The Wrong Kind of Regulation

Howard Baetjer, economics lecturer at Towson University, is upset wtih regulations restricting or banning Uber and Lyft in some cities. Well, that's not quite right. Technically, he is upset with all government regulation. He explains this in an article for Reason Magazine titled Not All Regulation Is Bad.

Baetjer's thesis is that free markets are capable of self-regulation, thus government regulation is an unnecessary waste at best; an economic burden and a hinderance to freedom at worst.

So it seems that we are stuck: Government regulation almost always denies liberty and usually causes economic harm, but we want the regularity, predictability, and quality assurance that regulation is supposed to provide. Does that mean the best we can do is to accept government regulation but try to rein it in, to limit it, to reduce the harm it does?

No. It is a semantic error to assume that regulation means government regulation. In fact, there is no such thing as an unregulated free market, because markets free of government regulation are very closely regulated by the choices and actions of market participants. And market forces regulate quality and safety better than government agencies can.

In Baetjer's libertarian fantasy world, all individual decisions are made in a vacuum. Markets work because two people can always reach an agreement that benefits them both and has no adverse effects on anyone else.

But in the real world, it's never that simple.

There are many areas in which the goals of government regulation and market self-regulation are not the same. People want government regulation because it promises—in theory at least—to promote fairness and to limit the ability of powerful people to cause harm to others in order to enrich themselves.

This is why we have, for example, consumer protection laws and food safety laws. We don't want to allow a processed food plant to inject carcinogens into its products, or a manufacturer to smother children's toys with lead-based paint, or a restaurant let its employees prepare food with unwashed hands.

We also have laws prohibiting manufacturers from making blatantly false claims. We don't allow anyone to sell snake oil as as cure for gallstones, or to tout the health benefits of cigarettes, or to claim they've invented an environmentally-friendly styrofoam.

And we have laws regulating toxic waste and environmental pollutants produced as a byproduct of modern manufacturing methods.

We have turned to government solutions for these problems because experience tells us the market won't regulate itself in these areas.

To see how this might look in practice, let's extend an example from a video I've reviewed previously, from the libertarian Prager "University". If I got laid off from my job at Chrysler and decided to mow lawns for a living so I could afford steak dinners, I might look for a cheap mower to start out with, so as to reduce my up front costs, and maybe I'd find one that was a real gas guzzler, and that's why it's cheap. Yes, I'd have to pay more for gas down the line, but maybe I've done my calculations and determined I'll still come out ahead this summer and next. After that, who knows? Maybe I can find a different job by then, or failing that, maybe I can expand my lawnmowing service to the point where it's worthwhile to get a better mower.

But maybe there's an objection by the neighbor who has a daughter with asthma. It doesn't matter. The neighbor's daughter isn't part of this transaction; the market, consisting of myself and the cut-rate mower manufacturer, has determined this is a mutually beneficial transaction, and that's all that matters.

And even though government research suggests that leaving grass clippings on the lawn is the healthiest option for your yard, maybe some of my clients want the clippings bagged up and taken away. So maybe, in a world free of government regulation, I decide the easiest solution is to take the clippings home and burn them in my back yard. Yes, this will exacerbate the neighbor's daughter's health problems, but again, she's not part of the market.

Of course, she could be. Maybe, instead of burning the clippings, I could sell them to my neighbors and the neighbors can turn around and pay someone else to haul the clippings away. It's win-win: The neighbors' daughter is healthier, and I get extra income. If the neighbors think this is extortion, they can just opt out of the mowing economy and go back to the doctor.

* * *

Back in the real world, it's just as messy.

Uber and Lyft are at the forefront of a revolution in transportation. They provide a service that's high in demand and not otherwise met. It seems like cities would be foolish to impose regulations on these services. But if you delve into the details, you'll find that Lyft and Uber increase traffic congestion and carbon pollution, and fail to provide basic employee protections for their drivers. As far as the market is concerned, as long as the customers don't complain about the pollution, these things are not problems and don't need to be solved. If my hypothetical neighbor's daughter isn't a paying customer, she has no say. Market self-regulation doesn't care about her, because she's not participating in the market. That's why city governments are stepping in with their own form of regulation.

We could argue about what is the right level of government intervention, but to suggest that everyone is better off if the government ignores the problem, is simply to ignore the problem.

Baetjer pads his article with a couple of other examples, advocating market self-regulation replace government regulation in the banking and pharmaceutical industries. He notes that government research often slows the introduction of new treatments.

But he fails to note that 90 percent of all new medications ultimately fail the tests and are never introduced at all. (Does anyone remember thalidomide, widely used in Europe but blocked by the FDA in the United States?) If the market were left to self-regulate, there would be a lot of incentive to push these drugs on the market anyway, to recover the research costs if nothing else. And because of the placebo effect, a number of people would find even the least effective drug adequate to treat their conditions at least some of the time. Some patients would die from side effects, but they wouldn't be able to complain. So the incentives to market these drugs would be greater than the disincentives.

So there would be a glut of medicines for every condition. Would private organizations step up to evaluate the effectiveness of different treatments? Yes, if there was money to be made. Presumably, someone would pay for this information: Insurance companies might have an incentive to see their customers healthier in the shortest amount of time. Doctors might want to have an idea of the most effective treatment before giving it to their patients.

Would competition among raters lead to reduced costs? Not likely, as each competing agency would have to be at least as thorough as the federal government is today. There would be a lot of redundancy in their work, and we'd probably see disagreements in their results, and need a meta-agency rating the raters. We would see increased costs for health care. And ultimately these costs would be passed along to the patients. That's a win-win, too, because it grows the economy.

When it comes to bank regulations, Baetjer reminds us that government regulation did not prevent the Great Depression nor the more recent subprime meltdown.

Again Baetjer fails to dig into the details. Both the Great Depression and the subprime meltdown were preceded by periods of deregulation, in which the government tried to allow banks more leeway in the loans they made and services they offered, in an attempt to boost their profits. Ditto for the savings and loan (S&L) crisis of the late 1980s and early 1990s, preceded by deregulation of the S&L industry. And don't get me started on the financial crises of the 19th century before government regulation of the banking industry even began: the Panic of 1857, the Panic of 1873, the Panic of 1893. Maybe government banking regulations need to be revisited periodically, but history suggests they should not be abandoned.

If we lived in a libertarian dream world, where everybody could act in their own self interest without any unintended consequences, life would be a lot simpler and we wouldn't need government. Unfortunately, the real world does not work the way libertarians want it to. Government regulations, at their best, play a role in keeping us safe from each other.