Cataloging Washington’s Hidden Costs, Part 2: The Unmeasured Impacts of Economic Intervention

by Wayne Crews on November 19, 2013

in Deregulate to Stimulate, Economy, Features, Regulation

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Back in Part 1 of Cataloging Washington’s Hidden Costs, the topic was the incalculable cost of the loss of liberty in an advanced mixed economy.

On the other hand, “mere” economic costs of regulations are supposed to be the easy part, the stuff we can really get a grip on. Turns out, most economic interference is unmeasured and probably unmeasurable too.

Let’s do a non-exhaustive rundown of some economic costs not included in my rough $1.8 trillion annual regulatory cost placeholder that I have so far.

Antitrust: Most antitrust intervention in the economy is untabulated.

Permitting restrictions and denial of access to resources: J. Paul Getty said “The meek shall inherit the Earth, but not its mineral rights.” But the strong aren’t getting them either.

The federal government owns a large portion of America’s lands, and access for resource extraction and other uses is a constant battle.

Nobody’s working and jobs aren’t teed up while awaiting permits for access to energy resources, obviously. The Environmental Protection Agency and the Interior Department are notorious, but costs of most of their restrictions do not appear in OMB reporting.

Costs created by proposed rules that disrupt commercial activity: The late 2013 EPA proposed rule to limit carbon emissions from all coal plants, even without enactment of the final rule, means that the United States will build no more coal-fired power plants. Agencies count costs, in the rare instances they do it, of life under enactment, not the incentives changed by the existence of and uncertainty created by a proposed rule.

Costs of policy uncertainty: Wynn Resorts CEO Steve Wynn called Washington:

…the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right.

What are policymakers going to do with respect to the uncertainty created by regulations and by fiscal, trade and debt policy? A Vanguard study estimated $261 billion in such costs just since 2011. At this point such costs are not added in Costberg, but likely will be in some fashion in the future.

The costs of “rent-seeking”: Also disruptive are firms actively seeking regulation when it disadvantages rivals. Environmental rules, privacy mandates and antitrust are examples. Unseen costs include businesses not created and other distortions. OMB reports neglect the phenomenon. Even Ralph Nader once agreed, writing in Yale Law Journal with co-author Mark Green:

The verdict is nearly unanimous…that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful. [ Such regulation] undermines competition and entrenches monopoly at the public’s expense.

The same rent-seeking impulses occur in the public sector as in the private. There’s nothing saintly about government compared to the rest of humanity.

The distortions of crony capitalism: The costs include not just the spending or favors on behalf of the crony, but the distortion created by the overrule of the market. Examples range from bailouts of traditional industry like GM, to new ventures like Solyndra; from Farm Bill subsidies to government funded sciences and pet technologies. Government funding has implications for the trajectory of regulation, and the spending itself is distortionary compared to what the marketplace otherwise would have done.

Differential effects of rules on contemporary businesses: Related to rent-seeking but perhaps inadvertent for the sake of argument, the very existence of regulation ends up picking winners when something new comes along, in that there are complex differential effects on incumbents with hands tied relative to newcomers. The communications industry is an example, where incumbents face impediments that don’t apply to the new. Wealth creation and technology won’t advance at same rate in a regulated firm as a less regulated one.

Diversion of resources and private initiative created by government funding: The taxes we pay are, of course, counted in the federal budget. But related to the phenomenon of deadweight cost is the distortion caused when government assumes a role or conducts investments that should be vetted and carried out by the competitive private sector. This cuts to the core of the central planning vs. free enterprise debate, the age-old puzzle of why anyone would reckon that a bureaucrat spends someone else’s money better. Yet funding of productive activity and crowding out is not assumed recognized as a cost of government at all; It is more likely to be regarded as stimulus. In public/private partnerships, non-parties involved in related and unrelated endeavors remain free to compete, but they don’t get any of these advantages of government support (meanwhile, such support also comes with strings attached for the recipient).

Indirect costs: Indirect costs relative to direct take many forms and can be difficult to assess, such as ventures not pursued, economic distortions created by reaction to being a regulated vs. unregulated entity; the government-steered vs. market-steered.

Sometimes, efforts are made to assess dynamic effects, such as in the EPA’s lookback on Clean Air Act amendment cost. The EPA acknowledges it still doesn’t hear enough from small business, and that public comment is limited. But small businesses that were never created never comment on negative impacts of regulations. Ventures not pursued are a critical indirect cost of a heavily regulatory environment.

Finally, product bans and their costs also are hard to tabulate and aren’t fully assessed. Those might be regarded as indirect costs but the target firm would see it as direct. The Consumer Product Safety Commission’s targeting of “Buckyball” magnetic toys might be seen as an example.

Economic effects of the minimum wage: The impact on the avoidably unemployed but voiceless invisible are not of much concern to the policymaker establishment.

Perpetuation of early-20th century style infrastructure regulation: The costs of siloed, regulated infrastructure could be far more significant than many realize.

Early electricity and telecommunications were characterized by competing, overlapping, redundant, maybe even ugly, infrastructure — but not natural monopoly. Cronyism led to establishment of regulatory commissions to outlaw competition and guarantee returns. The modern approach is to sustain this model while blocking major private projects like pipelines,and forcing access elsewhere, such as the FCC’s net neutrality rules.

The persistence of regulation that keeps infrastructure eternally segregated has left us with less robust networks, less overlap and redundancy than could be optimal. The cost appears nowhere.

Most regulations impacting mostly every industry and sector: Actually, apart from a relative handful of rules — only a few dozen — that appear over the past decade in the OMB roundups with which we are concerned, plus some paperwork tallies and a few industry reports. Interventions impacting mostly every industry and sector (like railroading, aviation, energy, electric power and telecommunications) are not tabulated.

Also, review and conceptualization of entire categories of interference — like antitrust, central control of the money supply, federal manipulation of housing markets, the embrace of a “too big to fail” stance and its inevitable regulatory consequences, have no cost estimates.

Forced technologies, forced “benefits”: Estimates of the cumulative impact of government support of technological projects like green energy and cybersecurity versus relying on market guidance of technology do not abound, since the assumption is that the government is the proper source of investment in basic knowledge. There is an alternative approach, freedom, but meanwhile we are stuck with the cost of “government steering while the market rows.”

Next Time: The Costs of Benefits

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