Regulations Are Good for Us

regulartions

It’s is a terrible deal to toss out two regulations for every new one as the President recently ordered. Regulations were invented to correct the raw mechanics of capitalism and minimize its harmful unintended consequences. I have lived through and worked with environmental regulations since they first showed up in the 1970’s. A company I started helped write the very first regulations put out under the Clean Air Act of 19790. I remember why they came to be. Smog events in Los Angeles with dreadful health consequences. The Cuyahoga River catching fire in Cleveland. Love Canal. Some 3000 excess deaths after an extended fog in London, England. Today Beijing is choking in the absence of adequate regulation.

Regulations are a standard mechanism to control the bads that accompany the goods that commerce produces. They are necessary to make the cost of the goods include both direct and indirect inputs. Direct inputs are items like labor, materials and the cost of capital; indirect costs include harms incurred in manufacture, use, and disposal. Dirtying the air or water with wastes creates a cost that you and I, the consumers, pay. Minimizing the wastes by imposing a tax, technical controls, or other measures limits the direct harmful effects on humans and other life and the costs to remedy any such outcomes. Financial regulations such as those issued under the Dodd-Frank Act similarly limit economic losses to private citizens.

Regulations are always costly to those on whom they are imposed. That’s the very idea: to make the price reflect the true cost, a necessary condition for the market to function properly. In some cases, the potential harms are so severe or unethical that regulations ban certain practices outright. The rules by which regulations are put into place require that the benefits exceed the costs. The process by which this happens is onerous and is constrained by the requirement that the result cannot be either arbitrary or capricious.

The benefits generally accrue to the general public, but the costs are borne by the firms doing the damage. So they yell and scream, “Foul.” These outcries are not justified according to a report of the Office of Management and Budget in 2013. Examining 536 major rules issued between FY 2003 and FY2012, they found that the annual benefits were in the range of $193 to $800 billion, while the costs ranged from $57 to $84 billion. The broad range reflects the difficulty of valuing indirect costs. Nonetheless the net positive effect is unassailable.

Those of us who would be negatively affected by rolling back regulations have short memories. Few are old enough to remember the filthy linens in the houses of those living near coal-burning power plants. The harms to millions caused by the 2008 financial crises are already fading from view. The perpetrators of these harms are not necessary evil or venal; they simply don’t learn. The bottom line and personal greed show up every day at work; the indirect costs are far away and the Boss is pushing to outdo the competitor next door.

The business sector now includes a small number of companies that do have a social responsibility to produce goods and service with a net positive value that includes all costs, direct and indirect. They are yet but a tiny fraction of the firms that continue to stick with the famous utterance by economist Milton Friedman, “The social responsibility of business is to increase its profits.”

Any government that purports to represent all the people has no choice but to use regulations to insure that the costs and benefits of the economy are fairly distributed. An administration that politically claims to side with the poorer and disenfranchised elements of the public has an even greater stake in making sure that the lack of regulation does not exacerbate the very situation that has led to the imbalance. Before applauding efforts to roll back or fail to implement regulations, make sure that the job created by that move doesn’t harm your family or cause your insurance to skyrocket. Somebody always pays for the costs of poorly- or un-regulated commerce.

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