A key contributor to this technological transformation was a mandatory EU technical standard enforced in By , there were more than a billion subscribers to GSM services worldwide. The global reach of the regulation implied huge economies of scale in the manufacture of handsets and network hardware, so prices fell rapidly, and interoperability between networks and across countries was much easier to achieve.
Many regulations play this standard-setting role. Contrary to the simplistic view that regulation is inevitably bad for business, there are in fact three important channels through which regulation can benefit an economy. One is the market-creating and market-growing role illustrated by the GSM standard. When there are competing technological approaches, such as the famous contest in the s between the Betamax and VHS standards for videotape, consumers are better served if these contests between similar standards are settled promptly and decisively, to preclude the risk of spending money on a losing technology.
When the standard is set by regulation in a large market like the EU, the United States, or China, economies of scale kick in quickly. The virtuous circle of falling prices, quality improvements, and growing demand is thereby established. This is a powerful dynamic. It explains why British businesses are increasingly appalled by the prospect that the UK government will not deliver continuing post-Brexit regulatory alignment with the EU. The scale of the accessible market is immensely important to growth prospects.
Regulation can also benefit an economy by enabling competition. This seems counter-intuitive, and indeed some forms of regulation serve to enable rent-seeking behavior. Businesses in oligopolistic sectors often complain about the burden of compliance; but they clearly rely on regulation as a barrier to market entry by new competitors.
The cost of their regulatory burden is a fee they pay for market power. The regulation of some of these sectors, like finance, is an example of what not to do.
Officials imagine that consumer protection requires another regulation whenever something goes wrong, resulting in thickets of rules that protect incumbents and lead to all kinds of unintended consequences and complexities. As the new regulations prove ineffective not surprising, given the overabundance of scams and mis-selling in finance , a vicious circle is set in motion, with additional regulation resulting in further failure — and more regulation.
The FCA is proposing to make its regulatory sandbox method global. Moreover, there is some safeguard against complex regulatory thickets if new rules need to undergo a cost-benefit analysis. But such assessments are only incremental, whereas what is needed is a periodic assessment of the regulatory framework as a whole. The first is through spending programs. The IRS collects compulsory taxes, and the revenues are spent on desired public functions such as parks, roads and other infrastructure, schools, law enforcement, homeland security, and scientific research, as well as welfare and social insurance programs such as Social Security, Medicare, Medicaid, food stamps, and unemployment assistance.
The second is through regulation. The goals of spending programs and regulations are widely accepted. For example, a clean and healthy environment, safe food and drugs, and fair business and employment practices are among the most important things citizens expect of their government. The goals are largely nonpartisan—most conservatives, moderates, and liberals agree on them. However, the implementation of spending and regulatory programs often is controversial. While the goals of most regulatory programs enjoy broad public support, in practice regulation usually comes down to detailed rules and lots of paperwork that can be highly costly and burdensome to those who must comply with them.
This includes not only large corporations but small businesses, nonprofit organizations, schools, state and local governments, farms, and consumers and citizens. Some sectors of the economy bear the heaviest burdens, such as manufacturing, automobiles and transportation, energy and power, banking and finance, and health care and pharmaceuticals. But all of us pay for federal regulations through higher prices, fewer available products, services, and opportunities, and stifled wages or job opportunities.
In our democracy, citizens express their views at election time by voting for candidates and parties that stand for broad menus of policy positions. While policies effected through both spending and regulatory programs provide benefits to Americans, the costs associated with regulatory programs are much less transparent than their on-budget counterparts.
To implement spending policies, presidents send proposed budgets each year to Congress, and Congress must both authorize activities and appropriate necessary funds to implement them. Spending agencies are generally enthusiastic about their programs and want more resources to pursue them, but the available funds are necessarily limited and must be allocated to the highest priorities by Congress and the President in a much-debated, highly-publicized, annual budget process.
These checks and balances make elected officials accountable to citizens. Regulatory policies cannot be measured in the same way, however; and there is nothing equivalent to the fiscal budget to track regulatory costs. Further, regulations have the force of law, but Congress usually just sets broad regulatory goals by statute, and delegates the power to write and enforce detailed rules to specialized regulatory agencies. As the size and reach of the government has grown dramatically over the last century, so too have concerns about the costs and unintended consequences of regulatory programs.
At the end of the nineteenth century, government accounted for less than ten percent of the U. Today, government consumes or directs nearly half of the economy, with direct government spending alone reaching on the order of one-third of U.
At the federal level alone, there are over 70 federal regulatory agencies, employing hundreds of thousands of people to write and implement regulations.
Regulatory mandates often are very costly—for example, for expensive pollution control equipment, extensive testing of new drugs, and collection of detailed information from consumers. As noted, these costs are not controlled as they are for spending programs. Federal spending is limited by the available revenues, and by budgeting among many competing programs.
But regulatory costs are born outside the government, by those who must comply with the rules, their customers, and their employees. Additionally, lacking the budget constraint of spending agencies, regulatory agencies are prone to excess. They often pursue their specific mission with zeal, but this results in too little regard for other legitimate goals, such as a strong and growing economy.
Both types of programs may claim dramatic benefits from eliminating disease, or crime, or pollution, but such claims often lack credibility and accountability. We would never allow the spending agencies to collect their own taxes from the public, in whatever amounts they feel they need.
Yet regulatory agencies effectively do just that. While many regulatory costs initially fall on regulated businesses, those costs are necessarily passed on—to consumers in the form of higher prices, to employees in the form of lower wages, and to investors in the form of lower returns on investment.
For this reason, regulation can produce not only large social benefits but also large negative effects on prices, wages, business investment, and job opportunities.
As mentioned earlier, regulation functions essentially as stealth taxation. The regulatory dilemma is this: On the one hand, regulation can be critically important to our welfare. Federal and state regulatory agencies have contributed to great improvements in air and water quality, highway safety, public health, honest commerce, racial and gender equality, and many other central aspects of American life. On the other hand, regulatory actions often have come at a cost that exceeds their benefits and sometimes actually have been counterproductive.
These failures are abetted by the structure of the regulatory process: regulation operates outside our usual system of checks and balances, where policies are enacted directly by our elected representatives and disciplined by taxing and budgeting. Regulatory agencies have too often fallen short of public expectations and disappointed public trust. Precisely because of its importance, regulation deserves constructive criticism and earnest efforts at improvement. In the following pages, we attempt to show how regulation can be reformed to achieve its valuable goals more thoroughly, more effectively, and at lower cost.
In thinking about the real effects of regulation, it is important to understand that the special resource of the government—which private entities do not possess—is the power to coerce. Interest groups that can convince the government to use its coercive power to their benefit can profit at the expense of others.
The motivation for each of these activities is to maximize economic returns, but the unintended consequences of profit-seeking and rent-seeking differ dramatically. Ultimately, consumers receive the gains in the form of lower prices and better products.
Such rent-seeking to achieve favorable regulatory treatment is a rational response to the opportunity presented by regulation, and generates concentrated gains for the successful rent seekers at the expense of everyone else. But rather than creating new opportunities and value for consumers, such behavior leads to socially wasteful uses of resources. When regulations can provide competitive advantage, it is often in the self-interest of regulated parties to support them, 17 often hiding behind public interest arguments 18 even while other interests oppose them.
Thus, talent and energy get channeled into lobbying for favorable government treatment a zero sum game at best , rather than into entrepreneurial experimentation and innovation that leads to growth and prosperity. This leads to regulatory agencies advancing the commercial or political concerns of the most well-organized special interests which may be, but are not necessarily, regulated parties.
And even where regulations are well intended, they can produce unintended negative consequences. For example, drug regulation may delay the introduction of new, life-saving pharmaceuticals. The well-connected—those who can hire lobbyists and know the right people in Washington—can gain at the expense of ordinary citizens. For example, large, established interest groups, such as large companies and trade associations, environmental groups, trial lawyers, unions, and state, local, and tribal governments, generally have much better access to legislators and regulatory officials, and can influence how regulations are designed and enforced.
They often have Washington offices dedicated to ensuring their interests are reflected in regulations. This can disadvantage everyone else—ordinary consumers, taxpayers, workers, small businesses, the middle class, and the poor. Businesses who ignore Washington, and just concentrate on competing for customers in the marketplace, can quickly find themselves on the losing side of trade policy, or tax policy, or some other regulatory tilt of the playing field.
Large businesses also have advantages over smaller entities in that they have systems in place to handle the burdens of regulatory compliance, and can spread those costs over more employees and products. In heavily regulated industries like medical care or consumer finance, it becomes difficult, if not impossible to be successful by attending only to the needs of consumers.
Catering to the whims of the regulators can dominate other considerations. The real costs of regulation are passed on to all Americans, who are generally unaware of these costs because they are hidden in lower wages, higher prices for consumer goods and services, and fewer products and opportunities made available. Often, those least able to represent themselves shoulder the greatest burdens. For example, many regulations lead to higher energy and transportation costs, raising product prices on almost everything we buy.
These regulations may lead to some benefits, but is it really fair to ask low-income families to pay a larger share of their income for these benefits than wealthier families? Products standards that may make sense for many may also price low income consumers out of the market entirely. Higher prices for new cars to incorporate backup cameras, for example, make them less affordable to lower income consumers who end up driving older, less safe cars longer.
Regulations in the workplace may keep the workplace safer, but they limit worker flexibility, and can dampen wages, or discourage employers from hiring less-experienced or lower-skilled workers. Lengthy drug approval processes not only increase the cost of new drugs but discourage investment in potentially life-improving products. Consumers may face absurdly high drug prices, not because the drug is new or expensive to produce, but because it enjoys a monopoly protected by regulatory barriers.
And, patients are prevented from getting access to promising products during the bureaucratic delay, even those with terminal illnesses. Small, pioneering companies cannot afford the costs and time required to get approval of innovative new products, and often sell out to larger companies with the expertise and resources to obtain government approvals.
Corporations and their spokespeople often denounce government rules as irrational impediments to profits, economic efficiency, and job creation. Unsurprisingly, many firms have used loopholes , moved operations abroad, and violated antitrust laws as they attempted to deal with regulations. In reality, American businesses have both prospered and suffered due to an ever-increasing number of rules and a complicated tax code.
As a result, the relationship between firms and the government can be either collaborative or adversarial. More importantly, the rules have protected consumers from exploitative practices. Below, we'll look at some of these regulations to see why their impacts on businesses can be difficult to determine. Congress passed the first antitrust law in and followed that with periodic changes in corporate tax rates and increasingly complex regulations governing business.
The business community has generally opposed laws, regulations, or tax levies that it thinks impede its operations and profitability. A common argument against overregulation and excessive taxation is that they impose a net cost on society in the long run. According to critics, government regulations slow disruptive innovations and fail to adapt to changes in society.
Others argue that there are good reasons for regulation. In pursuit of profit, businesses have damaged the environment, abused labor, violated immigration laws, and defrauded consumers.
Proponents say that is why publicly accountable elected officials are in charge of regulation in the first place. Furthermore, some rules are essential for civilized competitive businesses to flourish. Few legitimate firms wish to engage in racketeering or participate in the underground market. In any case, we now have entities and regulations to limit the alleged excesses of the free market.
Businesses complain about many of these rules while also lobbying to have other rules changed in their favor. The act governs accounting, auditing, and corporate responsibility. Many in the business world opposed the bill, claiming that compliance would be difficult, time-consuming, and ineffective. Furthermore, they predicted that the law would not protect shareholders from fraud.
The agency regulates the disposal of waste materials, restrictions on greenhouse emissions, and controls on other pollutants. Companies required to comply with these rules have complained that the restrictions are costly and compromise profits.
Some firms regard the FTC as a foe of business. It was created in to protect consumers from deceptive or anti-competitive business practices. These can include price-fixing , the formation of monopolies, and fraudulent advertising.
It regulates initial public offerings IPOs , ensures full disclosure, and enforces rules governing stock trading. Pharmaceutical companies often complain that the FDA needlessly delays the approval and marketing of certain drugs. They often demand additional or more extensive clinical trials , even when the drugs have already shown effectiveness. The high costs of getting drugs approved may deter small firms from entering the market.
Furthermore, the FDA has been criticized for delaying approval and human trials of drugs for people facing life-threatening conditions. Perhaps the most substantial criticism of government regulations is that they create the potential for regulatory capture. When that happens, the agencies supposedly responsible for protecting consumers come under the control of the industries they are supposed to regulate. The regulator may actively create barriers to entry and divert public funds for bailouts to benefit favored firms.
Regulations can increase the power of dominant and abusive firms if policymakers are not careful when they create new rules.
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