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The harm of regulation: Evidence and solutions

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Abstract

What most in this room believe… The general welfare is greatest when the “simple and obvious system of natural liberty” that Adam Smith described prevails. Who can really know better…what is best for us, than we do ourselves? But not everyone agrees that freedom trumps all other values. So what is the evidence that regulation can and does increase welfare?
The harm of regulation:
Evidence and solutions
Kesten Green
University of South Australia Business School
Economic Reform 10:30-11:30AM
Sunday 27th of May, 2018
6th Annual Friedman Conference
What do I mean by regulation?
Measures by governments, or their agents, to
control behaviors and practices through
prohibitions and requirements, and
taxes and subsidies
that can be enforced via
penalties for non-compliance and, ultimately,
force.
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Regulation is costly
Administration and enforcement increases
burden on taxpayers
Compliance
Increases producer costs
Suppresses producer innovation
Increases product prices
Reduces economic activity
Reduces producer and consumer surplus
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Regulation versus freedom
What most in this room believe
The general welfare is greatest when the
simple and obvious system of natural liberty”
that Adam Smith described prevails.
Who can really know better…
what is best for us, than we do ourselves?
Am I right?
But not everyone agrees that freedom trumps all
other values
So what is the evidence that regulation can and does
increase welfare?
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Not everyone agrees that freedom
trumps all other values
But who would argue for taking away
freedoms if doing so would make people
worse off?
Unlike freedom, regulation isn’t a value that
people hold dear as an end in itself
Regulation, then, must be justified on the
basis that it will increase welfare over the
short and long run.
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Does regulation increase welfare in practice?
Climate policy
No scientific forecasts that
global mean temperatures will increase dangerously over
the 21st Century
Green, Armstrong, & Soon (2009)* no-trend benchmark remains
unchallenged
UN IPCC projected temperatures would cause serious net
harm if they occurred
Regulations would provide a benefit by reducing harm at a
lower cost than that of the harm itself
*“Validity of climate change forecasting for public policy decision making”
(See also theclimatebet.com)
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Does regulation increase welfare in practice?
Responses to other environmental alarms
26 analogous alarms of catastrophic harm from
human impact on environment (e.g., DDT, cooling).
Policy response? 23/26
Based on scientific forecasts? None
Accurate forecasts?
Correct direction of effect 7/26
Correct magnitude of effect None
Policy beneficial? None
(See Global Warming Analogies Forecasting Project at publicpolicyforecasting.com)
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Does regulation increase welfare in practice?
Industry regulation
Winston’s 1993* survey and analysis of the
effects of deregulation on airline, railroads,
trucking, telecommunications, cable TV,
brokerage, and natural gas
Found substantial benefits for consumers
*Clifford Winston’s Google Scholar profile is at
https://scholar.google.com/citations?user=mUleW6QAAAAJ&hl=en
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Does regulation increase welfare in practice?
Safety regulation
Consider the “risk offset hypothesis”
“We find that safety-conscious drivers are more
likely than other drivers to acquire airbags and
antilock brakes but these safety devices do not
have a significant effect on collisions or injuries,
suggesting drivers trade off enhanced safety for
speedier trips.”
Winston et al. (p. 83, 2006) Journal of Risk and Uncertainty
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Does regulation increase welfare in practice?
Banking regulation
1. Has government money retained its value?
2. Has regulation eliminated financial crises?
3. Has regulation eliminated bank failures?
4. Has regulation increased competition in the
banking market?
5. Is there any evidence that regulation of banking
has increased general welfare relative to a free
market?
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Does regulation increase welfare in practice?
Speech regulation / information policy
Is “commercial speech” different from other speech?
Do mandatory disclaimers/claimers/warnings etc. increase consumer
welfare?
Consider the knowledge and motivations of
Sellers
Buyers
Regulators
Evidence that speech restrictions (mandates) and information policy increase
consumer welfare?*
NONE (instead, harm through confusion, etc.)
*Green, K. C. & Armstrong, J. S. (2012). Evidence on the effects of mandatory disclaimers in advertising. Journal
of Public Policy and Marketing, 31, 293304.
Winston (2008) “information policiesweak solutions in search of a problem
Ben-Shahar & Schneider (2016). More Than You Wanted to Know: The Failure of Mandated Disclosure”
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Does regulation increase welfare in practice?
Firearms regulation
Guns in civil society can be used to (a) commit crimes, to (b)
prevent crimes, as (c) production goods, and for (d) leisure pursuits.
Regulations assume a > b
Is that assumption correct?
Lotts research and analysis (More Guns Less Crime; The Bias
Against Guns) lead to the conclusion that
Restrictions on the freedom of law-abiding citizens to own, carry,
and use guns increase home invasions, robbery, rape, murder,
and mass shootings.
(See crimeresearch.org)
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Does regulation increase welfare in practice?
Science policy
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Regulation of research
1. need to comply restricts scientist’s speech
2. individual scientists have greatest incentive to ensure studies are the
best use of their abilities, and cause no harm
3. no evidence of a problem when scientists are personally responsible
(vs., e.g., U.S. governments Tuskeegee experiment)
4. evidence of harm to scientific progress
Government funding of research
1. private scientific research increases economic growth
2. government-funded research crowds out private
3. government research does not contribute to growth
4. government funding encourages advocacy research
(See guidelinesforscience.com; Terence Kealey books and Cato video)
Does regulation increase welfare in practice?
Rules, protection, adjudication
Rules for market participation and other interactions,
adjudication of disputes, and protection of property are
valuable
but is government monopoly provision necessary, or
beneficial?
Stringham’s Private Governance: Creating Order in Economic
and Social Life provides evidence that government provision
is
neither necessary,
nor superior to private (market) provision
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The evidence supports giving freedom
the benefit of any doubt, and the
presumption of innocence.
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The Iron Law of Regulation
Cumulative knowledge on the effects of regulation is
summarised in the Iron Law of Regulation:
There is no form of market failure, however
egregious, [that] is not eventually made worse by
the political interventions intended to fix it.
Is it possible that there are exceptions?
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Checklist: Ten conditions
Necessary for successful regulation
1. know stakeholders’ endowments, relationships,
and preferences
§How can a central planner know these things… about
everyone?
§Knowledge problem (Hayek)
§A belief that central planning can nevertheless be
successful has been referred to as…
§Chess pieces fallacy (Smith)
§Fatal conceit (Hayek)
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Regulations that meet the conditions
1. All 10 conditions must be met.
2. Failure to meet even a single condition would
be sufficient to reject the regulation.
3. To date, we are not aware of any regulation
that meets even a single condition.
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Possible solution to proliferation of
harmful regulation
1. Put onus on sponsors to prove beyond a
reasonable doubt that each regulation
has or will increase the general welfare.
2. Revoke “orphaned” regulations: ones
without a sponsor, or that are enforced
inconsistently at best.
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To prove beyond a reasonable doubt
Use evidence-based forecasting procedures to
predict long-run effects of proposed regulations
(goldenruleofforecasting.com checklist)
Consider only studies that follow the scientific
methods as evidence
(guidelinesforscience.com checklist)
Regularly commission cost-benefit evaluations of
existing regulations
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Reasonable doubt studies:
Theyre not easy to do properly
Dont regulate when even experts are uncertain or
ignorant about the situation
Ignore the opinions of experts and voters on the
effects of a regulation
Require unbiased expert reviewers working
independently to use validated methods, and
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Deregulation: A great opportunity
With so many regulations restricting people’s choices
there are great opportunities to increase the welfare
of Australians…
by thoroughgoing deregulation.
Here are some tools (checklist) to help achieve that
IronLawofRegulation.com
GuidelinesForScience.com
GoldenRuleofForecasting.com
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