There are many arguments against government regulation of price and quantity. In competitive markets, regulation moves equilibrium away from the most efficient outcome. Regulation can produce black markets. There are administrative costs associated with regulation.
One often overlooked consequence of regulation is that it adds to the complexity of decision-making. Thus government regulation tends to favor the better informed members of the community, over those who are less well informed.
Although I have a PhD in economics, I don’t believe that I am anywhere near well informed enough to deal with government regulation:
1. The tax code is too complex for me. I’ve given up and farmed the job out to an expensive tax accountant.
2. The health insurance system (which is almost completely a product of government regulation) is too complex for me to navigate. I spend far too much of my life dealing with its complexities, and still fall well short of understanding the system.
There are many other areas of life where being well informed helps one to deal with the complexity of regulation. Big companies have an easier time complying with complex regulations than small companies. Occupational licensing laws favor those with more formal education. Our welfare state favors those who understand the complexities involved in applying for benefits. Expertise in taxes favors those who wish to avoid estate taxes, or those who wish to avoid losing wealth to the government after signing up for Medicaid. Our immigration system is highly complex and difficult to navigate.
In the past few days I came across two stories that nicely illustrate this concept. One story discusses applying for Global Entry. Apparently it is extremely difficult to schedule the required interview. (I am currently attempting to do so.) Thus well-informed people will hire a firm to search out an available spot. I won’t say this never occurs in the private sector (concert tickets can be hard to get) but with government offices a long wait is more the norm than the exception. Ever been to the DMV? The Social Security Administration?
Another example was discussed in a recent Reason magazine article:
Legal restrictions on pseudoephedrine sales, in short, gave us reformulated products, including pseudo-Sudafed, that not only do not work as well but apparently do not work at all, as you may have discovered after trying them. But at least those ineffective products are easy to buy.
Legal restrictions on pseudoephedrine, by contrast, took it off the shelves and put it behind the pharmacy counter, whence it can be retrieved only under certain conditions.
Readers might be thinking, “What’s the problem, you could just ask the pharmacist for the better product.” Here’s the problem. A solution that is obvious to one person might be not at all obvious to another. I spend an enormous amount of time on monetary economics. When I have free time I watch films and read books. Yes, I could have spent my time researching how pharmacies dispense drugs, and then the regulation would not have harmed me. But I bet I’m not the only consumer who naively assumed that the cold medicines that one found on the aisle in a pharmacy were effective in reducing the symptoms of a cold.
There’s an almost infinite amount of time we could spend making our choices more effective. I could spend hours looking into how to change the oil in my car, or how to get the best deal when buying airline tickets, or how to save money on my taxes. But my time is valuable, so I choose to spend it in other ways.
When the government designs its tax laws and regulations, it seems as though almost no weight is put on the way in which the rules favor those who are better informed. I have two problems with complex regulations:
1. They favor the cognitive elite (as well as big businesses that can hire people to navigate the regulations.)
2. They incentivize people to become well informed about facts with no social utility.
The first problem relates to equity, the second to efficiency.
Regulation creates a shortage of painkillers. Who gets painkillers in that environment? Those who are smarter and more well connected. Regulation creates a shortage of kidneys for transplant. Who gets kidneys in that environment? Those who are smarter and more well connected. The safety net doesn’t have enough money for everyone who is needy. Who benefits from government programs? People smart and well connected enough to navigate through all of the paperwork. (I.e., not the homeless.) Who has an easier time navigating the regulatory gauntlet to build new houses? The big builders. There are many more such examples.
Progressives tend to favor big government, thinking it will help those on the bottom of society. Sometimes it does. But big government also creates a system that favors those who are skilled at navigating its complexity—the economic and cognitive elite.
PS. These Razib Khan tweets makes a related point:
