Regulation

Let’s begin with:

Goodman’s Law of Regulatory Impact: most economic regulation, most of the time, imposes social costs on people without changing any fundamental behavior.

Take something really far out. Suppose we repealed the law against murder. Would the murder rate go up or down? For the vast, vast majority of us, the prohibition is not binding. We wouldn’t kill anyone, even if it weren’t illegal. For the small number of people who would be tempted, there would be nothing to fear from the government. They would have to fear retaliation by family and friends, however. (Think The Godfather.) Since I suspect that family retaliation is more fearsome than government retaliation, the overall murder rate would probably go down.

Here’s the bottom line. The criminal justice system is very expensive. When you add the cost of the police, the courts, the prison system, etc., it’s adding a lot to our tax bill. Yet it is changing the behavior of only a tiny number of people. And even for that tiny number, it’s not clear what the net change actually is.

Most economic regulation is also that way.

Those of us who are in the position to hire and fire employees know that lawyers are involved every step of the way. They tell you what you can and can’t say in a job interview. They approve your employee handbook. They tell you what you can and can’t do with respect to employee benefits. They tell you what must be in every employee’s file. They tell you what you can and can’t do if you fire someone. In short, there is no free labor market. Employment in the United States is totally dominated by labor law.

Aside from the enormous costs in terms of time and money, what difference does all this make? Surprisingly little.

The natural assumption is to believe that a lot of labor market regulation is preventing discrimination — against blacks and other minorities, against women, against…Well, against just about everybody who isn’t a young, white male with an Ivy League degree.

However, June O’Neill, an economist who used to direct the Congressional Budget Office, and her husband Dave O’Neill have produced a comprehensive study of this issue and they find that the natural assumption is wrong.

Take the 1964 Civil Rights Act. The O’Neill’s find that the black/white wage gap was narrowing at about the same rate in the two decades leading up to the passage of the act as it did in the years that followed. Only in the South is there evidence that the legislation mattered. Outside the South, federal legislation basically followed social change rather than lead it. The wages of blacks rose relative to those of whites over time for two primary reasons: (1) more schooling and better schooling and (2) the migration of blacks out of the South.

As for the wages of men and women, the O’Neill’s find no evidence that antidiscrimination policies have made a difference, including the actions of the Equal Employment Opportunities Commission (EEOC) and the Office of Federal Contract Compliance Programs (OFCCP).

But isn’t there a lot of discrimination going on right now? Isn’t regulation combatting it?

Take the difference in pay for black and white men. The O’Neill’s find that the difference narrows to just 4% after adjusting for years of schooling and it reduces to zero when you factor in test scores on the Armed Forces Qualification Test (AFQT), which is basically an intelligence test. In other words, after adjusting for just two factors that cause people to be different, the pay gap between black and white men disappears entirely. Among women, the gap actually reverses after adjusting for education and AFQT scores. Black women get paid more than white women.

Among Hispanic and white men, the pay gap narrows to 8% after adjusting for years of schooling and disappears altogether with the addition of AFQT scores. Among the women these two variables cause the pay gap to reverse. As in the case of race, Hispanic women are actually paid somewhat more than white women.

What about men as a group versus women as a group? In addition to years of schooling and test scores, men and women differ in the amount of work they do. Men are more likely to work full-time; and among full time workers, men work 8%-10% more hours than women. Also, men typically accumulate more continuous work experience and therefore acquire higher productivity in the labor market. The gender gap shrinks to only 3½ % when adjustments are made for work experience, career breaks and part-time work.

So am I saying that no one is discriminating? Of course not. Court cases prove that discriminating is alive and well in America. But there is a difference between individual behavior and market behavior. Individuals can discriminate, even though the market as a whole is not discriminating. Similarly, regulation can affect the behavior of individual employers without having any perceptible impact on the market as a whole.

The O’Neill’s findings are consistent with economic theory. If workers receive substantially different pay for doing the same job, an employer would have to be leaving money on the table by not hiring the lower-paid employees. And it can’t just be one employer. In order for pay differentials to persist in entire industries, every employer in the market must be willing to discriminate — including the firms run by women and minorities.

Most health and safety legislation also obeys Goodman’s Law. The Occupational Safety and Health Administration (OSHA) regulates workplace safety. Yet in the years leading up to OSHA, workplace fatalities were falling at the same rate as they fell in the period after its passage. Non-fatal injuries show no impact of OSHA as well. More generally:

  • Do you think the reason airplanes aren’t falling out of the sky every day is because of the FAA? Or is it because the airlines have a self interest in not losing planes and passengers?
  • Do you think the reason you don’t get food poisoning every time you go out to eat is because of the local health inspection agency. Or is it the self-interest of the restaurateurs?
  • Is the FDA keeping you from eating tainted meat? Or is it the self-interest of the supermarket and the agri-businesses?

The answers are fairly obvious. And that is not a bad thing. It is a good thing. If we had to depend on government to keep us from being poisoned, most of us probably would have been dead long ago.

Comments (23)

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  1. Jordan says:

    There are structural inequalities in how discrimination is measured. If you go over the statistics for.. say… DFW, you find that white people are overwhelmingly more likely to commit hate crimes. Unfortunately, there’s data out there to show that these things just get reported or under reported because of existing stigmas. Like how we can never have a White Students Association, or White Entertainment Television.

    What we have isn’t exactly the sort of equality MLK was looking for.

  2. Harley says:

    The president’s new budget is supposedly creating a program for low to moderate income families (whatever threshold moderate means) for universal preschool. Funded through increased taxes on tobacco. Funny that taxes on tobacco are regressive, and those low-moderate income families would bear the burden.

  3. Desai says:

    I bring up some very good points, but what about cases where self-interest in providing the service is murky.

  4. Ken says:

    Interesting slant.

  5. Desai says:

    Sorry I mean’t to say “you bring up some very good points”

  6. H. James Prince says:

    “If we had to depend on government to keep us from being poisoned, most of us probably would have been dead long ago.”

    BOOM! Drop the mic – Dr. Goodman in da house!

  7. Patel says:

    Regulation are there to protect and take into account socio-historical factors when protecting certain groups. I think Market Forces are too focused on the present, and so it collectively care little about socio-historical causes to blacks having higher unemployment rates verses the rest.

  8. Sandeep says:

    Individuals discriminates, but markets don’t. But I am sorry, aren’t markets the collection of all these individuals.

  9. Saket says:

    I think the example you opened this essay with is really powerful and clever, you make such are powerful case of the Goodman law. Thanks for this alert.

  10. Sadat says:

    Wow, I forgot about how much money we put into maintaining jails. It is sad if you think about, our prison system probably gets more funding that our education system.

  11. Gabriel Odom says:

    It doesn’t. Prison spending is about 12% of education spending. That doesn’t pardon our waste however. Over 25% of incarcerated persons are so because of non-violent drug charges.
    Sources: http://compromisedconservative.wordpress.com/2011/01/23/prisons-vs-schools/
    http://www.nationalreview.com/corner/269208/prison-math-and-war-drugs-veronique-de-rugy

  12. Kyle says:

    We have a larger incarcerated population (as a percentage) than any other country in the world.

    Land of the Free.

  13. Peter says:

    Does anyone really think the Law was seriously meant to solve this problem? It is designed to drive private insurance out of the market so the “only solution” is single payor government universal healthcare. Then we will all be beholden to them as they will control our lives.

  14. Al Baun says:

    The article brushes against the basic reason for laws and regulation, but skippes over it to debate the peccadilloes of affirmative action and to protest government’s intervention into society in general.

    ‘Retaliation’ is the human instinct which laws attempt to moderate. Regulation and laws are the mechanisms for individuals to address perceived injustices perpetrated by someone else … instead of mutual combat. Attorneys are the intermediaries between the two participants … who temper the arguments. The judicial system determines the retribution if warranted … instead of plaintiff just shooting the defendant or burning down their house.

    Humans justify their own actions … always. For every action, there is a reaction. One man’s benefit or ‘good business decision’ is another man’s injustice. Society puts governments in place to mediate disagreements of perceived violations of acceptable societal actions or norms. Society has put ‘guidelines’ (laws and regulations) forth which reflect current acceptable actions and norms. Slave labor, child labor, female subjugation, and rampant botulism were once acceptable norms; archaic norms had their body counts. Norms change over time. It’s called progress.

    Regulations protect life, liberty, and property on both sides of human interaction. Some might want to cut societies regulations a little slack.

  15. Robert says:

    Please do an analysis of the American Cancer Association and other Cancer organizations. It seems to me that the rate of cancer has increased since they started. It would be interesting to see the underlying dynamics.

  16. Anda says:

    I think that a major overhaul over our criminal justice system is necessary in terms of expenditures and efficiency. The premise behind the structure of the system is not bad enough to merit change at the moment, however. Other areas, such as education, do merit a major overhaul in all areas.

  17. Ron says:

    Economic regulation may be bad in some aspects, but the example of murder laws is illogical, at best. Try living in a place without murder law or enforcement and let me know if you’ll enjoy fearing for your life on a constant basis. If you’re into that, then pardon me, I must be the illogical one.

  18. Wanda J. Jones says:

    Regulation in the era of PPACA is going to be the worst nightmare of the healthcare system and the public that could possibly have been conceived. Seven feet of regulations, or 70,000 pages so far. And the government thought admin costs in healthcare were too high before PPACA? Even if single payer were to be imposed to conceive the failures of Obamacare, it would simply carry along these intrusions.

    Among the categories of too much regulation are the rules about professional licensure, some of which are to create requirements that have the effect of limiting the number of people who compete for jobs, then the rules about every technical aspect of healthcare, even the width of corridors in hospitals, or the finish on the vinyl wall covering. Everyone is afraid to try modernizing these because this is a boring topic to legislators, and there is an army of interested parties who want to hang onto this spider web. All the tort laws and regulations are a feeder system for attorney aggressiveness and greed, and physician fear.

    I really wish an economist would do an overview of the universe of regulations in the healthcare system and make it look as expensive and ridiculous as it is.

    Cheers..

    Wanda J. Jones, President
    New Century Heatlhcare Institute
    San Francisco

  19. David Lenihan says:

    I personally feel that murder is a heinous crime and that the death penalty is appropriate as law and is also a deterrent. I also feel that public sector corruption is an equally heinous crime….but I am having difficulty getting legislators to agree that it is a capital crime.

  20. Dan M. Krausse says:

    Truly revolutionary thought!!! Where do we sign up?

  21. MarkH says:

    Hey John, how good were those patent medications before the FDA? Remember why the FDA went from regulating food to additionally drugs? Did it have something to do with over 100 children killed by a patent medicine quack putting ethylene glycol in a flu remedy?

    Your convenient examples ignore the conditions that existed in that state of perfect capitalism before the FDA. You could sell any drug you wanted with a label that said anything you wanted. The more expansive the promises, the more people bought. The mistake, was rather than just selling placebo, some idiot actually started putting something other than water (and usually alcohol) in these “medicines”. Now we have an FDA, and really the first rule they made was that before a claim is made, efficacy needs to be demonstrated.

    Now, sure, sometimes the regulatory scheme can be onerous. But can you really argue that the only financial incentive is for effective products? How can you say that when there is still such an extensive placebo market? How can you say that when the major drug market used to consist of little more than poisons and alcohol? There’s a huge financial incentive to sell people placebos, because people will still think they are working, and if you do it right, the liability risks are actually lower if the drug doesn’t actually do anything.

    Oh, and did car manufacturers voluntarily institute seatbelts? Airbags? Crumple zones? Didn’t the Ohio river catch fire before the clean water act? And how was that leaded gasoline going for you guys in the 70s.

    Your analysis of the benefits of regulation is a bit glib.

  22. Frank Timmins says:

    Al and Mark, take a breath. I don’t think anyone is suggesting that “murder” be declared legal, or that back room meth labs be allowed to sell their products as an elixir for fatigue. It was simply being pointed out that government regulation is not the personal or societal safety and protection mechanism that most presume it to be, and given the return on the tax investment detailed in the post it seems that a congressional investigation into the financial practices of these agencies would be in order.

    With regard to the effectiveness of hiring practice laws, I can offer some evidence of how badly many of these efforts compound the very problems they seek to solve. This is especially true with small businesses, which I interrelate with constantly. I have had many business owners tell me they are loath to hire “protected groups” even if they would like to based upon qualifications. The reason is simply this. In the event this person had to be terminated the employer would be facing unwarranted scrutiny from the various regulatory agencies as well as the court system far exceeding the amount of scrutiny (harassment)were the terminated employee not in a protected classification. Gee, aren’t these regulations helpful to both employers and employees?

  23. MarkH says:

    The title is “regulation”. He then uses the absurd analogy of laws against murder as examples of regulation. Talk about comparing apples and oranges. He then generalizes this false analogy to civil rights and health care legislation. This is a bad argument, resting on the flimsiest of foundations.

    Regulations can be good or bad, thoughtful or stupid. They can serve their intended effect, or they can fail to do so. Listing examples of regulations that failed or that had unintended effects doesn’t mean there is no benefit to the practice of government acting to serve the interests of the populace.

    We’ve had a free market in drugs. It was said at the time that if the entire US pharmacopeia were dumped in the ocean it would be better for the man and worse for the fish. If free market principles applied and were perfect, effective drugs should have been popular and ineffective drugs should have been going bankrupt. But the opposite happened! This is still true today. There is a huge placebo market, because you can still make wild promises (just not on the packaging – go to natural news or mercola instead), and sell placebos. These products are much better from a market perspective because (1) they usually do nothing so there is less risk of side effects (2) you don’t have to spend 100 million dollars on clinical trials (3) product claims are made separate from the product so you aren’t liable.

    There is a huge financial incentive to sell us crap. This is why I despise the libertarian nonsense that regulation does us no good. I want consumer protection legislation. I want regulation of medical claims, training, and hospital safety. I don’t have the time or expertise to evaluate every claim, every product, every safety profile, every hospital, every doctor. This is the great myth that the libertarians always try to sell us, that we as some omniscient consumer will be able to discern in every case the best option for us, because of our financial interest (or that of the crowd). The data shows otherwise, or there wouldn’t be a multi-billion dollar market to this day for placebo water.

    I like living in a society where I know if I buy food it’s extremely unlikely to poison me, if I buy a legitimate drug the claims on the label are proven in man, if I see a doctor they have at been vetted by the state, and so on. I don’t want to be injured and then have to sue for damages. I want protection from fraud and malfeasance at baseline.

    I mean, he had the nerve to say that we aren’t being poisoned by food because of the financial interests of the food companies, when they had to be regulated because of their unbelievably terrible practices at the turn of the 20th century. The nerve! Try reading a goddamn history book.

    But I guess I shouldn’t be surprised. I remember when he tried to make the argument that the problem with poverty in Africa was “socialism”. He must have gone to college via a correspondence school.