cities have developed symbiotic relationships between large and small developers in which the large company gets the approvals and builds the high profit infrastructure and undifferentiated row housing, while leaving the minimal number of lots ear marked for single detached housing open to the small builder - whose products are then pictured in the consumer marketing materials needed to sell the development.

    This works for Giganticus because it sells product, it works for Uncle John because it reduces his regulatory risk, and it can work for customers whose employers (e.g. school boards) let them avoid the long commutes that normally go with the new communities lifestyle.

    On the other hand, it raises everyone's costs, decreases the value of the city infrastructure to those paying for it, increases the pressure to spend hundreds of millions on freeways and LRTs, and reduces the resources available for core redevelopment. It is in other words, a perfectly rational answer for those involved, but utterly destructive of the city's economic value to its citizens.

Regulation, to repeat, exemplifies just about everything progressives profess to detest: from the arbitrary exercise of power to the destruction of individual and social value, there's nothing in regulation for a progressive to like - except that, when in power, regulation is what progressives do.

Why? because when you look at regulation as objectively as possible, it appears to almost always have four kinds of consequences:

  1. it creates and expands a class structure by clearly separating the rule makers from the rule enforcers and the rule followers;
  2. it favors well established organizations over newcomers and makes it more difficult for poor and middle class people to rise above their birth stations;
  3. it slows technical and socio-economic progress; and,
  4. it drives apparently irrational socio-economic adaptation that, in turn, produces market inefficiencies, higher costs, and net decreases in economic productivity - processes which drive demand for more government action while contributing to the believability of Malthusian prophecy.

 

P.S. if you thought this essay rambling, repetitive, and confusing, please remember its subject.