Why Regulation is Good for Growth

I have in the past criticised regulation for throwing up barriers to entry and taking away opportunity from the youth.

But it turns out that regulation (the more the better) can be an engine for growth.

From Paul Krugman:

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

So by forcing private firms and individuals into spending money on things they don’t believe they need, government can create demand, which will lead to jobs via the magic of Keynesian multipliers.

Central planners know better than individuals and businesses. That is because they tend to be better educated, having attended the best schools and universities. Central planners tend to think about the bigger economic picture, while businessmen and individuals tend to have small parochial horizons. They are simply not qualified to know how to spend their money.

Bastiat was wrong — anything that creates spending during a depression will have a good effect on unemployment and aggregate demand. Austrian economists and libertarians carping on about opportunity cost should look at the opportunity cost of not forcing businesses to spend. During recessions, businesses tend to hoard cash, causing a fall in aggregate demand. This means prices fall, and the value of debt rises as debtors struggle to make payments on falling incomes, which can lead to mass defaults. The cost of not creating the spending would be falling demand and greater debt deflation. Well-educated central planners understand that under such circumstances government must do all it can to get the economy flowing again to stabilise price levels, and the best way to do that is forcing businesses and consumers into spending their cash on things they would not otherwise need or want, as well as by creating inflation.

It is also imperative that well-educated central planners do all they can to alleviate the damage that citizens are doing to our environment. The common businessman does not think about environmental concerns. He only thinks about maximising profit, like a common jungle beast. And we know what happens when this primal force is unleashed upon the world — we get economic depressions. It is the job of the well-educated central planner to correct his dangerous and deleterious behaviour. This can be done through levying taxes, by passing laws to mandate spending, or by laying smart regulations.

The biggest problem with “free” markets is the stupidity of the common people. How can they possibly know what they want, or what they want to achieve when they have not attended prestigious universities like Oxford, Harvard, or Yale? Without help from central planners working with fact-based information derived from simulations, mathematical models, and empirical studies the common people will never be able to make informed economic choices. Thanks to the genius of central planning for the common good — as well as the hard work and self-sacrifice of central planners — the common people are liberated from making difficult economic decisions. They can concentrate on what they are qualified to decide — what to have for lunch (so long as its contents have been approved by central planners for consumption), what to name their children (so long as it comes from a list of names pre-approved by central planners), or what to watch on television (so long as the transmission has been approved by government censors).

Happy April Fools’.

35 thoughts on “Why Regulation is Good for Growth

  1. This is the best kind of April Fools’ joke. If Krugman was in a snarky mood, it could more or less pass for his writing.

  2. This is way too close to the bone, mainly because without the Krugmanish snark, it could have been you writing. I hope you take the time to properly debunk your parody.

    • I could have done much worse. My second choice was writing that I was taking Federal Reserve funding to debunk some of the common myths propagated by economic terrorists like Ron Paul.

      All I am really doing is speaking out loud some of the nastier Keynesian assumptions. People really believe this shit, they just don’t say it for the sake of modesty and decency. All centralist statist systems are by definition somewhat paternalistic.

  3. It is good to learn about the powers of the Sith, but be careful you do not go over to the dark side, young Skywalker.

    • Yes, I probably know Keynesianism better than most Keynesians. I do find this quite scary. But I’ve long believed that the only way to be able to win arguments is by understanding your opponents’ positions better than they do. And Keynes himself isn’t the problem, it is his followers who misinterpreted his ideas.

  4. Although regulation is certainly costly, there are instances in which regulation can be good for growth. I’ll list just two:

    1. Correcting market externalities that result in a misallocation of resources.
    2. Solving non-cooperative game theory problems.

    The last case is the more complicated, but can be illustrated by the example of CAFE standards. The US automakers spent decades fighting the Corporate Average Fuel Economy (CAFE) standards until very recently, when they decided instead to depart from the economics of Adam Smith and explore those of John Nash.

    What they previously failed to realize is that Congress can resolve a non-cooperative game theory problem that the Big Three (and now, Toyota, Honda and others) all face. If any one manufacturer were to unilaterally meet the higher CAFE standard, they would lose market share to their competitors. However, if ALL manufacturers act in concert, they market for vehicles will expand for all of them, as consumers accelerate replacement of older, inefficient vehicles with newer, more efficient (and safer) models.

    While I’m no fan of bureaucracy, a simplistic understanding of regulation that is blind to instances when it IS appropriate is dogmatic and counterproductive. Please don’t interpret this comment as defending regulation in a general sense. There are a myriad of downsides. E.g.:
    1. Regulation is almost always retrospective in that it fails to keep pace with technology or cultural trends,
    2. It inevitably ignores costs of compliance,
    3. It disproportionately favors the politically privileged, and
    4. It is a tool by which entrenched interests can squash innovation in favor of the status quo.

    I get all of that. Regulation is power, and power is subject to abuse.

    But regulation CAN serve a social purpose. You can’t critique regulation credibly if you are in denial about this.

    • I take quite a dim view.

      My real view on regulation is that the main form of regulation should be preventing violence against other people and property. There are real environmental crimes: those that lead to damage to others’ persons or property. Saying that this kind of forced redistribution will result in any economic activity above what otherwise would have taken place is a real stretch. People have needs and wants. Just because “demand is depressed” doesn’t mean people won’t spend to satisfy their needs and wants. That may be a lower amount than a central planner desires, and it may need to a negative cycle until prices fall enough to become sustainable again. Yeah, that will mean hardship for some people. It is cheaper to help the poor than it is to destroy the market mechanism and wreck the entire economy by turn ing it into a giant centrally planned mess.

    • Honestly, externalities are a myth promulgated by central planning apologists to cover ‘solutions to problems I can’t figure out.’ It has become the argument of last resort for the mixed economy when in fact the costs of them are always paid.

      The concept has been debunked over and over again by the Austrians a priori A simple google search (or afternoon spent at mises.org) is all that is required for you to flush out bad information that is keeping you from making good economic decisions with your time.

      The promulgation of externalities as a market force is itself a form of drag on the market as the opportunity of discussing something worthwhile was lost in beating this zombie horse back to the land of the dead.

      I guess the April Fool’s joke is on me… I replied.

      Great post, Aziz.

      • Thanks.

        Here is a useful scenario for those of us who follow Krugman’s doctrine:

        I think with a big enough alien invasion we can get a big enough stimulus to have a recovery.

  5. Pingback: Why Regulation Is Good For Growth | Financial Feeder

  6. Oh my F#$%*n’ God. I’m going to crash my car into a telephone pole today and “stimulate” the economy.

    As usual, I followed the link to Krugman’s NY Times page, because, I frankly didn’t believe he could say such stupid things or that it was an April fool’s joke, but alas, the post is real.

    If half the USA thinks, believes and follows Mr. Krugman, this country is toast!

    • I’m going to crash my car into a telephone pole today and “stimulate” the economy.

      No, no, no. To get a proper stimulus we need something more substantial like a war or alien invasion.

      That way we can increase aggregate demand greatly.

      • The next country the USA “brings democracy to” will hopefully have better tourist options then Afghanistan or Iraq.

        My first vote would be Australia! Sorry Buddy, we yanks are coming over to “Free” you Aussies.

  7. Our Labour party needs to pander to Obama.

    Go long Lithium. We are going to get an increase in demand for lithium mined in Australia to build batteries for Drones. Did you hear that we are getting a US base complete with Drone runways and hangers. Thank you Benny Bucks!

    P.S. For every Government worker there is a child living on reduced handouts Take from one hand to give to the other) and can’t find a job because of regulations suffocating low skilled employment (Sweeping, Cleaning, Nannying). Criminal!

    I used to believe in Union, but now I realise Union organisers feather their nests and support lazy workers who won’t do a fair days work for a fair days pay. It is true what Adam Smith said. If the work is not compensated for the skill and effort. workers will go elsewhere. With a dynamic labour market employers would have to increase compensation.

    Labour Unions, Monopoly Businesses and Socialist Bureacratic Governments equal privillege. How do I get on the Gravy Train?

  8. Very clever, and well done getting on zerohedge.
    But we ARE in a liquidity trap, and coprorations ARE sitting on record uninvested cash hoards, and making companies spend some of that WOULD lead to growth.

    Those freshwater muppets have been proven wrong about everything in the last few years, they had it their way, and look where it got us.

    • But at least Corporations are sitting on cash and earning 3% instead of 1%.

      You would be better off buying into a company with loads of cash to take advantage of the power of “Bulk Buying” and the opportunity to participate in a “Buy Out” of a weaker competitor, or invest in “Innovation”. Plus the improvements in economic science have reduced the incidence of economic depression. The Government has it all worked out.

      I should work for Goldman Sachs. I can spout these lines and show graphs from the last 3 months and then if they ask questions the last 3 years. See the stock martket goes up!

    • Synopticist:

      Yeah we are in a liquidity trap. I think you know by now that I am not completely opposed to everything Keynes said, e.g. I understand austerity in a depression is stupid, and I think governments do well to save during fat times and spend during lean ones. That’s sensible.

      On the other hand, I am really opposed to paternalism. If we want to get out of the liquidity trap, I think the last thing we should be doing is telling people what to spend their money on. Maybe we need to let prices fall some more, to the point where people started buying again simply because their money is netting them a great deal. I think government’s role should be to help the little guy to achieve what he or she wants to do, not tell him or her what to do. I’d start by repealing bad regulation (e.g. barriers to entry) that keeps unemployed people from becoming self-employed.

      • @Aziz: start by repealing bad regulation (e.g. barriers to entry) that keeps unemployed people from becoming self-employed.”

        Unlike me, people who actually have to pay rent to run sheep, don’t make the best living. Our local council in their Wisdom says that a offloading ramp does not meet regulation and to pay for its upgrade they are going to charge advertisers to promote themselves at the sheep market yards. Perhaps raise charges. If so, this renders the trade uneconomic, and the selling yards have to move to a bigger market in a regional town that will not justify the fuel expense. As a result fewer people can find self emplopyment through farming justifiable.

        This means fewer sheep coming to market and higher prices for consumers. Ceteris Paribus! Our local “Big Chain” grocer buys the sheep 100km away. Trucks them to the Abbatoir, sends them to a distribution hub, trucks them back. When Lamb is 20KG Retail and 3KG Sale Yard, someone is getting shafted. I visited Ukraine, and a local Bazaar market had a onsite Butcher, where a farmer could get an animal slaughtered and rent a stall at the same venue. 100% vertical integration. No regulation free market in action. Maybe that is why the ratio of income to food costs is lower in an impoverished place like Ukraine than Australia, USA or EU. You would not want to get Germs would you?? What did we do for 10,000 years!!!

        If they bothered to come down and visit a farm they would realise most loading ramps don’t meet obligations, or the small number attending the sales would not justify advertisers spend.

        I look forward to criticising them in the local “Town Hall” meeting.

        Amateurs!

        • Yes. My neighbours who are sheep farmers also have to comply with this kind of thing. They birth, rear and sell the lamb at their farm. Yet they have to ship it to an abattoir elsewhere for slaughter. That doesn’t just add to costs. It wastes resources.

      • The trouble is, what if “opposition to paternalism” means doing nothing effective about getting out of a liquidity trap?
        If deep pocketed companies prefer to sit on their cash piles, having got so used to bossing governments around and paying ever-lower taxes, how does one move that money back into the real economy? Clearly not with a laissez-faire, hands off approach, as events of the last few years have proven. And freshwater economics have been proven wrong along with them.
        And allowing deflation to get consumers to spend more definatelly didn’t work in Japan, did it? Rather it became self re-enforcing, because why spend now when you know it’ll be cheaper soon.

        Sometimes the state has to force companies to spend money on all sorts of things. In a normal economy this might be best kept to a minimum, but we’re not in normal times.

        Sure we can try to get rid of some idiot govt regulation, but watch everyone go crazy when kids die from some infected lamb meat. It’s incredibly difficult for anyone, let alone politicians looking for re-election, to argue against policies which would have “saved the poor poisoned children” during a media sh*t storm. Especially as big comapnies know they can shove costs onto the consumer.

        • It is a difficult line to tread.

          Japan is a unique case. There are a lot of uniquely deflationary forces (e.g. the laws that require banks to gold government debt), the laws that have constrained the supply of housing, the fact that Japan’s government has been controlled by Japan’s elders who want their fixed incomes to keep buying them more while kids struggle to find jobs. I do see a few of these traits in America, but nothing like to the extent of Japan. Noahpinion (who is probably my favourite modern Keynesian) did a good post on the uniqueness of Japan a few months back if you can find it…

          I do see some room for stimulus spending, particularly on infrastructure, and particularly particularly on energy infrastructure. Overall though, I think that the 2008 bailouts greatly entrenched corporate power and whatever policy government adopts (inflationary paternalism/ noninflationary deflationism) I think it will be skewed toward corporations and their big piles of cash. On the other hand, government seems completely happy to watch Apple amass cash piles that they recycle buying treasury bills…

          But I see an energy shock coming soon, anyway. Whatever government does, those cash piles will be smoked out by the cost-push inflation of energy prices, methinks.

          As for food hygiene… Well yeah. A lot of people love the idea of “professionalisation” and will vote for politicians who offer it, which of course means barriers to entry. On the other hand, I am not so sure they love mass unemployment. We’ll see which way that balance tips…

  9. The biggest assumption made by all politicians, economists and media speaking heads is that the planners themselves have perfect knowledge, that they can tinker with the economy, manage it and bring about desired results, and that their agenda in explicit. Why someone with so much power and ability would serve everyone’s economic interests is a mystery. Bernanke and people like him may be serving their own interests, which is not the same as everyones interests and so power should not be given to these people or any people.

    • The biggest assumption made by all politicians, economists and media speaking heads is that the planners themselves have perfect knowledge, that they can tinker with the economy, manage it and bring about desired results, and that their agenda in explicit.

      Excellent point.

      • I have got to be honest, libertarians confuse the shit out of me. Correct me if I’m wrong, lest I setup and unintentionally argue a straw man, but is the libertarian schema: private good (must be accountable because you could get sued; the lesser of evils because why alienate customers in a free market — it’s bad for business) govt bad ( paternalistic, overbearing, corrupt, elected officials game the system in favor of the elites) ?? If I have the general idea down, and I am not arguing a straw man, why, then, is a libertarian simply not an anarchist? I mean why even trust govt to protect your rights and property at all? The more the population grows the more the security, or rather, the rights “protecting” and property “protecting” segment of govt grows. The more govt grows the more potential for corruption, correct? So why not just jettison govt all together? To the bit about regulations, since you did mention that not all regulations are bad, I would be interested in the ones you would approve of and the ones you disapprove of — what do you think of glass stegall and it’s subsequent repeal, for example? Also, in a very round about way perhaps, couldn’t you argue that regulation falls squarely in the purview of govt in the libertarian schema, because govt exists to protect your rights and property, after all.

        • The key difference between libertarians and anarchists is that libertarians recognise some government and regulation (Glass-Steagall is one example) as a necessary evil.

          My view on Glass-Steagall is that while it is not perfect, it is much better than the status quo.

  10. Don’t get me wrong, Aziz. I agree with a lot of things libertarians say about civil liberties and bureaucracy – the ideas are mostly attractive given a reasonable definition of “freedom” – but sometimes I feel like Libertarianism is very cynical and can be crassly summed up as: Government you suck! You’re paternalistic, you favor the elites, you’re corrupt and you tax way too much – now protect my rights and property dammit!!!

    • That sums up libertarianism pretty well. All of the former (paternalism, corruption, elitism, and overtaxing) gets in the way of the latter.

        • The libertarian ideal (at least in terms of my notion of libertarianism) is government by for and of the people. Not big brother at all. It is the state itself (e.g. tsars, bureaucrats, technocrats, academics, policymakers) that tends toward big brotherism.

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