Economics 101 & Public Square

What Is The Harmful Side of Regulation?

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In my previous post, I outlined the biblical case for regulation. In Scripture, regulations serve as guidelines for how to live out the command to love one another beyond merely refraining from doing evil. The underlying principle of these regulations is protection.

But being sinful, flawed, and limited creatures, we regularly take a God-given idea and distort it to our own purposes, often at the expense of others. How might regulations be misused?

Insight on Regulation from Public Choice Theory

A branch of economics called public choice theory focuses on studying this very aspect of regulation. Dr. Anne Bradley describes public choice quite well in a previous post.

Public choice examines politics and policy making not as acts of community service conducted by public servants, but as the actions of self-interested people, given the tools of the state, and operating within a certain kind of institution.

For example, public choice theory would explain growing budget deficits in the following way:

  • Politicians want to be re-elected and they get re-elected by making voters happy.
  • One way to make voters happy is to give them services for which they do not have to pay.
  • Policy-makers are incentivized to borrow money to pay for the promised goods and services, and let future generations worry about paying it back.

While public choice is a relatively new field of study, its observations about human behavior are timeless. 1 Samuel 8 perhaps articulates it best:

This is what the king who will reign over you will claim as his rights: He will take your sons and make them serve with his chariots and horses….He will take your daughters to be perfumers and cooks and bakers. He will take the best of your fields and vineyards and olive groves and give them to his attendants….He will take a tenth of your flocks, and you yourselves will become his slaves. When that day comes, you will cry out for relief from the king you have chosen, but the LORD will not answer you in that day.

In this, Samuel warns that the king will press into his service the best people, the best land, and the best animals. He will use this to enrich himself and his supporters and eventually oppress the people to the point of slavery.

How does public choice theory act as an analytical lens of the modern regulatory state?

Modern Regulations

When thinking about regulation, it’s helpful to keep in mind that almost all regulations are advertised as being for public protection. Yet even this good intention can go beyond proper bounds if we’re not careful. Even in Jesus’ day, regulations became something much different in the hands of men, as we see in Matthew 15 where the Pharisees used regulations to exert power over people.

Political Power

Power still motivates regulators.

The way many in government advance professionally is by growing budgets and expanding power. Whether one is attracted to government service by the lust for power or one believes he or she can truly help people, the end result is often the same. Both motivations can lead to the quest for more money and influence.

Restricting the Market

Regulatory capture theory is a component of public choice theory. Capture theory predicts that any regulation will soon be captured by the industry it is regulating, since industry players have the highest level of interest in regulations. Through lobbying and political activity, they can influence the quality and scope of the regulation so that the piece of regulation soon becomes a tool of that industry to hurt competitors.

Examples of “captured” regulations include:

  • New admission standards to enter a profession that are more stringent than the standards current members faced,
  • Stricter environmental regulations on businesses and industry than older firms faced,
  • Grandfather clauses exempting current members from the new rules, and so on.

These new rules and requirements are always advertised as furthering public protection. Instead, many regulations primarily benefit older, more established firms by restricting the competition and increasing the established members’ wages and revenues.

Revenue Generation

Sometimes, complying with a regulation involves paying a fee, and this makes it more difficult for a would-be craftsman or business to apply for a license. Many of the regulatory boards are self-financing and the board keeps most of the fees generated by licensing and testing procedures. Many other regulation-related fees, however, go to the state general fund. These fees can make it hard for poorer, less-established people to start businesses and generate income and wealth.

There is a biblical case for some regulations, as pointed out in previous posts. But we must also remember that man is sinful, a notion that is consistent both with the Bible and public choice theory. If we are not careful, even the most well-intentioned regulations have the potential to serve the interests of the most powerful while harming innovation and small business.

How do we distinguish between harmful and helpful regulation? 

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