Regulation: The Unnoticed Problem

June 19, 2013

Many agree on the importance of free enterprise, but perceptions vary on what exactly it is. Some think it is a system about money and how to make it, a method for how to foresee the ups and downs of Wall Street, the movement of interest rates, or the right time to buy a house. These are woefully inadequate and shallow understandings of the idea, but unfortunately they are widespread, says the Competitive Enterprise Institute (CEI).

  • Contrary to textbook models, real world markets are not static, predictable or perfectly efficient. Rather, they are dynamic, unpredictable and self-organizing.
  • Markets lead to economic progress because they encourage and test on-the-spot experimentation among millions of individuals. From this decentralized trial-and-error process come innovations and coordination that no single mind could have planned.
  • The institutions governing markets are crucial. Given that markets are so complex and ever changing, and given that people respond to incentives created by institutions, minor changes in market institutions can have far-reaching effects (both positive and negative) that are difficult to see and even harder to predict.

Public policies that pick winners or prescribe one-best-way solutions will tend to freeze markets and reduce innovation. The better role for public policy is to ensure underlying rules of the game that:

  • Maintain the openness and dynamism of already-established markets.
  • Encourage the evolution of decentralized, self-organizing markets where they do not yet exist.

In fact, regulations are a costly form of taxation. The burdens depend upon the skills of the firms covered in negotiating exemptions and agencies' decisions on the level and timing of enforcement (which allow agencies to lower resistance to their rules). Most importantly, the primary costs of regulation are not direct costs but rather opportunity costs -- the forgone wealth creating activities forgone because of regulation. Based on a Competitive Enterprise Institute study, the costs of federal regulations amount to 48 percent of the total federal budget.

Economic growth is being crushed by regulatory and other interventionist policies. Yet, while Congress finally seems to be becoming aware of the unsustainability of our current tax, spending and entitlement policy regime, the hidden and growing burdens of regulation have largely escaped attention.

Regulations must receive the attention they have long deserved. Toward that goal, CEI's new report details specific steps in that review process.

Source: "Avoiding the Regulatory Cliff: A Bipartisan Agenda to Restore Limited Government and Revive America's Economy," Competitive Enterprise Institute, June 12, 2013.

 

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