Public Choice, System D, Black Markets

The growth of federal regulations over the past six decades has cut U.S. economic growth by an average of 2 percentage points per year, according to a new study in the Journal of Economic Growth. As a result, the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now.
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So if the effects of regulation are so deleterious to economic growth and the prosperity of citizens, why do countries enact so much of it? Dawson and Seater’s paper mentions three theories: Arthur Pigou’s notion that governments enact regulations to improve social welfare by correcting market failures, George Stigler’s more cynical view that industries capture regulatory agencies in order exclude competitors and increase their profits, and Fred McChesney’s argument that regulations are chiefly aimed at benefiting politicians and regulators. I asked if their results fit most closely with McChesney’s. Dawson replied: “This could be the conclusion that one reaches based on our empirical results (since they show a net cost of regulation over time), but again we did not set out to prove or disprove any particular theory.” Seater added that their research does not address the question of “why society allows excessive regulation….It’s an important [issue], but it is one for the public choice people to study, not for macroeconomists like me and my coauthor.”

One such public choice theorist, Mancur Olson, argued in The Rise and Decline of Nations (1982) that economic stagnation and even decline set in when powerful special-interest lobbies—crony capitalists if you will—capture a country’s regulatory system and use it to block competitors, making the economy ever less efficient. The growing burden of regulation could some day turn economic growth negative, but in a note Dawson and Seater suggest that in the long run that will “not be tolerated by society.” Let’s hope that they are right.

Federal Regulations Have Made You 75 Percent Poorer

People benefit from voluntary exchange, i.e., trade and free markets. As trade increases, wealth increases and trade grows. The growth of wealth attracts state actors that attempt to capture the wealth. The state then grows until it strangles trade, and the society becomes poor. The state and growing bureaucracy are parasites on trade.

States use coercion (police, prisons, etc.) to take wealth from individuals. Regardless of the use to which the wealth confiscated is put, it is taken by force. As the state grows, rent seeking, e.g., crony capitalism, increases. As the state continues to crowd out voluntary exchange, the innovation and voluntary exchange stagnate and trade moves underground. See., e.g., “Soaring tax rates feeding Europe’s booming black markets, study says“. System D grows.

Self reliance, System D, spontaneous organization.

“Businesses that exist solely on their own effort with no help from the government.”
Robert Neuwirth, Stealth of Nations: The Global Rise of the Informal Economy

Ozymandias.

Forward!

Unfortunately, it seems that the future Aldous Huxley predicted in 1932, in Brave New World, is arriving early. Mockery, truculence, and minimalist living are best, then enjoy the decline. However, we do need a Revolving Door Tax (RDT), learn what Members of Congress pay in taxes, and prosecute politicians and staff and their “family and friends” who profit from insider trading.

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