Make Government Regulation Optional

October 22, 2023November 19, 2023 George Noga

Make Government Regulation Optional

Who do you trust, government bureaucrats or the market?

GEORGE NOGA
OCT 22, 2023

If you like your government regulations, you can keep them. All current and future regulations at the local, state and federal level would remain in force. However, any business in America that so desires could opt out of all regulation – excepting only environmental regulations and natural monopolies.

35 Years Owning a Regulated Business

I have firsthand experience with the perniciousness of government regulation as I owned and managed an investment company for 35 years. My business was regulated by the SEC, NASD, FINRA and by each of the 30 odd states in which we did business. The regulations were so numerous, complex, arcane and even contradictory that it was impossible to be in full compliance. I was perpetually at the mercy of any benighted regulator, who didn’t know the difference between a stock and a bond.

Despite all the lunacy, I would not have objected to the onerous regulatory regimen if it served its purpose, i.e. protection of investors. Instead, the regulations confused and harmed investors by giving them a false sense of security. Regulators behave in accordance with the tenets of public sector economics, i.e. they respond to personal incentives rather than the interest of investors. One need look no further than Madoff or FTX to grasp the utter failure of regulation. Madoff and FTX perpetrated multibillion dollar frauds lasting decades despite numerous regulatory inspections. Regulators even ignored tips that included detailed roadmaps to uncover the fraud.

Make Regulation Optional

Any business in America would be free to opt out of all regulation simply by prominently displaying the word “UNREGULATED” on all signage, letterhead, advertisements and any other materials. Businesses that choose to remain regulated could proclaim: “We proudly adhere to all government regulations”. It’s that simple. Opting out of all regulations means not just consumer regulation but terms of employment, health, workplace safety – in short: everything. For readers who want more details about how this works, I recommend a book by Charles Murray¹

The benefits from making regulation optional are breathtaking. It would save $3 trillion per year in regulatory costs and increase GDP nearly one percentage point annually.² American families would benefit as regulatory costs are over 20% of payroll. Moreover, the cost of most goods and services would plunge. Small businesses would thrive as large corporations use regulation to quash smaller firms.

Product Safety: Who Do You Trust?

There is a 130-year-old organization whose sole mission is to protect consumers. It has over 150 laboratories and employs 10,000 people, many of whom are scientists. It has evaluated 100,000 products made by 70,000 manufacturers. Of course, I must be referring to the US Consumer Product Safety Commission, the Commerce Department or the Federal Trade Commission. No, no and no; I am referring to Underwriters Laboratories, a privately owned company, no one is forced to use, that thrives solely by dint of its impeccable reputation. Many government regulations (including several states) shamelessly copy the standards set by UL.

Another private company held in high esteem by the public is Consumer Reports; founded 88 years ago, it is the most trusted independent testing organization in the world. CR has consistently preceded and outshone government such as with seat belts, cigarettes, microwave ovens, child safety seats, vehicle rollovers, lawnmowers, water supply, kerosene heaters and door locks to name but a few.

Businesses deliver quality, safety and value in many ways. The primary method is branding; when you buy a product or service, the reputation of the provider is on the line. Another method is franchising, with strict quality control imposed by the franchiser. A third method is independent rating services such as UL and CR noted supra. A powerful method is social media where just a few bad reviews can sink any business. As von Mises said, “The market is a democracy in which every penny gives a right to vote.” The most powerful force on earth is a consumer armed with a free choice.

So, who do you trust to have the consumers’ interest at heart – a faceless bureaucrat behaving in accordance with the tenets of public sector economics, or a businessman who will go the superhuman lengths to protect the integrity and value of his brand?

I choose the businessman; however, if you like your government regulations, you can keep them. What’s not to like?

1 – What it Means to be a Libertarian by Charles Murray – pages 60-78

2 – Published by the Mercatus Center at George Mason University

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

A Personal Memoir On Regulation

March 1, 2017February 26, 2017 George Noga

My experience owning and managing a highly regulated business for 35 years

A Personal Memoir On Regulation

By: George Noga – March 1, 2017

After a decade in large corporations, I started a financial services business. Before conducting any business, I formed a broker-dealer firm to comply with regulations for sale of investments. Within weeks of registering, I was subjected to a surprise SEC examination and found in violation of a few paperwork regulations A full blown investigation ensued which took 3 years and $150,000 (today’s dollars) to settle. In the end, I was formally censured by the SEC, which became part of my permanent record. All this occurred before I had even one client or had sold even one product.

Fast forward many years and my growing business now was regulated by the SEC, NASD, FINRA and 20 states. Agents from one of the states arrived for a surprise inspection; after poking around for several days, they discovered (horrors) that a newly hired broker had made a single $5,000 sale a few days before his registration in that state had become effective. This broker had been duly registered with the SEC and NASD and we had submitted his state registration over 3 weeks previous but it had not been timely processed. This became a cause celebre; my firm was reprimanded, fined and subjected to further examinations; another indelible violation was on my record.

In my career these were the only two regulatory hiccups; yet I was tarred with the same broad brush as truly dishonest brokers who caused great harm. My cost and sanctions were more severe than if I never had registered in the first place. Regulations are so numerous, complex and arcane it is impossible to be in full compliance and I was perpetually at the mercy of any benighted regulator with a chip on his shoulder. My firm with 50 brokers was subject to the same regulations as industry behemoths, which could afford to hire a veritable legion of high-priced compliance professionals.

Despite all the lunacy, I would not object to the onerous regulatory regimen if it actually protected investors. Instead, regulation confuses and harms investors. It gives them a false sense of security that the government is looking out for them; whereas, in reality, the rules are the same as always, i.e. investors must know what they are doing and who they are doing it with. Investors can’t distinguish good brokers from dangerous ones because everyone in the industry for awhile has a record of violations. And, of course, the not inconsequential cost of regulation is passed on to clients.

Prospectuses were required to provide investors full informative disclosure but have been subverted to become nothing more than insurance policies for promoters. The list of risk factors is endless; yet most investments that go bad do so because of unknown and/or unknowable risks not among the factors listed. The prose has become turgid with horrors such as indecipherable 257 word sentences explaining tax consequences.

Regulators behave in accordance with the tenets of public sector economics, i.e. they respond to personal incentives and not to the interests of investors. There has been a long train of frauds, abuses and Ponzi schemes such as Madoff that have gone on for decades despite ongoing SEC and FINRA examinations and even after regulators were tipped off about the wrongdoing and given a road map to uncover the fraud.

The goal of regulators is not about promoting honest, ethical, moral, client-friendly or even lawful behavior. It is only about mindless compliance with ever-changing and expanding esoteric and complex rules promulgated by politicized, bureaucrats and requiring a phalanx of specialists to interpret and to enforce. Moreover, the regulations are only tangentially, if at all, related to serving the interests of the public.

I close with one final outrage. I retired in 2009 and have not been licensed since then. Nevertheless, by virtue of continuing to receive compensation as a retired broker, I remain subject to regulation until the day I die and beyond. After I cross that final bar, my heirs remain subject to regulation. It never ends; even the grave is no respite.

My lifetime of experience convinces me government regulation is a vast Kafkaesque wasteland that benefits no one except the regulators. And the band plays on!

The next post on March 5th addresses Trump Derangement Syndrome

Excess Regulation Costs America $5 Trillion

February 26, 2017February 15, 2017 George Noga

This post quantifies the true cost of excess regulation and explains how it impedes growth.

Excess Regulation Costs America $5 Trillion

By: George Noga – February 26, 2017

The USA has not achieved 3% economic growth since 2005, a stretch of 11 years and counting. Previously, the longest period without 3% growth was a mere four years from 1930 to 1933! Excessive government regulation is the primary cause, yet few Americans truly understand the grave harm this causes and how it wreaks its damage.

If the regulatory burden had been held constant at 1980 levels, when regulation already was pervasive, the US economy would be 25% larger today. That translates to unrealized economic growth of $5 trillion, equal in 2017 to $15,000 for every man, woman and child in America, or $60,000 for a family of four, each and every year forever. The regulatory cost for the average business is 21% of payroll. The costs used herein are only incremental costs since 1980; the total costs are vastly higher.

The cumulative effect of new regulations since 1980 costs us nearly 1% per year in GDP. If the US regulatory burden were its own country, it would be the world’s fourth largest economy, bigger than Germany, France, and the UK. Source Note: Most data cited herein are from the Mercatus Center at George Mason University; some data have been extrapolated from 2012 (when their study concluded) to 2017 by MLLG.

Now that we have quantified the horrific cost of excess regulation, let’s look at how it savages economic growth. The direct cost of compliance alone is $2 trillion per year. Regulation results in less investment, misallocation of resources and increased unemployment. Following are specific insights and examples of how the 1+ million regulations now in existence destroy economic growth and harm American families.

The first insight is that regulation must be viewed from a cumulative perspective. The effect of adding one incremental regulation onto the mass of existing regulations creates an endogenous effect that is far greater than the impact of just the newly added regulation and is compounded by the uncertainty and likelihood of future regulations.

Most industries succeed in regulatory capture, i.e. manipulating the regulators and using regulation as a weapon to prevent competition. Big companies use regulation to quash smaller firms. Researchers found that stocks of companies heavily committed to lobbying outperform the S&P 500 by 25%. The lesson is not lost on business: better to invest in gaming government rather than in creating new products and jobs.

The World Bank Ease of Doing Business Index lowered the US from third to eighth place during the past eight years. During the same period, getting a construction permit increased from 40 to 81 days. Enforcing a contract now takes 420 days compared to 300. Regulatory risk has jumped 80%; capital expenditures dropped $32 billion and jobs shrank by 1.1 million. Alarmingly, many more regulations now carry criminal penalties whereas in the past they were simply civil. Remember the collapse of Arthur Anderson, the giant CPA firm, when it was slapped with ersatz criminal charges?

Progressives believe society would be better if governing elites (i.e. progressives) used highly credentialed experts in every field to establish enlightened rules to govern behavior. This is a fundamentally flawed view of human nature and of how the world really works. As has been repeatedly demonstrated throughout human history, free people and free markets work best without the heavy hand of government.

President Trump recently signed an executive order requiring that every dollar of cost imposed by new regulations be offset by eliminating two dollars of other regulatory costs. This is a good start not only for obvious economic reasons but because it can change the culture and incentives from rule making to deregulation.

Next from MLLG on March 1st – A Personal Perspective on Regulation

Product Safety: Government Versus Private Sector

June 1, 2014January 20, 2016 George Noga

By: George Noga – June 1, 2014

Who keeps us safe? Surely it must be government without whose oversight private business rapaciously would seek profit without regard to consumer safety. It seems axiomatic that bureaucratic watchdogs are required to set standards, police markets, punish miscreants and look out for the public. After all, government employees are benevolent and dispassionate, whereas private industry is greedy, self interested and profit motivated. So, who do you trust?

“Who do you trust; benevolent bureaucrats or profit-hungry businessmen?”

There is a 120 year old organization dedicated to product safety; it has 152 laboratories employing over 10,00 people, many of whom are scientists; its sole mission is to protect consumers. This organization has evaluated 90,000 products and bestowed its approval on over 20,000 types of products made by 70,000 different manufacturers. It has conducted 600,000 inspections benefitting 700 million consumers. Of course, I must be referring to the US Consumer Product Safety Commission, the Commerce Department and/or the Federal Trade Commission.

Actually, the organization I just described is Underwriters Laboratories (“UL”), a privately owned and operated company which no one is forced to use. It thrives solely by dint of its impeccable reputation – because of which it is despised by liberals. Yes, greedy businessmen voluntarily seek the UL certification and, if necessary, go to great lengths to make their products conform to the highest safety standards. In fact, many government regulators (including several states) shamelessly copy the codes and standards established by UL.

Another private organization held in high esteem by the public is Consumer Reports (“CR”), an independent, non-profit organization whose mission is to empower consumers to protect themselves. Founded 78 years ago it eschews advertising to remain free of all commercial pressure. CR is the most trusted independent testing organization in the world and has an extensive network of test facilities and scientists. CR’s work has consistently preceded and outshown government, particularly with regard to seat belts, cigarettes, microwave ovens, water supply, child safety seats, kerosene heaters, door locks , lawnmowers and vehicle rollovers. CR is relied upon by 8 million consumers.

“Government standards don’t assure safety and safe products fail to pass.”

Perhaps readers by this point will concede that UL and CR bring something to the table. But surely government is at the forefront of consumer protection. Wrong! Wrong! Wrong! Government sets standards which are tinctured by politics, often contradictory and come with tens of thousands of pages of esoteric regulations. They tend to stress hard-edged enforcement and create an adversarial atmosphere. Government is concerned with standards – not safety. Products that meet government standards aren’t necessarily safe while completely safe products can fail to meet standards.

Because government is inherently political, it often harms consumers. A case in point affecting all of us is sugar. Outside the USA soft drinks are made with cane sugar, whereas here they are made with high fructose corn syrup – which tastes worse – much worse. This is true for one reason: Archer Daniels Midland lobbied (think $$$) Congress to pass draconian quotas on sugar imports. Surprise: ADM is a leading producer of corn syrup. In another example of government fecklessness, its touted Energy Star program is a fraud. Government leaves it up to manufacturers to self certify Energy Star compliance. Hmmm – I wonder how that would fly at Underwriters Laboratories?

“Okay so now who do you trust – the CPSC and FTC or UL and CR?”

Many (particularly the young and liberal) are infatuated with government even though we constantly see where private sector decision making is far superior. Human nature dictates that decisions are reached on the basis of personal risks, rewards and incentives – true in both business and government. Business understands this and does a much better job of aligning business and personal objectives so that the correct decision is reached. Government decision making as informed and explained by public choice economics is: (1) based on personal interests and incentives; (2) short sighted; (3) political; (4) rife with perverse incentives and unintended consequences; (5) misaligned with the public interest; (6) favors groups over individuals; (7) slow to change; and (7) within a perverse culture that never will admit failure.

Most Americans voluntarily do business with Apple, Disney, Wal-Mart, FedEx, UPS and countless others; they have come to admire the quality, value and customer service these companies display each and every day. Americans also are forced to interact with DMV, IRS, USPS and a myriad of other government agencies. Immediately following Hurricane Katrina, Wal-Mart had trucks loaded with food and water ready to assist victims; within 24 hours Verizon had 95% of its cell phone service running. Government did nothing. Yet, despite their direct personal experiences, many Americans demonize business and worship government; they believe business creates oppression and government creates prosperity.

Also despite all evidence to the contrary, many Americans distrust business to make safe products and falsely repose their trust in government. Who really has the consumers’ interests more at heart – a faceless bureaucrat behaving in accordance with the tenets of public choice economics or a businessman who will go to superhuman lengths to protect the integrity and value of his brand? I will choose the businessman every time because I know his interests, incentives (and disincentives) and decisions are much more closely aligned with my safety than that of the government puke.