Economics and Government Regulation

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Economics and Government Regulation

My discussion with Charles DeBow below has brought some pushback. Check this out:

JVH misses the point by only commenting on the “laundry mat problem” and that the solution is for the owner to “get its act together”. The laundry mat example serves to make the point that instances exist where the public is better served by regulation that controls the purely market-based control. Can you comment on that, which is the point of the post? Thanks.

Asking me to comment is like putting a bone in front of a dog. The free market isn’t for the faint of heart. It doesn’t work overnight. One of the features of the free market is that it is free. People can elect to go on and be walked over by businesses, they can complain and perhaps get the business to fix the problem, or they can quietly vote with their feet. The company can then do nothing and most likely go out of business, can listen to the complaints and then do something about them, or can see their numbers going into the dumpster and go out and find out why. In a free economy all three are perfectly acceptable. The good companies succeed, the bad one’s don’t.

However when you add regulation into the mix, it skews the marketplace. Consider our current economic troubles. It all began with the government attempting social engineering by coercing banks into loaning money to people who couldn’t afford to pay it back. Government regulators threatened banks that didn’t make “subprime” loans with audits or worse. The government backed Fannie Mae and Freddie Mac were told to buy these subprime loans from the banks and the banks jumped into the fray and figured “why not.” We’ll make these loans and then sell them to the government, we have no risk. In a free market, the government would have kept out of the mix, the banks would have said “no” to the people who were buying houses they couldn’t afford, and Wall Street would have had no loans to bundle, turn into derivatives, and economically ruin cities in Norway and Iceland. By the way, this all began a decade ago in the late 90’s, carried on through the last 10 years, and here we are. Simplistic? Perhaps, but not too far off the mark

Without government interference, most banks would have been more cautious, and the entire recession and financial collapse would have been avoided, or at least mitigated.

But what about regulating the parking enforcement at the Laundromat? PDW wants to jump in “fix” the problem. Charles is more cautious, but is leaning in that direction. Let’s see what might happen…

Laundromats operate on a tight margin – it’s a big capital investment and the goal is to keep the labor cost at a minimum. There is one down the street from my house and the owner also owns the Quick Pick market next door and has the manager of the market oversee both.

I have never seen a government regulation that didn’t require the group regulated to fill out forms, make reports, and pay fees. It’s just how it works. In many cases companies have entire divisions that deal with the government. This is costly. When we regulate towing or ticketing services, we add to the cost of providing those services. The Laundromat now has more expenses, and also has flexibility that it may need to attract customers removed. Whenever you are regulated, you lose freedom of action.

I understand that some regulation is necessary. Perhaps it’s a good thing to have health inspectors checkout the grease traps in restaurants but frankly if we could survive the salmonella epidemic long enough, people would learn that if they ate at “Mom’s” they would get sick and “Mom” and her ilk would go out of business. So maybe a visit by the health department is a good thing. However, I can’t see how a aggressive ticketing or towing company is going to bring down civilization as we know it.

A couple of phone calls from an offended party, a downward spiral in income, and my guess is that the Laundromat owner would fix the problem immediately.

Government regulation should be the last resort after all other remedies have failed or there simply isn’t enough time to let them work.

JVH

John Van Horn

John Van Horn

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