What are we really “asking” for?

Posted by Marc Hodak on May 18, 2007 under Invisible trade-offs | Comments are off for this article

Russell Roberts does an excellent job dissecting a common argument for government regulation by breaking it down in terms its components. Specifically, he goes after the imbedded assumptions of this statement:

…perhaps you are uncomfortable with the idea of government intervening to assist the financially stupid. But I think there are many cases of the financially, legally or scientifically stupid asking the government to restrict their choices.

Russ breaks it down like this: When advocating government intervention on such grounds, one is implicitly assuming that the government has the good intent, capability, and incentives to actually do what it has nominally set out to do.

The first error is that “the government” is a thinking entity capable of intent. Russell dissents by calling the government a “sausage factory of legislation.” Even this, I think, dramatically understates the fragmentation of government “intent.” Don’t forget the executive branch. Whatever remains of the original good intent after the ‘sausage factory‘ process has turned it into a law, it is quickly discarded by the bureaucracy needed to implement it. At that point, intent has been boiled down to rules that every single person must follow. Anyone who has had to jump through the hoops set up by the bureaucracy to comply with its requirements knows that this is not a system where good intent is institutionalized.

As for government capabilities, consider for a moment the knowledge possessed by the most enlightened, empathetic bureaucrat versus that of the average person actually involved in a transaction. What are the odds that the bureaucrat will really understand the particular issues and tradeoffs you face better than you or whatever advisor you might bring into the transaction? Sure, the odds are there. It’s possible that a government agent might know what is good for you better than you do, but it would be a gross understatement to suggest she might not. Especially when you consider that the government’s agent is not an expert at anything other than following specific rules that cannot, by design, account for the particular concerns you, as an individual, might bring to a particular transaction. As Russ pointed out, lending rules may prevent loans that shouldn’t happen, but they certainly also prevent loans that would be mutually beneficial to borrower and lender. What is the proportion of each type? That would be an interesting question, but it is never even asked by legislators, which brings us to incentives.

By far, the most problematic area in regulation and enforcement is incentives. Every single agent of government is as much a slave to their personal incentives as we are to ours. Laws are made by people seeking votes. Thus, they are shaped by institutions with political clout, including those being regulated. The resulting rules are enforced by people just like you and me. Many of these bureaucrats are honest and diligent, but many are not. The problem is that, unlike a business subject to market discipline, there is no mechanism to keep a check on those in government who have the power to make your life as difficult as possible in order to make their lives as easy as possible. And, for all the theorizing about the potential economic benefits of certain regulations, there is no market test for government, other than the coarse, often undetectable reactions of market agents leaving the regulatory regime.

There is one more thing about the statement that Russ left unchallenged: the magic word “asking.” Who are the people “asking” to be regulated? A commenter to Russell’s post put it very well by suggesting that people who want to be regulated could simply be given the ability to opt in, or the rest of us given the ability to opt out. For instance, I think I can deal pretty well with nearly perfect freedom in my financial transactions, subject to the normal protections of anti-fraud laws. I have an MBA in finance. I may not always know what I’m doing financially speaking, but does Congress know better? Does the bureaucrat with the power? But my choices are limited and my costs are higher because of financial regulations “protecting” me. For me, as well as most people, the costs associated with that loss of freedom, with the inability to truly “ask” for the government’s protection, is very high. How high? I’d like to know. But the legislators imposing those costs don’t even ask what they are, let alone provide them in good faith in weighing the costs and benefits of the mandates.