Monday, October 24, 2016

What Regulations You Talkin' 'Bout, Willis?

Please, be specific.

Over the weekend AT&T agreed to acquire Time Warner. And yesterday, Jeffrey Sparshott of the Wall Street Journal documented the decline in the rate of business startup formation, writing:
The startup slowdown may have a number of causes. Perhaps some companies need more time than backers are willing to provide. Demographics may also explain some of the shift—baby boomers are retiring and millennials are just entering the age bracket that is most common for entrepreneurs. 
Rules and regulations also could be at play. Goldman Sachs economists in part blame the cumulative effect of regulations enacted since the Great Recession for reducing the availability of credit and raising the cost of doing business for small firms, making them less competitive.
Mr. Sparshott  cites specific areas were startups may encounter barriers to entry. Among the political set, however, such specifics are rare. Rarer still is the admission that most barriers are erected at the state and local levels. The U.S. Small Business Administration (SBA) attempted to punch holes in local regulation with its Startup in a Day initiative. And while SBA gave a few small prizes, the prizes did little to puncture the clout of existing businesses and their influence on local politics.

So what are some specific areas of regulation to bolster or peel back?

Regulations that promote competition. Antitrust laws and enforcement are typically applied at the national level to mergers such as AT&&T and Time Warner. But state-regulated industries often fall far from the keen eyes of antitrust enforcement.

Regulations that stifle competition. Such is the automobile dealer network in Virginia. Even though the Virginia Antitrust Act has been in its code of law for over 40 years, the Commonwealth continues to restrict competition. Through its Department of Motor Vehicles (DMV), Virginia bars direct-to-consumer automobile sales. From the start, the DMV sounds hostile to startups: "As this is a highly regulated business, it's not all that easy to become a licensed motor vehicle dealer."

Regulations that fight externalities. Pollution is a negative externality, that is, a byproduct of production that has negative effects on people and places, and whose costs have not been captured in the price of the good or service. Virginia regulates automobile pollution through its emissions inspection program that requires repairs should the emissions of a car exceed the determined limit. However this is not the same as or as efficient as pollution pricing typically applied through a fuel tax.

Regulations that address a problem that doesn't exist. Virginia Vehicle Safety Inspection program cannot be shown to increase safety, and is administered by private-sector auto mechanics who inspect for and correct found defects. No chance for abuse there, amirite?

Regulations that raise prices. Certificate-of-need (CON) laws control the entry or expansion of healthcare facilities. The Mercatus Center at George Mason University found that "that CON laws have not only failed to achieve their goals but have in many cases led to the opposite of what those who enacted the laws intended," that is, increase the supply of, ensure access to, and reduce the cost of health resources. It's Econ 101: when supply is constrained, prices go up. As a result of CON laws, there are over 10,000 fewer hospital beds in Virginia.

Regulations that raise barriers to entry. In the 1950s about 5 percent of workers needed a government-issued permit to perform their job; today, it's over 25 percent. In Virginia, its takes about 150 hours of training to become an Emergency Medical Technician (EMT) but 1,500 hours to become a barber.

The regulatory environment is complex, distributed, and ingrained. It took a long time to get this way; it will take a long time to unravel. But just like a tangle of yarn, you must first see the strands for the rat's nest.