Saving the Welfare State by Cutting Regulations: Sounds Great, But Will It Work?

Will Wilkinson writes in the New York Times that conservatives, in pursuing their goal of economic growth, have become too fixated on shrinking the size of government. Instead, he says, they should focus on cutting regulations, which aren’t as sacrosanct as entitlement programs. While his points are reasonable in the abstract, and his political analysis of the Republicans’ electoral dilemma is astute, his prescriptions are much less compelling when examined up-close.

Time to cut the strings?

Wilkinson argues that our complex regulatory environment stems from a “lack of a robust safety net capable of keeping people from becoming collateral damage” of the “routine creative destruction” that would occur in an unbridled economy. This is a nice theory, but it doesn’t match up with the empirics: Countries with large welfare states also tend to have complicated regulatory frameworks. (Notably, the ones that do not, such as the Nordics, have very strong union cultures and collective bargaining a the national level — more on this later.)

But if the lack of a sufficient safety net in the U.S. isn’t the cause of our complex regulatory environment, then what is? A much better explanation is simply that the complexity of the regulatory state is a function of the relative complexity of the economy itself. In 2017, the average person is affected by international and non-regional economic activity — as a consumer, a market participant, or even as a bystander — far more than before our economy became so “dynamic”. Because these powerful economic forces are no longer subject to local mechanisms of control (such as reputational concerns, devastating targeted boycotts, organized local resistance, environmental norms, etc.), people have clamored for governments to fill in the gap with regulations. (The Nordics appear to have retained something akin to the previous localized mechanisms of control with their strong labor movements.) Ironically, the widespread demand for the regulation Wilkinson bemoans is created by the very “dynamism” that he extols. Thus his prescriptions to boost “dynamism” while reducing regulation, while promising at first glance, are ultimately incoherent.

Wilkinson is clearly right when he notes that continued Republican opposition to safety net programs would be electoral suicide. But he should consider whether his own program wouldn’t suffer from a similar popularity problems: Regulations are reviled in the abstract, but start asking which specific regulations you’d like to see cut, and the task quickly becomes complicated. Where to start cutting — environmental regulations? No, people like clean air and water too much to leave it to the mercy of a creatively-destructive private sector. Food safety? One good botulism scare is enough to keep lawmakers from fiddling around with FDA. Oh, I know! — what about the regulations stemming from corporate lobbying to protect particular industries? (I’m looking at you, USDA.) Well… those were never the ones lawmakers were likely to cut anyway: The whole reason industry-friendly regulations exist, despite their rickety justifications, is that industry lobbies have a lot more power than the diffuse consumer interests that might otherwise oppose them. If cutting regulations is the way to go, then Wilkinson should suggest some specific deregulations that would be both popular with voters and capable of navigating the morass that is K Street. At present, the unfortunate reality is that wonks can’t even dial back something as universally-derided as corn subsidies.

It’s also worth pointing out that Wilkinson’s advice will likely find few takers among Republican thinkers and policymakers anyway. These people typically subscribe to the idea that “big government” inevitably crowds-out private enterprise, irrespective of whether the government action even directly regulates behavior. Taxes reduce the amount of money that citizens have to invest or donate, they say, and create deadweight losses besides.

Is there any path forward? Perhaps: Instead of gutting regulations entirely, they could be streamlined. Right now a big problem is that rule-making is such a hidden activity that only a few powerful players get to systemically engage in it. So instead of having onerous minutiae of rules designed to fix problems piece-by-piece, we could aggressively internalize externalities more broadly. Processed food companies are causing health spending to balloon? Instead of specific regulations like banning trans fats or taxing soft drinks, perhaps we could instead compel those companies to shoulder national health care costs, thereby incentivizing them to create healthier food environments. A company wants to build a power plant? Instead of specific regulations about local particulate matter pollution, perhaps we could ensure that the company will be held liable for attendant environmental and health degradation even if it passes through bankruptcy. These would decrease the size and complexity of the regulatory state — and therefore in some sense the burden of compliance — but still leave citizens protected.

Of course, my proposed deregulations can be attacked on many of the same grounds as Wilkinson’s. And maybe an aggressive internalization of vigorous economic activity would lead companies to decide that their dynamic enterprises wouldn’t be worth it, and while the regulatory state’s size and scope would shrink, the economy would return, in important respects, to a more localized focus. But also consider: Would that really be such a bad thing?