Why business owners are always so wrong about regulations

Jun 20 JDN 2459386

Minimum wage. Environmental regulations. Worker safety. Even bans on child slavery.No matter what the regulation is, it seems that businesses will always oppose it, always warn that these new regulations will destroy their business and leave thousands out of work—and always be utterly, completely wrong.

In fact, the overall impact of US federal government regulations on employment is basically negligible, and the impact on GDP is very clearly positive. This really isn’t surprising if you think about it: Despite what some may have you believe, our government doesn’t go around randomly regulating things for no reason. The regulations we impose are specifically chosen because their benefits outweighed their costs, and the rigorous, nonpartisan analysis of our civil service is one of the best-kept secrets of American success and the envy of the world.

But when businesses are so consistently insistent that new regulations (of whatever kind, however minor or reasonable they may be) will inevitably destroy their industry—when such catastrophic outcomes have basically never occurred, that cries out for an explanation. How can such otherwise competent, experienced, knowledgeable people be always so utterly wrong about something so basic? These people are experts in what they do. Shouldn’t business owners know what would happen if we required them to raise wages a little, or require basic safety standards, or reduce pollution caps, or not allow their suppliers to enslave children?

Well, what do you mean by “them”? Herein lies the problem. There is a fundamental difference between what would happen if we required any specific business to comply with a new regulation (but left their competitors exempt), versus what happens if we require an entire industry to comply with that same regulation.

Business owners are accustomed to thinking in an open system, what economists call partial equilibrium: They think about how things will affect them specifically, and not how they will affect broader industries or the economy as a whole. If wages go up, they’ll lay off workers. If the price of their input goes down, they’ll buy more inputs and produce more outputs. They aren’t thinking about how these effects interact with one another at a systemic level, because they don’t have to.

This works because even a huge multinational corporation is only a small portion of the US economy, and doesn’t have much control over the system as a whole. So in general when a business tries to maximize its profit in partial equilibrium, it tends to get the right answer (at least as far as maximizing GDP goes).

But large-scale regulation is one time where we absolutely cannot do this. If we try to analyze federal regulations purely in partial equilibrium terms, we will be consistently and systematically wrong—as indeed business owners are.

If we went to a specific corporation and told them, “You must pay your workers $2 more per hour.”, what would happen? They would be forced to lay off workers. No doubt about it. If we specifically targeted one particular corporation and required them to raise their wages, they would be unable to compete with other businesses who had not been forced to comply. In fact, they really might go out of business completely. This is the panic that business owners are expressing when they warn that even really basic regulations like “You can’t dump toxic waste in our rivers” or “You must not force children to pick cocoa beans for you” will cause total economic collapse.

But when you regulate an entire industry in this way, no such dire outcomes happen. The competitors are also forced to comply, and so no businesses are given special advantages relative to one another. Maybe there’s some small reduction in employment or output as a result, but at least if the regulation is reasonably well-planned—as virtually all US federal regulations are, by extremely competent people—those effects will be much smaller than the benefits of safer workers, or cleaner water, or whatever was the reason for the regulation in the first place.

Think of it this way. Businesses are in a constant state of fierce, tight competition. So let’s consider a similarly tight competition such as the Olympics. The gold medal for the 100-meter sprint is typically won by someone who runs the whole distance in less than 10 seconds.

Suppose we had told one of the competitors: “You must wait an extra 3 seconds before starting.” If we did this to one specific runner, that runner would lose. With certainty. There has never been an Olympic 100-meter sprint where the first-place runner was more than 3 seconds faster than the second-place runner. So it is basically impossible for that runner to ever win the gold, simply because of that 3-second handicap. And if we imposed that constraint on some runners but not others, we would ensure that only runners without the handicap had any hope of winning the race.

But now suppose we had simply started the competition 3 seconds late. We had a minor technical issue with the starting gun, we fixed it in 3 seconds, and then everything went as normal. Basically no one would notice. The winner of the race would be the same as before, all the running times would be effectively the same. Things like this have almost certainly happened, perhaps dozens of times, and no one noticed or cared.

It’s the same 3-second delay, but the outcome is completely different.

The difference is simple but vital: Are you imposing this constraint on some competitors, or on all competitors? A constraint imposed on some competitors will be utterly catastrophic for those competitors. A constraint imposed on all competitors may be basically unnoticeable to all involved.

Now, with regulations it does get a bit more complicated than that: We typically can’t impose regulations on literally everyone, because there is no global federal government with the authority to do that. Even international human rights law, sadly, is not that well enforced. (International intellectual property lawvery nearly is—and that contrast itself says something truly appalling about our entire civilization.) But when regulation is imposed by a large entity like the United States (or even the State of California), it generally affects enough of the competitors—and competitors who already had major advantages to begin with, like the advanced infrastructure, impregnable national security, and educated population of the United States—that the effects on competition are, if not negligible, at least small enough to be outweighed by the benefits of the regulation.

So, whenever we propose a new regulation and business owners immediately panic about its catastrophic effects, we can safely ignore them. They do this every time, and they are always wrong.

But take heed: Economists are trained to think in terms of closed systems and general equilibrium. So if economists are worried about the outcome of a regulation, then there is legitimate reason to be concerned. It’s not that we know better how to run their businesses—we certainly don’t. Rather, we much better understand the difference between imposing a 3-second delay on a single runner versus simply starting the whole race 3 seconds later.

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