Last week we talked about some of the wackier laws and regulations in Argentina, which is considered to be one of the most regulated economies in the world, with rules about pretty much everything. People in the comments section mostly agreed with the requirement to put a hat on your horse on hot days, mostly because they liked the look.
But many of the other regulations that built up in Argentina over decades of populist rule only serve to slow down economic activity and impose unintended costs on society. Argentina shouldn't be singled out too much for its wacky rules, though. There are strange rules and regulations all over the world. The Salmon Act of 1986 makes it a jailable offence to handle a salmon in a suspicious, vicious manner.
In the UK, Russia, Belarus and Kazakhstan made it illegal to wear Lacy underwear a few years ago, and in Japan it's illegal to be fat. Or at least companies are required to measure the wastes of their employees, and if they're too large and don't lose weight in the timely manner, the companies can be fined. I'm not sure if there's an exemption for sumo wrestlers or not. I'll have to look that up. In Wyoming, any new public building being constructed must have art displayed valued at 1%
of the building's costs. The artwork, of course, has to be approved as art by an advisory panel of community representatives. The Nickelback law in Canada requires Canadian radio stations to ensure that at least 50% of the popular music that they play is Canadian content. Many people feel that this law has led to the Canadian people being confused about the meaning of the word ironic.
In 2009, Christopher Hitchens, angered by excessive regulation in New York under Mayor Bloomberg, wrote that there are laws that are not possible to obey, that nobody can respect, and that are enforced by arbitrary power. He argued in his Vanity Fair article that the essence of tyranny is not iron law, it's capricious law. He then spent the day breaking pointless laws in New York.
He sat on an upended milk crate, putting his bag next to him on a subway seat, paused to adjust his shoe on a subway step, fed pigeons in Central Park, had a cigarette in a town car, attempted to put a plastic frame on a car license plate, and rode a bicycle without keeping his feet on the pedals at all times. He pointed out in his article that no sane New Yorker would occupy an extra subway seat with their bag when the subway was crowded, as their fellow passengers would likely
discipline them. He also pointed out that on a crowded train, there's no room for an inspector to walk around handing out tickets. Thus, in real life, you'd only get ticketed for doing this when there are plenty of spare seats available. For obvious reasons, no one would sit blocking the subway stairs during rush hour either. But he wrote that a pregnant woman had been ticketed for this
offence a few months earlier. When overcome with exhaustion, it might have been more reasonable for the officer to have offered her assistance, but that's not how things worked out. It is, of course, easy enough for me to dig through the Internet looking for funny regulations, But just because some exist doesn't mean that all
regulation is pointless. Excessive regulation, which we often call red tape, stands in contrast to justified regulation, where social benefits outweigh social costs. Up until the 1960's, the conventional wisdom was that if there was a market problem, government regulation could and should step in and fix it. Policy makers and economists assumed that the new laws, once passed, had their desired
effect. In 1962, this all changed when a paper by Stiegler and Friedland analysed the effect of regulation on electricity prices and found that government regulation hadn't lowered electricity prices nearly as much as expected. George Stigler went on to win a Nobel Prize for his research on regulation and created a new area of study for economists known as the Economics of Regulation, which involved testing the outcomes and side
effects of legislation. In recent months, we've seen tech entrepreneurs who not so long ago were demanding government bailouts for their uninsured bank deposits, saying that the government needs to get out of their way with regulation, which slows down the innovative fintech they've invested in. So let's look at the costs and benefits of regulation and how the regulatory environment could be improved. There's a long history of waves of regulation followed by deregulation.
Big scandals often have provided the catalyst for new regulations, and then the realization that the rules are possibly excessive has caused them to be rolled back in finance. The 1933 Glass Steagall provisions, which separated commercial and investment banking, came in the wake of the 1929 crash. The 2002 Sarbanes-Oxley Act was a reaction to the Enron and Worldcom scandals. Dodd Frank was enacted in 2010 after the 2008 financial crisis. Good regulation can bring all
sorts of benefits. Owning stocks can grow people's wealth and Dr. economic growth. Yet the level of equity ownership, especially outside of the United States, is less than what financial theory would consider optimal. A2019 paper from the University of Chicago analysed data from EU countries and found that better regulation on insider trading and market manipulation, along with better consumer protections, prompted households to increase their average equity
ownership significantly. When investors feel that they'll be treated fairly, they're more likely to invest, and so a good regulatory framework is good for both investors and businesses
seeking investment. If some regulation is good, then how much regulation is too much and what should be regulated well, Milton Friedman, who along with George Stigler was one of the leaders of the Chicago School of Economics, argued for minimal government intervention in markets, saying that regulation is only needed in situations where it's not feasible for the market to force individuals to pay for the costs
they impose on others. He argued that this mostly occurs in situations where property rights are vague or diffuse, and it's almost impossible to make them precise. In Free to Choose, Friedman argued in favour of environmental taxes instead of environmental regulation, saying the preservation of the environment and the avoidance of undue pollution are real problems where the government
has an important role to play. He argued, though, that instead of regulation, the best way for a government to deal with pollution is to impose a tax on polluters that's sufficient to minimize the amount of pollution that occurs. When presented with the example of thalidomide, a drug which was widely prescribed in Europe but had not been approved in the United States, which caused severe birth defects in thousands of children, as an example of how strict US
regulation had paid off. He argued that of course it's desirable that the public be protected from unsafe and useless drugs, but that this needs to be balanced against the need that drugs also be made available to those who need them as quickly and cost effectively as possible. He argued that it's easier to count the lives saved by a bad drug being delayed than the lives lost when good drugs take years longer than necessary to approve.
His point was that even seemingly good regulations still have costs associated with them. I'll put a link to his discussion in the description as he makes some really good points. The point here isn't that the FDA should be shut down, it's just that with any rules there are trade-offs which are often missed by the people who are either really pro or really anti regulation. The real world tends to be pretty complicated when they
work well. Governments make laws to protect people from harmful things that they can't prevent on their own.
Examples that matter to everyone are food safety and food hygiene regulations, where individuals can't reasonably know how the food they buy at a supermarket or restaurant has been treated before they buy it. Sure, if we eat something that makes us sick, we won't return to the shop or restaurant where we bought it. But there are many food outlets that deal with passing trade rather than regular customers.
And to quote Milton Friedman, it's not feasible for the market to force these businesses to pay for the costs they impose on others. So we need food inspectors to make sure our food is hygienic. I don't have to give much thought to the quality of the food that I buy where I live, but when I go on holiday and get sick after eating out, I feel glad to not have to spend my day worrying about issues like that. People constantly getting sick is also a drag on an economy as
it reduces worker productivity. There are, on the other hand, regulations that deliver next to no net social value and undermine productivity because the time and money spent on understanding and accommodating them could be put to much better
use. George Stigler's paper The Theory of Economic Regulation in 1971 changed the way that people thought about regulation from something that emerged naturally due to the existence of market failures to instead sometimes being something sought out by businesses with the goal of erecting barriers against potential competitors. We see this today with the big crypto and AI firms actively seeking government regulation, which might seem quite
surprising. While they say that they want regulation to protect the public from bad actors, Stigler might argue that they want regulation that they can easily comply with, but that start up competitors will find really expensive and which may reduce competition, giving the big
firms monopoly like powers. Stiegler argued that one of the reasons that regulation fails is that regulators end up being captured and dominated by large monied interests who can influence regulation to work in their favour. This idea prompted economists to analyse regulations just like any other economic problem, where they build models to analyse the outcomes, often finding that regulations don't
have the desired effect. This type of analysis led to the discovery that people take greater risks in cars that are safer. If you know your brakes won't lock up in an emergency, you might drive closer to the car in front of you. The skydiver Bill Booth might have explained this best when he said the safer skydiving gear becomes, the more chances skydivers will take in order to
keep the fatality rate constant. In 1976, Sam Peltzman built on Stiglers ideas, suggesting that regulators bowed not only to industry, but that they also leaned towards decisions that optimize political support from groups that have an interest in regulation. He argued that regulators went through cycles of creating rules and enforcing them more strictly, but could then be convinced to ease up over time. Regulation and deregulation, he argued, are a natural part of
the political process. The Merchant Marine Act of 1920, which is better known as the Jones Act, says that every time you want to send something from one US port to another US port, it must travel on a ship built in America, staffed by Americans and owned by Americans. The ship has to be mostly built of American components, too. It provides one of the best examples of the law of unintended consequences.
The law was introduced over 100 years ago to protect the American shipbuilding industry and to ensure that there would be a ready supply of trained sailors in times of war or national emergency. Based on the outcomes, the Jones Act has been a failure on every front. Due to a lack of foreign competition. The ACT allowed American shipbuilders to push up their prices. American built coastal and feeder ships cost 6 to 8 times more than comparable foreign
built ships. For this reason, very few American ships are built or purchased. The fact that the ships are so expensive means that it's
cheaper to transport goods by rail or road. 1 alternative is to ship the goods to Mexico or Canada and then and transport them by road to their destination in the United States to work around the Jones Act. Americans pay vastly higher prices to move goods around their own country because of the act, and goods are particularly expensive in places like Hawaii and Puerto Rico, where they either have to choke down the higher shipping cost or import foreign made goods.
The Jones Act incentivizes using more carbon intensive road and rail transportation, making it responsible for unnecessary environmental costs and unnecessary wear and tear on roads and bridges across the country. The Act additionally makes disaster relief during a crisis like a hurricane so difficult that presidents usually wave it for a few days to get lifesaving supplies delivered. In the aftermath of Hurricane Fiona in 2022, Puerto Ricans
were in desperate need of fuel. ABP ship full of diesel anchored right offshore was unable to deliver it without presidential approval because of this 100 year old outdated and entirely pointless regulation. Well, at least it saved the US shipbuilding industry, right? No. The size of the US fleet has declined steadily since the introduction of the ACT and today there are only 93 ocean
going Jones Act compliant ships. Typically, a ship has a total life expectancy of about 20 years, but excluding tankers, the Jones Act compliant fleet are on average 30 years old. With regard to military preparedness, the House Armed Services Committee was told in 2018 that the dwindling size of the domestic shipping fleet demands that the country reassess its approach to ensure that the US retains critical national security surge sealift capabilities.
The Jones Act forces many U.S. states to buy commodities from abroad when they're domestically produced because of the high shipping costs. The average citizen of Hawaii pays $2000 per year more than they should have to because of the Jones Act, which benefits a few entrenched interests at great expense to the broader American public.
If you believe that the new administration zeal for deregulation means that this law, which has failed on every front, will be on the chopping block, you'd be wrong. Both Trump and Biden have announced their support for the ACT because that's just the way politics works. The fact that laws like this are so hard to get rid of is exactly why citizens should worry about new regulations being introduced
without a very good reason. As you would imagine, there is a lot of academic research on the impact of regulation on economic growth. A 2022 paper by David Reicher analyzed how a nation's regulatory quality, as measured by the World Bank's World Governance Indicators, affected its GDP along with its trade with the United States. He analysed 20 different countries.
The highest regulatory quality was found in Singapore, followed by Australia and New Zealand, and the lowest regulatory quality was Argentina, followed by Egypt. There was a strong relationship between regulatory quality and productivity and the level of trade with the United States.
Bruegel and Hahn found that countries with a more business friendly regulatory environment grew faster than those with more burdensome rules, and that improving from the worst quartile of business regulation to the best can increase a countries annual growth by 2.3 percentage points.
An Italian paper looked at regional differences between Italian provinces, where regulatory quality can vary significantly, and found that local institutional quality positively affects rates of entrepreneurship and its impact is the strongest in high tech industries. This all makes sense, as what these papers find is that high regulatory quality can improve a country's productivity, lower the costs of production and raise the quality of goods
produced. But when the amount of regulation becomes onerous, it starts to drive up compliance costs such that businesses become uncompetitive. Essentially, there's an optimal level of regulation where regulations that deliver little or no net social value undermine productivity as the time and money spent accommodating them
could be put to better use. A paper by Coffee, McLaughlin and Pareto published in 2020 suggests that regulation in the US may have gotten too restrictive, as they find that had regulation have been held constant at its level since 1980, the US economy would have been nearly 25% larger by 2012. I came across an excellent article by Ben Hopkinson earlier this week on how Madrid tripled the length of its metro system, both faster and cheaper than almost any other city in the
world. The 12 year expansion made Madrids Metro system one of the world's fastest growing metro systems. A 35 mile extension in Madrid cost about the same as the 1 1/2 mile extension of the Seven Train line in New York. London's Jubilee Line extension, built at the same time as Madrid's expansion, cost nearly 10 times more per mile. Some of the efficiency came from streamlining the political processes around getting the job
done. Construction began right after an election, with elected officials aware that progress would likely be rewarded by voters. Extensions to the project were also scheduled within four year windows tied to the political cycle. The timelines were set such that elected officials could open the lines and stations right before the next election.
If everything was completed on time, which incentivized them to get things done and stay on schedule to stay within budget, the project managers moved quickly, leaving less time for the project to be exposed to global shocks, inflationary pressures, or chopping and changing by different politicians, which all drive up costs. To speed up building, Madrid removed unnecessary environmental impact requirements, speed up the approval process, and worked around the clock to finish
construction on time. Environmental evaluations weren't sidestepped, but impact assessments were abbreviated if the work was occurring in an already established urban area, as the impacts to nature would be lower and the long term environmental benefit of the project outweighed the need to analyse the CO2 impact of the digging. Approvals that would have taken two or three years in the UK or United States happened in five months in Madrid.
In contrast, the British spent more than 100,000,000 lbs, which is $125 million on a kilometre long tunnel to protect the bats as part of the high speed rail construction. Despite there being no evidence that bats were at risk from the trains, the Madrid Metro company expedited construction with eight tunnel boring machines running 24 hours a day, which meant that the disruption, which might otherwise have taken 8
years, only took three. The fast work also helped the public accept the noise and disruption as they quickly saw the benefit of new lines and stations opening up around them. In Madrid, the metro stations were standardised using copy and paste designs, which kept costs low and allowed for quick construction. London's Jubilee Line extension, on the other hand, used different architects for each station and several stations were shortlisted for
architecture awards. But they were also a lot more expensive to construct, as each station was bespoke. In Madrid, new lines typically opened within three weeks of construction being completed. In contrast, London's Elizabeth line was completed in 2019 but wasn't fully opened until 2023 because of the complex digital signalling technology used, which required three years of testing before the trains could
be opened to the public. This switching system may be better, but three years is a long wait. The take away from this video is that it's an oversimplification to say that all regulation is good, or that all regulation is bad. Regulations are usually put in place for good reasons, but over time it makes sense to revisit them, analyse the outcomes and see if the regulations are providing the benefits that were promised and if they're causing any unforeseen problems or costs.
Good regulation delivers benefits that outweigh it's societal and economic costs and is administered efficiently and fairly. Excessive regulation, on the other hand, does little to serve the public interest while creating financial costs and frustration for businesses and
the public. When we look at the World Bank Regulatory Quality Index, the lowest ranked countries are places like North Korea, Venezuela and Zimbabwe where often one rule is put in place which causes a problem and then other rules are layered on top of it to fix that problem, causing even more problems and even more regulation. Soon there are rules about everything and no economic
progress can take place. Elon Musk and Vivek Ramaswami wrote an op-ed for the Wall Street Journal where they argued that the new US administration could just halt the enforcement of environmental rules that are deemed unnecessary. This would liberate individuals and businesses from illicit regulations never passed by Congress and stimulate the US
economy, they wrote. I don't agree that this would do anything to help businesses, as companies still have an obligation to comply with regulation whether it's being enforced or not, but it would give an advantage to the least ethical businesses who are most willing to break the law. This is a third world approach to regulation, where rules exist but certain people, often those with political connections,
choose not to follow them. I don't think that this would work in the United States either, as even if an agency decides not to enforce a rule, citizens can still sue companies for violations when States and federal regulators fail to. The only real way to reduce red tape is to eliminate or improve the regulations. Thanks for tuning into this
week's podcast. If you found it interesting, I would really appreciate you sending a link to a friend or sharing it on social media, as that's how podcasts grow. Have a great week and talk to you again soon. Bye.