The New Wave of Regulation: An Appraisal
Langenfeld, James
James Langenfeld The New Wave of Regulation: An Appraisal In the last twelve years a new kind of regulatory agency has invaded the marketplace. Previously, agencies had been set up to regulate,...
...Few of these )rms actually contribute to making the rorkplace safer...
...Nevertheless, the regulatory agencies were clearly interested in questions of cost as well as the quality of servcies...
...I might add that the cost of much of this aperwork is regressive in the sense that oth large and small companies are freuently required to file the same forms...
...It is generally agreed, for example, that government ought to provide (directly or indirectly) for fire and police protection and for defense—primarily to ensure that everyone who enjoys the benefits of such services pays his proper share of the costs (the so-called "free rider" problem...
...There is an old saying that a raiload must keep three complete sets of )ooks—one for the IRS, one for the ICC, nd one to run the business—and the proiferation of regulatory agencies has enormously increased the...
...Professor Sam Peltzman of the University of Chicago has estimated that the 1962 amendments to the Food, Drug-and Cosmetics Act—which require elaborate testing before new drugs are marketed—are delaying the introduction of new drugs by four years, as well as leading to higher drug prices...
...First, there are additional costs of design and production changes made to meet CPSC specifications...
...OSHA' s regulations tell a manufacturer exactly how he should set up his plant, without regard to its actual safety record...
...Enforcing a rigid set of standards discourages innovation and may work against the goals for which the agency was created...
...Their purview is not the market operations of one industry but some particular aspect of production .or sales which cuts across all industries...
...Friedrich A. Hayek observed in The Constitution of Liberty that "...a free market system does not exclude on principle...
...According to data supplied by the Bureau of Labor Statistics, federal requirements from he Alternative: An American Spectator March 1976 21 1968 to 1974 added an average of $320 to the retail price of each passenger car...
...Louis, in his book Government-Mandated Price In:reases (American Enterprise Institute, 1975...
...The harm of keeping effective new drugs off the market may exceed the harm of allowing ineffective drugs to be sold for a period of time...
...Few economists would argue against the necessity of government intervention in some aspects of a capitalist economy...
...of this increase, 4.6 million man-ours were devoted to OSHA paperwork lone...
...There is no incentive for the firm to find safer methods of production...
...regulatory agencies are justified in terms of the costs they generate...
...The first question Weidenbaum adiresses is the overhead cost of these agencies...
...according to a study by the agency, it will cost industry about $13.5 billion to comply with the 90dbA maximum and would cost about $31.6 billion with the lower level...
...A substantial 'inflationary multiplier' must be applied to the direct outlays for federal controls...
...People pay either by sufferingfrom the sewage (a nonmonetary cost), by paying taxes to have the government clean up the river, or by requiring the polluter to dispose of the effluence in a sanitary way...
...Previously, agencies had been set up to regulate, and sometimes to promote, particular industries...
...Adding the cost of catalytic converters required in 1975 could raise these estimates by fifty percent...
...Second, the cost of product recalls can be devastating, and indeed must be passed on in the form of higher prices if the company is to remain solvent...
...Robert H. Marik f the U.S...
...Why Regulation...
...The third, and perhaps most significant, cost is the diminished selection of products on the market...
...The question is not whether people are for or against sewage, but rather how do we allocate the costs of pollution...
...Similarly, we could decrease the risk of injury from kitchen knives by making them less sharp, but that would reduce their ease of operation and usefulness...
...The bureaucracy only ensures that the private sector follows the law, making workplaces safer or employing the proper, amount of minorities, etc...
...The second example is the method OSHA uses to make workplaces safer...
...The prospect of potential benefits from these agencies is not sufficient reason for their activities...
...22 The Alternative:, An American Spectator March 197...
...However, the actions of the new agencies have tremendous influence on manufacturing costs and market structure, invariably affecting the prices of final products...
...Office of Management and Budget testified before Congress that ,usiness' reporting burden increased by 3.5 million man-hours, or about fifty ,ercent, from December 1967 to June 974...
...The new regulatory agencies are considered by Congress as an attractive alternative to government spending, but their costs show up in higher prices and a more limited selection of products for the consumer...
...The Cumulative Effects of Regulation On a national scale, it is currently impossible to estimate the cumulative effects of the overhead and full costs of regulation...
...Relating this particular standard to the general case, Weidenbaum points out: "In evaluating the merits of such an investment, an economist is concerned not only with the magnitude of the resources involved, but also the alternative uses to which those resources could be put (the 'opportunity cost...
...According to his calculations ederal spending for the various business nspection and other activities of the new agencies rose from $1.3 billion in fiscal rear 1972 to an estimated $2.2 billion in fiscal year 1975, and continues to grow •apidly...
...But either consumers or taxpayers must pay for any benefits that may be achieved...
...What are the effects of the new regulators on income distribution in the U.S...
...The decrease in consumer choice is as real a cost to society as are dangerous products...
...People with lower incomes tend to purchase used cars, so the effect of these government regulations has been to hurt the poor more than they hurt the rich...
...OSHA's regulations not only discourage technically safer innovations, but may actually forbid them...
...The actual work and its cost rest with private industry...
...Are government regulations the most effective way to solve society's problems...
...What is the most efficient and equitable way to cure the ills of society...
...Ine effect of the increased paperwork is ) favor big business, which can spread le increase over greater output...
...Businesses and eventually conumers pay for this red tape...
...OSHA has recently imposed a maximum noise level of 90A scale decibels for working places, and last summer it held hearings to consider lowering this standard to 85dbA...
...One example where the dollar cost of regulation has been estimated with some precision is in the achievement of noise level maximums dictated by OSHA...
...Professor Weidenbaum has calculated the sum of the quantifiable costs of government regulation on automobiles...
...it also discourages the search for better drugs...
...The cost of this single regulation must, for the most part, be passed on either in the form of higher prices or in lower wages to labor...
...Can regulation costs be summed...
...The overhead costs of regulation, asWeidenbaum points out, are "only the tip of the iceberg...
...Regulatory agencies, as traditionally conceived, were also to ensure that industries under their purview offered a "fair" price for their products or services...
...Let us suppose, for instance, that a baby food manufacturer is pouring solid waste into a river...
...Whether they should be so used, therefore depends not only on whether the intended use is "good," but on whether it is better than the uses to which the resources would otherwise be put.' " The most obvious opportunity cost of this OSHA regulation is that money used to lower noise in industry could be spent on medical research designed to prevent hearing loss...
...Thus the Occupational Safety and Health Administration (OSHA) is intended "...to assure so far is possible every working man and woman in the Nation safe and healthful working conditions and to preserve our human resources...
...The regulatory agencies which have been created since 1964 are different...
...The overhead expenses of regulaion are not limited to the agencies hemselires, however, for private industry nust comply with its reporting requirenents...
...It is much more difficult to estimate their benefits, so this essay has only attempted to point up the hidden costs of regulation...
...People may prefer some amount of pollution in the river to higher taxes of more expensive baby food...
...The Environmental Protection Agency (EPA) regulates the effluence of every company and every individual, while the Equal Employment Opportunity Commission seeks to eradicate discrimination in hiring...
...A rm employing one hundred people has le same OSHA reporting requirements s General Motors, without being able to (ford the large staff to handle reports...
...As it turned out, the "fair" price in a- regulated market was often higher than would have been the case if the forces of competition and innovation had not been restrained...
...By examining case studies of how prices, consumer choice, and income distribution are affected by OSHA, CPSC, EPA, et al., Weidenbaum offers some first approximations of the efficiency and :osts of (as he calls them) the "new wave" of government regulators...
...If the govern-ment does not pay for the benefits these agencies supposedly produce, then businesses, and eventually consumers, will...
...What are the opportunity costa of such regulation...
...Perhaps the portion of the $3 billion spent on safety devices for every car, such as impact-absorbing bumpers, could have been better spent on reducing road hazards or getting drunken drivers off the road...
...The market price of goods and services is at best a secondary concern of these agencies, and often the impacts on cost are neglected completely...
...Thus, one of the ostensible duties of the ICC, when founded in 1887, was to moderate windfall monopoly profits of the railroad industry...
...The Consumer Product Safety Commission (CPSC) concerns itself with potential safety hazards associated with all products sold to consumers...
...The "old" regulators may have their own defects, but they at least recognize that the price consumers pay is central to any regulatory process...
...The expenditures of these agencies by themselves do not prevent pollution or bring about product safety...
...In the areas of workplace safety and pollution, tax incentives based on the safety or the effluence levels of individual firms may better achieve, the goals of OSHA and EPA...
...all regulations 20 The Alternative: An American Spectator March 1976 governing the techniques of production...
...Even though the instructions on the tools are very clear in this respect, some customers may willingly buy the cheaper model and knowingly take the chance of burning it out...
...This is ne more strike against the small usinessman and competition...
...The major costs resulting from the operations of the growing force of federal inspectors and regulators show up in the added expenses of business firms which must comply with their directives...
...A policy of complete product safety would ban the cheaper model, thereby effectively depriving the low-income consumer of buying a power tool at all...
...Nevertheless, if the most efficient and equitable ways to achieve the goals of the new regulators are found and adopted, there still will be a real cost to society...
...Cars with mandated safety and environmental features cost substantially more to produce—a cost which the consumer pays whether he wishes to or not...
...Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University in St...
...They will normally raise the cost of production, or what amounts to the same thing, reduce overall productivity...
...Government regulations have raised the prices of used cars proportionally higher than new ones...
...Putting a price on limiting consumer choice is as difficult as valuing the benefit of saving a human life...
...Two examples immediately come to mind...
...In the area of product safety, perhaps the government or private industry should concentrate on informing the public of the hazards associated with a product, rather than flatly banning it...
...The approach of the new regulators doesnot appear to be the solution, but what are our alternatives...
...The real costs of CPSC product safety regulations show up in several ways...
...When the EPA promulgates a standard it does not eliminate the problem of pollution, it merely changes how society pays for it...
...If consumers realized this, perhaps more government regulation would not be as attractive to Congress...
...There are also times when government is justified in stepping in to deal with the external costs of production...
...With new car purchases totaling nine million in 1974, American motorists paid $3 billion extra for governmentally-imposed standards, not including the extra fuel costs related to these changes...
...How much are we willing to pay for clean water...
...As Weidenbaum suggests, "...a power tool selling for $20 may not have the capability of being used for more than an hour, while the $500 tool may safely be used for a much longer period...
...Assuming current regulations are effectively enforced, we are still faced with one additional "real cost" to society...
...paperwork which usinesses must produce for their iureaucratic overseers...
...The automobile example brings together many of the questions raised by the new form of government regulation...
...As Paul McCracken has stated the matter: 'resources used in one direction are then not available to be used elsewhere...
...Ideally, it should choose the method of dealing with these costs which most efficiently reflects people's preferences...
...Regulatory Overhead It is difficult to compare the costs and benefits of the new regulatory agencies, because the agencies are young and data are therefore scarce...
...Analogous are work and product safety regulations...
...But if this effect on cost is fully taken into account and it is still thought worthwhile to incur the cost to achieve a given end, there is little more to be said about it...
...No matter how the law is drawn, someone pays...
...If the firm is held liable for-the pollution, it will either pass on that cost through higher prices or simply shut down...
...Bear in mind that there is a real cost whether or not government intervenes...
...This waste is an external cost of producing baby food, in that it is borne by the community rather than by the manufacturer and his customers, and government may be justified in intervening to limit pollution in accordance with community preferences, because the manufacturer has little incentive to minimize this cost...
...This cost will show up in the form of higher taxes or higher prices for everyone, i.e., Government-Mandated Price Increases...
...The Interstate Commerce Commission (ICC) was to focus solely on ground transportation, the Civil Aeronautics Board on the airline industry, the Federal Power Commission on utilities, and so on...
...Society may receive substantial benefits from a clean environment and from safe working conditions and products...
...An excellent start has been made, however, by Prof...
...The important question is whether the new...
Vol. 9 • March 1976 • No. 6
