The truth about regulation: The overhead smash

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Politics,Beltway Confidential,Timothy P. Carney

It is an article of faith among many liberals and a self-evident truth among most mainstream reporters that government regulation curbs Big Business, and that the free market is the dream of monopolists.

To correct this misconception, I recommend two brief articles for your weekend reading: Reihan Salam gets macro and writes on how overregulation is helping shape the peculiar maladies of our economy by protecting Big Business from competition. And Megan McArdle gets local and writes on how Mayor Gray is using regulation to protect incumbent businesses from upstarts.

Salam writes that American mistrust of corporate America is well-founded, but he also looks at the peculiar maladies of the American economy today, and concludes:

It turns out that this “anticorporate” agenda of ramping up regulation is actually pro-corporate. Stringent regulations tend to protect incumbent firms from their greatest fear — innovative start-ups that could drive them out of business.

My columns and my books are filled with dozens of examples of regulation adding to overhead costs, and thus crowding out competition. Most recently, we've seen health insurers' profit margins grow in the wake of Obamacare. While National Journal stuck a "despite" in their report on the windfall, I suspect that added regulations serve as barriers to entry keeping out competition. Other fairly recent examples of Big Business supporting and benefitting from stricter regulation -- I call it "The Overhead Smash" include toys, employer-based health-insurance, food, tax prep, trucks, minimum wage, tobacco, emissions rules, and plenty more.

Salam collects evidence that these barriers to entry are shaping our economy today, in a bad way:

Since 2006, the number of new “employer businesses” — start-ups that are more than a one-person operation — has fallen by 27 percent. This is toxic for economic growth. New firms are the ones that introduce entirely new ways of doing business.

And according to the Kauffman Foundation, which studies entrepreneurship, start-ups are starting smaller and staying smaller. The weak economy is obviously part of the picture. But so is the decades-long creep of incumbent-protecting regulations, and the furious effort to tighten patent protections and other barriers to entry.

Unleashing entrepreneurs will force rich and powerful incumbents to spend money on inventing new products and processes that will help them maintain their edge. Lounging timidly on a mountain of cash will no longer be an option when new firms show up to compete and siphon away hefty profits.

McArdle's discussion of DC regulatory barriers to entry highlights the nature of the current mayor, Vincent Gray, Mr. Machine, whose candidacy was based on showing "respect" for the current incumbent businesses and special interests. Gray's endorsers in his primary challenge to incumbent Adrian Fenty included the American Federation of Government Employees, Washington DC Realtors, DC Chamber of Commerce, AFL-CIO, AFSCME, Fraternal Order of Police and the Washington Teachers' Union.

Two incumbent businesses Gray is protecting from competition: cabbies and restaurants. Read McArdle's account, but remember, Gray isn't the first government official to conduct protectionist and absurd stings on unlicensed cabbies. And food trucks aren't the only victims of restaurant protectionism, lemonade stands, too.

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