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Posts Tagged ‘Free Market’

I’ve written before about the heavy costs of regulation, including these rather sobering statistics. Or, to be more accurate, here are some staggering numbers.

But a lot of people don’t focus on the cost of regulation. They are motivated instead by a desire to protect themselves against unknown risks, which they assume are exacerbated by companies that are greedy for short-run profits.

I acknowledged this concern in the November issue of Townhall magazine.

…it is difficult—or even impossible—for the average consumer to gauge safety. Are we flying on a well-maintained plane? Are we eating food that is free of salmonella and botulism? Is our workplace protected against dangerous machinery? Are our children vulnerable to chemical exposure? Since the vast majority of people have no way of answering these questions, we shouldn’t be surprised that many of them want some sort of independent oversight—especially since they suspect that businesses will be tempted to cut corners. After all, less money spent on health and safety means more profit for shareholders.

But I also explained how the free market produces very effective forms of private regulation.

…the desire for profits creates a big incentive for businesses to use good practices while producing safe and effective products. Imagine you’re the CEO of a major airline, and one day all the regulatory agencies disappear. Are you going to stop maintaining your planes? At the risk of stating the obvious, the answer is no. One disaster could be the death knell for an airline, particularly if there were the slightest hint that the company was skimping on upkeep. Moreover, it’s highly unlikely that investors would plow money into an airline when share value could disappear overnight because of an accident. And banks presumably would be leery about lending to an airline that faced the risk of quick bankruptcy. Moreover, insurance companies would have a very strong incentive to monitor the safety practices of the airline— and keep in mind no bank would lend money to an airline that lacked insurance. In other words, the competitive marketplace can be viewed as a very effective form of regulation. Instead of rules and red tape from Washington, the profit motive creates mutually reinforcing oversight.

This “mutually reinforcing oversight” does not guarantee that business won’t cut corners and/or make mistakes. But, then again, regulation from politicians and bureaucrats don’t stop that from happening either.

The key question to ask is which approach achieves the best results at the lowest cost.

The answer is the free market, though augmented by government regulations that pass a cost-benefit test, the tort system to discourage bad business behavior such as negligence, and the criminal justice system to fight behaviors such as fraud.

There will be a debate, of course, on where to draw the line. But one thing I can say for sure is that an intelligent system will never produce these examples of bureaucratic idiocy.

Remember, if government is the answer, you’ve asked a very strange question.

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The world is a laboratory and different nations are public policy experiments. Not surprisingly, the evidence from these experiments is that nations with more freedom tend to grow faster and enjoy more prosperity. Nations with big governments, by contrast, are more likely to suffer from stagnation.

The same thing happens inside the United States. The 50 states are experiments, and they generate considerable data showing that small government states enjoy better economic performance. But because migration between states is so easy (whereas migration between nations is more complicated), we also get very good evidence based on people “voting with their feet.” Taxation and jobs are two big factors that drive this process.

Looking at the census data and matching migration data with state tax systems, here’s what Michael Barone wrote. He finds (not that anyone should be surprised) that the absence of a state income tax is correlated with faster growth, which attracts people from high-tax states.

…growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England. Altogether, 35 percent of the nation’s total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

And here’s Diana Furtchtgott-Roth, writing for Realclearmarkets.com. She uses the presence of right-to-work laws (which prohibit union membership as a condition of employment) as a proxy for the degree to which big government and big labor are imposing restrictions on efficient employment markets. Not surprisingly, the states that have a market-friendly approach create more jobs and therefore attract more workers.

The American people have been voting with their feet, the Census Bureau announced on Tuesday, leaving states with heavy union influence and choosing to live in “right-to-work” states with higher job growth where they cannot be forced to join a union as a condition of employment. …As a result of geographic shifts in population uncovered by the 2010 Census, nine congressional seats will move to right-to-work states from forced unionization states. Some winners are Texas, Florida, Arizona, Georgia, and South Carolina, while losers include New York, Ohio, Michigan, Illinois, and New Jersey. Over the past 25 years job growth in right-to-work states has been over twice as high as in unionized states.

This leaves us with one perplexing question. If we know that pro-market policies work for states, why does the crowd in Washington push for more statism?

Welcome, Instapundit readers. Since many of you might not be regular readers of International Liberty, the important lesson to learn from the Census data is that federalism is good because state governments have to compete against each other, and this helps restrain the greed of politicians. The same principle operates at the international level, which is why tax competition is such a powerful force for liberty.

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The title of this post may be a slight exaggeration. I actually recommend you read the entire two-page paper by Devon Herrick of the National Center for Policy Analysis. But this chart from that study is an excellent visual display of what’s wrong with the health care system.

You can see that the price of medical care is rising twice as fast as inflation, but you can also see that prices for cosmetic services are rising only half as fast as the general price level. Why are general health care prices soaring, yet prices in one segment of the health care world are very stable (and actually falling relative to all other prices)? The answer is simple. As Devon writes:

A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else’s money. When patients pay their own medical bills, they are conservative consumers. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. Thus, the increase in spending has occurred because third parties – employers, insurance companies or government – pay almost all the bills.

Study this image for two minutes and contemplate the implications. After that, you’ll know more about healthcare economics than 98 percent of all politicians (though that’s not exactly a huge accomplishment).

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