Sunday, February 21, 2010

Government regulations limit consumers' options

Published in The Tennessean, February 21, 2010

Government regulations limit consumers' options

by Richard J. Grant

A business succeeds by moving resources from less-valued uses to higher-valued uses. The willingness of customers to pay for the product is a visible sign of its value to them. If customers provide a stream of revenue that significantly exceeds the firm’s expenditures, then the managers can conclude that the business is worth continuing.

If the managers believe that the firm's capital could be better used in another line of business, then they will shift into that other use. Again, customer reaction will guide them in their decision as to whether or not to continue. If customers are not willing to pay enough to cover the firm's expenses, then the managers must act on that information and change course.

Though we speak in terms of "businesses" and "managers," all commercial activity involves individual people interacting directly with one another. Every agreement reveals information about people's desires and their abilities to provide goods and services to each other. The more free and voluntary the interactions that we have with one another, the better informed and able we are to serve one another.

All this changes when our interactions cease to be free and voluntary. When we are coerced to act, even in exchange for some good, an observer can no longer be sure that we are all benefiting from the transaction. For example, were a mugger to induce me at gunpoint to hand over my watch, we could conclude that I am worse off. But if that same mugger then handed me a $100 bill, would that necessarily make me better off?

The answer is no. Sure, I got away with my life and $100; but I might still have preferred to keep things the way they were. The mugger took that option away from me.

When transactions are coerced, we lose information. It is harder for us to know how best to serve potential customers and how much it will cost us to do so.

This is what we all experience each day when we must deal with some regulation, or tax, or expenditure by government. Regulatory compliance takes away many options that would otherwise be available to individuals and businesses. Too often, regulations exist for the benefit of special interests, not the general public.

In a free and voluntary relationship, people would be able to correct their situation. They would have the right to say “No” to a bad deal. But in a political situation any such right is far more difficult to exercise.

Congress can impose a tax on people, and then spend the proceeds on other people. Although a citizen might consider this to be unfair or even unconstitutional, the remedy is not as simple as saying “no.” Reversing this imposition might entail a long and expensive process requiring the agreement of many other people.

The more politicized our lives become, the less information we are able to share about the realities of our desires and abilities. No matter how good our intentions, we are less able to serve one another.

The US Budget for Fiscal Year 2011 projects Social Security outlays to be larger than the payroll taxes in every year from 2009 through 2020. This deficit in the Social Security system can be corrected only with a political solution. Ultimately, that means some combination of reduced benefits and higher taxes.

Medicare is worse. Already, Medicare payroll taxes cover barely 40 percent of Medicare outlays. This is not even including Medicaid.

In a free market, wise customers would have said no to all of this. We would not be facing this actuarial disaster.

Social Security and Medicare are nice things. But we would all be better off now if Congress had better understood James Madison’s words: "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.”


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2010