Who Left $39 Trillion on the Table?

When people (like me) and organizations (like mine) encourage debaters to learn economics and incorporate economic principles into their speeches, we argue expanded economic freedom will enable people to improve their lives and the lives of others.

We encourage students to explore economic freedom reforms and and to master the arguments both for and against government programs, taxes, and regulations.

There are strong ethical as well as economic reasons for societies to rely on voluntary cooperation rather than coercive regulations. Regulations can be arbitrary, static, and the regulatory process tends to be “captured” by regulated firms. Regulations generally limit choices, especially of poor and low-income people. Economists have long argued that voluntary standards and certification systems provide voluntary means to safety and consumer protection goals.

This video by Susan Dudley explains regulatory capture theory.

“Regulatory capture” occurs when special interests co-opt policymakers or political bodies — regulatory agencies, in particular — to further their own ends.  Capture theory is closely related to the “rent-seeking” and “political failure” theories developed by the public choice school of economics.  Another term for regulatory capture is “client politics,” which according to James Q. Wilson, “occurs when most or all of the benefits of a program go to some single, reasonably small interest (and industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).”  (James Q. Wilson, Bureaucracy, 1989, at 76).

More on the economics of regulation in this Econlib.org entry.

“Intermediary institutions” that help provide trust when consumers purchase goods and services. Economist Daniel Klein explains in this EconLib.org post on Regulation:

Producers typically put on their best face and will tend to conceal their failings, and this creates opportunities for a parallel industry of record-keeping, evaluation, and certification. These third-party practitioners range from neighborhood mavens to industry inspectors to product raters to medical schools. In any of these varieties, the agent may be called a “knower.” Knowers have some knowledge that the consumer values but does not have. (Some use the term “certifier,” but that term is too narrow.) 

Sometimes, the consumer pays knowers for reporting on producers. Consumers pay Consumers Union for its magazine, Consumer Reports; patients pay doctors to recommend drugs; employers pay agencies to screen prospective employees; employees pay agencies to screen prospective employers; and home hunters pay agents and inspectors to evaluate properties. 

Other times, the producers pay knowers. Electronics manufacturers pay Underwriters’ Laboratories to evaluate the safety of their products; corporations and governments pay Moody’s or Standard and Poor’s to evaluate the securities they issue; corporations pay accounting firms to conduct an audit; kosher foods manufacturers pay Orthodox Union to certify their preparations; and students pay universities, institutes, and training programs to certify their abilities.
Regulations are often advocated as shortcuts to better, safer, cleaner, policy goals. The Clean Air and Clean Water Acts replaced common law remedies those harmed by pollution could seek in courts.

Economist Howard Baetjer Jr. looks at similar issues in his Freeman article “There’s No Such Thing as an Unregulated Market” which begins:

A big economic problem the world faces is semantic. That is, “regulation” has come to mean “government regulation.” We don’t seem to be aware of the alternative: regulation by market forces. That’s a problem because it leads us to accept so much government meddling that we would be better off without. 

We want the aims of regulation — regularity and predictability in markets, decent quality and reasonable prices for the goods and services we buy — and thinking that government regulation is the only way to get those, we accept a vast array of unnecessary, wrongheaded, and usually counterproductive mandates and restrictions. 

Voluntary certification processes and services have costs. Consumer Reports charges subscribers and spends a lot of money testing and reporting on products. Underwriters Laboratories charges companies to test their products for safety and workability, which most retailers require before they will buy them for resale.

Certification programs can also be referred to a private regulation. This Cato Institute study, PRIVATE REGULATION: A Real Alternative for Regulatory Reform), explains:

But it is a mistake to assume that “regulation” necessarily involves the government. Much regulation in the American economy is private, produced and enforced by independent parties or trade associations. These private organizations can oversee market participants’ actions by different processes, such as standard setting, certification, monitoring, brand approval, warranties, product evaluations, and arbitration. Private regulation works, and it deserves closer attention. 

The federal government should consider transferring regulatory functions such as certification, inspection, monitoring, and product testing to independent parties; it should also consider allowing independent parties to compete with federal agencies in setting standards. 

Incorporating independent third parties into the regulatory process will eliminate the existing command-and-control system and replace it with a flexible, responsive, and evolutionary process. It will drastically reduce the compliance costs of regulations by decreasing the time and other resources spent by businesses and private individuals.

State and federal regulations have higher costs and are less able to adjust when times and technologies change. Much regulation is originally set my legislative mandates and surrounded by years and sometimes decades of additional regulatory rules. This eye-opening video shows the scale of regulatory expansion since the 1950s.

The growth of federal regulations over the past six decades has cut U.S. economic growth by an average of 2 percentage points per year, according to a new study in the Journal of Economic Growth. As a result, the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now.

Ten Thousand Commandments highlights (lowlights?) many regulatory measures, including:

Regulatory costs amount to an average of $14,974 per household – 23 percent of the average household income of $65,596 and 29 percent of the expenditure budget of $51,442. This exceeds every item in the household budget except housing – more than health care, food, transportation, entertainment, apparel, services, and savings. Some 63 departments, agencies and commissions have regulations in the pipeline.

 And per-person regulatory expenses hit small firms harder:

Small businesses pay more in per-employee regulatory costs. Firms with fewer than 20 employees pay an average of $10,585 per employee, compared to $7,755 for those with 500 or more employees.

This 2013 US News article gives a glimpse of a less-regulated world that could have been, “An Economy Buried by Regulations:”

A study in the June issue of the “Journal of Economic Growth” – authored by John Dawson of Appalachian State University and John Seater of North Carolina State University – estimates that federal regulations have reduced economic growth by about 2 percent per year between 1949 and 2005. They find that if federal regulations were still at levels seen in the year 1949, current GDP would be $38.8 trillion higher. While that number seems extraordinarily high, a number of other studies have similarly concluded that regulatory accumulation slows down economic growth.

Leaving $38.8 Trillion on the Table?
When one-side in an exchange could have bargained for a much better deal, it is sometimes called “leaving money on the table.” Key employees could maybe earn higher income if they know how much they were valued. Home buyers and car buyers might have purchased for less if they knew how much lower the seller was willing to go (and same for sellers if they knew how much buyers were willing to pay).

I will argue here that speech and debate students have left on the table some portion of the $38.8 trillion in U.S. wealth that might have been. Since the 1950s most domestic high school debate topics have called for more regulations and more federal government programs.

That was then and this is now. Now homeschool debaters have topics like the freedom vs. equity topic, where affirmatives argue the benefits of freedom “in the realm of economics.”

If homeschool debaters take the time to learn economic principles and develop reasoned and informed speeches and debate cases, they could take these arguments to college with them, as well as to business and community groups.

Ten thousand speeches and debates by current and former homeschool debaters over the next year or two could be enough to reach and enlighten audiences large enough to allow politicians to “lead” in the direction of reducing regulations and wasteful federal programs. In return, debaters could ask for 1% of the savings. That would have been $380 billion had the project been effective in the 1950s, and could generate much more savings given today’s economy. Potential economic expansion currently bottled-up by today’s complex multi-layers regulations is far greater than in the past.

Consider this diagram of today’s federal health-care programs and regulations…

Sweeping regulatory changes, even with wide academic support, still should be carefully explained and discussed to the general public. Thousands of local speeches and debates on these topics would help advance understanding of economic research on the costs of regulation and the many alternatives that have succeeded in the past and in other countries today.