Thursday, May 29, 2008

Too Much Regulation Hurts A Free Market

Keeping a free market going is a bit of a balancing act.  On the one hand, if it is entirely unregulated, monopolies start to form.  These monopolies will then prevent other businesses from competing by either buying them out or underselling them or something similar.  This in turn stifles innovation and takes choice away from the consumer.  On the other hand, if you have too much regulation it stifles a business.  When a company can no longer choose how it acts and is forced to spend a large portion of it's income on compliance with regulations innovation suffers and barriers to entry are created.  You can't just start an insurance company, there are certain rules and regulations you have to follow.  The same with any other business.

It is government's job to make sure that business stays competitive by creating appropriate regulations.  However, if government goes too far, it runs the risk of having the solution be worse than the problem.

The other thing about regulation is that it doesn't always do what was intended.  For example, when the government first gave businesses tax breaks to insure their employees, it was to encourage them to offer insurance.  It was supposed to give people more access to insurance.  Today it is almost the only way a person can afford insurance.  It takes away our choices because we only get to pick what our employer offers.  It stifles competition because insurance companies aren't catering to people any more, they cater to HR departments which usually choose the cheapest plans not the ones that are best suited to all of their employees.

So how do we fix bad regulation?  Well, one of the problems is that once it goes on the books, nobody ever goes back and checks to see if it is working like it should.  Therefore, I believe that all regulation should have an expiration date.  If a regulation is passed, it will automatically expire in two years.  At that point it can be extended but not for more than five years.  This forces the legislature to review regulations regularly.  They can ask if they are doing what they were intended to do and if they are a help or a burden to businesses and the consumer.

As for existing regulations, expire them at the rate of five or ten a year, starting with the oldest.  Basically, enough that meaningful change can happen but not enough that the legislature is overwhelmed with a hundred years of regulation.

Not all regulation is bad but there is a risk whenever government dictates how the market is to operate.  Lets mitigate that risk by insuring that all regulations are periodically reviewed and by allowing unnecessary and counterproductive regulations to expire.  This helps business which lowers cost for consumers.  It's a win win proposition.

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