The Moral Hazard of Regulation

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Since
the bailout bill passed, I have been frequently disturbed to hear
“experts” wrongly blaming the free market for our recent
economic problems and calling for more regulation. In fact, further
regulation can only make things worse.

It is important
to understand that regulators are not omniscient. It is not feasible
for them to anticipate every possible thing that could go wrong
with whatever industry or activity they are regulating. They are
making their best guesses when formulating rules. It is often difficult
for those being regulated to understand the many complex rules they
are expected to follow. Very wealthy corporations hire attorneys
who may discover a myriad of loopholes to exploit and render the
spirit of the regulations null and void. For this reason, heavy
regulation favors big business against those small businesses who
cannot afford high-priced attorneys.

The other problem
is the trust that people blindly put in regulations, and the moral
hazard this creates. Too many people trust government regulators
so completely that they abdicate their own common sense to these
government bureaucrats. They trust that if something violates no
law, it must be safe. How many scams have “It’s perfectly
legal” as a hypnotic selling point, luring in the gullible?
Many people did not understand the financial house of cards that
are derivatives, but since they were legal and promised a great
return, people invested. It is much the same in any area rife with
government involvement. Many feel that just because their children
are getting good grades at a government school, they are getting
a good education. After all, they are passing the government-mandated
litmus test. But, this does not guarantee educational excellence.
Neither is it always the case that a child who does NOT achieve
good marks in school is going to be unsuccessful in life. Is your
drinking water safe, just because the government says it is? Is
the internet going to magically become safer for your children if
the government approves regulations on it? I would caution any parent
against believing this would be the case. Nothing should take the
place of your own common sense and due diligence.

These principles
explain why the free market works so much better than a centrally
planned economy. With central planning, everything shifts from one’s
own judgment about safety, wisdom and relative benefits of a behavior,
to the discretion of government bureaucrats. The question then becomes
“what can I get away with,” and there will always be advantages
for those who can afford lawyers to find the loopholes. The result
then is that bad behavior, that would quickly fail under the free
market, is propped up, protected and perpetuated, and sometimes
good behavior is actually discouraged.

Regulation
can actually benefit big business and corporate greed, while simultaneously
killing small businesses that are the backbone of our now faltering
economy. This is why I get so upset every time someone claims regulation
can resolve the crisis that we are in. Rather, it will only exacerbate
it.

See
the Ron Paul File

November
4, 2008

Dr. Ron
Paul is a Republican member of Congress from Texas.

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Paul Archives

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