Tuesday, December 3, 2013

Government Regulation: The Benefits Can NEVER Justify the Costs

Chris Rossini has posted a very good column at EPJ, entitled “Governments Can't Count The Costs.”  To summarize this very worthwhile piece, while private enterprises must count the cost of every action they take, government never has to concern itself with such trivial issues:

Government (sadly) is different. If they want more money, they'll raise our taxes. If that's not enough, they have their very own printing press called The Federal Reserve that will take care of the rest. In other words, their ability to rip each of us off is unlimited. "Count the cost" is not in the lexicon. Afghanistan and Iraq alone have cost about $2 Trillion. You think anyone is losing sleep?

My intent is not to rehash Chris’s main point, however; he certainly doesn’t need my help!  Rather, he touches on a subject that I would like to expand on a little further.  Chris cites Cass Sunstein (don’t worry, it will make sense soon enough):

In 1981, President Ronald Reagan instructed federal agencies that they could issue regulations only after demonstrating that their benefits justified their costs.

There is not a single government regulation (absent those fully consistent with the NAP, at least conceptually) that can be shown to offer benefits that justify the cost.  Not one.

The Daily Bell would regularly point out that every government regulation is a price fix.  I think this is indirectly quite correct; however I think the direct impact of every government regulation is that it hinders the human action of individuals in the market making efficient decisions in accordance with each individual’s (subjective) value scale. 

This hindrance results in prices being other than they otherwise would be (prices being the objective manifestation of the subjective preferences of all market participants).  Leading to the “price fix.”

However, because of this hindrance, the benefits can NEVER justify the cost.  Bear with me….

Every government regulation inherently precludes some individuals from taking action that they otherwise would take.  In cases where the regulation is consistent with the NAP, this is a good thing (set aside the fact that there are more efficient, market-based means by which to achieve similar ends).

In a free and open market, when an exchange occurs both parties benefit.  I value the candy bar more than my dollar; the shopkeeper values my dollar more than the candy bar.  If this wasn’t true, no voluntary exchange could ever take place.  After the exchange, we both feel wealthier – wealth that cannot be captured in any macro-economic model.  Yet, the subjective benefit of the exchange to each party is clear and positive.  Wealth has increased for both of us.

But if a government regulation hinders, makes more expensive, or prohibits my ability to take an action – say my desire to buy a Cuban cigar – I pay a cost for this regulation.  The cost cannot necessarily be mathematically quantified (one more reason that all macro-economics is quackery), but it is a cost nonetheless.

Wait a minute, you say: buy a cigar from the Dominican Republic instead.  Yes, you might not feel as wealthy; the cigar manufacturer in Cuba might not feel as wealthy; but the cigar manufacturer in the DR feels wealthier than he otherwise would have been.  So – net, net – the result is the same!

Keeping in mind that nothing I write on this subject can be demonstrated with any mathematical equation (I am no quack, after all; I don’t practice quackery), I will suggest that AT BEST the sum of the subjective gain in wealth is the same in both cases.  AT BEST, all the government did was shuffle around a different distribution of the subjective gain.

It seems to me that the case can never be this good – a breakeven – but I cannot prove it mathematically.  However, there is one way to demonstrate it; even assuming the best case – the sum of everyone’s subjective-wealth-unit increase is the same in both cases – it took the resources of some bureaucrat to write the regulation and another to enforce it.  These actions, unnecessary in a free market exchange, are subtractions from the sum of the subjective-wealth-units of all of the participants.

Hence, the benefits of government regulation can NEVER justify the costs.