Thursday, November 13, 2014

Reason for big Government: The Firm

I enjoyed John Goodman's essay at, "Reason for big Government: The Firm"
California has a new law that requires all eggs sold in the state to come from chickens that are housed in roomier cages. Specifically, the hens “must be able to lie down, stand up and fully spread their wings.” 
So how many Californians have been arrested for eating the wrong kind of egg? Zero. Not even one? Not one. Actually, the law doesn’t take effect until January, but even then egg eaters will have nothing to fear. The reason: the law doesn’t apply to people who eat eggs. It only applies to people who sell eggs.
When you stop to think about it, that’s not unusual. Almost all government restrictions on our freedom are indirect. They are imposed on us by way of some business. In fact, laws that directly restrict the freedom of the individual are rare and almost always controversial.
John's main point: the regulatory state entangles businesses but largely leaves people (i.e. voters) alone. If it did, us peasants would rise up with pitchforks and put a stop to it. He has a bunch of examples:
Take OSHA regulations. If a construction firm employs carpenters who climb ladders, federal law regulates how safe the ladder must be. But is there any law that tells you how safe your own ladder must be if you decide to climb up on your own roof? Of course not. Although the federal government imposes safety standards on almost every work place, it imposes no safety standards on how those workers behave when they are not at work. They can sky dive, hang glide, scale vertical cliffs, scuba dive in caves – and take just about any other risk they desire.
I don't really buy the provocative bottom line counterfactual
Bottom line: if there were no firms, taxes would be much lower, there would be far fewer regulations and government would be a much less important institution in our lives. 
Perhaps he means "democratic" government as there have been plenty of modern tyrannies that restrict individuals. And many firms welcome, nay, demand, regulation as a way to stifle competition.
But that aside, the basic point that our government hyper-regulates firms, but dares not do such things to individual voters is good and interesting.


  1. 'Twas the same with Prohibition, and that got repealed, kinda'. So there is ground for hope.

  2. Right. Organized groups offer natural fulcrums for governments to exercise control. They allow to police a greater number of people indirectly.
    Firms in particular are susceptible as they involve assets and long-term investments which give leverage to the police over the entrepreneur.

    Just today, I was listening to a podcast on Ebola and the approach the Ivory Coast's and other governments took (Planet Money ep.582). They found it difficult to close the borders, since people were just walking across the border to trade in another village. So instead they forced the markets closed, thus removing the incentives.
    It's easier to shutdown markets and control firm than to police individuals.

  3. Two reasons government goes after companies:

    1. In a company, with many stakeholders, the burden is shared. The incentive to resist is dilluted.

    2. Companies earn profits, therefore government has the "right" to go after those profits in some way, because with profits comes responsibility.

    The thing is, companies are tools, they are a way individuals organize themselves in order to increase productivity of some business idea, and profit is the measure of success of that productive effort. Messing with this process, in my opinion, governmet only reduces the capacity society has to increase productivity and innovation ...

  4. Here are two recent examples highlighted for us by Jonathan Gruber:

    1. Rather than eliminate the tax exclusion for employer-provided health insurance (or a tax directly on individuals), the ACA introduced a "Cadillac tax" that taxes employers who offer "too-generous" health insurance plans;

    2. Rather than impose direct taxes and redistribute those via spending under the ACA, the Act hides these cross subsidies by requiring healthy persons to subsidize unhealthy persons via the mandate and the insurance pooling (doubly clever, really, because it not only hides the effect on individuals, but also keeps the cross subsidies from being treated as taxing and spending by the CBO).

    It also explains, I think, the tendency of proponents of large government to argue that "corporations are not persons". It allows them to achieve politically via regulating and taxing corporations what they would be unable to do directly to individuals. Mitt Romney seems to have understood this point very well ("corporations *are* people") but he was vilified for it.

  5. There is a good reason for a government to say to firms: you must not tell your employees to climb unsafe ladders. There is less reason for a government to tell individuals that they must not personally climb unsafe ladders. I think you will find that there are government regulations that try to prohibit the sale of unsafe ladders.

    1. you just made goodman's point. There are indeed regulations against the sale of unsafe ladders. Companies who make or sell them will be prosecuted. There are no regulations against the purchase of unsafe ladders.

    2. John - I think there is an issue of where is the most effective point in the production / consumption chain to regulate. If we want to regulate the design and manufacture of ladders (and as the son of a window cleaner I can tell you that we do) then the most effective point is to regulate the manufacturer, rather than the purchaser. Regulating one manufacturer rather than 100 stores or 10,000 purchasers is cheaper and more effective.

    3. Prof Cochrane -- Did you never hear of "information asymmetry"? The government prohibits the sale of unsafe ladders because the manufacturers are in a position to know when the ladder is unsafe; it does not prohibit the purchase of unsafe ladders (by individuals) because the purchasers are not in a position to know when the ladder is unsafe. Makes sense to me.

  6. Bottom line : firms don't vote. Laws would change a lot if firms were given some votings rights, according to their taxes and regulation burden.

    1. Firms may not vote but they buy a lot of politicians, which is a lot more efficient.

  7. Kinda like taxing business like the Cadillac health care tax. People are stupid, so they won't notice it's a tax on consumers (so say some smart economists).


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