Is this a reasonable argument against government regulations, or a false equivalency/non sequitir

Great Debates
1

I was trying to think about why certain people say that regulations are bad for the economy, and why others say that regulations are a necessary evil.

I found that it was pretty clear that very few people, within the general spectrum of American political views regarding the economy, believe that regulations are a “positive good” for the economy.

I tried to come up with a mathematical concept that could effectively capture the essence of what a “regulation” is in the economy, and I used the Lagrangian multiplier, and treated national economic output (GDP), which is a function of k capital variables, l labor variables, and r resource variables; So the GDP function is a function of k+l+r variables.

I treated each government regulation as a single constraint function that would be a function of at most k+l+r variables, but possibly even just one of them, this function being set to a constant. It is also possible that a constraint function could range over an interval, in which case the regulation would be modeled as an inequality constraint, rather than an equality constraint in the previous case. If there are c constraints, then there are a total of c equality and inequality constraints. It’s somewhat obvious that inequality constraints/interval constraints are “less constraining” than an equality constraint; i.e. a mandated wage is a stricter regulation than a minimum wage or wage interval.

Under certain conditions, an optimum (a maximum GDP) will exist, and be unique. Since an unconstrained maximum is greater than (more optimal) than a constrained maximum, the difference becoming larger as more regulations (constraints) are added to the economic system, it has thus been shown that regulations make us poorer than what we would be without them. If the Lagrangian multiplier model of constrained optimization is mathematically rigorous (which it is), and government regulation of the economy can be treated as a constraint (which I’m not sure is even valid), and we want to maximize the GDP given those constraints, then the constraints would lead to total output lying inside the production possibilities frontier, (the maximum production being the optimum, or “full employment” given the constraints you have). The production possibilities frontier or full employment could be approached with less regulations.

Is this model valid/invalid?

2

I’m afraid I don’t follow your model. Let me ask: are you including in your model aspects of the economy such as the morbidity and mortality rates of workers, consumers, and capitalists?

3

I didn’t mention it, but I was assuming that the number of workers, consumers, and capitalists leaving the labor force was equal to the number leaving (which is obviously not true). It’s more of a static model than a dynamic model.

4

Isn’t a kind of Laffer curve more reasonable? Too little regulation, and you get corruption, Ponzi schemes, insider trading, all leading to no one being willing to invest. (Also things like pollution and child labor and people in debt to the company store, etc.) Too much regulation, and business stifles.

Somewhere in the middle is a maximum point.

As with the Laffer curve, this is only an “existence” proof; it doesn’t help at all in telling us where that ideal maximum point is. Some people will always say we have too much regulation right now…and others will always say we have too little.

5

Do you know what an “externality” is? Are you familiar with the Theory of Second Best? What are your thoughts on how a logical approach to welfare economics should properly calculate Pareto efficiency?

I mean, in all seriousness, “regulations are bad” is just as generic, and as useless, as saying “sauce is tasty.” What regulations are you talking about?

To use an example, I can demonstrate, very quickly and easily, that a regulation can increase aggregate wealth. Suppose I have a workplace with 50 people, all of whom enjoy smoking. However, they all dislike secondhand smoke; inhaling it’s great, but it sucks in the air where it stings our eyes. Suppose we place a value on these things; each smoker places a value of $1 on the utility of smoking a cigarette, but a value of negative 5 cents on someone else’s smoke (an externality.)

Without any rule against smoking, everyone’s going to be in the hole; the absolute, inevitable result is that everyone will have a “value” of -$1.45 as a result of workplace smoking; they’ll be up $1 for the enjoyment of their own cigarette, but be down $2.45 for the secondhand smoke caused by others. You see, now matter how many people are smoking right now, my rational move as a smoker is to smoke. That always pushes me $1 ahead of my existing utility. Since everyone’s rational decision is to smoke, no matter how many people are smoking, everyone will smoke, and everyone will be have -$1.45 of utility.

But now suppose we could regulate this - say, the employer institutes a strict no smoking policy, one that cannot rationally be avoided. Now nobody smokes - and everyone’s utility is 0, which is $1.45 BETTER than it used to be. It’s possible only because of regulation.

So why can’t a real life regulation have a similar effect? The straight answer is they do; the obvious corollary to my example is pollution regulation.

Of course some regulations are dumb and it’s a good thing they were gotten rid of; airline deregulation was a wonderful movie. But some forms of regulation, especially ones that deal with market failures, clearly INCREASE wealth from where it would otherwise be.

6

I don’t see how there could ever be a perfect or even optimal amount of regulation - rather there will be a pendulum swing of increasing regulation up to the point where innovators who have access to new technologies, methods and ideas complain they’re being stifled, then major deregulation and expansion of productivity and markets, followed by gradual corruption to the point where citizens start complaining they’re being cheated and/or jeopardized, then new regulations, etc… back and forth indefinitely.

7

We do not live in a chart.

8

Yeah, but they edit out the crashes.

9

I thought he was talking about that classic of airline deregulation, Snakes on a Plane.

10

I was.

11

I’ve never really understood why people talk about more or less regulation. What matters is the specifics of each regulation, not the generic “amount” of regulation.

12

I always viewed regulation as an insurance premium mandated by Government that protects members of a specific industry from catastrophic outcomes.

Right?

13

I have some minor sympathy for this notion, based on the amount of paperwork companies have to fill out to show compliance. I have performed Sarbanes-Oxley audits, a Y2K audit, ISO-9000 audits, and a ROHS (Reduction of Hazardous Substances) audit. Basically, my employer paid me for an awful lot of paperwork.

I think that all of these were valid regulations, and were more beneficial to society and to the economy than they cost us. But there are costs, and the paperwork is a burden.

(And the answer to that is, “Tough!” It’s also a burden to have fire extinguishers on the walls, or lighted “Exit” signs near the doors, or to hold semi-annual fire drills, or to require an annual inspection of the elevator, etc. And it’s also a DAMN GOOD THING these things are required!)

14

No, not really

15

Or alternatively, big business could just lobby lobby lobby so no one but them has a voice.

16

Los Angeles County enforces health regulations on restaurants operating within their jurisdiction. They regularly inspect kitchens to make sure they are maintaining minimum standards of hygiene. Maintaining these standards certainly costs the restaurants money. Their operating expenses would be somewhat lower if they didn’t have to sterilize utensils and monitor the temperature that they’re storing their meat at.

However, without the regulations eating a meal at an unfamiliar restaurant would be a crap shoot. Right now I can walk into a joint I’ve never been before without worrying that I’m going to get food poisoning. But without those “A” placards in the windows, I’d be a lot more suspicious and I’d eat out a lot less. The minor cost of following the county’s health regulations is balanced by the increased consumption by diners who are confidant that most restaurants are safe to eat at.

So, no, your simplistic model that “all regulation hurts the economy” is not valid.

17

Care to elaborate on what is then purpose of regulation of economic activity in the country?

18

Is it realistic? You can write down any model you want and draw whatever conclusions it gives you, but if it doesn’t capture anything about the real world, no one will care.

19

Sometimes it helps the public/consumers. It is possible for a company to engage in activity that would help itself, but be bad for the public or even for other industries.

20

I’ll go one step further.

Regulation helps to put a bigger picture and longer range outlook on industry.

A perfect example of this is the fishing industry. There was an area of fishing off of Florida if I remember right that was over fishing the region and without regulation would have absolutely destroyed itself in about 2-3 years because all of the fish would have been gone. With regulation, yes the number of fishing fleets dropped but the ones that were left could be viable long term businesses.

Industry (especially a public company) is terrible at regulating itself and looking out long term.