Economics

Should government regulate business? I expect most people would answer “yes” to that question, but if you ask them why, I expect these same people will have a harder time giving an answer that makes sense.

Some may say, “in order to prevent businesses from engaging in fraud or misrepresentation.” But we do not need regulation to do that; there are already many federal, state and local statutes against fraud and misrepresentation, and businesses that behave badly can be dealt with through normal civil and criminal legal means. Others who are a bit more sophisticated might argue that we need to regulate business in order to protect people from “market failures.” However, the empirical evidence is that there are far fewer “market failures” than commonly imagined, and many of these so-called market failures are actually a result of misguided government policy or regulation.

For a minute, try to imagine a world without government regulation, but where all of the standard laws against theft, fraud, misrepresentation and bodily injury still exist. Under such a scenario, what do you think would happen if we had no food and drug administration to tell us what was safe to consume? No financial regulators to protect us from bank failures and financial scams? No health and safety regulators to protect us from unsafe products? Would we all die? Not likely, because the judicial system, coupled with private standard setting associations, would likely give us an equal, if not a higher, level of protection than we have now.

How many companies offer phone service — traditional land-line telephone companies, cable companies, satellite providers, numerous wireless telephone providers?

Whatever the number, it certainly is not a monopoly and the providers are highly competitive. Yet, we still have a telecommunications regulatory agency, the Federal Communication Commission, that in many ways still operates as if we had but one land-line company.

The U.S. lags well behind many countries in Asia and even some in Europe in broadband deployment, not because many companies in the U.S. are unwilling to provide the service, but because they are hobbled by regulators. Some people at the FCC and their sister organizations within the states not only lack a vision of the future, but seem incapable of understanding both the industry’s economics and the technologies now available.

When the next terrorist incident occurs in the U.S., who do you think Democratic National Committee Chairman Howard Dean, Democratic Sens. Harry Reid of Nevada and Hillary Clinton of New York and much of the national news media will blame? If you said President Bush and the Republican Congress, you understand the “politics of terrorism.”

It will be charged not enough was spent to protect Americans from bombs on (insert appropriate noun for the incident — buses, trains, airplanes, ships, buildings, bridges, etc.). Of course, the Republicans know this is what will be said.

As a result, huge amounts of dollars are spent, and our civil liberties curtailed to protect politicians from both parties from the charge they “did not do enough to protect us.” Much of this new expenditure is not enhancing our protection, but only weakening us economically, and the never-ending restrictions on civil liberties undermine the freedoms we hold dear.

Assume you decided to build a new home and contracted with a builder to construct it for $300,000. Several months later, after the basement is finished, the builder comes back and says, “I underestimated my costs, and the house will now cost $900,000.” Would you pay the additional amount?

Assume you ordered a new car from a dealer for an agreed upon $20,000 price. Two weeks later, the dealer calls and says the car will now cost $60,000. Would you pay more?

In both the above cases, you would refuse to pay the additional amount, because in the real world of competitive private sellers and buyers, such behavior by a seller would be unacceptable. However, what we find unacceptable behavior in our private dealings becomes the norm when dealing with government.

Imagine you own a successful business, and you have a much larger and less efficient competitor. Your inefficient competitor has demanded you make payments to him or he will pressure your suppliers to stop doing business with you. I have just described classic criminal extortion, as now conducted by some governments in the European Union.

In the above example, substitute: France, Germany and Italy for the “inefficient competitor;” smaller, low tax jurisdictions for the “successful business;” global financial institutions for “suppliers;” and coerced taxes and information for “payments.” Now you begin to understand what is going on.

On July 1, the controversial European tax savings directive took effect. This requires 25 EU members and 15 other countries and independent territories to institute an automatic information exchange system. This would require financial institutions to report to the citizen’s home country any interest earned outside that country. Or countries may withhold taxes on interest income at a rate that will rise to 35 percent.

If you were told the government could take your real property and give it to another preferred, private person, would you be more or less prone to make improvements on your property? If you were a clear-thinking person with a basic knowledge of economics, you would reply, “less prone.” Unfortunately, five U.S. Supreme Court justices — David Souter, Ruth Bader Read More ›

Do you think there is too little or too much regulation? Though the appropriate amount of regulation may be in the eye of the beholder, we do have objective evidence of the growth of federal regulation.

The Annual Regulators’ Budget Report by Susan Dudley of George Mason University’s Mercatus Center and Melinda Warren of Washington University’s eidenbaum Center has just been released.

Their study shows both the cost and number of regulators continues growing far faster than inflation and population, which means in real terms we are becoming an increasingly regulated people. In inflation-adjusted dollars, the most of federal regulation has gone from $2.3 billion in 1960 to $38.9 billion expected in this next fiscal year. This is a greater than fourteenfold increase. The number of regulators has grown from 57,000 in 1960 to more than 240,000.

The basic function of government is to protect person and property, but all too often government does just the opposite. In their zeal to protect us from financial fraud, government officials recently engaged in a series of actions that have cost tens of thousands of innocent people their jobs, reduced U.S. international competitiveness, and destroyed more than $1 trillion in value for American shareholders.

Every American now suffers from the excesses of certain prosecutors and judges, and from Congress’ tendency to pass legislation aimed at correcting what they perceive as problems without thinking through the consequences of their actions. In the wake of the Enron scandal, the government went after Enron’s auditor, Arthur Andersen, and destroyed the company. The Supreme Court has just overturned the conviction of Arthur Andersen. The government’s irresponsible attack on the company cost 28,000 innocent people their jobs and made the auditing business less competitive, which has substantially increased auditing costs for every U.S. company. That, in turn, hurts their employees, suppliers and customers.

New York Attorney General Elliott Spitzer has just suffered a defeat at the hands of a jury for trying to convict a stockbroker for noncriminal actions. Mr. Spitzer has used intimidation against a number of companies, charging them with actions that may not even be crimes. In essence, he “blackmails” them into paying large settlements under the threat of destroying their business (like Andersen), though they may be innocent of any wrongdoing. These unfairly induced, forced settlements are costly to innocent stockholders and current and potential employees.

Fortunately, there are few problems that have not been at least partially solved by others some time in the past — and this is true for the mess in which Europe now finds itself.

In 1786, the United States was in a somewhat similar situation. Near the end of the Revolutionary War, in 1781, the Articles of Confederation were adopted that formed the United States. It quickly became apparent the Articles of Confederation were fatally flawed, in that tensions were rising among the states and the economy had stagnated.

Several Founding Fathers, notably Alexander Hamilton and James Madison, called for a convention to revise the Articles. The convention met in Philadelphia in 1787, where it was decided to replace the Articles with a new Constitution. The Constitution was adopted by the requisite number of states and went into effect in 1789 — and has served the United States right well ever since.

If you were a stockholder of a bank and its managers kept telling stockholders they would have to “write off” the loans they had made because the borrowers were in no position to repay them would you fire the management for incompetence? If you are a taxpayer, particularly an American taxpayer, you are a stockholder in such a bank — the World Bank.

The World Bank was set up in 1944 (along with the International Monetary Fund) to assist with post-World War II reconstruction. Its mandate is to reduce world poverty and promote economic growth but, in fact, many of its activities have had precisely the opposite effect. It now has 184 member countries, but most of the $400 billion it has dispensed in loans, grants and credits have been underwritten or guaranteed by the taxpayers in a few rich nations.