Monday, May 2, 2016

The Opposite of Government Regulation Isn't Chaos; It's Choice

Among the ostensibly scary ideas promoted by libertarians is the cause of deregulation. For those on the left, this term comes with a substantial amount of political baggage for being associated primarily with the presidency of Ronald Reagan. And for almost all regular Americans, the concept has been tarnished by the financial crisis of 2008-2009, which many people believe was somehow caused by financial deregulation. There is basically no basis for this claim. But Americans needed a scapegoat, and our politicians naturally preferred to point fingers at a lack of government involvement in the economy, rather than an excess of such involvement.

In any case, the point is that deregulation has a bad image. And while much of this may be undeserved, part of it also stems from a failure of free market supporters to explain what this would look like in practice. Properly understood, deregulation is not about eliminating all rules and regulations for private businesses, and the ideal world is not one where businesses "regulate themselves" as critics often claim. Rather, the goal is to eliminate politically-imposed regulations and allow for customer preferences and competition to create standards and norms that may be desirable and maximize choice. In other words, what we want is a system of private regulation.

In a new article for the Foundation for Economic Education, Bob Murphy does an excellent job fleshing out what such system of private regulation would look like in practice, and he uses the room-sharing service, AirBnB, as a real world approximation. The whole piece is worth reading, but one part of his analysis in particular is worth elaborating on here.

Murphy suggests that we need to distinguish between two types of rules /regulations (emphasis in original):
...we can loosely define a sensible rule as one that may increase the final price to the renter, but only by providing more benefits that he or she would voluntarily pay for, if acting on the basis of complete knowledge and in one’s own long-run interest. 
In contrast, an absurd rule is one that forces owners to alter the mix of room attributes in a way that raises the total price more than the renter would be willing to pay for the increase in perceived value, even taking into account the initial lack of knowledge and the human foibles of shortsightedness and weak willpower.
So to make these definitions more intuitive, a sensible rule might be something like requiring all properties listed on AirBnB to be free from any rabid rat infestations. I've got nothing against rats, but just about everyone would likely prefer / expect to not have a rat as a roommate while on vacation. Moreover, it's the sort of thing that we also might not think to ask; rat-free is not commonly listed under amenities after all. It could raise the price of a room to ensure it's rat-free, but at least in a US context, it's tough to imagine someone would seek out the cheaper alternative.

Contrast this with something like a requirement to have all rooms have a queen-sized mattress or a private bathroom. These things may be nice to have, and they are standard features in every hotel I've ever stayed in. But they also raise the price considerably. And by the mere fact that the hostel industry can profitably exist--by providing low-cost lodging without either feature mentioned above--we know that at least some people are unwilling to pay a higher price for these features. Thus, under Murphy's framework, requiring such things would be an absurd rule.

This in turn offers an insight into why we should prefer private regulations over political ones. In a best case scenario for democracy, politicians will try to cater to the opinions of the majority. So assuming the district they live in is an affluent district or state, this might mean that a majority of people (or at least, of likely voters) would want a private bathroom in a hotel room or apartment. So when the topic of regulations comes up, the politician will call for private bathrooms to be required in all hotels. Indeed, if the politician wasn't just appealing to his affluent base, we can imagine him putting an egalitarian spin on it, something like, "I believe that, in the wealthiest country in the world, no family, no matter how poor, should be denied access to having their own bathroom and shower. We are a better country than that." Or, we could imagine a more conservative branding on it as well, with slogans such as, "Make America modest again," or, "Make America shower again."

So this noble reform gets passed into law, and all accommodations are now required to provide a private bathroom in each room. On its face, this sounds great, until we realize what really happened. Before, there were some people, whether because they were poor or just oddly frugal, who would prefer a lower price and a shared bathroom. Now, because political regulations are almost always one-size-fits-all solutions, those people no longer have the choice to get a lower-cost room. Depending on their particular circumstances, maybe it means they're homeless periodically, cancel a planned trip, or maybe they can bear the increased cost. In any case, they are made worse off. So this is one key problem with political regulations--the uniform nature of them often restricts choice and, at best, merely codifies the opinion of the majority.

A second problem is how slow such regulations are to change. Let's imagine a law is passed and pretty much everyone agrees it's a bad idea. Maybe it was an okay idea at the time and technology has since made it obsolete. Or maybe it was a bad idea to begin with. It doesn't really matter for our purposes. As an example, in Louisiana, the state requires florists to have a license in order to legally provide floral services. This limits the number of florists in existence (since it's harder to become one) and thus drives up prices for consumers. Since it's not clear how much damage can be done by negligent flower arrangements, it's safe to say this only benefits one group--the existing florists who were already forced to waste time and money acquiring a license. Except for said florists, everyone agrees this is a stupid rule. And yet it persists. Why is this?

Well, one reason bad laws stick around is that, depending on the position, elections only happen once every couple years. So unless it's really outrageous and worthy of a recall, most of the time you have to wait until several months before you can vote out a politician that voted for a bad law. Then, a more significant problem is that it will only be one of many issues that matter in the election. And chances are, floral policy won't be the top priority for most voters. Instead, they'll vote based on another issue, and small bad ideas like floral licenses can live on indefinitely.

Of course, once we include any degree of corruption or special-interest lobbying in the mix, political regulations are likely to be even further divorced from consumer preferences, and cause further harmful distortions of the free market. For all of these reasons, private regulation should be preferred.
So we should continue to champion deregulation, but we should be careful to explain to paint a constructive and plausible alternative to critics. The opposite of government regulation is not a world of financial collapse and anarchic chaos. Rather, it's a world where consumer preferences and competition help improve the products and services that are available. And in almost every area where the government has not caught up to regulate new technologies, it's already here.

For more on this theme, check out the rest of Bob Murphy's piece. Here's the link:

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