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Corrupt Regulations Are the Problem

Here’s an interesting twist on an old political argument, and it’s coming from the Harvard Business Review no less.

Some politicians like to argue for less regulation — regulations are bad, and stifle the economy. Others like to argue for more regulation — regulations protect the middle class. But the problem isn’t regulation per se, the problem is corruption.

This distinction should be obvious to us. After all, many of the same people who are arguing against some regulations, are arguing just as strongly for other regulations. Mainly regulations that don’t apply to them. Sound familiar? It’s just like entitlements, where “entitlement” is defined as “money someone else receives”. Or pork.

The corruption that the Harvard article is talking about is money in politics. This isn’t about overt (and illegal) bribes in return for favors. They are talking about corruption that amazingly enough has been made legal in this country. And yet the damage it does to our economy and to our future is far worse than any illegal corruption.

For example, copyrights. Every time the copyright on Mickey Mouse is about to expire so that he will enter the public domain, Congress passes another bill to extend the length of copyrights. Somehow, much shorter copyrights were enough to encourage Walt Disney to come up with his character in the first place, but now it makes more sense to big content corporations to spend more money on campaign contributions to buy the regulations they want, rather than on developing new characters and stories.

Or the thousands of regulations that make it more difficult for anyone to start a new automobile company. The National Automobile Dealers Association (NADA) recently sued Tesla Motors for opening up stores to sell their cars, because laws in many states prohibit car factories from owning their own dealerships. Can you imagine if Best Buy sued Apple because they opened up their own stores? In Indiana, there are laws that require dealerships to house at least 10 vehicles of the type that the dealer is selling. That’s easy for car companies like GM or Ford, but makes no sense for new companies like Tesla or Fisker.

I recently toured a museum that holds several hundred antique cars from the 1800s and early 1900s, and the guide stated that back then there were over 4000 different car manufacturers, all competing and innovating. But today, we are left with car companies that are “too big to fail” and whose major innovations are things like center-mounted brake lights and improved gas milage, which were forced down their throats.

Another huge example are regulations that hurt companies that are innovating on the Internet. For example, AirBNB, which lets normal citizens rent out spare bedrooms that would otherwise go empty, or Uber, which uses the Internet to let independent taxi drivers book fares. Both companies are being fought by trying to impose new regulations that are all but designed to put these upstarts out of business. For example, the International Association of Transportation Regulators is proposing a new set of regulations, which would prevent the use of GPS to measure the precise time and distance of a trip (using GPS is much easier and cheaper than installing a traditional taxi meter). The new regulations would also prohibit anyone from making a booking less than 30 minutes from the pickup time. Why? You guessed it, so drivers won’t accept electronic hails.

Similar regulations and rules are being used against disruptive technologies and companies, including NetFlix, which is forced to pay more to transport movies over the Internet than large incumbent companies like Comcast.

In general, the corrupt regulations are the ones that benefit incumbent companies at the expense of innovators and upstarts. Not surprisingly, the incumbent companies that are benefiting the most from these corrupt regulations are some of the least innovative. Imagine the problems we could solve if we had true competition and innovation in energy (rather than subsidizing big oil and coal), transportation, housing, and other sectors.

Not mentioned in their article (but in the same category of corrupt regulations) are tax breaks given to large companies to get them to locate factories in a specific state or county. How much does that hurt small businesses, who are the real innovators?

What benefits accrue when these regulations are eliminated? A few years ago, the city where I live rewrote their health laws to make it easier for street vendors to operate. The changes didn’t compromise health or cleanliness, they just eliminated regulations that made it next to impossible for food carts to operate. As a result, my city has undergone a food renaissance. Did removing these regulations hurt the large restaurants that they were ostensibly protecting? Not really. In fact, many of them opened up their own food carts. Often, successful food carts have graduated and opened up their own restaurants. The creation of a vibrant food culture has helped all restaurants, not just the food carts, and grown a supply of excellent cooks and restaurant entrepreneurs.

I’m not arguing against all regulations. There are definitely many areas where we need more regulations. I’m arguing against corrupt regulations. This is an important distinction that we should be careful to make when we are discussing whether or not we need regulations.



  1. dave tn wrote:

    good post

    Sunday, December 23, 2012 at 9:29 pm | Permalink
  2. Max wrote:

    We need to get money out of the economy.

    Monday, December 24, 2012 at 3:54 am | Permalink
  3. David Freeman wrote:

    Well said, I’ve forwarded this link to many friends

    Monday, December 24, 2012 at 9:59 am | Permalink