Monday, May 5, 2014

The cost of regulation

Gordon Crovitz has a nice piece in the Wall Street Journal, Monday May 5, titled "The end of the permissionless web" which sparks several thoughts.
What has made the Internet revolutionary is that it's permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook  profiles or Apple  apps, as Adam Thierer of George Mason University notes in his new book, "Permissionless Innovation." [Available free and ungated here. - JC]  
The central fault line in technology policy debates today can be thought of as 'the permission question,' " Mr. Thierer writes. "Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?" 

This brings to mind a recent discussion I've had with Glen Weyl and Eric Posner on their proposal for a financial FDA, in which financial companies have to get prior approval for any new products (here and here). I don't think I ever expressed well just how much it strangles growth and innovation for companies to have to prove ahead of time, to the satisfaction of discretionary regulators and politicians, that their products are good. The following examples make the point forcefully.

That strangulation is especially clear in these examples since they show that so much regulation serves to prop up the profits of incumbents and to protect them from competition.  If Uber had to ask permission ahead of time, it never would have happened, because the point of regulation is to protect the taxi industry. Uber  only happened now because it grew so fast and so well that its customers became a political force, in a way that (say) jitney customers never did.
In a recent New York Times opinion article, New York Attorney General Eric Schneiderman...argues: "The only question is how long it will take for these cyber cowboys to realize that working with the sheriffs is both good business and the right thing to do."
"Working with the sheriffs." What a nice way to express the trade of regulatory blessing and protection in return for political support that poisons our economy and democracy.
Mr. Schneiderman has targeted Airbnb, an online service that lets users easily rent homes or apartments for short-term stays, giving travelers a new option. The hotel industry, concerned about being disrupted, is lobbying hard to kill the upstart. ...costly regulatory overreach will inevitably suppress new startups from trying to compete.
I think we can find a better word for "competitors eating your lunch by providing better cheaper service" than "disrupted."
Like Airbnb, mobile-phone app Uber creates a marketplace directly linking buyers and sellers—in its case, passengers and drivers—outside the ornate regulations of analog-era municipal taxi commissions. Brussels, Seattle and Miami have banned or strictly limited Uber cars. New York's Mr. Schneiderman objects to the company's practice of pricing more when demand is heavy. The alternative is severely restricted supply, as anyone knows who has tried to hail a cab in the rain. 
The drone industry in the U.S. has been grounded because the Federal Aviation Administration has banned commercial use of drones pending new regulations. Meanwhile, countries such as Canada and Australia encourage drones. "As American regulators struggle to come up with a rulebook for the fast-moving industry," Toronto's Globe and Mail bragged recently, "Canada has emerged as perhaps the center of commercial drone technology—from Ontario farmlands to Alberta's oil sands."
Other examples include the Food and Drug Administration's scrutiny of 23andMe's marketing, which forced the company to stop offering health data from its at-home $99 genetics-analysis kit, and prohibitions against selling self-driving cars, which have left the U.S. in the dust behind less regulated Europe.
"left the U.S. in the dust behind less regulated Europe" is not a phrase I thought I'd hear in my lifetime. (Monday morning and already grumpy...)

This sparks a second and larger thought. The big macroeconomic question is, why is US growth so stagnant? The Keynesian side has one simple answer: lack of "demand," easily curable by spending a lot of money, even if that spending is totally wasted. None of these stories matter. The "supply" or, better, "equilibrium" answer is that we have thrown a lot of sand in the gears, and maybe we should take the same market-liberalization diagnosis and cures that we offer Greece and Italy.

The hard question for both sides is to quantify their frictions. How much of the perceived shortfall in GDP or GDP growth comes from your mechanism? Keynesians have not, that I know of, come up with any independent measure of lack of demand.  Likewise, how much of our stagnant GDP growth comes from these regulatory impediments? At least here we all know the sign. We can all see regulatory strangulation as a major factor in foreign countries. But it is devilishly difficult to come up with a solid number.  I think equilibrium macro (or macro as micro, or macro as growth theory) gets short shrift just because it's hard to come up with the numbers, and so much easier to say "well, it must be lack of demand."  But coming up with a serious measurement strikes me as a very useful exercise. Hence, I added the "thesis topics" label.


  1. I'm fairly sure Milton Friedman said that regulators and bureaucrats have a motive for saying "no" whenever anyone asks their permission to do something. Reason is that if they say "yes", that makes them surperfluous.

  2. Did the same guy write statements (1) and (2) below ?

    (1) "The "supply" or, better, "equilibrium" answer is that we have thrown a lot of sand in the gears, and maybe we should take the same market-liberalization diagnosis and cures that we offer Greece and Italy."

    (2) "I suggest that Pigouvian taxes provide a better structure to control debt issue than capital ratios; that banks should be 100% funded by equity, allowing downstream easy-to-fail intermediaries to tranche that equity to debt if needed. Fixed-value debt should be provided by or 100% backed by Treasury or Fed securities. "

  3. John,
    All I see from the fed is "we know what we're doing" and were not listening to anyone else. Think about Bernanke with the construction gear that workers sent Volcker in his office. It reinforced his idea that he knows what to do. Now we are stuck

    1. James,

      Don't you mean a 2' x 4' stick of lumber?

  4. Isn't a standard prediction of a negative supply shock that inflation should increase, while the opposite would occur if there were a negative demand shock?

  5. Maybe there's something to be done akin to purchasing power parity, and the trends towards divergence. For example, over here in the super-regulated EU, one can track that the price of imports has risen by approximately 40% against the price of US imports since the introduction of the Euro. My guess is that this provides a pretty good measure of the cost of 'single market regulation' propping up incumbents.

  6. I agree with what Mr. Thierer concludes on regulation over new technologies. It will definitely stagnant the growth of technological start up companies. Most start-up companies usually start with no money, they rely on their product to bring money and investors to fund their product. If their was a system forcing the government to regulate the innovative products coming out, it will restrict creators from making great technological products that would benefit consumers. But to be candid, we all know that the government secretly or maybe not secretly monitors what we do on the internet, I mean come on, everyone knows this. If the government were to implement a form of regulation over technological innovative products, well it would just be a legal leeway of justifying their need to spy on us.


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