Worst Argument for Regulation Ever

We generally use startup activity as a proxy for positive innovation and future increases in productivity and consumer value.  But it is only a proxy - based on the theory that in a free economy new startups generally add new value or die.  Startups per se are not inherently positive, especially when all they are doing is fixing the inefficiencies and mandates imposed by government regulation

I wrote about a new study suggesting that new federal regulation doesn't inhibit the creation of new startup companies in an industry. In fact, it might actually stimulate the creation of startups. This seems counterintuitive, but a reader with some experience in the education and health care sectors—which were influenced by NCLB and Obamacare, respectively—proposes an explanation for this:

Healthcare startups have absolutely exploded post-ACA....This was pretty well anticipated by venture capital; a bunch of Sand Hill firms started putting together ad-hoc health IT teams shortly after the ACA was passed, on the basic logic that anything that changed an industry as much as the ACA did would necessarily create a lot of startup opportunities.

Drum says, well this may be good or may be bad.  Look, it HAS to be bad.  All this investment and activity is going into trying to get back to even from productivity losses imposed by the government, or is being spent addressing government mandates for new services that the market did not want or value.  This is a diversion of resources from new value-creation to fixing things, and as such is just the broken windows fallacy re-written in a new form.

The language he is using, of shaking things up, is a bit like that of chemistry.  He seems to imagine that markets can reach and get stuck in local maxima, so that government action that shakes the system out of these maxima (like annealing in a metal) is positive in that it allows the system to progress to a better state over time even if the government's action initially makes things worse.  I know of absolutely no evidence for this being true, and my strong suspicion given how many industries the government has trashed is that this is rare or non-existent.  And impossible to spot, even if it did exist.  Not to mention the fact it is a total joke to talk of health care as if it was some pristine untouched-by-government industry before Obamacare.

  • Trevor

    It's amazing the elementary level of thinking guys like Drum get away with. It would be like if a CEO was touting to the public all the revenue they brought in without mentioning any expenditures or debt incurred in the process. But that's what wannabe central planners like Kevin Drum and Ezra Klein get away with every single day.

  • Nimrod

    Heh, it sounds like he's saying that this is I Chng divination for the economy. (The only rational explanation I can think of for why ancient Chinese leaders, or anyone else, would find any use for generating a random six bit number to inject into their thought process would be to "jolt it out of a local maxima".)

    Of course the problem is that an overbloated policy generated by a legislative system is far from a random number. You can bet the soothsayer in this case is rigging the number generator in order to get a desired minima rather than a global maxima.

    Perhaps he should just argue for regulation based on I ching castings since that would actually be random. Repeat until suspected global maxima reached. Then again, perhaps it isn't "auspicious to cross the great steam" or maybe "a major sacrifice should be conducted."

  • Not Sure

    If Mr. Drum is excited by the prospect of broken windows, well... his house is as good a place as any to start. After he's done picking up the rocks, it would be interesting to hear if his thoughts on the subject have changed at all.

  • Canvasback

    Drum may not be completely wrong, though the ACA is a poor example. Instead, use the automobile industry. Over the last 30 years they've gotten safer, cleaner, and more fuel efficient largely through regulatory mandates. The auto industry pissed and moaned every step of the way saying it would break them. It didn't. And I think we're generally happy with our cars. Do a count on the new technologies and industries that we needed to build to get where we are now.
    I don't think the same approach works for education - regulation seems like an incentive killer there and the product has shown no improvement in 50 years.
    All the health care start-ups just sound like paper shuffling firms. No improvement on outcomes. No lowering of costs.

  • poitsplace .

    Not all jobs are equal. Regulatory jobs are parasitic. And "green jobs" are a great example of parasitic jobs. The number of workers necessary to produce the same amount from "green" energy are far higher...while the various higher costs of that green energy put the rest of the economy in a bind. The same is true of regulatory jobs for socialized medicine...more workers doing less work. They naively assume the system works exactly the same as it would have without them. But in reality, they're just slowing down economic growth. The economy still grows some though, hiding the inefficiency. They proudly proclaim "It creates jobs!", but they might just as well be paying people to paint coal white.

  • Mike Powers

    "Over the last 30 years they've gotten safer, cleaner, and more fuel efficient largely through regulatory mandates."

    And foreign competition. American automobile companies have been playing catch-up to foreign designers since the 1970s; nothing shows up in America that didn't start overseas.

  • Mike Powers

    It's like that science fiction story about the business devoted to junking newly-built cars, which existed because of a government mandate that 100% of men had to be employed.

    Except that was a satirical sci-fi story that we weren't supposed to think could ever happen.

  • bigmaq1980

    It is largely "invisible" to us and the stats, because it is so ingrained in the economy, but without the complications in the tax code, a large segment of the economy (and the government) would be out of business, as well as a few software companies (TurboTax anyone?).

    Highly doubtful any "benefits" (likely aimed at well connected "cronies") from each increment of complexity added ever counterbalances the incremental cost of the compliance for everyone else. Nor, the mis-allocation of resources to become "tax efficient" sub optimized the return that could have been had (i.e. more employment, innovation, stock gain).

  • TruthisaPeskyThing

    "auto industry pissed and moaned every step of the way saying it would break them." The opposition of the auto industry is largely exaggerated. They have been willing -- even participants -- in helping to design these requirements. Sometimes they objected -- like EV requirements in CA. Sometimes their objections were vindicated; sometimes not. But it is a myth that the auto industry always tried to derail mandates that made cars safer and cleaner.

  • obloodyhell

    }}} He seems to imagine that markets can reach and get stuck in local maxima

    There's little chance this cannot, and even does not, happen.... I'd say the IC engine is probably an example in the automotive industry. One reason everyone keeps trying to find an alternative is because the entire concept of how an IC engine works is preposterously inefficient. It seems inherently obvious that there MUST be a better technology, which, with 20 years of development and a lot of funding could get past the admittedly non-trivial benefits which the IC engine had over anything possible before, say, 1940 or so, but for which there's literally zero chance the free market will tackle short of some truly innovative engineering genius making a breakthrough with Elon Musk funding it pretty much just for the heck of it... not because of a clear foreseeable market advantage at the start of the first financing round. And even there, it's admittedly pure speculation that something better exists. It just seems remarkably likely

    The REAL question here is if a committee -- the only known form of life with six or more legs and no brain -- and a government committee at that (add "no real-world experience" to that collection of traits) is actually a good fit to identifying these localized maxima

    Add to that: along with a spelling out a way to fix the problem -- that latter of which is always at the heart of such mandates.

    For example, look at the 10+ foot stack of paper that it took Obamacare in order to implement three words: "Free Government Healthcare" and the amazingly effective** job it did at that.

    ==================================================
    ** Yes: Irony for effect...

  • obloodyhell

    No no no.... Being a liberal is ALWAYS about never having to say "I've got this..." and pulling out your own wallet.

    Now, Drum would be all in favor of it if his neighborhood association footed the bill.

  • obloodyhell

    Very true. I think you can make at least as good an argument that all the improvements really came from competition, and not from regulation -- in many cases, it's even possible they supported the regulations under the table because it made producing cars more of a problem for the importers than for them...

  • obloodyhell

    I would point out that cars are substantially more expensive to buy and operate than at any time in the past, too. A car now costs more than a full year's salary for most, and, while once anyone could work on almost any car, now, you have to have a specialized engineering degree just to change the oil (yes, hyperbole)...

    The net effect is that it's more difficult than ever in the last 75 years for the "average person" to own and operate a car.

  • Matthew Slyfield

    "It seems inherently obvious that there MUST be a better
    technology, which, with 20 years of development and a lot of funding
    could get past the admittedly non-trivial benefits which the IC engine
    had over anything possible before, say, 1940 or so"
    "And even there, it's admittedly pure speculation that something better exists. It just seems remarkably likely"

    Considering that people have been looking for that supposedly obvious and remarkably likely better solution since before Henry Ford built his first car and in more than 100 years of trying, no one has come anywhere near something that can even equal the capabilities of the internal combustion engine, It seems remarkably likely to me that you are dead flat wrong.

  • Harry

    Great post, Coyote. It took me some study a good time ago to understand the meaning of "market failure" which my wife would describe as my failure to use the right coupons. Also, for the longest time I did not understand what deconstructing was. I thought you could not deconstruct a Marietta silo easily, because it was lined with mortar, or that it was difficult to deconstruct a refinery in Texas City and move it to anywhere. Not to cast any aspersions on my wife, who is very smart and has saved us maybe half a million in 2008 dollars.

    Keep up the good work.

  • marque2

    I would beg to differ, you are comparing apples and oranges so to speak. Average cars have grown immensely in size, horsepower, and creature comforts at least since I have been alive. The cost per average hour of wage is down as well.

    An example I purchased a VW FOX subcompact in 1987 for $7500 in 2001 my Ford Focus, the equivalent car was $11500, but it was compact, not sub, it had 15" rims vs, 13" 205 tires vs 155, its windows are thicker, it had more soundproofing in the doors and trunk, and thicker glass to keep out road noise, much better radio and speakers, 132/139 hp/torque vs 81/89. It had airbags, handled better ... Also, the Fox needed major service every 30,000 miles, focus didn't need anything until 100,000 miles and get this, adjusted for inflation, it was almost exactly the same price!

    Today a Focus lists for $17000, I could probably get it for 16. I am not as familiar with the new ones, but radio has voice controls, there is outdoor temperature gauge, mood lighting (you can change the colors) better mileage, more HP/torque again, traction control, anti-lock brakes, phone connectivity and hands free. The inflation adjusted value is 15500, but you must see that these extra features are probably worth the extra $1500 bucks.

    Also as far as maintenance is concerned. The car only needs oil changes until 100K miles. Compare this to a car in the early 80's which needed new plugs and spark wires every 30,000, probably a new water pump around 60K a new oxygen sensor every 30K - if you even had fuel injection. Point is, yes in the 1970s and 1980's you could do a lot of work on your car yourself, but then there was so much that had to be done, you better be a weekend mechanic. Cars of the the 1950s needed constant adjustments to keep them moving. You also are probably not aware of the Internet. Because of youtube, there is an explosion of videos of how to fix parts on your car. I have been able to change plugs, oil filters, side view mirrors, a faulty interior fan. There are also videos how to change the McPherson struts (conceptually easy, but I will leave it to the experts), timing belts, air conditioner compressors, starter motors etc. In fact repairing the car, which doesn't really need repairing much any more, couldn't be easier. Now do I want to spend my entire weekend replacing a starter - or should I take it to a mechanic who can do it for me for $250 bucks hmm, mechanic wins.

    One thing I do have to say - auto dealers ream you on that 100K service. You should take it to an independent instead, but if you do, make sure the independent puts in the 100K plugs (better yet buy them and give them to him) For some reason independents don't trust that plugs can last 100K and so will frequently put in the cheap copper 30K plugs, and then 40K later, your plugs stop working.

  • marque2

    New Ford focus similar to my 2001 actually lists for 16750 not 17000 - also it includes a smart key - you can program the car to respond differently to different keys. And in addition to what I mentioned above, it has a rear camera, a remote door opener comes standard, power door locks, and windows now come standard, All for just $1250 more.

    So in summary - cars have not gone up, or have gone up marginally, but have many for features, are safer and easier to drive in the same class of vehicle, however folks tend to compare the smaller cars of the past to the bigger cars of today - which distorts the price comparison.

    Secondly, the not being able to fix your own car today, is a myth, with youtube tutorials and all the extra help from the autoshops (they will loan you tools and test equipment, and have the error code readers) you are help to fix it at home more than ever before, but you don't have to, because the cars are almost an order of magnitude more reliable, and need service only at 1/4 the rate they used to.

  • marque2

    A woman in a hot air balloon realizes she is lost.
    She lowers her altitude and spots a man fishing from a boat below.
    She shouts to him, 'Excuse me, can you help me? I promised a friend I
    would meet him an hour ago, but I don't know where I am.'
    The man consults his portable GPS and replies, 'You're in a hot air
    balloon, approximately 30 feet above a ground elevation of 2346 feet
    above sea level. You are at 31 degrees, 14.97 minutes north latitude and
    100 degrees, 49.0 9 minutes west longitude.

    She rolls her eyes and says, 'You must be a Republican!'
    'I am,' replies the man. 'How did you know?'

    'Well,' answers the balloonist, 'everything you tell me is technically
    correct, but I have no idea what to do with your information, and I'm
    still lost. Frankly, you're not much help to me.

    The man smiles and responds, 'You must be a Democrat.'
    'I am,' replies the balloonist. 'How did you know?'

    'Well,' says the man, 'You don't know where you are or where you're
    going. You've risen to where you are, due to a large quantity of hot air.
    You made a promise that you have no idea how to keep, and now you expect
    me to solve your problem. You're in exactly the same position you were in
    before we met, but, somehow, now it's my fault.

  • morgan.c.frank

    drum seems to be leaving out the key issue: compliance with regulation has costs, money is finite, so, spending money on regulatory compliance keeps it from being spent on something productive.

  • Dan Wendlick

    the thing is, the battle over technologies has already happened. If you look at the period from 1900-1910, you'll see that there were steam and electric cars on the roads competing with gasoline engines. They lost the competition then for approximately the same reasons they so today: range, convenience, and cost.
    Since 1940, the infrastructure that built up around the gasoline engine - sales, maintenance, fuel availibility, wtc. has worked synergistically to increase those advantages. In order to replace it today, you would have to demonstrate that not only the vehicle, but the whole infrastructure surrounding it were as efficient as today's structure around gasoline engines.
    The one thing that has not changed in all these years is the inherent amount of energy stored in H-C and C-C bonds in short hydrocarbon chains. This gives petroleum-based fuels an energy density advantage that even the most advanced batteries can not yet match.

  • DCribbin

    Say Broken Window falicy three times fast!

  • Matthew Slyfield

    "This gives petroleum-based fuels an energy density advantage that even the most advanced batteries can not yet match."

    Which is exactly why
    obloodyhell''s supposed better solution that only needs 20 years of r&d is nothing but a can of unicorn farts.

  • FelineCannonball

    Huh. Is tragedy of the commons not a thing in libertarian circles? Fisheries? Clean air? Sewage treatment? What's the free market model look like? How about stop lights and speed limits?

    I'm going to go with Kevin. Could be good, could be bad. Depends on the regulation.

  • skhpcola

    As usual, Kevin Dumb touts the leftist line and propagandizes for the Dims. No surprize there. "I award you no points and may God have mercy on your soul." Dumb and his tribe keep their sycophantic readers dumb and dumber.

  • the_zyxwvutsr

    A car now costs more than a full year's salary for most...

    That's ridiculous. The median personal income in the US is about $24K. There are plenty of new cars available for less than that.

  • markm

    The theory is that with the IC engine, the auto industry got stuck in a local optimum. That is, that they concentrated on small improvements to IC engines, and ignored bigger improvements that might have been possible with some totally different technology. The payoff to improving what you have may be small, but it comes soon and is as predictable as any R&D ever is, while trying something different will require years of decades of refinement, with no certainty of ever being better.

    So the auto industry could have got stuck in such a local optimum, IF THEY WERE THE ONLY ONES WHO MIGHT WORK ON OTHER TECHNOLOGY. But that hasn't been the case. Large steam engines have been pushed to as efficient and reliable as the materials allow, and there is nothing to suggest that smaller ones would be competitive on cost or starting time with the IC. Turbines have been engineered to the max, and they are just too expensive for cars.

    Diesels can be competitive - and I've got a VW turbo-diesel in the garage. Gasoline vs. diesel is a tradeoff of initial cost versus on-going fuel costs, and also of one kind of pollution versus another, and neither one is going to be the best in all cases. Either way, it's an IC engine.

    Fuel cells once seemed very hopeful, but they basically burn hydrogen, which would require unreasonably large, heavy, and expensive fuel tanks. Instead, you need a stage before the fuel cell that extracts hydrogen from hydrocarbon or other fuel that _is_ practical to carry in a tank. If it's ever cost effective, it's going to be in much larger systems than a car, such as backup power for an office building.

    But usually this argument winds up claiming that the technology for battery-powered cars has been neglected, so government subsidies are needed to get it started. It's not so when you look at the other industries that use the tech. More efficient motors have always been desirable for every industrial application and every household appliance that uses motors; motors have vastly improved over the last couple of decades, but even 100% efficient motors would not be good enough without better batteries. There has always been pressure for better batteries. In huge sizes, the phone company has run on banks of huge rechargables since the beginning, and AFAIK they've yet to find a lower-cost chemistry than lead-acid. Power companies would also love to be able to use batteries for load-leveling, but the possibilities just are not there. In small sizes, people have wanted longer-lasting flashlight, radio, and toy batteries for over a century - but not to pay much more for them. Small rechargables entered the market in the 1970's for calculators, and as money-saving replacements for the standard flashlight/toy batteries. The last 25 years of advancement have been driven by laptops and cell-phones; people will even pay more for the same in a smaller or lighter package. But apply that tech to a car, and you've got a battery pack that costs nearly as much as the rest of the car, and will only continue taking a charge for a few years. This technology can only improve a little in cost and weight, not nearly enough to make it competitive with a tank of gasoline.

  • Milton_Hayek

    Agree- the broken windows fallacy is an apt analogy.

    If the market hasn't "offered" to pay for these changes, they are superfluous and resource destroying.

  • Milton_Hayek

    "it's even possible they supported the regulations under the table
    because it made producing cars more of a problem for the importers than
    for them.." - agree - modern day mercantilist protectionism...