Monday, June 15, 2009

Ryan: Why Government Should Have Regulatory Powers

(This is in response to Justin's original post.)

The idea of regulation helping mitigate a large scale failure in the ex-post protection of property rights is an interesting argument, but also realize that it’s not fundamentally different from the wide-ranging argument for regulation in the first place—namely, to improve upon market outcomes. The range of markets need not be narrow, either—labor markets (minimum wages, OSHA), financial markets (SEC, FDIC), toys market (child safety measures). We don’t like the fact that labor market outcomes could involve someone making a sufficiently low wage; therefore, we impose a minimum wage. We don’t like the fact that someone could get hurt at work; therefore, OSHA regulations. And so on and so forth.

People don’t generally speak of it in probability terms—at least not the things I’m reading—but I think that actually makes the argument for regulation a bit harder to make. I see it this way; there’s a probability that something drastic could happen, perhaps a hurricane impacting insurance contracts, or on a smaller level, a car wreck. (It needn’t be insurance related, though both of those examples are—perhaps you drank a bit too much, inflicted grave harm upon someone and you can’t pay a court-ordered restitution. The specifics of the examples aren’t the issue.) By extension, the probability of bad events happening translates to the probability that property rights will be compromised. Presumably, that probability is less than 1—and I’ll go a step further and assume it’s a lot less than 1.

But consider the solution—in exchange for our situation of a probability of infringing property rights being less than one, we’re incorporating a solution where the probability of compromising property rights is exactly 1. Imposing regulation at the outset necessarily infringes upon everyone's property rights. If the goal is to respect and reinforce property rights, regulation cuts immediately and significantly against that end. Requiring everyone to purchase liability insurance infringes on the property rights of every driver (whether they would have purchased said insurance anyway, it should be noted)—in the ex-post example above, we have property right infringement only in the case of a calamity.

Now, naturally, there is an argument of degrees here, and maybe the devil’s in the details here. We can see where the discussion goes. But, again, if the goal is to protect property rights, I could think of no worse stance to take from the onset than harming every single person’s property rights through regulation.

Justin, I appreciate the stance—next time, it’s my turn to play devil’s advocate! I think I may have an idea once this one runs its course—and giving the characteristics of summer blogging, that may be sooner rather than later.

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