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Nov 22, 2010

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Dan Anderson-Little

Mike,
Good question about regulation vs. management. I think you are right about liberals and conservatives. As a way to see how we think about this, let me know which category you think these examples fall into:

Air pollution standards
Water pollution standards
Nutritional labeling
Banning Happy Meals
Putting warning signs on cigarettes
OSHA rules
NLRB (essentially protecting union rights)
Affirmative action and set asides for racial minorities
Criminalization of marijuana
Capping punitive damages for medical malpractice
Recalls on cars
Recalls on baby cribs

The devil, it seems to me, is in the details. I suspect that most people (except staunch libertarians) would favor some of those regulations/managements enumerated above, but not all of them. I also suspect that most people would finally have to admit that their preferences have to do with how these regulations/managements affect them directly. (Sort of like the people who want the government out of health care EXCEPT for their Medicare).

Can we develop a template or philosophy of regulation that would apply in most cases? Or is much or all of this driven by self-interest? I would be interested in your thoughts on this.

Dan

Michael W. Kruse

Dan this is a collection that would require some significant breakdown. For instance, pollution is the quintessential example of #2 in the article. Polluting the air or water imposes a substantial cost to those who most weren't a party the selling and buying of the polluting companies product. From a property rights standpoint, it can frequently be argued that your pollution is an uncompensated appropriation of my property (land and air) ... a type of theft and therefore not very free market. So regulation makes sure that potential polluters play fair. Depending on the issue, it could mean banning/limiting some production, taxing production, or other alternatives.

Warnings on cigarettes might meet #4. Consumers need to know the full costs they could encounter for purchasing the product.

NLRB and Affirmative Action could be seen as addressing anti-competitive behavior of businesses against labor or specific minority groups. The goal is not to privilege these groups but equalize competitive factors in the economy.

As you say, the devil is in the details. First it has to be established that something anti-competitive has emerged. Second, a strategy must be adopted to change the status quo. Frequently, there are unintended secondary consequences. A common example is imposing rent controls to make housing affordable. But rent controls mean landlords can't raise prices to capture what the market price is for their units. Meanwhile, tenants hang on to units subletting them to others, getting a profit above the rent control price. Landlords can't make enough money and let buildings deteriorate. In some extreme cases (Ex. Brooklyn, Detroit, Chicago), landlords resort to arson to destroy their buildings and collect the insurance. Developers cease building new units because they can't get the income. In short, the real cost of renting rises and the number of units decline under rent control. There is correlation between rent control measures and increased homelessness. Sometimes working with the market to develop solutions is better than working against the market with regulation. Does that make sense?

There are also some things government needs to do (or are at least preferable or them to do.) No one individual is going to build their own tornado early warning system, where they put out all the money but the whole neighborhood gets the benefit. It is better to have everyone contribute a small amount and have government provide such services.

Also, each of us benefits by everyone else being able to read and do math at a basic functional level. There are positive spillovers to all of society beyond the benefit received by individuals. If for no other reason, it facilitates our ability to engage in commerce with each other and vote about public policy. Therefore, investing in everyone receiving a basic education and requiring it has positive spillover that would not be achieved it were simply left optional. You might say some similar things about some aspects of health care. But again, I go back to the rent control example, it is critical to more prudent and less ideological about how to accomplish much of this.

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