1 00:00:00,240 --> 00:00:03,440 Last week we talked about some of the wackier laws and 2 00:00:03,440 --> 00:00:07,000 regulations in Argentina, which is considered to be one of the 3 00:00:07,000 --> 00:00:10,680 most regulated economies in the world, with rules about pretty 4 00:00:10,680 --> 00:00:13,280 much everything. People in the comments section 5 00:00:13,280 --> 00:00:16,600 mostly agreed with the requirement to put a hat on your 6 00:00:16,600 --> 00:00:20,520 horse on hot days, mostly because they liked the look. 7 00:00:20,800 --> 00:00:23,400 But many of the other regulations that built up in 8 00:00:23,400 --> 00:00:27,800 Argentina over decades of populist rule only serve to slow 9 00:00:27,800 --> 00:00:31,920 down economic activity and impose unintended costs on 10 00:00:31,920 --> 00:00:35,240 society. Argentina shouldn't be singled 11 00:00:35,240 --> 00:00:37,600 out too much for its wacky rules, though. 12 00:00:37,840 --> 00:00:41,440 There are strange rules and regulations all over the world. 13 00:00:41,760 --> 00:00:46,880 The Salmon Act of 1986 makes it a jailable offence to handle a 14 00:00:46,880 --> 00:00:48,720 salmon in a suspicious, vicious manner. 15 00:00:48,720 --> 00:00:54,160 In the UK, Russia, Belarus and Kazakhstan made it illegal to 16 00:00:54,160 --> 00:00:59,160 wear Lacy underwear a few years ago, and in Japan it's illegal 17 00:00:59,160 --> 00:01:01,480 to be fat. Or at least companies are 18 00:01:01,480 --> 00:01:05,360 required to measure the wastes of their employees, and if 19 00:01:05,360 --> 00:01:09,040 they're too large and don't lose weight in the timely manner, the 20 00:01:09,040 --> 00:01:12,400 companies can be fined. I'm not sure if there's an 21 00:01:12,400 --> 00:01:14,960 exemption for sumo wrestlers or not. 22 00:01:14,960 --> 00:01:19,480 I'll have to look that up. In Wyoming, any new public 23 00:01:19,480 --> 00:01:24,840 building being constructed must have art displayed valued at 1% 24 00:01:24,840 --> 00:01:28,360 of the building's costs. The artwork, of course, has to 25 00:01:28,360 --> 00:01:32,720 be approved as art by an advisory panel of community 26 00:01:32,720 --> 00:01:36,640 representatives. The Nickelback law in Canada 27 00:01:36,920 --> 00:01:41,880 requires Canadian radio stations to ensure that at least 50% of 28 00:01:41,880 --> 00:01:45,520 the popular music that they play is Canadian content. 29 00:01:45,800 --> 00:01:49,360 Many people feel that this law has led to the Canadian people 30 00:01:49,560 --> 00:01:53,120 being confused about the meaning of the word ironic. 31 00:01:53,600 --> 00:01:58,560 In 2009, Christopher Hitchens, angered by excessive regulation 32 00:01:58,560 --> 00:02:02,000 in New York under Mayor Bloomberg, wrote that there are 33 00:02:02,000 --> 00:02:06,200 laws that are not possible to obey, that nobody can respect, 34 00:02:06,400 --> 00:02:09,199 and that are enforced by arbitrary power. 35 00:02:09,440 --> 00:02:13,040 He argued in his Vanity Fair article that the essence of 36 00:02:13,040 --> 00:02:16,680 tyranny is not iron law, it's capricious law. 37 00:02:17,000 --> 00:02:20,600 He then spent the day breaking pointless laws in New York. 38 00:02:20,720 --> 00:02:24,920 He sat on an upended milk crate, putting his bag next to him on a 39 00:02:24,920 --> 00:02:29,800 subway seat, paused to adjust his shoe on a subway step, fed 40 00:02:29,800 --> 00:02:33,560 pigeons in Central Park, had a cigarette in a town car, 41 00:02:33,720 --> 00:02:38,280 attempted to put a plastic frame on a car license plate, and rode 42 00:02:38,280 --> 00:02:42,160 a bicycle without keeping his feet on the pedals at all times. 43 00:02:42,680 --> 00:02:46,400 He pointed out in his article that no sane New Yorker would 44 00:02:46,400 --> 00:02:50,560 occupy an extra subway seat with their bag when the subway was 45 00:02:50,560 --> 00:02:53,160 crowded, as their fellow passengers would likely 46 00:02:53,160 --> 00:02:56,360 discipline them. He also pointed out that on a 47 00:02:56,360 --> 00:03:00,200 crowded train, there's no room for an inspector to walk around 48 00:03:00,200 --> 00:03:03,880 handing out tickets. Thus, in real life, you'd only 49 00:03:03,880 --> 00:03:07,320 get ticketed for doing this when there are plenty of spare seats 50 00:03:07,320 --> 00:03:10,400 available. For obvious reasons, no one 51 00:03:10,400 --> 00:03:14,200 would sit blocking the subway stairs during rush hour either. 52 00:03:14,400 --> 00:03:17,360 But he wrote that a pregnant woman had been ticketed for this 53 00:03:17,360 --> 00:03:21,040 offence a few months earlier. When overcome with exhaustion, 54 00:03:21,280 --> 00:03:24,040 it might have been more reasonable for the officer to 55 00:03:24,040 --> 00:03:27,440 have offered her assistance, but that's not how things worked 56 00:03:27,440 --> 00:03:30,120 out. It is, of course, easy enough 57 00:03:30,120 --> 00:03:33,200 for me to dig through the Internet looking for funny 58 00:03:33,200 --> 00:03:37,680 regulations, But just because some exist doesn't mean that all 59 00:03:37,680 --> 00:03:41,480 regulation is pointless. Excessive regulation, which we 60 00:03:41,480 --> 00:03:45,440 often call red tape, stands in contrast to justified 61 00:03:45,440 --> 00:03:49,480 regulation, where social benefits outweigh social costs. 62 00:03:50,280 --> 00:03:54,800 Up until the 1960's, the conventional wisdom was that if 63 00:03:54,800 --> 00:03:58,560 there was a market problem, government regulation could and 64 00:03:58,560 --> 00:04:02,680 should step in and fix it. Policy makers and economists 65 00:04:02,680 --> 00:04:06,520 assumed that the new laws, once passed, had their desired 66 00:04:06,520 --> 00:04:10,880 effect. In 1962, this all changed when a 67 00:04:10,880 --> 00:04:14,320 paper by Stiegler and Friedland analysed the effect of 68 00:04:14,320 --> 00:04:18,279 regulation on electricity prices and found that government 69 00:04:18,279 --> 00:04:22,560 regulation hadn't lowered electricity prices nearly as 70 00:04:22,560 --> 00:04:26,680 much as expected. George Stigler went on to win a 71 00:04:26,680 --> 00:04:31,120 Nobel Prize for his research on regulation and created a new 72 00:04:31,120 --> 00:04:34,720 area of study for economists known as the Economics of 73 00:04:34,720 --> 00:04:38,640 Regulation, which involved testing the outcomes and side 74 00:04:38,640 --> 00:04:42,920 effects of legislation. In recent months, we've seen 75 00:04:42,920 --> 00:04:46,320 tech entrepreneurs who not so long ago were demanding 76 00:04:46,320 --> 00:04:50,160 government bailouts for their uninsured bank deposits, saying 77 00:04:50,160 --> 00:04:52,920 that the government needs to get out of their way with 78 00:04:52,920 --> 00:04:56,760 regulation, which slows down the innovative fintech they've 79 00:04:56,760 --> 00:04:59,800 invested in. So let's look at the costs and 80 00:04:59,800 --> 00:05:03,920 benefits of regulation and how the regulatory environment could 81 00:05:03,920 --> 00:05:07,360 be improved. There's a long history of waves 82 00:05:07,360 --> 00:05:10,280 of regulation followed by deregulation. 83 00:05:10,560 --> 00:05:14,080 Big scandals often have provided the catalyst for new 84 00:05:14,080 --> 00:05:17,520 regulations, and then the realization that the rules are 85 00:05:17,520 --> 00:05:21,520 possibly excessive has caused them to be rolled back in 86 00:05:21,520 --> 00:05:24,480 finance. The 1933 Glass Steagall 87 00:05:24,480 --> 00:05:27,880 provisions, which separated commercial and investment 88 00:05:27,880 --> 00:05:31,600 banking, came in the wake of the 1929 crash. 89 00:05:32,200 --> 00:05:37,200 The 2002 Sarbanes-Oxley Act was a reaction to the Enron and 90 00:05:37,200 --> 00:05:41,560 Worldcom scandals. Dodd Frank was enacted in 2010 91 00:05:41,560 --> 00:05:47,360 after the 2008 financial crisis. Good regulation can bring all 92 00:05:47,360 --> 00:05:50,720 sorts of benefits. Owning stocks can grow people's 93 00:05:50,720 --> 00:05:54,600 wealth and Dr. economic growth. Yet the level of equity 94 00:05:54,600 --> 00:05:58,760 ownership, especially outside of the United States, is less than 95 00:05:58,760 --> 00:06:01,600 what financial theory would consider optimal. 96 00:06:02,040 --> 00:06:07,560 A2019 paper from the University of Chicago analysed data from EU 97 00:06:07,560 --> 00:06:12,120 countries and found that better regulation on insider trading 98 00:06:12,120 --> 00:06:15,520 and market manipulation, along with better consumer 99 00:06:15,520 --> 00:06:19,880 protections, prompted households to increase their average equity 100 00:06:19,880 --> 00:06:23,880 ownership significantly. When investors feel that they'll 101 00:06:23,880 --> 00:06:27,800 be treated fairly, they're more likely to invest, and so a good 102 00:06:27,800 --> 00:06:32,000 regulatory framework is good for both investors and businesses 103 00:06:32,000 --> 00:06:36,320 seeking investment. If some regulation is good, then 104 00:06:36,320 --> 00:06:40,440 how much regulation is too much and what should be regulated 105 00:06:40,840 --> 00:06:44,400 well, Milton Friedman, who along with George Stigler was one of 106 00:06:44,400 --> 00:06:48,200 the leaders of the Chicago School of Economics, argued for 107 00:06:48,200 --> 00:06:51,520 minimal government intervention in markets, saying that 108 00:06:51,520 --> 00:06:55,640 regulation is only needed in situations where it's not 109 00:06:55,640 --> 00:07:00,000 feasible for the market to force individuals to pay for the costs 110 00:07:00,040 --> 00:07:04,400 they impose on others. He argued that this mostly 111 00:07:04,400 --> 00:07:08,200 occurs in situations where property rights are vague or 112 00:07:08,200 --> 00:07:12,200 diffuse, and it's almost impossible to make them precise. 113 00:07:12,600 --> 00:07:16,040 In Free to Choose, Friedman argued in favour of 114 00:07:16,040 --> 00:07:21,000 environmental taxes instead of environmental regulation, saying 115 00:07:21,000 --> 00:07:24,360 the preservation of the environment and the avoidance of 116 00:07:24,360 --> 00:07:27,760 undue pollution are real problems where the government 117 00:07:27,760 --> 00:07:32,280 has an important role to play. He argued, though, that instead 118 00:07:32,280 --> 00:07:35,280 of regulation, the best way for a government to deal with 119 00:07:35,280 --> 00:07:39,960 pollution is to impose a tax on polluters that's sufficient to 120 00:07:39,960 --> 00:07:42,680 minimize the amount of pollution that occurs. 121 00:07:43,080 --> 00:07:46,880 When presented with the example of thalidomide, a drug which was 122 00:07:46,880 --> 00:07:50,520 widely prescribed in Europe but had not been approved in the 123 00:07:50,520 --> 00:07:54,040 United States, which caused severe birth defects in 124 00:07:54,040 --> 00:07:57,920 thousands of children, as an example of how strict US 125 00:07:57,920 --> 00:08:02,000 regulation had paid off. He argued that of course it's 126 00:08:02,000 --> 00:08:05,800 desirable that the public be protected from unsafe and 127 00:08:05,800 --> 00:08:09,640 useless drugs, but that this needs to be balanced against the 128 00:08:09,640 --> 00:08:13,880 need that drugs also be made available to those who need them 129 00:08:13,880 --> 00:08:16,640 as quickly and cost effectively as possible. 130 00:08:17,120 --> 00:08:21,120 He argued that it's easier to count the lives saved by a bad 131 00:08:21,120 --> 00:08:25,360 drug being delayed than the lives lost when good drugs take 132 00:08:25,360 --> 00:08:27,840 years longer than necessary to approve. 133 00:08:28,280 --> 00:08:32,600 His point was that even seemingly good regulations still 134 00:08:32,600 --> 00:08:36,640 have costs associated with them. I'll put a link to his 135 00:08:36,640 --> 00:08:39,840 discussion in the description as he makes some really good 136 00:08:39,840 --> 00:08:42,880 points. The point here isn't that the 137 00:08:42,880 --> 00:08:47,280 FDA should be shut down, it's just that with any rules there 138 00:08:47,280 --> 00:08:51,040 are trade-offs which are often missed by the people who are 139 00:08:51,040 --> 00:08:54,560 either really pro or really anti regulation. 140 00:08:54,840 --> 00:08:58,720 The real world tends to be pretty complicated when they 141 00:08:58,720 --> 00:09:02,080 work well. Governments make laws to protect 142 00:09:02,080 --> 00:09:06,200 people from harmful things that they can't prevent on their own. 143 00:09:06,480 --> 00:09:10,880 Examples that matter to everyone are food safety and food hygiene 144 00:09:10,880 --> 00:09:15,320 regulations, where individuals can't reasonably know how the 145 00:09:15,320 --> 00:09:19,000 food they buy at a supermarket or restaurant has been treated 146 00:09:19,000 --> 00:09:22,160 before they buy it. Sure, if we eat something that 147 00:09:22,160 --> 00:09:25,360 makes us sick, we won't return to the shop or restaurant where 148 00:09:25,360 --> 00:09:28,080 we bought it. But there are many food outlets 149 00:09:28,160 --> 00:09:31,640 that deal with passing trade rather than regular customers. 150 00:09:31,840 --> 00:09:35,600 And to quote Milton Friedman, it's not feasible for the market 151 00:09:35,600 --> 00:09:39,120 to force these businesses to pay for the costs they impose on 152 00:09:39,120 --> 00:09:41,960 others. So we need food inspectors to 153 00:09:41,960 --> 00:09:46,080 make sure our food is hygienic. I don't have to give much 154 00:09:46,080 --> 00:09:49,240 thought to the quality of the food that I buy where I live, 155 00:09:49,520 --> 00:09:53,400 but when I go on holiday and get sick after eating out, I feel 156 00:09:53,400 --> 00:09:57,320 glad to not have to spend my day worrying about issues like that. 157 00:09:57,600 --> 00:10:02,040 People constantly getting sick is also a drag on an economy as 158 00:10:02,040 --> 00:10:06,200 it reduces worker productivity. There are, on the other hand, 159 00:10:06,200 --> 00:10:10,800 regulations that deliver next to no net social value and 160 00:10:10,800 --> 00:10:14,800 undermine productivity because the time and money spent on 161 00:10:14,800 --> 00:10:18,680 understanding and accommodating them could be put to much better 162 00:10:18,680 --> 00:10:21,480 use. George Stigler's paper The 163 00:10:21,480 --> 00:10:26,760 Theory of Economic Regulation in 1971 changed the way that people 164 00:10:26,760 --> 00:10:30,920 thought about regulation from something that emerged naturally 165 00:10:30,920 --> 00:10:35,160 due to the existence of market failures to instead sometimes 166 00:10:35,160 --> 00:10:38,880 being something sought out by businesses with the goal of 167 00:10:38,880 --> 00:10:42,000 erecting barriers against potential competitors. 168 00:10:42,440 --> 00:10:46,560 We see this today with the big crypto and AI firms actively 169 00:10:46,560 --> 00:10:49,800 seeking government regulation, which might seem quite 170 00:10:49,800 --> 00:10:52,520 surprising. While they say that they want 171 00:10:52,520 --> 00:10:56,760 regulation to protect the public from bad actors, Stigler might 172 00:10:56,760 --> 00:11:00,760 argue that they want regulation that they can easily comply 173 00:11:00,760 --> 00:11:04,080 with, but that start up competitors will find really 174 00:11:04,080 --> 00:11:08,240 expensive and which may reduce competition, giving the big 175 00:11:08,240 --> 00:11:13,400 firms monopoly like powers. Stiegler argued that one of the 176 00:11:13,400 --> 00:11:17,600 reasons that regulation fails is that regulators end up being 177 00:11:17,600 --> 00:11:21,680 captured and dominated by large monied interests who can 178 00:11:21,680 --> 00:11:24,560 influence regulation to work in their favour. 179 00:11:24,800 --> 00:11:29,520 This idea prompted economists to analyse regulations just like 180 00:11:29,520 --> 00:11:32,760 any other economic problem, where they build models to 181 00:11:32,800 --> 00:11:37,440 analyse the outcomes, often finding that regulations don't 182 00:11:37,440 --> 00:11:41,920 have the desired effect. This type of analysis led to the 183 00:11:41,920 --> 00:11:46,040 discovery that people take greater risks in cars that are 184 00:11:46,040 --> 00:11:48,480 safer. If you know your brakes won't 185 00:11:48,480 --> 00:11:52,400 lock up in an emergency, you might drive closer to the car in 186 00:11:52,400 --> 00:11:55,680 front of you. The skydiver Bill Booth might 187 00:11:55,680 --> 00:11:59,480 have explained this best when he said the safer skydiving gear 188 00:11:59,480 --> 00:12:03,840 becomes, the more chances skydivers will take in order to 189 00:12:03,840 --> 00:12:10,240 keep the fatality rate constant. In 1976, Sam Peltzman built on 190 00:12:10,240 --> 00:12:14,680 Stiglers ideas, suggesting that regulators bowed not only to 191 00:12:14,680 --> 00:12:18,840 industry, but that they also leaned towards decisions that 192 00:12:18,840 --> 00:12:22,640 optimize political support from groups that have an interest in 193 00:12:22,640 --> 00:12:26,440 regulation. He argued that regulators went 194 00:12:26,440 --> 00:12:29,960 through cycles of creating rules and enforcing them more 195 00:12:29,960 --> 00:12:34,280 strictly, but could then be convinced to ease up over time. 196 00:12:34,640 --> 00:12:39,200 Regulation and deregulation, he argued, are a natural part of 197 00:12:39,200 --> 00:12:43,840 the political process. The Merchant Marine Act of 1920, 198 00:12:43,840 --> 00:12:47,480 which is better known as the Jones Act, says that every time 199 00:12:47,480 --> 00:12:51,640 you want to send something from one US port to another US port, 200 00:12:51,800 --> 00:12:56,320 it must travel on a ship built in America, staffed by Americans 201 00:12:56,360 --> 00:13:00,400 and owned by Americans. The ship has to be mostly built 202 00:13:00,440 --> 00:13:04,880 of American components, too. It provides one of the best 203 00:13:04,880 --> 00:13:08,360 examples of the law of unintended consequences. 204 00:13:09,080 --> 00:13:12,920 The law was introduced over 100 years ago to protect the 205 00:13:12,920 --> 00:13:16,360 American shipbuilding industry and to ensure that there would 206 00:13:16,360 --> 00:13:20,200 be a ready supply of trained sailors in times of war or 207 00:13:20,200 --> 00:13:24,360 national emergency. Based on the outcomes, the Jones 208 00:13:24,360 --> 00:13:27,080 Act has been a failure on every front. 209 00:13:27,680 --> 00:13:29,880 Due to a lack of foreign competition. 210 00:13:30,120 --> 00:13:33,240 The ACT allowed American shipbuilders to push up their 211 00:13:33,240 --> 00:13:36,040 prices. American built coastal and 212 00:13:36,040 --> 00:13:40,680 feeder ships cost 6 to 8 times more than comparable foreign 213 00:13:40,680 --> 00:13:43,720 built ships. For this reason, very few 214 00:13:43,720 --> 00:13:46,360 American ships are built or purchased. 215 00:13:46,640 --> 00:13:49,880 The fact that the ships are so expensive means that it's 216 00:13:49,880 --> 00:13:54,600 cheaper to transport goods by rail or road. 1 alternative is 217 00:13:54,600 --> 00:13:58,560 to ship the goods to Mexico or Canada and then and transport 218 00:13:58,560 --> 00:14:02,080 them by road to their destination in the United States 219 00:14:02,280 --> 00:14:06,840 to work around the Jones Act. Americans pay vastly higher 220 00:14:06,840 --> 00:14:10,680 prices to move goods around their own country because of the 221 00:14:10,680 --> 00:14:14,840 act, and goods are particularly expensive in places like Hawaii 222 00:14:14,840 --> 00:14:18,000 and Puerto Rico, where they either have to choke down the 223 00:14:18,000 --> 00:14:21,680 higher shipping cost or import foreign made goods. 224 00:14:22,200 --> 00:14:26,680 The Jones Act incentivizes using more carbon intensive road and 225 00:14:26,680 --> 00:14:30,720 rail transportation, making it responsible for unnecessary 226 00:14:30,720 --> 00:14:34,840 environmental costs and unnecessary wear and tear on 227 00:14:34,840 --> 00:14:37,160 roads and bridges across the country. 228 00:14:37,640 --> 00:14:41,440 The Act additionally makes disaster relief during a crisis 229 00:14:41,440 --> 00:14:46,000 like a hurricane so difficult that presidents usually wave it 230 00:14:46,000 --> 00:14:49,240 for a few days to get lifesaving supplies delivered. 231 00:14:49,480 --> 00:14:54,440 In the aftermath of Hurricane Fiona in 2022, Puerto Ricans 232 00:14:54,440 --> 00:14:59,480 were in desperate need of fuel. ABP ship full of diesel anchored 233 00:14:59,480 --> 00:15:03,400 right offshore was unable to deliver it without presidential 234 00:15:03,400 --> 00:15:08,120 approval because of this 100 year old outdated and entirely 235 00:15:08,120 --> 00:15:12,720 pointless regulation. Well, at least it saved the US 236 00:15:12,720 --> 00:15:15,520 shipbuilding industry, right? No. 237 00:15:16,080 --> 00:15:19,680 The size of the US fleet has declined steadily since the 238 00:15:19,680 --> 00:15:24,200 introduction of the ACT and today there are only 93 ocean 239 00:15:24,200 --> 00:15:28,680 going Jones Act compliant ships. Typically, a ship has a total 240 00:15:28,680 --> 00:15:32,880 life expectancy of about 20 years, but excluding tankers, 241 00:15:33,080 --> 00:15:37,680 the Jones Act compliant fleet are on average 30 years old. 242 00:15:38,240 --> 00:15:41,680 With regard to military preparedness, the House Armed 243 00:15:41,680 --> 00:15:46,640 Services Committee was told in 2018 that the dwindling size of 244 00:15:46,640 --> 00:15:49,760 the domestic shipping fleet demands that the country 245 00:15:49,760 --> 00:15:54,400 reassess its approach to ensure that the US retains critical 246 00:15:54,400 --> 00:15:57,960 national security surge sealift capabilities. 247 00:15:58,600 --> 00:16:03,280 The Jones Act forces many U.S. states to buy commodities from 248 00:16:03,280 --> 00:16:07,400 abroad when they're domestically produced because of the high 249 00:16:07,400 --> 00:16:10,840 shipping costs. The average citizen of Hawaii 250 00:16:11,000 --> 00:16:16,320 pays $2000 per year more than they should have to because of 251 00:16:16,320 --> 00:16:20,520 the Jones Act, which benefits a few entrenched interests at 252 00:16:20,520 --> 00:16:23,360 great expense to the broader American public. 253 00:16:23,920 --> 00:16:27,000 If you believe that the new administration zeal for 254 00:16:27,000 --> 00:16:30,960 deregulation means that this law, which has failed on every 255 00:16:30,960 --> 00:16:34,200 front, will be on the chopping block, you'd be wrong. 256 00:16:34,480 --> 00:16:37,720 Both Trump and Biden have announced their support for the 257 00:16:37,720 --> 00:16:41,080 ACT because that's just the way politics works. 258 00:16:41,760 --> 00:16:46,200 The fact that laws like this are so hard to get rid of is exactly 259 00:16:46,200 --> 00:16:50,600 why citizens should worry about new regulations being introduced 260 00:16:50,680 --> 00:16:55,320 without a very good reason. As you would imagine, there is a 261 00:16:55,320 --> 00:16:59,760 lot of academic research on the impact of regulation on economic 262 00:16:59,760 --> 00:17:03,680 growth. A 2022 paper by David Reicher 263 00:17:03,880 --> 00:17:07,640 analyzed how a nation's regulatory quality, as measured 264 00:17:07,640 --> 00:17:11,280 by the World Bank's World Governance Indicators, affected 265 00:17:11,280 --> 00:17:15,359 its GDP along with its trade with the United States. 266 00:17:15,560 --> 00:17:17,880 He analysed 20 different countries. 267 00:17:18,040 --> 00:17:21,800 The highest regulatory quality was found in Singapore, followed 268 00:17:21,800 --> 00:17:25,440 by Australia and New Zealand, and the lowest regulatory 269 00:17:25,440 --> 00:17:28,840 quality was Argentina, followed by Egypt. 270 00:17:29,160 --> 00:17:33,080 There was a strong relationship between regulatory quality and 271 00:17:33,080 --> 00:17:37,040 productivity and the level of trade with the United States. 272 00:17:37,560 --> 00:17:41,280 Bruegel and Hahn found that countries with a more business 273 00:17:41,280 --> 00:17:45,320 friendly regulatory environment grew faster than those with more 274 00:17:45,320 --> 00:17:48,720 burdensome rules, and that improving from the worst 275 00:17:48,720 --> 00:17:52,800 quartile of business regulation to the best can increase a 276 00:17:52,800 --> 00:17:57,160 countries annual growth by 2.3 percentage points. 277 00:17:57,600 --> 00:18:01,480 An Italian paper looked at regional differences between 278 00:18:01,480 --> 00:18:05,680 Italian provinces, where regulatory quality can vary 279 00:18:05,680 --> 00:18:10,240 significantly, and found that local institutional quality 280 00:18:10,240 --> 00:18:14,320 positively affects rates of entrepreneurship and its impact 281 00:18:14,320 --> 00:18:17,120 is the strongest in high tech industries. 282 00:18:17,560 --> 00:18:21,760 This all makes sense, as what these papers find is that high 283 00:18:21,760 --> 00:18:26,000 regulatory quality can improve a country's productivity, lower 284 00:18:26,000 --> 00:18:29,120 the costs of production and raise the quality of goods 285 00:18:29,120 --> 00:18:31,200 produced. But when the amount of 286 00:18:31,200 --> 00:18:35,240 regulation becomes onerous, it starts to drive up compliance 287 00:18:35,240 --> 00:18:38,760 costs such that businesses become uncompetitive. 288 00:18:39,240 --> 00:18:43,040 Essentially, there's an optimal level of regulation where 289 00:18:43,040 --> 00:18:47,440 regulations that deliver little or no net social value undermine 290 00:18:47,440 --> 00:18:51,480 productivity as the time and money spent accommodating them 291 00:18:51,680 --> 00:18:56,240 could be put to better use. A paper by Coffee, McLaughlin 292 00:18:56,240 --> 00:19:00,920 and Pareto published in 2020 suggests that regulation in the 293 00:19:01,040 --> 00:19:04,440 US may have gotten too restrictive, as they find that 294 00:19:04,440 --> 00:19:08,440 had regulation have been held constant at its level since 295 00:19:08,440 --> 00:19:14,520 1980, the US economy would have been nearly 25% larger by 2012. 296 00:19:15,080 --> 00:19:18,920 I came across an excellent article by Ben Hopkinson earlier 297 00:19:18,920 --> 00:19:23,240 this week on how Madrid tripled the length of its metro system, 298 00:19:23,440 --> 00:19:27,120 both faster and cheaper than almost any other city in the 299 00:19:27,120 --> 00:19:29,720 world. The 12 year expansion made 300 00:19:29,720 --> 00:19:33,720 Madrids Metro system one of the world's fastest growing metro 301 00:19:33,720 --> 00:19:37,480 systems. A 35 mile extension in Madrid 302 00:19:37,640 --> 00:19:41,960 cost about the same as the 1 1/2 mile extension of the Seven 303 00:19:41,960 --> 00:19:46,040 Train line in New York. London's Jubilee Line extension, 304 00:19:46,240 --> 00:19:50,080 built at the same time as Madrid's expansion, cost nearly 305 00:19:50,080 --> 00:19:54,760 10 times more per mile. Some of the efficiency came from 306 00:19:54,760 --> 00:19:58,240 streamlining the political processes around getting the job 307 00:19:58,240 --> 00:20:01,160 done. Construction began right after 308 00:20:01,160 --> 00:20:05,200 an election, with elected officials aware that progress 309 00:20:05,200 --> 00:20:07,520 would likely be rewarded by voters. 310 00:20:07,720 --> 00:20:11,880 Extensions to the project were also scheduled within four year 311 00:20:11,880 --> 00:20:14,680 windows tied to the political cycle. 312 00:20:14,920 --> 00:20:18,960 The timelines were set such that elected officials could open the 313 00:20:18,960 --> 00:20:22,240 lines and stations right before the next election. 314 00:20:22,560 --> 00:20:26,920 If everything was completed on time, which incentivized them to 315 00:20:26,920 --> 00:20:31,760 get things done and stay on schedule to stay within budget, 316 00:20:32,000 --> 00:20:35,720 the project managers moved quickly, leaving less time for 317 00:20:35,720 --> 00:20:39,040 the project to be exposed to global shocks, inflationary 318 00:20:39,040 --> 00:20:41,680 pressures, or chopping and changing by different 319 00:20:41,680 --> 00:20:44,880 politicians, which all drive up costs. 320 00:20:45,320 --> 00:20:48,960 To speed up building, Madrid removed unnecessary 321 00:20:48,960 --> 00:20:52,120 environmental impact requirements, speed up the 322 00:20:52,120 --> 00:20:55,520 approval process, and worked around the clock to finish 323 00:20:55,520 --> 00:20:58,800 construction on time. Environmental evaluations 324 00:20:58,800 --> 00:21:03,400 weren't sidestepped, but impact assessments were abbreviated if 325 00:21:03,400 --> 00:21:07,400 the work was occurring in an already established urban area, 326 00:21:07,640 --> 00:21:11,440 as the impacts to nature would be lower and the long term 327 00:21:11,440 --> 00:21:15,080 environmental benefit of the project outweighed the need to 328 00:21:15,320 --> 00:21:17,880 analyse the CO2 impact of the digging. 329 00:21:18,480 --> 00:21:22,400 Approvals that would have taken two or three years in the UK or 330 00:21:22,400 --> 00:21:25,920 United States happened in five months in Madrid. 331 00:21:26,400 --> 00:21:30,520 In contrast, the British spent more than 100,000,000 lbs, which 332 00:21:30,520 --> 00:21:36,640 is $125 million on a kilometre long tunnel to protect the bats 333 00:21:36,720 --> 00:21:39,360 as part of the high speed rail construction. 334 00:21:39,600 --> 00:21:43,360 Despite there being no evidence that bats were at risk from the 335 00:21:43,360 --> 00:21:48,280 trains, the Madrid Metro company expedited construction with 336 00:21:48,400 --> 00:21:52,800 eight tunnel boring machines running 24 hours a day, which 337 00:21:52,800 --> 00:21:56,640 meant that the disruption, which might otherwise have taken 8 338 00:21:56,640 --> 00:22:00,480 years, only took three. The fast work also helped the 339 00:22:00,480 --> 00:22:04,040 public accept the noise and disruption as they quickly saw 340 00:22:04,040 --> 00:22:08,280 the benefit of new lines and stations opening up around them. 341 00:22:08,920 --> 00:22:13,400 In Madrid, the metro stations were standardised using copy and 342 00:22:13,400 --> 00:22:17,240 paste designs, which kept costs low and allowed for quick 343 00:22:17,240 --> 00:22:20,480 construction. London's Jubilee Line extension, 344 00:22:20,480 --> 00:22:23,720 on the other hand, used different architects for each 345 00:22:23,720 --> 00:22:27,080 station and several stations were shortlisted for 346 00:22:27,080 --> 00:22:30,800 architecture awards. But they were also a lot more 347 00:22:30,800 --> 00:22:34,600 expensive to construct, as each station was bespoke. 348 00:22:35,200 --> 00:22:39,640 In Madrid, new lines typically opened within three weeks of 349 00:22:39,640 --> 00:22:43,600 construction being completed. In contrast, London's Elizabeth 350 00:22:43,600 --> 00:22:49,760 line was completed in 2019 but wasn't fully opened until 2023 351 00:22:49,880 --> 00:22:53,760 because of the complex digital signalling technology used, 352 00:22:53,960 --> 00:22:57,200 which required three years of testing before the trains could 353 00:22:57,200 --> 00:23:00,840 be opened to the public. This switching system may be 354 00:23:00,840 --> 00:23:03,840 better, but three years is a long wait. 355 00:23:04,520 --> 00:23:08,320 The take away from this video is that it's an oversimplification 356 00:23:08,320 --> 00:23:12,560 to say that all regulation is good, or that all regulation is 357 00:23:12,560 --> 00:23:15,400 bad. Regulations are usually put in 358 00:23:15,400 --> 00:23:19,720 place for good reasons, but over time it makes sense to revisit 359 00:23:19,720 --> 00:23:23,400 them, analyse the outcomes and see if the regulations are 360 00:23:23,400 --> 00:23:27,000 providing the benefits that were promised and if they're causing 361 00:23:27,000 --> 00:23:29,280 any unforeseen problems or costs. 362 00:23:29,720 --> 00:23:33,200 Good regulation delivers benefits that outweigh it's 363 00:23:33,200 --> 00:23:37,560 societal and economic costs and is administered efficiently and 364 00:23:37,560 --> 00:23:40,080 fairly. Excessive regulation, on the 365 00:23:40,080 --> 00:23:43,440 other hand, does little to serve the public interest while 366 00:23:43,440 --> 00:23:47,560 creating financial costs and frustration for businesses and 367 00:23:47,560 --> 00:23:50,520 the public. When we look at the World Bank 368 00:23:50,520 --> 00:23:54,520 Regulatory Quality Index, the lowest ranked countries are 369 00:23:54,520 --> 00:23:58,320 places like North Korea, Venezuela and Zimbabwe where 370 00:23:58,320 --> 00:24:02,440 often one rule is put in place which causes a problem and then 371 00:24:02,440 --> 00:24:06,240 other rules are layered on top of it to fix that problem, 372 00:24:06,400 --> 00:24:09,920 causing even more problems and even more regulation. 373 00:24:10,120 --> 00:24:13,520 Soon there are rules about everything and no economic 374 00:24:13,520 --> 00:24:18,000 progress can take place. Elon Musk and Vivek Ramaswami 375 00:24:18,000 --> 00:24:21,440 wrote an op-ed for the Wall Street Journal where they argued 376 00:24:21,440 --> 00:24:25,440 that the new US administration could just halt the enforcement 377 00:24:25,440 --> 00:24:28,800 of environmental rules that are deemed unnecessary. 378 00:24:29,280 --> 00:24:32,920 This would liberate individuals and businesses from illicit 379 00:24:32,920 --> 00:24:37,640 regulations never passed by Congress and stimulate the US 380 00:24:37,640 --> 00:24:41,040 economy, they wrote. I don't agree that this would do 381 00:24:41,040 --> 00:24:44,400 anything to help businesses, as companies still have an 382 00:24:44,400 --> 00:24:47,800 obligation to comply with regulation whether it's being 383 00:24:47,800 --> 00:24:52,040 enforced or not, but it would give an advantage to the least 384 00:24:52,040 --> 00:24:55,440 ethical businesses who are most willing to break the law. 385 00:24:56,040 --> 00:25:00,240 This is a third world approach to regulation, where rules exist 386 00:25:00,440 --> 00:25:03,680 but certain people, often those with political connections, 387 00:25:03,800 --> 00:25:07,200 choose not to follow them. I don't think that this would 388 00:25:07,200 --> 00:25:10,960 work in the United States either, as even if an agency 389 00:25:10,960 --> 00:25:15,800 decides not to enforce a rule, citizens can still sue companies 390 00:25:15,920 --> 00:25:19,880 for violations when States and federal regulators fail to. 391 00:25:20,400 --> 00:25:25,000 The only real way to reduce red tape is to eliminate or improve 392 00:25:25,000 --> 00:25:27,920 the regulations. Thanks for tuning into this 393 00:25:27,920 --> 00:25:30,520 week's podcast. If you found it interesting, I 394 00:25:30,520 --> 00:25:33,440 would really appreciate you sending a link to a friend or 395 00:25:33,440 --> 00:25:37,240 sharing it on social media, as that's how podcasts grow. 396 00:25:37,480 --> 00:25:39,960 Have a great week and talk to you again soon. 397 00:25:40,080 --> 00:25:40,400 Bye.