The Bear’s Lair: Regulation killed the Jetsons

The Jetsons, a sci-fi fantasy family of the 1960s, lived in impossible luxury in 2062. Not only are we not nearing their living standards, we are going in the opposite direction. This column has wondered why, and a recent Supreme Court case has given us the answer. In one of its few good decisions of the recent term, the Court by a slim 5-4 vote struck down an EPA regulation whose costs were 1,000 times its benefits. It’s good to know imposing costs of 1,000 times the benefits is a no-no, but the myriads of regulations where costs are only 100 times, 10 times or even twice the benefits pervade the entire U.S. economy – and are leading us towards the Flintstones rather than the Jetsons.

The case, Michigan vs. EPA, concerned an EPA decision to regulate power plants directly, beyond the general requirements of the Clean Air Act of 1970, if they determined emissions (primarily mercury) from those plants posed a significant risk to public health. Thus the figure of $90 billion for benefits, bandied about in the media by friends of the EPA, included all the benefits from mercury regulation under the Clean Air Act – a dubious figure even under that definition, but of no relevance whatever to the further regulations proposed by the EPA. The new regulations, according to the Supreme Court ruling, imposed costs of $9-10 billion on the electric utility industry, while achieving benefits of $4-6 million – that’s million with an m. The cost/benefit ratio was thus in the region of 2,000 to 1.

Maddeningly, this Supreme Court ruling will in itself provide no benefit to the U.S. economy. Coming as it does three years after the regulations were imposed, it arrives only after most of the $9-10 billion of costs have been incurred, as utilities across the country have closed power plants in response to the EPA regulation.

Friends of regulation will no doubt claim that this was a rogue outlier, or (as many of the mainstream media have done) that the true benefit of the rogue regulation were a huge multiple of those claimed in the Supreme Court ruling. Both claims are implausible. The higher figure for benefits could be arrived at only by including the provisions of the Clean Air Act itself, and is any case highly likely to be spurious if examined closely. (A quick calculation: $90 billion claimed benefit divided by 11,000 claimed lives saved gives a value of $8.2 million per life, three or four times the value assumed in any reasonable actuarial calculation.)

The claim that the 1,000 to 1 cost to benefit ratio of this particular regulation is a rogue outlier is statistically highly implausible. Yes, it’s likely that the ratio was at the extreme of cost/benefit ratios produced by regulations as a whole, if only because 1,000 to 1 is a very rare cost/benefit ratio for anything. But it is vanishingly unlikely that the 1,000 to 1 regulation is one plucked from a population of regulations, the rest of which are close to 1 to 1 or even have a net benefit. Were that the case, the 1,000 to 1 cost/benefit ratio would be 25 or 50 standard deviations from the mean of all regulatory cost/benefit ratios, a deviation that only occurs one in the life of a million universes.

Statistically, it is much more plausible that the 1,000 to 1 cost/benefit ratio is only 3 or 4 standard deviations from the mean, and the population of regulations as a whole is full of 100 to 1, 200 to 1, 50 to 1, 10 to 1 and even 2 to 1 cost-benefit ratios. In other words, the entire population of regulations from the EPA (and we have no reason to believe the EPA to be especially egregious among government regulators) is likely to have costs a substantial multiple of its benefits.

When you look at the incredible density of regulations inflicted on the U.S. economy since around 1970, and more particularly since 2009, it’s clear that they should have a major economic effect. As this column has pointed out before, from the productivity statistics, the effect itself is clear, even if the causal link isn’t. The average annual rate of labor productivity growth in the United States from 1947 to 1972 was 2.88%. From 1973 to 2010 it declined by around a third, to 1.98%. Since 2011, the productivity growth rate has fallen still further, to 0.51% annually from the fourth quarter of 2010 to the first quarter of 2015. If average productivity growth had been maintained since 1973 at the rate obtaining before 1973, we would today be 54% richer. The United States would be richer than Singapore, rather than having fallen to a level one third below Singapore’s per capita wealth.

This is not especially an anti-environmentalist point. The personnel restrictions generated by the Occupational Health and Safety Act of 1970 (another of Richard Nixon’s less stellar moments) and the various anti-discrimination acts generate huge costs, partly for employers attempting desperately to avoid the flood of frivolous lawsuits the legislation has generated. The licensing requirements of the FDA add enormously to the cost of developing new drugs, making the United States’ the costliest pharmacopeia in the world.

The CAFÉ fuel economy restrictions on automobiles have come close to destroying the U.S. automobile industry, by far the world leader in 1970. The recent restrictions on financial services appear to be generating mostly gigantic fines for trivial offenses such as manipulating LIBOR by a basis point or so. They have effectively closed the financial sector to new entrants, while in the long run enormously raising the cost of financial transactions. Even trivial tech improvements such as Uber are banned from various cities by their local governments acting in concert with taxicab companies. Finally, there is the disaster that is U.S. healthcare, more expensive than anywhere else in the world, and always liable to zap ordinary citizens with outrageously padded medical bills, which they have no hope of paying. And so the list goes on.

Further clear evidence of the recent intensification in regulation, and its pernicious effects is the decline in U.S. entrepreneurship since 2008. In recent years, the exit rate of new firms has exceeded the entry rate, something never seen before in the postwar economy. Part of this can be blamed on the Fed, whose extreme ultra-low interest policies stifle saving and thereby prevent many smaller new businesses from getting started. But there can be no doubt that the plethora of modern regulation plays at least an equally important role.

The left invented Gross Domestic Product, so they could include all government activities, however wasteful and even damaging, in national output figures, as though they were truly productive. This statistical legerdemain flattered historical periods such as the middle 1930s and the 1960s and early 1970s, when the U.S. government was increasing rapidly in size. Now they want to move away from GDP towards a measure of output that includes such things as cleaner air and water, and other measures that are merely evidence of compliance with left-devised regulations rather than anything tangibly benefiting the populace as a whole.

The objective of this will be to move further towards the regulatory state, impoverishing ordinary citizens and causing immense economic misery, while being able to claim that their new “Gross National Happiness” index is increasing at a rapid rate and that all is for the best in the best of all possible worlds. Global Warming legislation, ideally on a global scale where democratic forces are impotent, is likely be a key element in the move to the ultimate regulatory state in which all economic activity is controlled by Platonic Guardians – and non-Party members lead a miserable existence. Curiously, this was very much the Soviet dream, and was set out powerfully in George Orwell’s 1984. The success of regulation in the U.S. since 1970 and its effect on the overall economy indicate clearly that the dream never dies – and for the rest of us the nightmare too lives on.

The Commissar wears many hats – and if he comes in the form of a kindly environmental regulator, concerned about the level of mercury in the drinking water, he should be resisted as fiercely as if he bore a hammer and sickle.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)