Even banal things can benefit from regulation, but regulators do sometimes make basic conceptual errors
There are many good reasons to have regulations. They create the standards and rules that govern a marketplace, give consumers confidence, keep rogue traders at bay and make sure things that should fit together — like plugs and sockets — do just that.
Regulation prevents a “race to the bottom” in environmental or labour standards and can make sure one person’s incompetence does not harm another. Even things as banal as the chimes of an ice-cream van benefit from regulation — how can they be loud enough to advertise the van’s presence without being so loud they create a rude intrusion? It is common to call for a bonfire of regulations as if they serve no purpose, only to discover that they do. However, regulators do sometimes overreach themselves or make basic conceptual errors. Here are seven sins:
1 Compliance fallacy
When governments prohibit or over-regulate something that people want, it does not cease to be sold. The biggest example is drug prohibition. Prohibition is a perturbation of the supply chain, not its elimination. The result for illicit drugs is a $400bn global criminal enterprise regulated by violence. Thousands are in jail. Products are impure and untaxed and a public health problem is inadequately managed by the criminal justice system. The policy itself causes more harm than the problem it is supposed to address.
2 Unintended consequences
Well-intentioned regulation can make matters worse once everyone has responded to new incentives. A statutory minimum wage might boost pay for some but increase youth unemployment. Rent controls may seem like a good idea until there is nowhere to rent because landlords have taken their properties off the market. Famously, the economists Steven Levitt and John Donohue presented evidence that the legalisation of abortion lead to decreased crime 18 years later. The theory was that more children born unwanted grow into delinquency. That theory remains controversial.
3 Disrupting the disrupters
Regulators have a bad habit of treating innovation as a threat rather than an opportunity, often at the urging of threatened incumbents. Is Uber a contractor, an employer or an online marketplace? Get that wrong, and a completely new business model, adored by passengers, could be throttled at birth. Does banning advertising of ecigarettes stop kids vaping, or does it protect the established cigarette trade from a potentially much safer and disruptive entrant?
4 Reckless precaution
Regulators can be obsessive about the risks they are responsible for but indifferent to the risks for which they are not. Do medicines regulators protect us too much from the possible side-effects of novel medicines but not enough from the diseases that new medicines could treat if they were not awaiting regulatory approval? Do regulators worry too much about possible environmental risks of genetically modified crops but not enough about the Vitamin A deficiency and exposure to excess pesticide use that GM can address?
5 Regulation by arbitrary numbers
In 2007, European nations signed up to a target to have 20 per cent greenhouse gas reductions, 20 per cent of energy from renewables and 20 per cent energy efficiency improvement — all by 2020. Notice anything? Were these the right targets? Of course not. They formed a pleasing cadence in a gesture-prone Brussels bubble but are resulting now in irrational distortions to energy supply.
6 Barriers to entry
Regulation can harm the public by creating and nurturing oligopolies, closed shops or restrictive practices. All these are likely to push up costs, reduce innovation and breed complacency. We might be glad a surgeon is qualified and licensed but does it make sense to extend licensing to hair braiders, florists, and interior designers — now the practice in some American states? At some threshold of risk, “buyer-beware” is a better approach: the consumer takes responsibility and does not look to a regulator for assurance of the quality of a good or service.
7 Losing an arms race
There is often an inevitable asymmetry between regulators and highly paid and motivated creative rule-dodgers. A guiding principle should be the transfer of cost and responsibility for failure to the regulated industry rather than focusing on rules to stop them ever going wrong. Regulation failed to prevent banks blowing up the economy in 2008. The focus should have been on protecting socially valuable “narrow banking”, but deeming “casino banking” never too big to fail.