From the Archives: Beyond Regulation vs Deregulation (Issue #9) and Regulation, Incomes and Prosperity (Issue #15)

From the Archives: Beyond Regulation vs Deregulation (Issue #9) and Regulation, Incomes and Prosperity (Issue #15)

By Ivan Light

We American progressives aim to overcome the conservative drive to leave businesses free to do as they will. Public good cannot be served that way. But we also need to propose mechanisms to sort out desirable from undesirable regulations. Perhaps the conservative rant against regulations as such could be softened if there were some administrative court for businesses to plead their case against specific regulations.

I recently spent a half hour with a fellow from Philadelphia who owns a big commercial bakery there. His bakery makes and distributes bread and cakes to supermarkets in the region. This business owner spent that half hour telling me the problems his business faces with government regulation. He was quite indignant, and thought that the government regulation (county, state, and federal) was trying to compel him to sell for three dollars what it costs him four to produce; as a result, he was desperately considering what options he might have to shift production to the American South or even offshore. The undesirable result of government regulation was job loss in his opinion. Did I, a known liberal, really want that, he wondered?

As the discussion progressed, it became clear that to this business owner the political issue at stake was regulation vs. deregulation. That is, in his opinion, the government regulates his business now, the cost of regulation is unacceptably high, and the result has been the creation of financial incentives to relocate his business to a low-regulation environment someplace else. Well, what’s his solution? In his opinion, the solution is total deregulation of his industry, wholesale bakeries. The government should stop regulating his industry, said he, and just let him make bread and cake in Philadelphia as he best devises, subject only to the competition of other bakeries. This opinion echoes Ronald Reagan, who famously said “Government is not the solution; government is the problem.”

Of course, I could not explain away nor condone the various examples of maladroit government policy that bedevil the bakery industry in Philadelphia. What do I know about the wholesale bakery industry in Philadelphia? I had to agree with him that the examples of maladroit regulations that he offered sounded unwise and counterproductive, and should be abolished. In fact, I do agree with him about that. We should abolish regulations that unreasonably and counterproductively hamstring business, and the sooner the better! But that is not the same as agreeing that all economic regulation of industry is undesirable and should be abolished, which was his program. Wholesale abolition was his nostrum, and, as is well known, it’s also the nostrum peddled by conservatives.

Wrong issue! The issue is not pro-regulation vs. deregulation. The issue is not deregulation at all. Recall that lack of regulation led to the financial crisis of 2008; lack of regulation led to the BP oil spill in the Gulf of Mexico; lack of regulation gave us air and water pollution and global warming; lack of regulation brings spoiled meat and poisonous vegetables to supermarket shelves; lack of regulation brings unsafe drugs to pharmacy shelves. The USA cannot just abolish government regulation of business.

The real issue is how to regulate most effectively. Effective regulation eliminates or minimizes undesirable restraints on business while retaining the desirable restraints. Effective regulation involves sifting and sorting what is helpful and what is not. Americans do indeed want to prevent companies from dumping their toxic waste into our water supply, the cheapest disposal solution for them, and government regulation of business is how we prevent them from poisoning us. Is there an alternative method? On the other hand, we do not want to impose useless or excessive regulation on any business. Therefore, America’s problem is not regulation vs. deregulation as it’s commonly introduced in the media, by the right, and by the business owner from Philadelphia. The problem is how to improve regulation.

What can be done to focus public attention around the terminally boring issue of how best to regulate business? First, we need to explain again and again why this boring issue is important so that people can understand why they should care. That’s what I am doing right here. Hey, you, wake up! People should care about government regulation because their jobs, their health, and their children’s future are at stake. Second, we need to make clear that American progressives stand the for effective but minimal regulation of business. That is, we progressives advocate the absolute minimum of government regulation that is necessary to protect the public safety and health; but we absolutely insist on protecting the public against what economists call “negative externalities” e.g. the production of harmful by-products for the public as a result of commercial business. They frack; and as a result we drink toxic water. The public gets polluted water, and the oil companies get profits. Does this sound right to you?

How can we accomplish effective regulation? First, we can make more use of sunset provisions. All government regulations of business should expire automatically every three or four years unless renewed; a regulations commission should sit continuously, its function to examine expiring regulations, to weigh their desirability, and, if found undesirable, to allow them automatically to expire while recommending for renewal those regulations found to be in the public interest. If a sunset commission existed, the owner of the Philadelphia bakery would have an opportunity to explain why burdensome regulations should be abolished; and, by golly, he might be right. Second, commissioners should be protected against cooptation from the industries they purport to regulate by whatever devices we can set in place, including high salaries on the one hand, and imprisonment for corruption on the other. These are initial thoughts indeed, and they should and can be improved in Congress, but even these simple reflections shift the debate from “regulation vs. deregulation” to “how best to regulate.” This is the debate we Americans need to have.

Regulation, Incomes and Prosperity
Increased regulations are the price business pays for increased economic growth – conservatives don’t get it!

by Ivan Light

In a previous piece on the TAIPD website (Issue #9, April 2012) , I explained that conservative complaints about regulation have some validity. Government regulation of business can be and sometimes is excessive, ineffective, and counter-productive. It’s always a pain-in-the-neck for business that regulation tends to raise the price of goods and reduce employment in affected industries.

That acknowledged, as earlier explained, government regulation of business is nonetheless a necessary evil because the alternative of non-regulation is worse. In the same sense, brakes detract from a car’s performance, but they are nonetheless essential.

Non-regulation’s consequences include reckless pollution of air, water, and soil; diseased meat sold in supermarkets; dangerous & gas-guzzling automobiles; incompetent medical doctors; lying advertisements for bogus products; cigarettes sold to minors, and the list goes on. Add your favorites.
Insisting on regulation that protects the public welfare, liberals want to minimize (not eliminate) essential regulation of business, and seek as well to produce regulations that provide the beneficial consequence desired. Regulations that do not accomplish these goals should be promptly scrapped. I suggested previously the use of sunset commissions that review all government regulations every four or five years, and mark some for discontinuation and others for change.

There is another important point to make about government regulation of business. Context matters. A desirable public policy would call for greater equality of incomes than currently prevails. One method of achieving that is heavy taxation of very high incomes. Another method is light taxation of low incomes. The upshot of both in tandem is greater income equality than unfettered capitalism provides.
The advantages of enhanced equality of income are many, both social and economic, but I mention here only the systematic correction of capitalism’s inherent and invariant tendency to tilt the distribution of income toward the wealthy with calamitous results for employment. Left to themselves, market economies too generously reward the very affluent, and starve the ninety-nine percent. As John Maynard Keyes long ago pointed out, working people spend every dime they get; and the rich save their millions.

As a result, in a crisis of under-consumption, such as we now face, the 99 percent lack the financial wherewithal to buy the output of the economy. Goods are unsold. For example, many unemployed people live now under overcrowded conditions, homeless, or in dilapidated shelters, yet new homes stand empty. Unfortunately, the under housed cannot buy the empty homes so they remain empty, and the unemployed suffer overcrowding.

When working people lack money, because too much money belongs to the wealthy, the result is mass unemployment. To offset their low incomes, the American people overused credit two decades, borrowing the wherewithal to buy what their paychecks were too meager to purchase, especially houses; but that credit bubble burst in 2008. Now we starkly confront the fact that the affluent one percent with money will not spend it, and the ninety-nine percent lack sufficient money to purchase essentials.

What does the unequal division of incomes have to do with government regulation of business? Plenty. Consider this. Liberal administrations introduce an economic policy favoring enhanced government regulation of business plus a regime of increased equalization of incomes. The two policies come together, not separately. The enhanced income equality creates buyer demand in the marketplace, which makes it easier for business to sell its products. Business is able to sell because customers have the money to buy. Therefore, when a liberal, progressive, administration reduces inequality of income, they create consumer demand that advantages business. True, they also impose regulations that restrict business. These restrictions limit the range of products that can be brought to market, and tend to raise their price. But, the point is that business gets compensation for that added hurdle of regulation: increased consumer demand.

Now consider the conservative option. Under conservative administrations the opposite policies are put into place: enhanced inequality of income accompanies reduced regulation of business. So the conservative allows business immense latitude of action, ignoring the public interest, but reduces the ability of business to find buyers for its products. In an extreme case, business can bring whatever junk it likes to market (spoiled meat, dangerous or useless pharmaceuticals, unsafe & gas-guzzling vehicles, collapsing bridges, etc.) and recklessly despoil the environment, injuring the public’s health, but the marketplace still contains insufficient buyers with money in their patched and worn blue jeans. Do you want to buy horsemeat because it’s cheap and, lacking money, you have no other option? Or would you prefer to afford sirloin? Worse, buying the crummy stuff does not produce full employment because the public lacks the money to pay for it.

This is the awful choice the right offers America. Such an outcome injures business, workers, and consumers alike. Under such policies, Americans must live in polluted squalor, and unemployment continues to stalk the land. This is a dreadful outcome, and it explains why economic growth under liberal administrations in the last fifty years has been more than twice as rapid as economic growth under conservative administrations during the same period. Enhanced economic growth is the compensation business receives for enhanced regulation.