Posts Tagged Regulations
The reason that capitalism has lifted more people out of poverty and created more wealth over the last 100 years than ever before is because when practiced correctly entrepreneurs are free to create products and services that solve problems. Then in the marketplace of ideas customers vote with their wallets. This creates jobs and wealth for the founder, investors and employees. It’s the old line “if you build a better mousetrap, people will come.”
This concept is captured in the idea of Permissionless Innovation. Permissionless Innovation can be summarized with the statement “Innovation should be allowed by default”. Freedom to Innovate should always be given the benefit of the doubt, it should be assumed that something is legal rather than the other way around.
This sounds like a no brainer but we see examples everyday where government at all levels doesn’t allow for the freedom to innovate. Two of the most successful examples would be Uber and AirBnb which have succeeded in spite of the myriad of road blocks that varying governments have put in their way. Which begs the question “what is governments role regarding business innovation?” In what areas should they have to give permission? When should the government step in?
I believe that the government should step in only when someone’s rights are violated or if there is a proven danger to life or liberty. It is important to point out that rights does not mean livelihood. Too often governments are stepping in because the new entrant is threatening the livelihood of a company or group that has managed to use to government to protect themselves.
Local and state governments around the country interfere with regulations governing things like nail salons, hair stylists, interior decorators and even food trucks. In San Antonio, if you operate a food truck within 300 ft of any establishment serving food (including convenience and grocery stores) you are subject to a $2000 a day fine. Even if you are on private property. Another example is the fact that in many states Tesla can not sell a car directly to the customer, they need to work through a dealer network. How is the customer harmed in this transaction? Who is the government really protecting?
The Heritage Foundation (www.heritage.org) does an annual ranking of economic freedom. They rank every country on 10 categories including things like property rights, corruption, trade and investment. One of these categories is Business Freedom. Business freedom covers what it takes to start a business, obtain a license and close a business. It is appalling that the United States which is supposed to be the most free country in the world ranks 12th on the overall rankings and 15th for business freedom.
This is how we turbocharge our economy and deal with income inequality. I am waiting to hear candidates talk it but I am not holding my breath.
As a self identifying Libertarian one of my intellectual guides is Russ Roberts. Russ is a fellow at Stanford’s Hoover Institution and a former Professor of Economics at George Mason University. He is a brilliant author and a prolific blogger at CafeHayek.com. He also greats me every Monday morning. Every Monday, Russ releases the latest installment of his EconTalk Podcast series. It is one of the highlights of my week.
In his podcasts he interviews leading thinkers from all over the political spectrum, all walks of life and the four corners of the world. Although Russ does not shy away from conflict or disagreeing with his guest, they are always very civil and thought provoking conversations.
This past Monday Russ interviewed Greg Page the former CEO of Cargill to mostly discuss the Food and Agriculture industries. Snoozefest right? This is the twenty first century, the tech century and he’s talking about agriculture. Are you kidding me! If you think this sounds like the waste of an hour you would be very wrong.
In the discussion Mr. Page laid waste to two very important issues in the current Washington debate. He tackled the conflict between government direction of markets and using prices to guide markets and the flawed logic of most of the arguments of the greens.
After discussing the complexity and the interconnectedness of the food supply chain Mr. Page described how price swings based on a local event like the severe weather in the US Midwest in 2012 can cause players all across the world to modify their behaviors. It might be farmers in the outback of Brazil or shippers in China. Price signals cause subtle changes across the supply chain and across the world that no government could possibly direct.
The discussion of the environment encompassed the complex trade offs involved in every decision that typically are over simplified in the common debate. When Locovores focus on an artificial radius from which to consume they ignore the consequences of producing food that others have a comparative advantage or ignore the cost of distributing small batches in an inefficient pickup truck versus large batches in a tractor trailer. They may also ignore the trade offs between the use of land versus the use of fertilizer to achieve the same output. The other common tradeoff was how by going organic the farmer requires the use of more tilling to keep weeds down which uses more fuel.
Among the two most colorful real world examples that Mr. Page and Mr. Roberts discussed were how as the price of fertilizer increased from $200 per ton to $900 farmers made investments in technology to allow for more consistent planting and growing of their product. This technology included precision depth and spacing of the planting as well as sophisticated soil analysis to assure optimum growing conditions. These cost of these technologies allowed for savings in fertilizer costs. The second one was how as grain costs went up a trade off was made to invest in improved housing for chickens. This improvement in the environment to keep the chickens at closer to the optimal temperature was made so that they did not need as much feed to live and produce eggs. The additional capital and operational costs of the improved housing are offset by the reduction in feed costs.
Who knew? Our world is so complex that one central authority could not possibly direct all of the decisions to make a market work efficiently. As Mr. Page said in the podcast, these decisions need to be made over the kitchen table.
Do your self a favor and make Russ Roberts part of your Monday routine.
 In New York City regulations initially required someone to be within 150 miles to be eligible to sell at a farmers market. They raised this to 400 (Western Pennsylvania) to increase supply and assortment.
One of the major elements of the Reagan Revolution was a reduction in Marginal Tax Rates. This was accomplished through the Tax Reform Act of 1986. This law reduced the top marginal tax rate from 50% to 28%. In the interest of full disclosure we should note that the bottom marginal tax rate was raised from 11% to 15% but the minimum level of income for joint returns where this rate kicked in was raised from $5,720 per year to $29,750 per year.
The Office of Tax Analysis estimated that the revenue impact of this bill was 0.01% of GDP over a 4 year period. So in spite of enacting sweeping reductions the revenue to the Treasury actually went up even if only slightly. This was accomplished because loopholes were closed and therefore taxes were simplified to make up for the lower rates. This also kicked one of the longest periods of economic growth in out countries history.
As we approach a new congress and the next presidential election, there is much talk about a major tax overhaul including simplification and reduction of rates. Experts are saying we could get a corporate tax overhaul with this congress but not any individual relief until after the presidential election. This is ridiculous as our tax code is an embarrassment. It is a political document that is stifling our economies growth.
It also isn’t enough. There is another honeypot that I believe should be the battleground for the next Revolution! Regulation.
The tax policy center estimated that in 2010 corporate taxes raised $358 billion for the treasury and Individual Income taxes raised $1,046 nillion in 2011. The Office of Management and Budget estimates that in 2015 government revenues (remember every dollar comes from you and me) will be $3,300 billion with 13% ($430 billion) coming from corporate taxes and 46% ($1,518 billion) coming from individual income taxes. (FYI, another 32% or $1,056 billion comes from payroll taxes).
No doubt that this is real money and in need of serious reform. It is absolutely a drag on the economy. But the elephant in the room is regulation. While corporate taxes and individual income taxes add up to $1,948 billion, it is estimated that regulations are costing even more… over $2,000 billion as of 2012. (2014 study by the National Association of Manufacturers).
These regulations hit the two groups of employers that every politician claims to love the most: small businesses and manufacturers. While it is estimated that it costs every business $10,000 per employee per year to comply with regulations for manufacturers that number goes to $20,000 and for manufacturers with less than 50 employees the number is $35,000 per employee.
And it’s only getting worse. It seems like everyday we hear of another scheme from the Obama Administration to regulate another part of our lives. From the EPA regulating Carbon Dioxide to the Department of Labor regulating Interns to Michelle Obama and the Department of Agriculture regulating school lunches. No corner of our lives goes unregulated by our government.
I would love to see a candidate make the reduction of regulatory overreach a central theme in their campaign for president. They could lay out regulation after regulation for repeal. A regulation a day for the next two years would capture the imagination of the country. The candidate who lays out concrete steps to be taken can unleash the entrepreneurial engine of our country and we could be the Shining City on the Hill again.
Who is that candidate going to be?
On Monday March 31, 2014, the Transportation Department issued a rule that will require rearview technology (legal speak for cameras) in all vehicles under 10,000 pounds. This includes almost all of the cars and SUV’s that you and I drive on a daily basis but motorcycles and trailers are exempt.
Backup accidents have been estimated to cause 15,000 injuries and an average of 210 deaths a year. Because drivers are still involved the National Highway Traffic Safety Administration estimates that these cameras will save between 13 and 15 lives per year and prevent 1,125 injuries annually.
Not an insignificant amount and when it’s your child that is saved, it is priceless. But we should still look at the economics.
The government estimates that a rearview system costs between $132 and $142 per vehicle. OK not too bad on an average vehicle cost of $31,252, sort of a rounding error. But is that how we should look at it?
With 15,600,000 new vehicle sales and using of cost of only $130 that is $2,028,000,000 in annual cost. At even 20 lives saved that is over $100,000,000 per life. This evaluation sounds callous but it is something that our government does everyday. As a point of comparison, in 2011 the Environmental Protection Agency, when proposing new pollution regulations set the value of a life at $9.1 million, which was somewhat controversial at the time because during the George W. Bush administration the value was as low as $6.8 million. The controversy is because the higher the value, the more our government can demand that industry pay to save even one life. But here the difference is between $9.1 million and $100 million. (Say $100,000,000 and you may figure out why I used the picture that I did).
I am not anti technology or anti kid. I actually have these backup cameras in two of my cars (and because of this I know how infrequently they are used). I am simply anti government regulation and this is one step waaay too far. If they start using $100,000,000 as the new value for a life I can only imagine the long list of regulations that will meet this new standard.