Bah Complex Regulation

There are many good arguments for and against regulation. But the strongest general economic argument against complex regulation is innovation:

A disease … is slowly killing the American economy. We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. … It is always hard to start a business. It is especially hard to start an innovative business, one that will foster a new technology or business method. … The two largest pieces of legislation enacted in the past two years – health care and financial reform – are very vague. …

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. … The World Bank ranks the United States 62nd in the world in terms of how easy it is to pay taxes – and with a 16,000-page tax code, this is no surprise. .. So, what is to be done? … It is time for Congress to do the hard job of saying what lawmakers mean in clear and easy-to-understand language. … We should reject bills that are thousands of pages or that delegate vast authority to unelected regulators. (more)

Growth is continuing even with heavy and complex regulation, so its not quite fair to say that is “killing” the economy.  But to those who try to develop products and services that stand a chance of substantially changing existing practices, it is pretty obvious that complex regulations are their main preventable obstacle. And these are the innovations that have the best chance of producing a large social surplus relative to private profit. Most new products and services, in contrast, are far more likely to benefit some firms at the expense of others, giving a low and perhaps negative net social gain.

If our hope is that Congress will volunteer to do a hard job, well we can just give up now. Since this innovation-hindering effect of complex regulation has been long known, you might think opponents of regulation would emphasize it loud and often. After all, even a small increase in growth rates due to more innovation offers enormous gains to our grandchildren and further descendants. But regulatory opponents hardly mention such gains; they realize that this argument has little emotional punch. Why?  An obvious answer: people hardly care about future generations.

But people do find it engaging to invoke future generations when they argue that carbon taxes will save future generations, or that redistribution today will hurt future generations. What is the difference? My theory: non-ideological stuff we don’t fundamentally care about is mainly interesting when it connects to ideological stuff, i.e., standard left-right positions we commonly argue. Key implications of such positions, or arguments for or against them, are interesting to us. But since both future generations and regulation complexity are mostly non-ideological, the connection between them is just not of interest. Politics is not about policy.

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  • William H. Stoddard

    Do you count “public choice” as part of economics? The strongest public choice argument against complex regulation is that it inevitably gives rise to rent-seeking. Regulation would not be such a problem if it just occurred at random; some governments would regulate more strongly than others, be left behind in the innovation race, and that would be that. The problem is that regulation enables rent-seeking that leads to further regulation, for reasons that Mancur Olson described.

  • Joseph K

    It’s not just that most people don’t care too much about future generations, they don’t really care too much about their future self either (which is why we all tend to make short-sighted choices). If you’re saying that people favor policy for non-long-term preferences, I think you may be on to something. It’s very probably that many people favor green initiatives for reasons like that they hold purity to be important, and what to avoid sullying the world with carbon and global warming, or that they demonize big companies and want to see them defeated. Or on the other hand, people who oppose regulation might just dislike the inconvenience of compliance costs or demonize government or bureaucrats. Arguments along these lines will have more rhetorical appeal. Though there’s nothing wrong with making the more logical or economic arguments.

  • Buck Farmer

    Ideally, you need a battery of stories about small local artisanal businesspeople forced to close up shop when they missed some detail in the fine-print or when a regulator on the recommendation of corporate lobbyists changed an interpretation of a statute.

    I agree…most arguments around climate change that invoke the needs of future generations are designed to reach across the aisle, whereas arguments about purity are for preaching to the choir.

    Notice that when we need to gain cooperation from an out-group we emphasize Community as a moral value and when we need to rally the energy of our in-group we emphasize Purity.

    How does Autonomy fit into the signaling, social-manipulation schema?

  • It was counter-intuitive to read that the USA is 62nd best in simplicity of tax regulation. I think USA is much higher than 62nd in entrepreneurship and innovation?

    So I think it makes sense to look at countries # 1-65, see how many of them are less innovative than the US, and factor that in to determining the relationship between complex regulations and ease of innovation and entrepreneurship in a country.

    • Okay, this is funny. Here’s the link:

      Unsurprisingly, the US ranks #5 in ease of doing business overall.

      But in large population countries, US ranks an impressive #2 -second only to UK- in doing business overall and a top quartile #15 out of 61 countries in ease of paying taxes specifically (and keep in mind the USA is one of the 5 largest nations by population, for example, it’s harder to pay taxes in China, Indonesia, and India).

      Prof. Hanson, major reputational downgrade for you. Are your technical papers this bad faith?

      • Curt Adams

        So even though the US is one of the most lightly regulated countries, median wages have been virtually flat for 30 years. Not good evidence for benefits of deregulation.

      • So even though the US is one of the most lightly regulated countries, median wages have been virtually flat for 30 years. Not good evidence for benefits of deregulation.

        This is such a tiresome thing to say.

        Firstly, if median wages had been flat for 30 years, the relevant comparison would not be whether the US has more or less regulation than other countries, but whether regulation in the US has increased or decreased. And, of course, it has substantially increased.

        But secondly, the claim that median wages have been flat for 30 years is a silly statistical artifact, created by

        – divorce (it’s calculated by household income, and rising divorce rates mean more households)
        – immigration (also creating more households)
        – failure to account properly for price/quality levels

        If you look at the panel data, i.e. tracking across time rather than taking instantaneous slices, you see that people in the US have got substantially richer over the past 30 years (and no, it’s not just life-cycle effects).

      • I made no claim myself about the US at all. The oped was a jumping off for me point to talk about the harms of complex regulation in general.

      • Professor Hanson, you ellipsied before and after the sentence fragment ” … The World Bank ranks the United States 62nd in the world in terms of how easy it is to pay taxes – and with a 16,000-page tax code, this is no surprise. .. So, what is to be done? …”.

        so it seems to me you made a point to include it in your post.
        That seems like bad form to me.

        I’m interested in the relationship between regulation and existential risk minimization, and it does seem intuitive to me that too-complex regulation harms existential risk minimization. But I think overfocusing on complexity may be sneaky libertarian ideology and an unhelpful distraction from regulatory optimization.

      • Curt Adams

        Median *wages* are not affected by household size changes. It’s per hour worked.

        The federal government employs fewer people as a proportion of the population than 30 years ago and spends considerably less after you take out transfer payments. There have been a number of aggressive deregulation attempts – such as Gramm-Leach-Biley. In what sense has regulation “increased” in America?

      • Actual wages have gone up considerably. You can only claim median wages are flat when you only look at the cash component. When you take into account benefits (most notably medical) wages have risen considerably. Now I would certainly agree with you that it would be much better if workers were getting more cash that they could decide how to spend, rather than benefits which are probably oversupplied – but that’s caused by complex overregulation.

        As for how government regulation has increased over the past 30 years, are you serious? Yes, there have been some small attempts at deregulation. But look at regulation by the EPA, or the several expansions of medical regulation, or Sarbanes-Oxley, or the TSA, etc, etc.

      • The bad faith reporting shocked nobody else? I’d fear ridicule by a smart readership if I tried that.

  • ” look at countries # 1-65″ should read “#1-61”, of course.

  • Jason

    I don’t think complexity itself is either good or bad. We are complex life forms operating from what could only be described as byzantine instructions in DNA, epigenetic factors, etc.

    A lot of these instructions do stifle innovation (mutations), but not all innovation is good; most is deadly.

    Is it possible that our current complex economic regulatory framework is stifling exactly this sort of innovation?

    Life forms that do tolerate more mutations (innovation) can suddenly surge in ecological niches, but usually this comes at the expense of the potential for catastrophic population collapses. Maybe these life forms are more like developing countries, or early human societies, and far more complex economic entities are like more complex lifeforms with byzantine rules suppressing innovation.

  • Evidence correlating complex regulations with low growth being…?

    Because modern developed countries are easily both the 1% most regulated and the 1% wealthiest of all existing historical societies.

    As far as I can tell, complex regulations are mostly natural result of complex economy, and they never seriously harmed innovation.

  • David C

    Agreed with Tomasz. The number of regulations can increase while the relative amount of regulation decreases if the economy increases in complexity. A lot of regulations are for sectors that didn’t exist 25 years ago. Some regulations follow the problems mentioned here, and some don’t. It makes more sense to talk about individual regulations that are bad. For instance, the oil spill is an example of poor regulation because BP had accrued several hundred violations, and yet was never shut down.

  • Karl Hallowell

    For instance, the oil spill is an example of poor regulation because BP had accrued several hundred violations, and yet was never shut down.

    That’s incorrect. Poor regulation is not the same thing as poorly enforced regulation. The outcomes are similar, but the solutions are normally different. If you have poor regulation, then you need to come up with better regulation (say covers a harmful externality missed by the old regulation or reduces the burden of complying with regulation).

    If you have poor enforcement of regulation, then that usually can’t be fixed by modification of regulation (unless the regulation itself causes the problem of poor enforcement in several ways). Normally though it’s a problem of someone not doing their job. That can’t be fixed with the regulatory hammer.

    In the case of the Deepwater Horizon accident, there probably was a combination of poor regulation and poor enforcement of regulation. From reading various reports, I get the strong impression that several parties cut corners in ways that both contributed to the accident and should have been caught by a regulator.

    Then you have the other problem with poor regulation, oversensitivity. Was there really several hundred violations that somehow got past inspectors before? Unlikely in my view. Instead, I doubt most of those items would have been considered violations before the blowout. It’s a common problem with regulators. They are far more cautious and picky after a public accident or gross violation than normal.

    But I think there’s also an element of regulatory Catch 22. I frankly doubt it is possible in most developed world countries for any significant human industrial enterprise to pass all regulation (for example, regulation on release of various pollutants at the trace level or some workplace safety issues), especially when regulators are in oversensitive mode. When you violate regulation merely by existing, then that makes it a lot easier to violate regulations that have serious negative consequences.

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