What's Wrong With Regulation?


The Future of Business Regulation, by Murray L. Weidenbaum, New York: Amacon, 1979, 172 pp., $12.95.

The Regulated Industries and the Economy, by Paul W. MacAvoy, New York: Norton, 1979, 160 pp., $11.95.

American attitudes toward government regulation of business have shifted in recent years. Once upon a time, Ralph Nader and his legions were virtually the only ones cited by news reports concerning regulatory legislation, but today we are often likely to read about doubts concerning the value of regulation expressed by economists and others all along the political spectrum. The news media have begun to discover another side.

And some of it is beginning to pay off. Witness the moves to reform regulations on airlines and trucking and to limit the activities of the Federal Trade Commission and the Occupational Safety and Health Administration.

Two prominent economists have recently contributed to the growing number of works taking issue with regulation: Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University, St. Louis; and Paul W. MacAvoy, of Yale University, who was a member of President Ford's Council of Economic Advisors.

The Future of Business Regulation by Murray Weidenbaum presents his case for rethinking the regulation issue. It is chock-full of statistics and lists of government agencies that bring home just how much the government has grown in the past 15 years. For instance, we learn that in 1978 the government required $666 worth of safety and emission equipment on automobiles, at a total cost of $6.7 billion, and that the budgets of the federal regulatory agencies increased 115 percent from 1974 to 1979—from $2.2 billion to $4.8 billion. We learn also that the federal government has 4,400 types of regulatory forms and that the total time devoted to filling them out—71,500 person-years—equals the total employment of General Dynamics Corporation.

The picture drawn is one of immense harassment of business, and the inevitable consequence is clear: the consumer picks up the tab. Weidenbaum is alarmed; he desperately wants to alert business leaders, consumers, the media, academics, and government officials to the behemoth that threatens us with reduced productivity, low standards of living, and stagnation.

MacAvoy's The Regulated Industries and the Economy is a very short but comprehensive survey of the regulated industries. His book has the quality of a long article in an academic journal—summarizing obviously extensive primary research in a number of tables and commenting tersely upon the findings. He acknowledges the help of a sizable staff of research assistants in the program on government-business relations at the Yale School of Organization and Management, and the book suffers from the committee-style approach to writing.

MacAvoy's findings, however, are devastating to any argument that government regulation is a net benefit to society. It is unfortunate that the book is so passionless, although its very monotony serves to accent the conclusion that government regulations fail to achieve their presumed objectives and perversely harm the economy instead. "It is clear that the health and safety regulatory system has increased prices and reduced GNP in the most regulated industries.…They have increased costs of production, which have increased prices to consumers, without having brought about significant improvements in the safety and cleanliness of production and consumption."

In his discussion of the price and entry regulations applied, for example, to public utilities and transportation, he suggests one reason why public opinion might have been ripe 20 years ago for Ralph Nader and the acceleration of regulatory activity since that time in the health and safety areas. Until the onset of strong inflationary pressures in the mid-1960s, the regulated industries benefited from "regulatory lag"—the normal delay one might expect from governmental agencies. As technology and productivity advanced, and costs dropped, the industries earned a good return on their investments because prices were held up and competition was held down. MacAvoy does not point out, but it is true also, that the regulated industries were only too happy to praise their masters and agree that regulation was in the public interest; it was both good politics and good business to celebrate the "enlightened" system of regulation. The failure of business itself in days gone by to support the free market prepared the intellectual garden where the likes of Ralph Nader would plant their seeds and reap a harvest of new regulatory agencies in the 1960s.

Times have changed, however, and the next decade may owe many of its social and economic crises to this same regulatory process. Public utilities, in particular, have suffered from "regulatory lag" during inflation. Their costs have gone up more rapidly than their rates. They are facing problems in raising capital, expanding facilities, and earning an adequate return on past investments. There could well be a shortage in electrical generating capacity in the mid-1980s as a result of public utility regulation in the 1970s.

Both of these books are informative, but reading them is like seeing picture postcards of the Grand Canyon: they just don't satisfy. MacAvoy, for example, is a defeatist. "In the 1980s the American economy will probably continue to operate under the legislation on regulation much as it now exists on the statute books. As a result, the economy will not perform as well as it might." As in the classic case of the "seen and the unseen," however, there are interest groups—consumerists, environmentalists, organized labor, business lobbies—that benefit in the short run from continued regulation; and no interest group speaks for the longer-run, less-visible, but far greater costs to society as a whole from government regulation.

Certainly the general public is not going to believe the anguished cries of the regulated businesses themselves, because their pleas are perceived to stem only from self-interest. It is regrettable that so many business leaders have lost all credibility to speak on behalf of the public interest, due in greatest measure to their venal pursuit of government subsidies and favorable regulations in the past. Yet if business leaders can't effectively speak for themselves, because of public distrust, can Murray Weidenbaum fill the gap? The problem is that Weidenbaum's case is also weak, his objectives are "moderate" to a fault, and his strategy borders on apologetic.

Weidenbaum urges Congress to compare the costs and benefits of proposals before acting on them. He aspires to make government more efficient, with sunset laws, pollution taxes, budget reviews, and other devices. He seeks to fine tune the regulatory system to make it more "cost-effective." Needless to say, he makes no comprehensive case against government regulation based on principle. He simply thinks the American people are paying too much for too few benefits.

Legislators should avoid a headlong rush into new regulatory adventures, says Weidenbaum, and instead work for reform and in some cases—the Interstate Commerce Commission, for example—deregulation. He concedes that there is another remedy for what ails the economy but gives it short shrift: "To be sure, a third approach is present, the desire to return to a simpler age with limited government involvement in private affairs. This book will give little attention to that alternative, not so much because of philosophical disagreement, but rather because a return to the status quo ante is not a reasonable expectation." Elsewhere in the book he writes, "There will not, in short, be a return to a simple status quo ante, since public concern with environmental quality, safety, equity and similar social objectives will certainly remain."

Though he may not have intended it, these passages are offensively condescending to those fighting for a free market. "Limited government involvement in private affairs" is associated with the pejoratives "simpler age" and "status quo ante." One would expect such treatment from Ralph Nader. And his self-fulfilling prophecy is too obvious. If established economists who acknowledge sympathy with the free market won't discuss it—indeed, disparage the idea!—because they think it cannot be achieved, then no doubt it won't be.

A particularly distressing part of Weidenbaum's analysis is that it is quite open to attack from the Naderites. Nader has already launched an assault on the cost/benefit approach to regulation, and he may win. In narrow terms, logic is on his side. For example, let us say a new safety regulation is proposed. It will cost $5 billion a year to administer and $10 billion in new equipment for business. Weidenbaum might argue that the regulation is ill-considered because it is too expensive, it may not deliver the promised benefits, and the goal could probably be achieved more cheaply if government simply required private enterprise to find a way, after setting the objective.

We could then expect to hear the Naderites retort: "Efficiency, efficiency, efficiency. That's all we hear from these free-market economists. Well, we believe that there is something more important than efficiency. We think human life comes before the balance sheet. This new regulation could save 5,000 lives per year, but these economists don't think that's worth $15 billion. It's about time we started putting people before profits."

The cost/benefit approach is powerless before such criticism because Ralph Nader is partly right. Not all values can be expressed in quantitative terms. Costs themselves are not objective but represent forsaken opportunities. Moreover, as James Buchanan points out in his brilliant little book, Cost and Choice, in the area of public policy there is not even a coherent model to relate policy decisions to public costs and benefits. Ralph Nader is arguing that those cost/benefit studies that reach conclusions that he disagrees with are in truth biased against the regulations they supposedly are evaluating objectively. What is more, all of us trade increments of efficiency (relative to some professed goals) for other values in our personal lives. So Nader can easily knock down the claim that government should consider only economic efficiency.

Ralph Nader, Murray Weidenbaum, and Paul MacAvoy, therefore, all miss the most important point about government regulation. It is irrelevant to debate its "benefits" and "costs" because those are dependent on the evaluations made by specific individuals in unique circumstances. A price cannot be placed on lost lives, but neither can it be placed on lost liberty, lost opportunity, lost dignity, or the precedent for further government involvement in the economy.

Both Nader and Weidenbaum have a similar problem. How much is Nader willing to force the American people to obey for their own "good"? Traffic deaths could be cut substantially by banning alcohol drinking, prohibiting left turns, and cutting the speed limit to 25 miles per hour. Would Nader regard these measures as worth the costs? As for Weidenbaum, how low must the costs be before regulation is a good buy? If $666 in auto equipment is too much, how about $333? Neither side can offer anything but an arbitrary standard because both are remiss on the question of justice. However much they may throw the word around, the Naderites don't care about it: they willingly sacrifice individual preferences in the free market for their opinions in government policy. The cost/benefit people ignore it implicitly because they favor regulation when "benefits" seem to "outweigh" costs.

Both sides in this political argument are willing to impose costs on innocent persons. Both sides are willing to prevent the market—that is, the voluntary search for solutions—from operating, rather than let persons select their own benefits and costs.

What is sadly missing from much of the criticism of government regulation is some recognition that costs and benefits don't fall on "society." They fall on particular persons, and in any given public policy they usually fall on different persons. Even if we could measure them (lost lives, saved lives, lost liberty, and all) and determine that benefits exceeded costs, that could not justify imposing lesser costs on Tom for the greater benefit of Dick and Harry. That is coercion. That is injustice.

On strategic issues, Weidenbaum misses the boat, probably because his strategic vision is the result of his uninspiring objectives. MacAvoy concludes that regulation is a counterproductive phenomenon, and shrugs. Weidenbaum tells businessmen to be better at serving consumers (do they need such advice?), avoid ostentatious executive perquisites (in other words, pay higher personal taxes), tell the public about the burdens of regulation (why should the public have any sympathy?), and get involved in the public policy process (lobby for favorable regulations?). To his credit, he urges businessmen to stop asking for taxpayer subsidies; such hypocrisy is highly damaging to the case for the free market.

Defenders of the market have too few friends. We must, of course, encourage fellow travelers on their strong points and note where they undercut them. The case for economic liberty cannot stand on efficiency grounds alone. Attempts at making it do so will not only fail; they will aid the market's enemies. The competitive economy is ultimately a matter of justice for producers and consumers, and justice is a matter for all persons, whatever their fields of expertise—even economists.

Joe Cobb and Sheldon Richman work for the Washington-based Council for a Competitive Economy, where Mr. Cobb is director of its Energy Project and Mr. Richman is director of research.