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Regulation doesn’t work. Period.

The current economic crisis has hit America, and it has hit us hard.  The same MSM (mainstream media) that was completely caught off guard by the crisis is now claiming that there are signs of recovery in our economy (supposedly more people have been going to the mall so things are looking cheery right?).  Do they actually expect us to believe they have any credibility anymore?  Americans are so desperate for a recovery they are hoping that Washington can be our saviors. The sad reality is that Americans are choosing to ignore personal responsibility and turning to the very people who caused the problem in the first place, our government.  So what’s our politicians going to do?  The only thing they know how to do: add more regulations and throw buckets of money out the window.  Unfortunately, government regulations often have unintended consequences (check out my Road to Hell blogs) and can achieve the exact opposite of what they are supposed to do.  This is not to say I’m against all forms of regulation.  If there’s one thing I’m a fan of regulating, it’s the Federal Reserve Bank.  But this is only because regulation destroys, and I’d like to see the Fed destroyed.  But this is beside the point.  Regulation never works, never will work, and will not save our economy!

The first reason regulation doesn’t work is that it gives people a false sense of security.  As long as government regulators are doing their job, why should the public have to worry about fraud?  Well, sometimes the regulators don’t do their job and when it’s your money on the line you should be concerned.  Regulators don’t have magic powers and there are always conmen who can get around the system.  Take for instance the Bernard Madoff ponzi scheme scandal.  A lot of people trusted him, including regulators, and most didn’t bother checking where their money was actually going or how they were getting such good returns.  Allegedly, the SEC was alerted 10 years ago to investigate Madoff and failed to do anything.  Thus, many people ended up being duped out of billions of dollars due to lack of investigation by themselves and the regulators.  If the SEC were a private business it would have failed and ceased operations.  Unfortunately, this won’t happen as it’s a government agency. 

This leads to the next point why government regulation doesn’t work: when it fails, it grows bigger instead of being abolished.  Why in the world would we spend more money on an agency that fails?  John Stossel notes in his article A False Sense of Security, “Notice the disconnect. Regulation failed, so we need more regulation. I see it differently. Regulation failed, so let’s try free markets. That would be a change….Savvy investors would do their own risk assessment if they didn’t believe the government was doing it for them. And wouldn’t they do a better job, considering it was their own money at risk? Regulators risk nothing.”  But what about the common person who is not a savvy financial investor?  Wouldn’t they lose?  Quite the contrary.  Ending government regulation would open up all sorts of new business enterprises focusing on risk assessment.  The average Joe “could pay specialists for the service, generating a competitive market for risk assessment — in contrast to the monopolistic SEC and other agencies…That form of investor protection would be superior in every way to a system that gives a bureaucracy arbitrary power. After all, private risk assessors would have to justify their fees, which clients would pay voluntarily.”  This is the genius of the free market.

Another reason regulation doesn’t work is that it drives out competition and benefits big business.  Consider the lead scare in Chinese toys that caused our politicians to pass the Consumer Product Safety Improvement Act.  This seemingly innocent bill would force every toy manufacturing company to do expensive lead tests on their toys in order to meet regulations.  Without doing these lead tests, the toy companies could face very stiff fines or even losing their business.  For smaller toy companies, this act would be a nail in the coffin as they’d face a catch 22.  They can choose to follow the regulations and have less profits, or they can choose to not follow the law and face losing their business.  Thus more small toy companies will run out of business, while the bigger toy companies like Mattel, which can easily afford to comply with this new regulation (and likely manufacturers most their toys in China ironically), will remain in business.  Due to ever increasing government red tape, entry into the field will be made more difficult and therefore less entrepreneurs will be likely to start a new toy business and this will lead to less competition.

As expected, regulation creates artificially inflated prices because of overhead costs.  Consider a contractor’s license (licensing being another form of government regulation).  In order to enter the field as a professional contractor, one must pass a test and pay to have their license.  This cost is passed down directly to the consumer.  Without the need for the license, more contractors would be able to enter the field and there would be more competition.  With more competition, the cheaper the prices and better the service.  Of course, people would have to pay closer attention to the contractors they hired.  But this would be a good thing because it would prevent people from blindly trusting someone just because of their license.  Plus, new potential risk assessment companies (as previously mentioned) could add this as another one of their services for people who don’t have the time or know how to investigate.

Thus, ending regulations would open a whole new world of freedom not just for businesses, but also for consumers.  If you paid a business to assess your risk and you end up getting duped, then you’d have the freedom to choose another risk assessment company and that previous one would be allowed to go out of business.  The more competitive the risk assessment industry, the more aggressive they could crack down on business fraud and pretty soon people would forget we ever had an SEC or any other government regulators.  Due to less overhead, it would be much easier to start up a new business and this would result in a much larger demand for new jobs.  Productivity would thus increase, America would once again be a more competitive industry, employment would rise, and prices would fall.  I’ll say it again, the genius of the free market.


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