Last week we talked about some of the wackier laws and
regulations in Argentina, which is considered to be one of the
most regulated economies in the world, with rules about pretty
much everything. People in the comments section
mostly agreed with the requirement to put a hat on your
horse on hot days, mostly because they liked the look.
But many of the other regulations that built up in
Argentina over decades of populist rule only serve to slow
down economic activity and impose unintended costs on
society. Argentina shouldn't be singled
out too much for its wacky rules, though.
There are strange rules and regulations all over the world.
The Salmon Act of 1986 makes it a jailable offence to handle a
salmon in a suspicious, vicious manner.
In the UK, Russia, Belarus and Kazakhstan made it illegal to
wear Lacy underwear a few years ago, and in Japan it's illegal
to be fat. Or at least companies are
required to measure the wastes of their employees, and if
they're too large and don't lose weight in the timely manner, the
companies can be fined. I'm not sure if there's an
exemption for sumo wrestlers or not.
I'll have to look that up. In Wyoming, any new public
building being constructed must have art displayed valued at 1%
of the building's costs. The artwork, of course, has to
be approved as art by an advisory panel of community
representatives. The Nickelback law in Canada
requires Canadian radio stations to ensure that at least 50% of
the popular music that they play is Canadian content.
Many people feel that this law has led to the Canadian people
being confused about the meaning of the word ironic.
In 2009, Christopher Hitchens, angered by excessive regulation
in New York under Mayor Bloomberg, wrote that there are
laws that are not possible to obey, that nobody can respect,
and that are enforced by arbitrary power.
He argued in his Vanity Fair article that the essence of
tyranny is not iron law, it's capricious law.
He then spent the day breaking pointless laws in New York.
He sat on an upended milk crate, putting his bag next to him on a
subway seat, paused to adjust his shoe on a subway step, fed
pigeons in Central Park, had a cigarette in a town car,
attempted to put a plastic frame on a car license plate, and rode
a bicycle without keeping his feet on the pedals at all times.
He pointed out in his article that no sane New Yorker would
occupy an extra subway seat with their bag when the subway was
crowded, as their fellow passengers would likely
discipline them. He also pointed out that on a
crowded train, there's no room for an inspector to walk around
handing out tickets. Thus, in real life, you'd only
get ticketed for doing this when there are plenty of spare seats
available. For obvious reasons, no one
would sit blocking the subway stairs during rush hour either.
But he wrote that a pregnant woman had been ticketed for this
offence a few months earlier. When overcome with exhaustion,
it might have been more reasonable for the officer to
have offered her assistance, but that's not how things worked
out. It is, of course, easy enough
for me to dig through the Internet looking for funny
regulations, But just because some exist doesn't mean that all
regulation is pointless. Excessive regulation, which we
often call red tape, stands in contrast to justified
regulation, where social benefits outweigh social costs.
Up until the 1960's, the conventional wisdom was that if
there was a market problem, government regulation could and
should step in and fix it. Policy makers and economists
assumed that the new laws, once passed, had their desired
effect. In 1962, this all changed when a
paper by Stiegler and Friedland analysed the effect of
regulation on electricity prices and found that government
regulation hadn't lowered electricity prices nearly as
much as expected. George Stigler went on to win a
Nobel Prize for his research on regulation and created a new
area of study for economists known as the Economics of
Regulation, which involved testing the outcomes and side
effects of legislation. In recent months, we've seen
tech entrepreneurs who not so long ago were demanding
government bailouts for their uninsured bank deposits, saying
that the government needs to get out of their way with
regulation, which slows down the innovative fintech they've
invested in. So let's look at the costs and
benefits of regulation and how the regulatory environment could
be improved. There's a long history of waves
of regulation followed by deregulation.
Big scandals often have provided the catalyst for new
regulations, and then the realization that the rules are
possibly excessive has caused them to be rolled back in
finance. The 1933 Glass Steagall
provisions, which separated commercial and investment
banking, came in the wake of the 1929 crash.
The 2002 Sarbanes-Oxley Act was a reaction to the Enron and
Worldcom scandals. Dodd Frank was enacted in 2010
after the 2008 financial crisis. Good regulation can bring all
sorts of benefits. Owning stocks can grow people's
wealth and Dr. economic growth. Yet the level of equity
ownership, especially outside of the United States, is less than
what financial theory would consider optimal.
A2019 paper from the University of Chicago analysed data from EU
countries and found that better regulation on insider trading
and market manipulation, along with better consumer
protections, prompted households to increase their average equity
ownership significantly. When investors feel that they'll
be treated fairly, they're more likely to invest, and so a good
regulatory framework is good for both investors and businesses
seeking investment. If some regulation is good, then
how much regulation is too much and what should be regulated
well, Milton Friedman, who along with George Stigler was one of
the leaders of the Chicago School of Economics, argued for
minimal government intervention in markets, saying that
regulation is only needed in situations where it's not
feasible for the market to force individuals to pay for the costs
they impose on others. He argued that this mostly
occurs in situations where property rights are vague or
diffuse, and it's almost impossible to make them precise.
In Free to Choose, Friedman argued in favour of
environmental taxes instead of environmental regulation, saying
the preservation of the environment and the avoidance of
undue pollution are real problems where the government
has an important role to play. He argued, though, that instead
of regulation, the best way for a government to deal with
pollution is to impose a tax on polluters that's sufficient to
minimize the amount of pollution that occurs.
When presented with the example of thalidomide, a drug which was
widely prescribed in Europe but had not been approved in the
United States, which caused severe birth defects in
thousands of children, as an example of how strict US
regulation had paid off. He argued that of course it's
desirable that the public be protected from unsafe and
useless drugs, but that this needs to be balanced against the
need that drugs also be made available to those who need them
as quickly and cost effectively as possible.
He argued that it's easier to count the lives saved by a bad
drug being delayed than the lives lost when good drugs take
years longer than necessary to approve.
His point was that even seemingly good regulations still
have costs associated with them. I'll put a link to his
discussion in the description as he makes some really good
points. The point here isn't that the
FDA should be shut down, it's just that with any rules there
are trade-offs which are often missed by the people who are
either really pro or really anti regulation.
The real world tends to be pretty complicated when they
work well. Governments make laws to protect
people from harmful things that they can't prevent on their own.
Examples that matter to everyone are food safety and food hygiene
regulations, where individuals can't reasonably know how the
food they buy at a supermarket or restaurant has been treated
before they buy it. Sure, if we eat something that
makes us sick, we won't return to the shop or restaurant where
we bought it. But there are many food outlets
that deal with passing trade rather than regular customers.
And to quote Milton Friedman, it's not feasible for the market
to force these businesses to pay for the costs they impose on
others. So we need food inspectors to
make sure our food is hygienic. I don't have to give much
thought to the quality of the food that I buy where I live,
but when I go on holiday and get sick after eating out, I feel
glad to not have to spend my day worrying about issues like that.
People constantly getting sick is also a drag on an economy as
it reduces worker productivity. There are, on the other hand,
regulations that deliver next to no net social value and
undermine productivity because the time and money spent on
understanding and accommodating them could be put to much better
use. George Stigler's paper The
Theory of Economic Regulation in 1971 changed the way that people
thought about regulation from something that emerged naturally
due to the existence of market failures to instead sometimes
being something sought out by businesses with the goal of
erecting barriers against potential competitors.
We see this today with the big crypto and AI firms actively
seeking government regulation, which might seem quite
surprising. While they say that they want
regulation to protect the public from bad actors, Stigler might
argue that they want regulation that they can easily comply
with, but that start up competitors will find really
expensive and which may reduce competition, giving the big
firms monopoly like powers. Stiegler argued that one of the
reasons that regulation fails is that regulators end up being
captured and dominated by large monied interests who can
influence regulation to work in their favour.
This idea prompted economists to analyse regulations just like
any other economic problem, where they build models to
analyse the outcomes, often finding that regulations don't
have the desired effect. This type of analysis led to the
discovery that people take greater risks in cars that are
safer. If you know your brakes won't
lock up in an emergency, you might drive closer to the car in
front of you. The skydiver Bill Booth might
have explained this best when he said the safer skydiving gear
becomes, the more chances skydivers will take in order to
keep the fatality rate constant. In 1976, Sam Peltzman built on
Stiglers ideas, suggesting that regulators bowed not only to
industry, but that they also leaned towards decisions that
optimize political support from groups that have an interest in
regulation. He argued that regulators went
through cycles of creating rules and enforcing them more
strictly, but could then be convinced to ease up over time.
Regulation and deregulation, he argued, are a natural part of
the political process. The Merchant Marine Act of 1920,
which is better known as the Jones Act, says that every time
you want to send something from one US port to another US port,
it must travel on a ship built in America, staffed by Americans
and owned by Americans. The ship has to be mostly built
of American components, too. It provides one of the best
examples of the law of unintended consequences.
The law was introduced over 100 years ago to protect the
American shipbuilding industry and to ensure that there would
be a ready supply of trained sailors in times of war or
national emergency. Based on the outcomes, the Jones
Act has been a failure on every front.
Due to a lack of foreign competition.
The ACT allowed American shipbuilders to push up their
prices. American built coastal and
feeder ships cost 6 to 8 times more than comparable foreign
built ships. For this reason, very few
American ships are built or purchased.
The fact that the ships are so expensive means that it's
cheaper to transport goods by rail or road. 1 alternative is
to ship the goods to Mexico or Canada and then and transport
them by road to their destination in the United States
to work around the Jones Act. Americans pay vastly higher
prices to move goods around their own country because of the
act, and goods are particularly expensive in places like Hawaii
and Puerto Rico, where they either have to choke down the
higher shipping cost or import foreign made goods.
The Jones Act incentivizes using more carbon intensive road and
rail transportation, making it responsible for unnecessary
environmental costs and unnecessary wear and tear on
roads and bridges across the country.
The Act additionally makes disaster relief during a crisis
like a hurricane so difficult that presidents usually wave it
for a few days to get lifesaving supplies delivered.
In the aftermath of Hurricane Fiona in 2022, Puerto Ricans
were in desperate need of fuel. ABP ship full of diesel anchored
right offshore was unable to deliver it without presidential
approval because of this 100 year old outdated and entirely
pointless regulation. Well, at least it saved the US
shipbuilding industry, right? No.
The size of the US fleet has declined steadily since the
introduction of the ACT and today there are only 93 ocean
going Jones Act compliant ships. Typically, a ship has a total
life expectancy of about 20 years, but excluding tankers,
the Jones Act compliant fleet are on average 30 years old.
With regard to military preparedness, the House Armed
Services Committee was told in 2018 that the dwindling size of
the domestic shipping fleet demands that the country
reassess its approach to ensure that the US retains critical
national security surge sealift capabilities.
The Jones Act forces many U.S. states to buy commodities from
abroad when they're domestically produced because of the high
shipping costs. The average citizen of Hawaii
pays $2000 per year more than they should have to because of
the Jones Act, which benefits a few entrenched interests at
great expense to the broader American public.
If you believe that the new administration zeal for
deregulation means that this law, which has failed on every
front, will be on the chopping block, you'd be wrong.
Both Trump and Biden have announced their support for the
ACT because that's just the way politics works.
The fact that laws like this are so hard to get rid of is exactly
why citizens should worry about new regulations being introduced
without a very good reason. As you would imagine, there is a
lot of academic research on the impact of regulation on economic
growth. A 2022 paper by David Reicher
analyzed how a nation's regulatory quality, as measured
by the World Bank's World Governance Indicators, affected
its GDP along with its trade with the United States.
He analysed 20 different countries.
The highest regulatory quality was found in Singapore, followed
by Australia and New Zealand, and the lowest regulatory
quality was Argentina, followed by Egypt.
There was a strong relationship between regulatory quality and
productivity and the level of trade with the United States.
Bruegel and Hahn found that countries with a more business
friendly regulatory environment grew faster than those with more
burdensome rules, and that improving from the worst
quartile of business regulation to the best can increase a
countries annual growth by 2.3 percentage points.
An Italian paper looked at regional differences between
Italian provinces, where regulatory quality can vary
significantly, and found that local institutional quality
positively affects rates of entrepreneurship and its impact
is the strongest in high tech industries.
This all makes sense, as what these papers find is that high
regulatory quality can improve a country's productivity, lower
the costs of production and raise the quality of goods
produced. But when the amount of
regulation becomes onerous, it starts to drive up compliance
costs such that businesses become uncompetitive.
Essentially, there's an optimal level of regulation where
regulations that deliver little or no net social value undermine
productivity as the time and money spent accommodating them
could be put to better use. A paper by Coffee, McLaughlin
and Pareto published in 2020 suggests that regulation in the
US may have gotten too restrictive, as they find that
had regulation have been held constant at its level since
1980, the US economy would have been nearly 25% larger by 2012.
I came across an excellent article by Ben Hopkinson earlier
this week on how Madrid tripled the length of its metro system,
both faster and cheaper than almost any other city in the
world. The 12 year expansion made
Madrids Metro system one of the world's fastest growing metro
systems. A 35 mile extension in Madrid
cost about the same as the 1 1/2 mile extension of the Seven
Train line in New York. London's Jubilee Line extension,
built at the same time as Madrid's expansion, cost nearly
10 times more per mile. Some of the efficiency came from
streamlining the political processes around getting the job
done. Construction began right after
an election, with elected officials aware that progress
would likely be rewarded by voters.
Extensions to the project were also scheduled within four year
windows tied to the political cycle.
The timelines were set such that elected officials could open the
lines and stations right before the next election.
If everything was completed on time, which incentivized them to
get things done and stay on schedule to stay within budget,
the project managers moved quickly, leaving less time for
the project to be exposed to global shocks, inflationary
pressures, or chopping and changing by different
politicians, which all drive up costs.
To speed up building, Madrid removed unnecessary
environmental impact requirements, speed up the
approval process, and worked around the clock to finish
construction on time. Environmental evaluations
weren't sidestepped, but impact assessments were abbreviated if
the work was occurring in an already established urban area,
as the impacts to nature would be lower and the long term
environmental benefit of the project outweighed the need to
analyse the CO2 impact of the digging.
Approvals that would have taken two or three years in the UK or
United States happened in five months in Madrid.
In contrast, the British spent more than 100,000,000 lbs, which
is $125 million on a kilometre long tunnel to protect the bats
as part of the high speed rail construction.
Despite there being no evidence that bats were at risk from the
trains, the Madrid Metro company expedited construction with
eight tunnel boring machines running 24 hours a day, which
meant that the disruption, which might otherwise have taken 8
years, only took three. The fast work also helped the
public accept the noise and disruption as they quickly saw
the benefit of new lines and stations opening up around them.
In Madrid, the metro stations were standardised using copy and
paste designs, which kept costs low and allowed for quick
construction. London's Jubilee Line extension,
on the other hand, used different architects for each
station and several stations were shortlisted for
architecture awards. But they were also a lot more
expensive to construct, as each station was bespoke.
In Madrid, new lines typically opened within three weeks of
construction being completed. In contrast, London's Elizabeth
line was completed in 2019 but wasn't fully opened until 2023
because of the complex digital signalling technology used,
which required three years of testing before the trains could
be opened to the public. This switching system may be
better, but three years is a long wait.
The take away from this video is that it's an oversimplification
to say that all regulation is good, or that all regulation is
bad. Regulations are usually put in
place for good reasons, but over time it makes sense to revisit
them, analyse the outcomes and see if the regulations are
providing the benefits that were promised and if they're causing
any unforeseen problems or costs.
Good regulation delivers benefits that outweigh it's
societal and economic costs and is administered efficiently and
fairly. Excessive regulation, on the
other hand, does little to serve the public interest while
creating financial costs and frustration for businesses and
the public. When we look at the World Bank
Regulatory Quality Index, the lowest ranked countries are
places like North Korea, Venezuela and Zimbabwe where
often one rule is put in place which causes a problem and then
other rules are layered on top of it to fix that problem,
causing even more problems and even more regulation.
Soon there are rules about everything and no economic
progress can take place. Elon Musk and Vivek Ramaswami
wrote an op-ed for the Wall Street Journal where they argued
that the new US administration could just halt the enforcement
of environmental rules that are deemed unnecessary.
This would liberate individuals and businesses from illicit
regulations never passed by Congress and stimulate the US
economy, they wrote. I don't agree that this would do
anything to help businesses, as companies still have an
obligation to comply with regulation whether it's being
enforced or not, but it would give an advantage to the least
ethical businesses who are most willing to break the law.
This is a third world approach to regulation, where rules exist
but certain people, often those with political connections,
choose not to follow them. I don't think that this would
work in the United States either, as even if an agency
decides not to enforce a rule, citizens can still sue companies
for violations when States and federal regulators fail to.
The only real way to reduce red tape is to eliminate or improve
the regulations. Thanks for tuning into this
week's podcast. If you found it interesting, I
would really appreciate you sending a link to a friend or
sharing it on social media, as that's how podcasts grow.
Have a great week and talk to you again soon.
Bye.