Chapter 20
Government’s Job
A job is usually easier when the duties are defined; the same is true with the government. However, there are many different views on what the job description for government should be and in democracies it can change after each election.
The government needs to set the laws of the land and oversee their enforcement. Safety is usually top on the list. Governments almost always manage a nation’s national defense though there can be debates on how to handle local police and other public safety services. Education is another major task of government. Availability of schooling through secondary school is fairly universal. After these few categories the debates can get quite loud and nasty over what the government should or should not do. These topics can include university education, health care, food programs, physical infrastructure, and beyond.
Policy changes on what the govenment will and will not do can impact how willing the private sector may be to commit capital. If a government is regularly changing policy in a sector and affecting changes in value then there may be less capital that is willing to invest in a sector, think of health care in the United States or in a more extreme case the oil industry in Venezuela. This has also been seen at the local level as well. Imagine if a company had a cable television franchise in a city and part of the agreement to retain the contract was that they would build out a 100% coverage of high-speed data service in the region, even if much of the coverage was not-economic for them. Now after the company invested that capital how does the value of that network change if five years later a new set of elected officials decides to use government money to build a free high-speed Wi-Fi system to cover the whole city? The answer is the value of the private network changes massively. Policy changes can wipe out or enhance asset valuations. This is more vital to factor into investment analysis as social media can increase the speed at which an issue gets addressed by public policy.
President Reagan was quoted as saying, “Government’s view of the economy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving regulate it. And if it stops moving, subsidize it.” In the current environment with so much innovation ongoing, overregulation or bad regulation may be one of the biggest risks to burgeoning flexibility and strength in many developed economies. In a system like the United States, rules are made by administrative regulators and they must be aligned with the laws and bills passed by the legislature. Regulatory rules are subordinate to laws, but both are enforceable by law. Regulatory rules definitely proliferate more than laws. For example, in the United States 2016 was a record year for regulatory rules. At the national level there were eighteen regulations passed for every law and as a measure of complexity the National Register, which includes regulations and regulatory notices, totaled approximately 97,110 pages.73
Regulation is a massive force on the economy. Bureaucracy can kill business projects or add to their cost. The level of rationality in regulations can run the gamut from sensible to absurd and mind-boggling. Occupational licensing is one area where regulation has often gotten out of control and can limit labor options for people. In Tennessee you needed a high school diploma to cut hair; shampoo professionals were required to have 300 hours of training. In some area permits are needed for lemonade stands run by children. In the United States each state requires their own licenses for many professions like nursing and teaching, especially disadvantaging a military family’s ability to have a spouse working in these fields as they move frequently. Understanding what the motivation is behind regulation is important; frequently it is a form of incumbent protection that prevents innovation. Noble laureate Milton Friedman wrote, “The pressure on the legislature to license an occupation rarely comes from the members of the public…On the contrary, the pressure invariably comes from members of the occupation itself.”74
Regulation also has multi-faceted costs. There is a cost to the tax payers to pay for regulators. Then there is the cost to the private sector to meet the regulations as well as legal costs should anyone want to challenge a regulation. Redundancy can add to the costs of regulation, for example a typical bank may have to answer to at least six regulatory agencies. Then there is the potential cost to the public should a regulation not be in place that could have prevented some kind of damage.
To challenge a regulation a person or business has to be willing to take on an extensive commitment of time and legal costs. However, it may become increasingly common to see the use of social media to try to create groundswells against, or in favor, of certain regulations, which could accelerate change. Of course, those who are under the regulatory scrutiny may fear real or imagined retaliation and this may limit the use of the media by those being regulated.
One of the problems with regulation is that there is significant leeway written into legislation and this gives an inordinate amount of power to regulators. Some of this is by design as the legislature may build a law to purposely allow for more flexibility and let the structure of the rules be made by those “closer to the process.” However, in other cases the legislature may just be abdicating its job and avoiding taking the responsibility of carefully designing the language in a new bill. When laws are written weakly regulators have a greater influence on the economy and changes can happen more quickly, but it may not always follow the full intent or letter of the legislation. Recourse for the public to be able to challenge regulations or regulators is not as easy as pulling a voting lever, because they are not elected officials.
One of the concerns about regulation is the lack of accountability and transparency in the process of rule setting. Regulators are not typically elected officials but they have a huge impact on how the government runs. Many are so far away from the public eye that an elected administrator or legislator may not effectively monitor them. Additionally, the sheer size of some of these organizations and the plethora of regulations in place make any form of monitoring quite difficult.
It is logical that regulators will lean toward increased regulation and favor studies that support their interpretation of legislation. Not because the regulators are malicious, but because of natural human biases. Most of the time they are doing what they deem to be best. However, it is natural that a regulator’s default position is to keep any regulation in place. From their seat, they are not rewarded for economic gains or streamlining of any rules, but only blamed if something goes wrong because a regulation was removed. Regulatory trends can be very important to watch as they change the cost structures in industries. They can also have secondary and tertiary impacts economically. For example, why do carmakers make unprofitable fuel-efficient cars that sell poorly? Many believe it is to meet “fleet” emission targets. Therefore, an economy’s resources are being redirected to make products people do not want under regulations in place to help lower pollutants. Additionally, if the cleaner energy cars are not selling, the regulations are not actually meeting the goal of lowering pollutants.75 More recently some states have gone after banning plastic bags and possibly plastic straws. Plastic appears to be the current “tobacco.” Any time there is a new series of regulation think about what it might impact, in this case the dynamics for the plastic industry and also demand for feedstocks used in making plastic, there are always derivative impacts from regulations.
It is not easy to find centralized or consistent data on regulations. In the United States the George Washington University Regulatory Studies Center does some excellent statistical compilations and regularly publishes on regulation. There are think tanks and lobbyist groups in the United States, such as the Competitive Enterprise Institute, Brookings Institute, and the American Enterprise Institute, that do a very good job of watching the trends in regulation. On a more global basis the World Economic Forum releases a competitiveness report on most countries that includes a good section on the burden of government. All of these reports can give you a good sense of trends and information on specific data points.
Government regulatory policies appear to be impacting the economy more than legislative policy. Through digital social media, public opinion can apply political pressure and cause regulatory policies to shift much more quickly than in the past. Shifts in government involvement can cause massive disruption to businesses and any regulatory change will always trigger a multitude of consequences. Regulation can change bank lending rules, block a merger, or change how stocks can be traded all with no change in legislation. The style and reach of regulatory entities should be included in any analysis of an industry or a company.
Digital media allows for greater scrutiny of regulators. Logic would dictate that they would increasingly err on the side of caution, because social media exists to get noticed and rarely draws much attention if it says, “Golly these people are doing a good job,” it gets noticed when it finds a mistake and it goes on the attack. Therefore, regulators do not benefit by being more laissez-faire in their policies.
Many of the innovations driven by technological advancements should allow the economies of the world greater flexibility and result in much greater insulation from instability, but inappropriate poorly designed regulation may pose the greatest risk to this being achieved.