Category Archives: regulation

Occupational Licensing

Posted on by

The Obama Administration reports a sort of meta-analysis. One excerpt:

Estimates suggest that over 1,100 occupations are regulated in at least one State, but fewer than 60 are regulated in all 50 States, showing substantial differences in which occupations States choose to regulate. For example, funeral attendants are licensed in nine States and florists are licensed in only one State.

Pointer from Tyler Cowen.

I have only skimmed the report, but I did not see a reform that was suggested at dinner the other night. That is, licensing should not be delegated to boards that consist solely of incumbent practitioners.

Tariffs vs. Quotas

Posted on by

Greg Mankiw writes,

rationing under price controls is never perfect. Under rent control, for example, apartments do not automatically go to those who value the apartments the most. The misallocation due to imperfect rationing makes the actual welfare cost of price controls much higher than the standard deadweight loss triangle.

Suppose that the minimum wage is $10. You have one worker who would be happy to work for $8 and another worker who would be happy to work for $10. If the second worker is the one who happens to get the job, you lose $2 of surplus due to what Greg is calling “imperfect rationing.”

I remember being taught the equivalence between tariffs and quotas. But it seems to me that such an equivalence fails by the same reasoning. The quota may be imperfectly rationed, unless rights to sell within the quota are tradable.

Brink Lindsey on Progressive Deregulation

Posted on by

He writes,

Despite today’s polarized political atmosphere, it is possible to construct an ambitious and highly promising agenda of pro-growth policy reform that can command support across the ideological spectrum. Such an agenda would focus on policies whose primary effect is to inflate the incomes and wealth of the rich, the powerful, and the well-established by shielding them from market competition. A convenient label for these policies is “regressive regulation”—regulatory barriers to entry and competition that work to redistribute income and wealth up the socioeconomic scale. This paper identifies four major examples of regressive regulation: excessive monopoly privileges granted under copyright and patent law; restrictions on high-skilled immigration; protection of incumbent service providers under occupational licensing; and artificial scarcity created by land-use regulation.

The subtitle is “Low-hanging fruit guarded by dragons,” by which he means that “the interest groups that benefit from the status quo are politically powerful, well organized, and highly motivated.” For me, it is clear that concentrated political power can explain why three of the four regressive regulations persist. The book publishers and incumbents in the entertainment industry want infinite copyright protection, and patent lawyers want powerful patent laws. Hair braiders and interior decorators want occupational licensing. Owners of developed property want land-use regulation.

The one I don’t quite get is high-skill immigration. Employers want it, and the high-skilled workers who might be threatened by it do not have a formidable lobbying organization.

I do not follow the issue closely, and I could be wrong about this, but I believe that Democrats do not want any legislation passed on immigration that is not comprehensive, and the Republican base does not want comprehensive immigration legislation that includes a path to citizenship for illegal immigrants. The high-skilled immigration question is caught in the middle.

Reputation Systems as Regulators

Posted on by

Tyler Cowen and Alex Tabarrok write,

In recent times, information technology has made it easier to observe a seller’s reputation and to contribute to the formation of a seller’s reputation at low cost. Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation.

This might mean that we need less regulation. Other possibilities:

1. We have always had the means to use reputation systems as an alternative to regulation. But regulation is the preferred outcome of the political system, perhaps for bootleggers and baptists’ reasons. The advent of better information and technology actually does not change the relative economic and political advantages of regulation.

2. One issue with reputation systems is that there is an ongoing temptation to game them. Consider “search engine optimization” or “social media marketing.” Surely there are folks out there offering to get your business top rankings on Yelp. Given that gaming will work at least sometimes, is an unregulated equilibrium necessarily the best?

3. It becomes harder for new entrants to break into a market governed by reputation than one governed by regulation. Obtaining a license from a regulatory agency might be easier than obtaining visibility in a rating system.

What I’m Reading

Posted on by

The Thing Itself, a new book by Michael Munger, which appeared without fanfare. Much of it consists of ideas that he has expressed previously. One of these is his comparison of private and public bus service in Santiago, Chile.

Here is an update on the story.

less than two weeks later, the week of its planned launch, Night School was postponed indefinitely while its founders grappled with the CPUC, which claimed the start-up was not properly licensed as a passenger carrier.

This more recent instance of government authorities insisting that mass transit not be privately provided took place not in Santiago, Chile, but in San Francisco, California.

Rules, Discretion, Principles, and Incentives

Posted on by

Timothy Taylor excerpts from a book on macroprudential regulation.

Paul Tucker: “Legislators have typically favoured rules-based regulation. That is for good reason: it
helps to guard against the exercise of arbitrary power by unelected officials. But a static rulebook is the meat and drink of regulatory arbitrage, which is endemic in finance. Finance is a ‘shape-shifter’.

Rules do not work, because banks figure out a way to manipulate the rules. Tucker gets this. So does Wolf Wagner, also quoted by Taylor.

Also, discretion does not work, in my opinion, because discretion tends to be procyclical, doing exactly the wrong thing at the wrong time. In good times, regulators ease up, and in bad times, they tighten up. Just look at how regulators behaved before and after the housing crash. Or compare Ben Bernanke’s discussion of bank supervision before and after he knew about the crisis.

I think that principles-based regulation might work better. That is, pass a law saying that managers and directors of financial institutions are responsible for prudent management. Require auditors to flag questionable practices.

Also, I think that incentives are important. Casual observation suggests that investment banking was more cautious when investment banks were partnerships rather than limited-liability corporations. We should look for ways to give bank executives more skin in the game in their institutions. Suppose you have a bank that goes bust in 2025. All of its top executives over the preceding 10 years would be held personally liable those losses, in proportion to the compensation that they received over that period.

(For each year, take the five most heavily compensated executives, and put their total compensation into a hypothetical pool. Add these to get a company total for fifteen years. Then divide each executive’s total compensation over the 10 years by the company total to get the fraction of losses for which that executive is liable.)

Actually, I don’t think that the formula needs to be perfectly “just.” The point of any such system is to make executives manage banks as if they were risking their own money, because they would be.

Michael Mandel and Megan McArdle on Regulation

Posted on by

He writes,

even the most regulation-minded can see how the accumulation of well-intentioned rules can have a pervasive and negative effect on innovation. One useful analogy is that of a small child idly tossing pebbles in a stream. One or two or even ten pebbles won’t make an obvious difference in the flow of the stream. Yet, accumulating gradually over the years, thousands of pebbles can make an effective dam. Or to put it into technology terms, asking a software developer to add one more feature or requirement to a program may seem like a small and innocuous request. Yet enough such ‘minor’ requests turns a simple task into a bloated, ungainly, and bug-ridden piece of code that may be virtually unusable.

She writes,

Framing the problem as “bad regulations” misses the real problem with the system: even good regulations are now so expensive, in complexity points, that they are probably not worth passing.

Great minds and all that.

My solution, of course, is principles-based regulation. Instead of hard-and-fast rules promulgated by agencies, which as they multiply become more complex and incoherent, we would have a few clear principles articulated by Congress. Common-law precedent would fill in the specifics, and the evolution of this common law would not necessarily be toward greater complexity and incoherence.

I do not expect to convince doubters of the superiority of principles-based regulation a priori. All I ask is that we try it with some field of regulation. Incidentally, the FTC has in fact done some experimenting along these lines, particularly in the area of truth in advertising, reportedly with some success.

Incidentally, Mandel is with me on the need to do something about the FDA. He writes,

The problem is that the FDA interprets the “safety and efficacy” standard as meaning at least as safe and clinically efficacious as anything on the market currently. That immediately rules out an innovation that is safe, much cheaper, but not as efficacious as best medical practice. So if the FDA had been in charge of the phone or computer markets at the time, early mobile phones and personal computers would have not been approved for sale because they provided inferior quality to existing products.

Ryan Avent on Urban Housing Supply

Posted on by

He writes,

Housing is more costly in the most expensive cities because so little of it is built. In the 2000s, Houston’s housing stock grew by more than 25 percent while that in the Bay Area grew just over 5 percent. In 2013 Houston approved 51,000 new homes while San Jose okayed fewer than 8,000, despite the booming Silicon Valley economy. Glaeser and Kristina Tobio find that since the 1980s, the extraordinarily rapid growth in the population of Sunbelt cities is due primarily to the receptiveness of those cities to new construction. A strengthening economy in places like Texas and Georgia leads to a construction boom and rapid population growth, while economic booms in coastal cities lead to very little population growth but soaring housing costs.

More Q where construction is allowed, higher P where it is not. Read the whole thing.

How to Regulate Comcast and Verizon FIOS

Posted on by

Brock Cusick writes,

Require utility companies to lease space on their rights-of-way to at least four ISPs, at cost.

Call it infrastructure neutrality, or open leasing. This proposal should independently provide most of the benefits in changing the Internet companies’ status to “telecommunications service,” as mere competition between local firms will discourage them from withholding any service or level of service offered by their local competitors. This competition would thus provide the consumer protections that voters are looking for, while allowing Internet companies to remain more lightly regulated (and thus more innovative) “information services.”

This sounds like a terrific idea to me. Competition is not a perfect regulator, but it is a better regulator than the FCC.

Are People Really Moving Back to Cities?

Posted on by

Joel Kotkin writes,

The last decennial census showed, if anything, that suburban growth accounted for something close to 90 percent of all metropolitan population increases, a number considerably higher than in the ’90s. Although core cities (urban areas within two miles of downtown) did gain more than 250,000 net residents during the first decade of the new century, surrounding inner ring suburbs actually lost 272,000 residents across the country. In contrast, areas 10 to 20 miles away from city hall gained roughly 15 million net residents.

I had the opportunity to discuss urban economics with Phil Longman the other night. He had many interesting points.

1. The distribution of income both within metro areas and across metro areas is much wider than it was in the 1970s. In the 1970s, Manhattan was not so much richer than Staten Island. New York was not so much richer than Detroit.

2. Some cities are now “colonial economies” in the sense that they are dominated by businesses owned elsewhere, with few local-owned businesses. He cited St. Louis as an example. When I grew up there, we had McDonnell-Douglas and Monsanto. Now even Anheuser-Busch is not locally owned.

3. So many venture capitalists are in San Francisco that it’s not clear that San Jose is still the capital of Silicon Valley.

4. Whatever happened to the death of distance? It seems that people will pay up to live in cities.

Of course, my theory is that cities are dominated by the New Commanding Heights of universities and hospitals. This brings in highly-paid professionals. So cities that were blue-collar in 1950 and became ghetto by 1980 are becoming yuppie now.

Kotkin’s finding of growth in outer-ring suburbs is really counter to the anecdotal picture of people being attracted by the new urbanism. I think it might be best to think about location choices in the aggregate as driven by supply elasticity. Take it as given that development in cities and close-in suburbs is restricted. If the overall trend is to move away from small towns and rural areas, then the increased demand shows up in P in the city and the close-in suburbs, while the Q shows up in the last place the pundit class would expect it–the distant suburbs.