What reducing regulation is really all about: getting the public to subsidize big business

Photo by Sharon McCutcheon on Unsplash

Just another transfer of wealth to the very rich from everyone else

It’s an article of faith among conservatives that government regulation on business should be reduced. The argument is that regulation gets in the way of economic activity, and thus reducing it leads to higher growth. There are certain circumstances where regulation can choke out economic growth, but most times when it is called for, that is really not the case.

Indeed, business is not always in favor of reduced regulation. Regulation creates a bottom line that everyone in the industry must comply with. As a result, each firm knows with certainty what its expenses are, and can be confident that its competitors will not undercut it on price.

An example of this phenomenon occurred a few years ago when a major food manufacturer decided it wanted to help address the obesity problem in America by reducing the amount of sugar in its products. According to Robert Lustig MD, everything seemed to be going well in this socially responsible initiative until… one of its competitors INCREASED the amount of sugar in its products, forcing the responsible corporate player to do the same or risk losing market share.

If the government had instead stepped in and required all companies to reduce the sugar in their products, the responsible corporate citizen could have been secure in the knowledge that its competitors could not use its good behavior as an opportunity to seize its customers. As a result, businesses are not always opposed to regulation, as conservatives frequently imply.

A recent example of this phenomenon involves the Corporate Average Fuel Economy (CAFE) standards that require automakers to produce vehicles that are more fuel efficient. Trump proposed reducing the required efficiency standards, but American automakers argued against such a change. Although it costs them money to produce more efficient cars, they have already made investments in this effort. They would rather have the certainty of the standards that have already been set than seeing their competitors undercut them on price by failing to make similar investments.

Nevertheless, conservatives frequently argue for less regulation, whether the businesses are demanding it or not. In response, progressives often point to the benefits regulation deliver to the environment, workers and consumers. By mandating certain standards, government makes sure that businesses don’t poison us with pollution, put workers into hazardous situations, or produce dangerous products. Conservatives don’t argue with the success that results from such efforts; they just claim that the costs outweigh the benefits.

The progressive argument ignores an important implication of the anti-regulatory fervor, however. We live in an era of increasing wealth inequality, and crises like the Great Recession of 2008 resulted in massive wealth transfers from the middle class to the very wealthy. We lost our homes, while our tax dollars bailed out the bankers who caused the crisis in the first place. By the way, the bankers could create these economic hazards due to deregulation of Wall Street, something that continues even to this day, even after what we experienced in 2008.

Consider this. The effects created by irresponsible business practices are borne by the rest of society. If companies pollute, society will bear the cost in the form of environmental clean-up costs and higher health care bills. Similarly, if workers are injured or killed on the job, society as a whole must take care of them and their families. Or if employers pay their employees starvation wages, society must make up the difference in food stamps, the earned income tax credit, and other assistance. In this way, business transfers costs it incurs upon society as a whole. Economists call such exchanges externalities.

Oftentimes, then, the goal of regulation is to “internalize” these externalities. In other words, we are not saying that firms cannot engage in hazardous activities if they are necessary to the business. If they do, however, they must pay the full cost such activities result in. In other words, they must take whatever steps are necessary to protect the workers, and to take care of them and their families if something happens to them.

Therefore cutting regulation is about shifting costs from the shareholders of the firm onto society as a whole. In other words, the middle class, through our taxes, pay for costs that are incurred by the business, thus increasing the profits to the shareholders.

In my view, economic arguments are the strongest arguments progressives can make in this day and age. Consider the extreme unpopularity of the Republican tax cut. Everybody knows that it was a give-away to the very rich, and that fact angered them. But that give-away pales in comparison to the benefits the rich have received by shifting their costs onto society as a whole through lower regulation. Perhaps once people understand the impact this policy has on their wallets, they will be less forgiving when corporate spokespeople argue against a higher minimum wage, a carbon tax, or other regulations designed to protect society as a whole from the behavior of the few.

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