Regulations are Best When They Regulate What is Not Done, Not What is Done

Regulations serve as circuit breakers for economic activity: If too restrictive, power can’t flow to the system. If too weak, power surges can overload and damage the system.

Those staunchly positioned on either the right or left of the political spectrum agree there are two issues at the core of the debate to find the best path to a strong and expanding American economic future: taxes and regulation.

When it comes to regulation, those of the conservative bent believe that the only thing standing in the way of a robust economic recovery is the virtual elimination of all government regulations on business so business can be “freed” to do what it does best, which is to stimulate jobs and opportunity. Those holding this philosophical viewpoint are the modern embodiment of Adam Smith’s (The Wealth of Nations, 1776) core belief that there is an “invisible hand” that naturally regulates all economic activity to the benefit of the greatest number. On the other hand, those on the left are just as passionate in their belief that America is being damaged by lax and ineffective regulation that allows corporations to run amok in a frenzied drive to achieve profits at any cost. They fear that if Smith’s “invisible hand” is left unfettered, it will encourage “sleight of hand” misdeeds by corporations, which will be to the detriment of the greatest number.

While there is a modicum of truth in the positions of both the right and left, when taken to the extreme – as many do – it exhibits a naiveté and simplistic thinking that is not aligned with reality. History is brimming with examples – large and small – of abuses that permeate economic activity when it is unencumbered by any type of regulation.

The Lessons of the Great Depression

In response to unregulated bank activities that were shown to be one of the causes of the Great Depression, Congress passed the Banking Act of 1933. In simple terms, this legislation, better known as the Glass-Steagall Act, established the FDIC and introduced banking reforms intended to prohibit certain speculative activities, i.e. investment banking and prevent banks from becoming “too big to fail.” More than 9,000 banks failed during the 1930s and millions lost their entire savings. (That’s Sen. Carter Glass to the left of FDR in the white suit and Rep. Henry Steagall on the right).

During the following 36 years, until the regulations were repealed in 1999, not one large bank failed; and any damage caused by those smaller banks that failed was isolated to the local community.  It took less than 10 years after the repeal of Glass-Steagall for the activity of banks to become the catalyst for another economic meltdown, causing federal regulators to pump tens of billions of dollars into the nation’s leading financial institutions fearing their failure would ruin the entire financial system. Regulations can also have a positive impact economic activity on a smaller scale. One has to wonder how many consumers were ripped off by used car salesmen before regulations were put in place to prohibit the “spinning” of odometers and cramming bananas into weary transmissions.

On the flip side, out the thousands of federal and state regulations that have mushroomed over the past few decades it would be laughable – if not so serious – to count the number of inane regulations that serve no purpose other than to give bureaucrats power to decide what is best for us and to inhibit the growth of business. In 1936 The Federal Register (a compilation of federal regulations) was about 2,600 pages long. Today the same register exceeds 80,000 pages; add to that all the state and local regulations in place and you can understand why starting or growing a business has become akin to attempting to roller-blade through a swamp. With the cornucopia of incongruous regulations on the books today, it is easy to get the feeling that our economy is now run by bureaucrats rather than entrepreneurs.

Obviously the solution does not rest with the extremes of either the left or the right in the regulatory debate; it can only be found in the middle (a place today’s politicians seldom visit) with a clear understanding of the purpose, scope and objective of effective regulation. Dealing with regulations in a more nuanced way is complicated by the fact that many on each side confuse and interchange “laws” with “regulations.” Laws are in place to punish wrongdoing, while regulations are intended to prevent wrongdoing.

It may be helpful to think of regulations as a type of “circuit breaker” for economic activity: If too restrictive, then power can’t properly flow to the system. If they are too weak, then there is potential for power surges that can overload and damage the system.

The sole purpose of regulations should be to create a “level playing field” for all those involved in economic activity. This means providing the consumer with full disclosure of the product or service being offered, so an intelligent, free-market decision can be made. The idea of a level playing field also precludes the regulation or the bureaucrat enforcing it from assuming the power to decide what is best for the consumer. And in no less fashion, a level playing field means that enterprise must be free to innovate, compete and profit without inappropriate government interference or unfair competition.

This concept of a level playing field is based on the philosophy of assuring a balanced “moral economy.” Seeking to achieve a “moral economy” is not an effort to limit or inhibit the potential for opportunity, growth and profit; instead it evolves out of the principle that no person, business or corporation is entitled to unjust enrichment at the expense of the public or their competitors. Private property – like free speech – does have clearly defined rights that should be respected and protected, but it still has to ultimately yield to the larger good.

Another aspect of a “level playing field” is assuring the physical safety of the consumer, especially when there is a lack of ability or opportunity to do so for themselves. For example, when someone purchases meat, it is impossible – without effective regulation – to be assured the meat is safe to eat. When we step on an airplane we are literally putting our life in the hands of federally-regulated pilots and mechanics of the airline. The dismal safety record of Russia and a number of other countries with lax flight safety regulations clearly demonstrates the value and necessity of effective regulation. Of course, this can be, and unfortunately often is taken to extremes as well, when regulations require companies to warn us not to eat light bulbs or that the coffee they are serving may be hot.

There is an often-ignored side to regulation as well. No activity offers more potential damage to the notion of an efficient, fair and equitable economic system than unfair competition. Not only should regulations seek to provide a level playing field for interaction between the consumer and the business enterprise, but equally as important – if not more so – is the assurance that each business enterprise has an evenhanded opportunity to fairly compete in the market. Unfair competition is, in the long run, more of a threat to free economic opportunity and innovation than even the most ludicrous of regulations.

And the Moral of the Story …

There is no more obvious evidence of illogical and shallow thinking than when one parrots the simplistic notion that all would be well in the economy if only the government would eliminate regulations and “get off the backs of business and let them do what they do best.” (To see this philosophy in action one needs only look to what happened in Russia after the fall of the Soviet Union.) Equally as mendacious is the belief that regulations offer government the power to successfully mandate economic growth and opportunity. (To see this philosophy in action one needs only look at the stagnation of the Russian economy during the era of the Soviet Union.)

The balance between the left and the right in the battle over government regulation rests with the acceptance that government is not a player, but an arbitrator on the field of economic activity. Only when government is used to create a level playing field for all participants will the free market be free to do what it does best.

Leave a Reply

Your email address will not be published. Required fields are marked *