Some answers — Deregulation

Republicans were (in my memory) opposed to business regulation in almost any form during the Reagan years, when the term “deregulation” came into currency. Republicans are widely perceived as continuing support for unlimited deregulation of all business activities. Is this still true, and why? — Themon

Themon,

Deregulation.

No. Republicans do not hate all regulation. They simply recognize that, if it is not limited, it has the effect of crushing business and stifling innovation. Good regulation guards against fraud and theft. Fraud, theft, and dishonesty tend to skew markets. At best, they lead to a hostile atmosphere for investing and stagnant growth. At worst, they can lead to large financial collapses. Thus, without interfering in the operation of the market, the state plays a vital role in ensuring contracts are met and the terms are honest.

Bad regulation, on the other hand, tells businesses exactly what they can and cannot do. While perhaps benign on first glance, when a business practice is enshrined in law, it creates a huge barrier for further innovation. It may also create inefficiencies which drive up costs for both consumers and investors. Though regulators often say these are necessary costs to ensure good practice, the free market and our courts tend to ensure good practices on their own that often achieve the goals we seek without the inefficiency resulting from regulation.

Consumer Products:

Let us take the case of seatbelts, because you mention Ralph Nader, whose dedication to auto safety is without question. Everyone wants their car to be as safe as possible. Most people think it is vitally important that every car come equipped with a standard safety restraining belt. That desire has gone beyond the point of consumer demand and into regulation, which promptly enshrined the best design at the time, now close to 30 or more years ago. Since that time, designs for seat belts have improved. There are some that have a much better safety rate. They are not used, though, because law requires the old model first produced in 1959. Does anyone still use car designs from 1959? No. They are better, lighter, safer, and more efficient because innovation was permitted.

Now, let us consider what would happen without seat belt regulation. We don’t even have to be theoretical. Ford had to pay a $30 million judgment for failing to provide a three point safety harness in the center seat of the back bench of a minivan, which had only a lap belt, and thereby knowingly risking severe lumbar injury. Karlsson v. Ford Motor Co., 140 Cal. App. 4th 1202 (2006). This standard practice standard was imposed without any regulation at the time. It was simply known by the industry that lap belts alone could cause damage and it had become standard to include three point restrains in back seats. As you can imagine, Ford quickly adapted best practices. Imagine how much safer cars might be if they were permitted to innovate beyond the three point restraint. You might say regulation was required to start the practice that eventually led to the industry standard cited in the above case, but that is not true. Consumer demand for safer cars and competition to offer the safest car on the road would be a far better motivator than any stagnant regulation.

Now then, let us consider an example of positive consumer product regulation. The FDA will not allow the sale of poisonous substances for use as medicines. Nor will they permit homeopathic merchants to claim that tiger’s claws can cure cancer. Instead, these merchants are limited to saying their products imbue general wellness, a term so vague that the merchant cannot be prosecuted for false advertising. Now, the FDA has standards I think go too far in some cases (they have forbidden a virtual cure for Alzheimer’s because it has a 6% chance of brain hemorrhaging–which would seem entirely worth the risk to most people). Nonetheless I say they provide a good service in preventing outright fraud. There are some libertarians who argue that the courts could just as easily impose penalties. However, if you take a poisonous snake oil, you will be dead and the merchant company dissolved and vanished by the time your estate sues. Known fraud should be prevented. Similarly, homeopathic remedies, which have not one jot of science behind them (and I say this as a practitioner of many other natural healing methods), should not be permitted to advertise as medicines until they can prove that is what they are. Here, again, the regulation is preventing fraud.

Business Practice Regulation;

Moving from consumer products over into business practice, take a look at good securities regulation. The SEC’s Rule 10b-5 is arguably the only regulation the modern securities world of instant communication really needs. It prohibits fraud of any sort in the purchase or sale of securities. Enforce this vigorously and you don’t need anything else for Madoff, Enron, et al. The quite period that so frustrated Google’s IPO, though? That is a provision of the Securities Acts which truly show their age (1933 and 1934 respectively). It is sheer idiocy today.

Now look at the banking and securities regulations that have landed us in our current mess. Is it really lack of regulation which caused the problem? No. Policy from the government led to the wretched lending practices of Fannie and Freddie. The lack of regulation was when general banking was allowed to combine with investment banking. That would have been okay, though, if banks had to be responsible for their own behavior under such a system. But FDIC’s mere existence promised risky behavior from banks, and this only compounded with the bailouts. We also permitted a leveraging level and fractional reserve banking that cannot be called anything but fraudulent. We then set regulations actively encouraging fraud when we set interest rates so low that any responsible investment and saving was unprofitable. The further regulations we pass to try to fix the already broken regulatory scheme, such as Sarbanes-Oxley, have done nothing to solve the underlying problems while they have driven costs up to crippling levels.

When government sticks to ensuring open markets, enforcing honorable contracts, and preventing fraud, it does well. When it tries to say exactly how things should happen, it succeeds only in stifling innovation, distorting markets, and creating toxic economic problems. A good Republican should recognize this truth.

Julian Dunraven

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