Often, when someone advocates deregulation, the response is something like “But without regulations, there’d be nothing to stop Tobias McCapitalist feeding starving child workers into his Raddling Nancy!”
Clearly, some regulations are good. But most are awful.
Here’s an example. The Housing Act 2004 defines a House in Multiple Occupation (HMO) as one inhabited by three or more tenants forming two or more households. All HMOs must be registered with the local council — for a fee (£500/unit or more is common).
In certain circumstances, every room must have its own basin. Even if there are already plenty of wash basins in the house. Even if the residents complain when they are installed, because they take up a useful corner of a room.
Bedrooms may not be smaller than 6.5m2. One landlord owned an HMO where one of the bedrooms was smaller than this. It was the only room in the house with a waiting list. The current tenant was happy paying less, and three other tenants had asked about moving into it: one wanted to save up to go travelling, another was going back into full-time student education and wanted to avoid going into debt, and a third only wanted a bed-sit to use three nights a week.
But now the room can’t be rented at all. The tenant now has to live in a more expensive room. These regulations force up costs for landlords and rents for tenants. They inconvenience landlords and tenants alike.
It is easy to see how many of these regulations were intended to protect the vulnerable. But it is also easy to see that the costs of the regulations outweigh the benefits by miles, and easily can and do harm the very people they were intended to protect.
Regulations intended to protect employees, by making it harder to fire them, have the unintended consequence of incentivising employers not to hire them in the first place. Like the minimum wage, they cause unemployment: they protect those with jobs, but stop plenty of people getting jobs at all. They encourage the replacement of labour with capital.
There’s a chilling effect caused by regulation, too. You have to read it. You have to read reams and reams of regulations to make sure you comply with them. Or hire a lawyer. Many people simply decide not to bother, reducing the amount of economic activity that would otherwise occur. Many people don’t even look at the regulations: they just assume that regulation will prevent them from whatever enterprise they might have considered. It’s a reasonable default assumption: with so many hundreds of thousands of regulations, it’s more than likely that at least one will prevent you doing business.
It’s so difficult to start a business and employ people nowadays — there are so many regulations you have to know — that many people, who would be otherwise perfectly capable of running a sound business, cannot do so. Everybody loses: the businessman, the would-be customers, the would-be employees who never get hired, even the tax-man!
“Government regulation has the same effect on the economy that molasses has on an engine: it slows everything down. The more hoops one has to jump through in order to start a new venture — permits, licenses, taxes, fees, mandates, building codes, zoning restrictions, you name it — the fewer new ventures will be started. And the least affluent will be hurt the most. The richest corporations can afford to jump through the hoops — they have money to pay the fees and lawyers to figure out the regulations. Small businesses have a tougher time, and so are at a competitive disadvantage. For the poor, starting a business is close to impossible. So the system favors the rich over the middle class, and the middle class over the poor.” Regulation protects big companies from competition, encouraging corporatism, not capitalism. Regulatory capture is also a concern.
In Russia, there are 54 bureaucratic hurdles to overcome before you can build a warehouse in Moscow, many with associated fees. The costs constitute a significant proportion of the value of a project, and these are just the official costs.
It is fascinating to see how complicated regulation can make the building of a simple shed. “If anyone wants to know why Russia remains poor despite a well educated population possessing impressive technical skills, looking at how long it takes to complete a simple construction project and what is involved is a good place to start looking.” Similarly, in “The Mystery of Capital” Hernando de Soto identifies lengthy and overly-bureaucratic application processes as one of the major factors in explaining why the Third World is so poor (the principal reason is the lack of secure property rights).
The problem is not just the onerousness of contacting the officials and paying the fees, but also the fact that you have to know who to contact or what your obligations are in the first place. The costs are borne by the whole of society as lower productivity and lower living standards.
Eamonn Butler gives another example at the Adam Smith Institute:
But what has made the banks so big and bloated? Regulation is the answer. Lots and lots of it. Regulators crawl over every aspect of a bank’s operation, right down to how quickly they answer the phone. It costs a fortune. You cannot run a bank without hiring a huge compliance team to keep you within in the rules. So smaller banks cannot survive, and have to merge to create bigger banks. Bigger, less competitive, more profligate banks. Yes, this is entirely a problem of government’s own making. And if the government is being forced to break up the banks, it should lighten the regulatory burden on them at the same time. Otherwise, they will not survive.
Or as Tim Worstall says, “there are only so many tens of thousands of pages of regulations and directives that a three man company can read through before we decide to flee the Continent.”
We need a bonfire of regulations, and regulations with automatic expiry dates. That way, they will have to be re-legislated when they expire. If anyone still wants them, that is. This system would help to mitigate the unforeseen and unintended consequences of regulation.
The advocates of regulation are making the classic error of seeing only “That Which is Seen”, and ignoring “That Which is Not Seen”. Regulation may have apparent benefits, but it has hidden costs. And all too often it has no benefits at all.
