Government regulation is so persistent and so popular because the American public doesn’t understand why regulations can be harmful.
“Economic theory suggests that the vast majority of regulations are counterproductive, and many actually hurt the people they are intended to help,” Scott Sumner wrote for the Foundation for Economic Education.
The reasoning is simple: regulation increases costs for businesses, who usually pass those increased costs to consumers. Many of those regulations get approved without a thought to their economic input. Compliance costs for the IRS to hunt down tax evasion from Americans living abroad, for instance, might cost more than the net effect of tax evasion. Economically, it makes Americans worse off.
That doesn’t mean all regulations should be removed.
“Special market failures, such as monopoly power, externalities, and information asymmetry,” Sumner wrote, could require regulations, as well as “primarily environmental mandates (or taxes), and perhaps a few anti-trust rules.”
A regulation that stops a chemical company from dumping in the river and poisoning the local population’s drinking water isn’t one that’s on the chopping block. Economic concerns might be secondary to fairness (with tax evasion), environmental protection, or civic values that take precedent over economic efficiency.
Ill-considered regulations, however, can weigh heavily on economic value or other civic values. They can limit freedom of speech, economic innovation, self-defense, non-profit organizations, and long-term economic growth. The cumulative effect of regulations, favored because they purport to prevent a social ill, can have far-reaching unintended consequences. New rules that govern overtime pay has been sold as a raise for workers when in reality they could lower salaries and limit flexibility.
The harm is not so much in a desire to make the workplace safer, or protect clean drinking water, or solve social problems. The danger is in the methods used and the flippancy with which economic reality is ignored. Assuming that a new law will fix a problem is hubris, not a fix in reality.
