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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