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Regulation and Law of Regulatory Impact

Let’s begin with:

Goodman’s Law of Regulatory Impact: most economic regulation, most of the time, imposes social The Treasury Deptcosts on people without changing any fundamental behavior.

Take something really far out. Suppose we repealed the law against murder. Would the murder rate go up or down? For the vast, vast majority of us, the prohibition is not binding. We wouldn’t kill anyone, even if it weren’t illegal. For the small number of people who would be tempted, there would be nothing to fear from the government. They would have to fear retaliation by family and friends, however. (Think The Godfather.) Since I suspect that family retaliation is more fearsome than government retaliation, the overall murder rate would probably go down.

Here’s the bottom line. The criminal justice system is very expensive. When you add the cost of the police, the courts, the prison system, etc., it’s adding a lot to our tax bill. Yet it is changing the behavior of only a tiny number of people. And even for that tiny number, it’s not clear what the net change actually is.

Most economic regulation is also that way.

Those of us who are in the position to hire and fire employees know that lawyers are involved every step of the way. They tell you what you can and can’t say in a job interview. They approve your employee handbook. They tell you what you can and can’t do with respect to employee benefits. They tell you what must be in every employee’s file. They tell you what you can and can’t do if you fire someone. In short, there is no free labor market. Employment in the United States is totally dominated by labor law.

Aside from the enormous costs in terms of time and money, what difference does all this make? Surprisingly little.

The natural assumption is to believe that a lot of labor market regulation is preventing discrimination — against blacks and other minorities, against women, against…Well, against just about everybody who isn’t a young, white male with an Ivy League degree.

However, June O’Neill, an economist who used to direct the Congressional Budget Office, and her husband Dave O’Neill have produced a comprehensive study of this issue and they find that the natural assumption is wrong.

Take the 1964 Civil Rights Act. The O’Neill’s find that the black/white wage gap was narrowing at about the same rate in the two decades leading up to the passage of the act as it did in the years that followed. Only in the South is there evidence that the legislation mattered. Outside the South, federal legislation basically followed social change rather than lead it. The wages of blacks rose relative to those of whites over time for two primary reasons: (1) more schooling and better schooling and (2) the migration of blacks out of the South.

As for the wages of men and women, the O’Neill’s find no evidence that antidiscrimination policies have made a difference, including the actions of the Equal Employment Opportunities Commission (EEOC) and the Office of Federal Contract Compliance Programs (OFCCP).

But isn’t there a lot of discrimination going on right now? Isn’t regulation combatting it?

Take the difference in pay for black and white men. The O’Neill’s find that the difference narrows to just 4% after adjusting for years of schooling and it reduces to zero when you factor in test scores on the Armed Forces Qualification Test (AFQT), which is basically an intelligence test. In other words, after adjusting for just two factors that cause people to be different, the pay gap between black and white men disappears entirely. Among women, the gap actually reverses after adjusting for education and AFQT scores. Black women get paid more than white women.

Among Hispanic and white men, the pay gap narrows to 8% after adjusting for years of schooling and disappears altogether with the addition of AFQT scores. Among the women these two variables cause the pay gap to reverse. As in the case of race, Hispanic women are actually paid somewhat more than white women.

What about men as a group versus women as a group? In addition to years of schooling and test scores, men and women differ in the amount of work they do. Men are more likely to work full-time; and among full time workers, men work 8%-10% more hours than women. Also, men typically accumulate more continuous work experience and therefore acquire higher productivity in the labor market. The gender gap shrinks to only 3½ % when adjustments are made for work experience, career breaks and part-time work.

So am I saying that no one is discriminating? Of course not. Court cases prove that discriminating is alive and well in America. But there is a difference between individual behavior and market behavior. Individuals can discriminate, even though the market as a whole is not discriminating. Similarly, regulation can affect the behavior of individual employers without having any perceptible impact on the market as a whole.

The O’Neill’s findings are consistent with economic theory. If workers receive substantially different pay for doing the same job, an employer would have to be leaving money on the table by not hiring the lower-paid employees. And it can’t just be one employer. In order for pay differentials to persist in entire industries, every employer in the market must be willing to discriminate — including the firms run by women and minorities.

Most health and safety legislation also obeys Goodman’s Law. The Occupational Safety and Health Administration (OSHA) regulates workplace safety. Yet in the years leading up to OSHA, workplace fatalities were falling at the same rate as they fell in the period after its passage. Non-fatal injuries show no impact of OSHA as well. More generally:

  • Do you think the reason airplanes aren’t falling out of the sky every day is because of the FAA? Or is it because the airlines have a self interest in not losing planes and passengers?

  • Do you think the reason you don’t get food poisoning every time you go out to eat is because of the local health inspection agency. Or is it the self-interest of the restaurateurs?

  • Is the FDA keeping you from eating tainted meat? Or is it the self-interest of the supermarket and the agri-businesses?

The answers are fairly obvious. And that is not a bad thing. It is a good thing. If we had to depend on government to keep us from being poisoned, most of us probably would have been dead long ago.

 John C. GoodmanJohn C. Goodman is President of the National Center for Policy Analysis, Research Fellow at the Independent Institute, and author of the book Priceless: Curing the Healthcare Crisis.

The Wall Street Journal and the National Journal, among other media, have called him the "Father of Health Savings Accounts." Dr. Goodman's health policy blog is the premier right-of-center health care blog on the Internet.

It is the only place where pro-free enterprise, private sector solutions tohealth care problems are routinely examined and debated by top health policy experts across the ideological specturm.

 

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