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Of course, thankfully, most of the world nowadays no longer follows the kind of full-on communism practiced by Stalin and Mao and the rest of the hardliners of the mid-20th century. Those regimes gave us some memorable examples of how bad things can get when government power is taken to its most critical extreme; but luckily, the majority of modern countries seem to have actually learned the right lessons from their cautionary tales (at least for the most part), and so have made a very conscious effort to avoid the obvious pitfall of putting their entire economies under direct government control. In fact, even Russia and China themselves have largely switched to having market-based economies, and have been better off for it (especially in China’s case). The fact that these countries are no longer losing millions of citizens to grim fates like mass starvation might seem like a pretty low bar – and sure, it is – but the fact that it’s actually been cleared is a genuinely big deal, and is not something that should be taken for granted.

Having said all that, it’s also worth emphasizing that just because a country has managed to escape the biggest trap doesn’t automatically mean that it has therefore achieved exactly the right balance of government control and private enterprise for itself, and so no longer needs to worry about the issue at all. In a lot of ways, even the most developed countries in the world still have certain things that their governments should probably be doing more of but aren’t, and other things that they should probably be doing less of but aren’t. So despite the fact that most countries have avoided the worst-case scenario of absolute state dominance over the economy, we should still be mindful of all the less extreme ways that governments can – and do – extend themselves further than they rightly should.

For instance, while we’re on the subject of Russia, here are some examples from Wheelan illustrating how excessive government regulations can needlessly stifle private commerce (and why countries like Russia, despite no longer suffering from complete government control, still have quite a ways to go on that front):

Government has plenty to do—and even more that it should not do. Markets must do the heavy lifting. Let’s talk about articles 575 and 615 of the Russian civil code. These regulations would be very important if you were a firm in Moscow doing something as simple as installing a vending machine. Article 575 forbids firms from giving anything away free, which includes the space that a firm “gives” to Coca-Cola when a vending machine is installed. Meanwhile, article 615 forbids subletting property without the landlord’s consent; the square meter taken up by the vending machine can be construed as a sublease. In addition, the tax collector forbids commercial enterprises (e.g., vending machines) to operate without a cash register. And since selling soft drinks from a machine constitutes retail trade, there are assorted fire, health, and safety inspections.

Excessive regulation goes hand in glove with corruption. Government bureaucrats throw up hurdles so that they can extort bribes from those who seek to get over or around them. Installing a vending machine in Moscow becomes much easier if you hire the right “security firm.” What about opening a business elsewhere in the developed world? Again, Peruvian economist Hernando de Soto has done fascinating work. He and fellow team members documented their efforts to open a one-person clothing stall on the outskirts of Lima as a legally registered business. He and his researchers vowed that they would not pay bribes so that their efforts would reflect the full cost of complying with the law. (In the end, they were asked for bribes on ten occasions and paid them twice to prevent the project from stalling completely.) The team worked six hours a day for forty-two weeks in order to get eleven different permits from seven different government bodies. Their efforts, not including the time, cost $1,231, or 31 times the monthly minimum wage in Peru—all to open a one-person shop.

[There are all kinds of] reasons government should stick to the basics. Harvard economist Robert Barro’s classic study of economic growth in roughly one hundred countries over three decades found that government consumption—total government spending excluding education and defense—was negatively correlated with per capita GDP growth. He concluded that such spending (and the required taxation) is not likely to increase productivity and will therefore do more harm than good. The Asian tigers, the all-star team in the economic development league, made their economic ascent with government spending in the range of 20 percent of GDP. Elsewhere in the world, high tax rates that are applied unevenly distort the economy and provide opportunities for graft and corruption. Many poor governments might actually collect more revenue if they implemented taxes that were low, simple, and easy to collect.

When government regulations become so onerous that even the most basic economic functioning becomes an ordeal, it’s not hard to see how this can grind a country’s ability to grow and prosper to a standstill. Just to emphasize this point, Wheelan adds a couple more international examples that are even more ridiculous:

India has over a billion people, many of whom are desperately poor. Education has clearly played a role in moving the nation’s economy forward and lifting millions of citizens out of poverty. Higher education in particular has contributed to the creation and expansion of a vibrant information technology sector; however, a recent shortage of skilled workers has been a drag on economic growth. So it’s no great economic conundrum as to why a pharmaceutical college in Mumbai would seek to use empty space in its eight-story building to double student enrollment.

The problem is that this action turned the college administration into criminals. It’s true—the Indian government imposes strict regulations on its technical colleges that protect against something as reckless and potentially dangerous as using empty space to educate more students. Specifically, the law stipulates that a technical college must provide 168 square feet of building space for each student (to ensure adequate space for learning). That formula precludes the Principal K. M. Kundnani College of Pharmacy from teaching more than 300 students—regardless of the fact that all the lecture halls on the top floor of the building are padlocked for lack of use.

According to the Wall Street Journal, “The rules also stipulate the exact size for libraries and administrative offices, the ratio of professors to assistant professors and lecturers, quotas for student enrollment and the number of computer terminals, books and journals that must be on site.”

Thankfully, governments sometimes roll back these kinds of regulation. In November 2008, the European Union acted boldly to legalize . . . ugly fruits and vegetables. Prior to that time, supermarkets across Europe were forbidden from selling “overly curved, extra knobbly or oddly shaped” produce. This was a true act of political courage by European Union authorities, given that representatives from sixteen of the twenty-seven member nations tried to block the deregulation while it was being considered by the EU Agricultural Management Committee.

I wish I were making this stuff up.

If you’re reading this as an American, laughing to yourself at how backward all those silly foreigners are, well, don’t feel too smug. The US has some of the most outlandish examples of overregulation in the world – including, as Alexander points out, things like laws against pumping your own gas in certain areas (I’ve already shared this example before, but it’s too appropriate not to include here as well):

Alex Tabarrok beat me to the essay on Oregon’s self-service gas laws that I wanted to write.

Oregon is one of two US states that bans self-service gas stations. Recently, they passed a law relaxing this restriction – self-service is permissable in some rural counties during odd hours of the night. Outraged Oregonians took to social media to protest that self-service was unsafe, that it would destroy jobs, that breathing in gas fumes would kill people, that gas pumping had to be performed by properly credentialed experts – seemingly unaware that most of the rest of the country and the world does it without a second thought.

…well, sort of. All the posts I’ve seen about it show the same three Facebook comments. So at least three Oregonians are outraged. I don’t know about the rest.

But whether it’s true or not, it sure makes a great metaphor. Tabarrok plays it for all it’s worth:

Most of the rest of the America–where people pump their own gas everyday without a second thought–is having a good laugh at Oregon’s expense. But I am not here to laugh because in every state but one where you can pump your own gas you can’t open a barbershop without a license. A license to cut hair! Ridiculous. I hope people in Alabama are laughing at the rest of America. Or how about a license to be a manicurist? Go ahead Connecticut, laugh at the other states while you get your nails done. Buy contact lens without a prescription? You have the right to smirk British Columbia!

All of the Oregonian complaints about non-professionals pumping gas–“only qualified people should perform this service”, “it’s dangerous” and “what about the jobs”–are familiar from every other state, only applied to different services.

Since reading Tabarrok’s post, I’ve been trying to think of more examples of this sort of thing, especially in medicine. There are way too many discrepancies in approved medications between countries to discuss every one of them, but did you know melatonin is banned in most of Europe? (Europeans: did you know melatonin is sold like candy in the United States?) Did you know most European countries have no such thing as “medical school”, but just have college students major in medicine, and then become doctors once they graduate from college? (Europeans: did you know Americans have to major in some random subject in college, and then go to a separate place called “medical school” for four years to even start learning medicine?) Did you know that in Puerto Rico, you can just walk into a pharmacy and get any non-scheduled drug you want without a doctor’s prescription? (source: my father; I have never heard anyone else talk about this, and nobody else even seems to think it is interesting enough to be worth noting).

The list of examples goes on. Apparently, we as a species just really like banning and regulating things, regardless of how beneficial it actually is. And just speaking from personal experience, I have to admit I understand the impulse; there’s always a real temptation, any time there’s some major crisis or controversy in the news, to reflexively say that the government needs to step in and do something about it – to insist that “there ought to be a law!” But more government involvement isn’t always automatically the right answer to every problem; as the above examples illustrate, despite government’s ability to resolve certain issues, in the process of doing so it can often create new problems that are even worse than the ones it was trying to solve. What’s more, in situations where big businesses and other powerful interests are involved (i.e. a whole lot of situations), these side effects aren’t always entirely accidental. As Thomas Sowell explains, it’s all too common for major government interventions, despite initially coming from a place of wanting to help consumers and lower prices, to eventually end up doing the exact opposite – becoming a tool of powerful interests rather than a check against them:

Regulatory agencies are often set up after some political crusaders have successfully launched investigations or publicity campaigns that convince the authorities to establish a permanent commission to oversee and control a monopoly or some group of firms few enough in number to be a threat to behave in collusion as if they were one monopoly. However, after a commission has been set up and its powers established, crusaders and the media tend to lose interest over the years and turn their attention to other things. Meanwhile, the firms being regulated continue to take a keen interest in the activities of the commission and to lobby the government for favorable regulations and favorable appointments of individuals to these commissions.

The net result of these asymmetrical outside interests on these agencies is that commissions set up to keep a given firm or industry within bounds, for the benefit of the consumers, often metamorphose into agencies seeking to protect the existing regulated firms from threats arising from new firms with new technology or new organizational methods. Thus, in the United States, the Interstate Commerce Commission— initially created to keep railroads from charging monopoly prices to the public— responded to the rise of the trucking industry, whose competition in carrying freight threatened the economic viability of the railroads, by extending the commission’s control to include trucking.

The original rationale for regulating railroads was that these railroads were often monopolies in particular areas of the country, where there was only one rail line. But now that trucking undermined that monopoly, by being able to go wherever there were roads, the response of the I.C.C. was not to say that the need for regulating transportation was now less urgent or perhaps even unnecessary. Instead, it sought— and received from Congress— broader authority under the Motor Carrier Act of 1935, in order to restrict the activities of truckers. This allowed railroads to survive under the new economic conditions, despite truck competition that was more efficient for various kinds of freight hauling and could therefore often charge lower prices than the railroads charged. Trucks were now permitted to operate across state lines only if they had a certificate from the Interstate Commerce Commission declaring that the trucks’ activities served “public convenience and necessity” as defined by the I.C.C. This kept truckers from driving railroads into bankruptcy by taking away as many of their customers as they could have in an unregulated market.

In short, freight was no longer being hauled in whatever way required the use of the least resources, as it would be under open competition, but only by whatever way met the arbitrary requirements of the Interstate Commerce Commission. The I.C.C. might, for example, authorize a particular trucking company to haul freight from New York to Washington, but not from Philadelphia to Baltimore, even though these cities are on the way. If the certificate did not authorize freight to be carried back from Washington to New York, then the trucks would have to return empty, while other trucks carried freight from D.C. to New York.

From the standpoint of the economy as a whole, enormously greater costs were incurred than were necessary to get the work done. But what this arrangement accomplished politically was to allow far more companies— both truckers and railroads— to survive and make a profit than if there were an unrestricted competitive market, where the transportation companies would have no choice but to use the most efficient ways of hauling freight, even if lower costs and lower prices led to the bankruptcy of some railroads whose costs were too high to survive in competition with trucks. The use of more resources than necessary entailed the survival of more companies than were necessary.

While open and unfettered competition would have been economically beneficial to the society as a whole, such competition would have been politically threatening to the regulatory commission. Firms facing economic extinction because of competition would be sure to resort to political agitation and intrigue against the survival in office of the commissioners and against the survival of the commission and its powers. Labor unions also had a vested interest in keeping the status quo safe from the competition of technologies and methods that might require fewer workers to get the job done.

After the I.C.C.’s powers to control the trucking industry were eventually reduced by Congress in 1980, freight charges declined substantially and customers reported a rise in the quality of the service. This was made possible by greater efficiency in the industry, as there were now fewer trucks driving around empty and more truckers hired workers whose pay was determined by supply and demand, rather than by union contracts. Because truck deliveries were now more dependable in a competitive industry, businesses using their services were able to carry smaller inventories, saving in the aggregate tens of billions of dollars.

The inefficiencies created by regulation were indicated not only by such savings after federal deregulation, but also by the difference between the costs of interstate shipments and the costs of intrastate shipments, where strict state regulation continued after federal regulation was cut back. For example, shipping blue jeans within the state of Texas from El Paso to Dallas cost about 40 percent more than shipping the same jeans internationally from Taiwan to Dallas.

Gross inefficiencies under regulation were not peculiar to the Interstate Commerce Commission. The same was true of the Civil Aeronautics Board, which kept out potentially competitive airlines and kept the prices of air fares in the United States high enough to ensure the survival of existing airlines, rather than force them to face the competition of other airlines that could carry passengers cheaper or with better service. Once the CAB was abolished, airline fares came down, some airlines went bankrupt, but new airlines arose and in the end there were far more passengers being carried than at any time under the constraints of regulation. Savings to airline passengers ran into the billions of dollars.

These were not just zero-sum changes, with airlines losing what passengers gained. The country as a whole benefitted from deregulation, for the industry became more efficient. Just as there were fewer trucks driving around empty after trucking deregulation, so airplanes began to fly with a higher percentage of their seats filled with passengers after airline deregulation, and passengers usually had more choices of carriers on a given route than before. Much the same thing happened after European airlines were deregulated in 1997, as competition from new discount airlines like Ryanair forced British Airways, Air France and Lufthansa to lower their fares.

In these and other industries, the original rationale for regulation was to keep prices from rising excessively but, over the years, this turned into regulatory restrictions against letting prices fall to a level that would threaten the survival of existing firms. Political crusades are based on plausible rationales but, even when those rationales are sincerely believed and honestly applied, their actual consequences may be completely different from their initial goals. People make mistakes in all fields of human endeavor but, when major mistakes are made in a competitive economy, those who were mistaken can be forced from the marketplace by the losses that follow. In politics, however, those regulatory agencies often continue to survive, after the initial rationale for their existence is gone, by doing things that were never contemplated when their bureaucracies and their powers were created.

Timothy Taylor summarizes these points this way:

Any method of regulation faces the danger of what economists call “regulatory capture,” when regulators start believing their job is to protect industry profits and industry workers, rather than protect competition and consumers. Regulators often seem to develop a form of Stockholm syndrome, sympathizing with the firms they are regulating until it impedes their judgment about protecting consumers.

Thus, in some cases the answer to the best form of regulation has been to deregulate. The U.S. economy experienced a wave of deregulation in a number of industries in the late 1970s and early 1980s. Deregulated industries included airlines, banking, trucking, oil, intercity bus travel, phone equipment, long-distance phone service, and railroads. When these industries were deregulated, they stopped being nice, neat, orderly markets with a predictably high level of profit year in and year out. Yet by the end of the 1990s, America’s great deregulation experiment of the 1970s was saving consumers about $50 billion a year in lower prices. Consumers’ choices mushroomed. The airlines reorganized themselves into hub-and-spoke systems, creating more connections between cities. Trucks set up similar hub-and-spoke delivery systems, improving their reach. Deregulation in banking brought in automatic teller machines and flexible financial services. Deregulation of telecommunications led to an explosion in new technology.

After the fact, it’s easy to argue that many of these changes would have happened anyway. After all, science marches on. Aren’t new services such as smartphones and automatic teller machines technologically inevitable, regardless of market competition? Don’t be too sure. Telephones, for example, changed relatively little over the decades from when they were invented until the telecom industry was deregulated, despite huge technological changes over that time. Today’s toddlers may not even recognize a phone with a cord by the time they become teenagers. It’s not a foregone conclusion that all this change would have happened in a regulated market—at least, not this rapidly.

This is an important point; the more a particular industry is regulated, the less likely it is to change. And granted, this isn’t always necessarily a bad thing; in some areas, it can be better for firms to stick with what works rather than trying to constantly innovate and come up with (potentially harmful) new methods for operating more efficiently. (I’m sure a lot of people felt that way after the 2008 financial crash, for instance.) Other times, though, this government-imposed pressure not to change or innovate does nothing but create a drag on progress. Alexander sums up the issue this way:

The problem with banning and regulating things is that it’s a blunt instrument. Maybe before the thing was banned someone checked to see whether there was any value in it, but if someone finds value after it was banned, or is a weird edge case who gets value out of it even when most other people don’t, then that person is mostly out of luck. Even people operating within regulations have to spend high initial costs in time and money proving that they are complying with the regulations, or get outcompeted by larger companies with better lobbyists who can get one-time exceptions to the regulations.

In short, the effect is to decrease innovation, crack down on nontypical people, discourage startups, hand insurmountable advantages to large corporations, and turn lawsuits into the correct response to everything.

(Of course, he also adds, “The problem with not banning and regulating things is that the rivers flow silver with mercury [and] poor people starve in the streets” – which is an important counterpoint! But we’ll get into that more in the next post. For now, the key point is just to acknowledge that the benefits of regulation aren’t always the whole story by themselves; government regulation can in fact have negative effects as well as positive ones.)

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