Why Regulation Is Good For Growth

Tyler Durden's picture

From Azizonomics

I have in the past criticised regulation for throwing up barriers to entry and taking away opportunity from the youth.

But it turns out that regulation (the more the better) can be an engine for growth.

From Paul Krugman:

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.


This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.


And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

So by forcing private firms and individuals into spending money on things they don’t believe they need, government can create demand, which will lead to jobs via the magic of Keynesian multipliers.

Central planners know better than individuals and businesses. That is because they tend to be better educated, having attended the best schools and universities. Central planners tend to think about the bigger economic picture, while businessmen and individuals tend to have small parochial horizons. They are simply not qualified to know how to spend their money.

Bastiat was wrong — anything that creates spending during a depression will have a good effect on unemployment and aggregate demand. Austrian economists and libertarians carping on about opportunity cost should look at the opportunity cost of not forcing businesses to spend. During recessions, businesses tend to hoard cash, causing a fall in aggregate demand. This means prices fall, and the value of debt rises as debtors struggle to make payments on falling incomes, which can lead to mass defaults. The cost of not creating the spending would be falling demand and greater debt deflation. Well-educated central planners understand that under such circumstances government must do all it can to get the economy flowing again to stabilise price levels, and the best way to do that is forcing businesses and consumers into spending their cash on things they would not otherwise need or want, as well as by creating inflation.

It is also imperative that well-educated central planners do all they can to alleviate the damage that citizens are doing to our environment. The common businessman does not think about environmental concerns. He only thinks about maximising profit, like a common jungle beast. And we know what happens when this primal force is unleashed upon the world — we get economic depressions. It is the job of the well-educated central planner to correct his dangerous and deleterious behaviour. This can be done through levying taxes, by passing laws to mandate spending, or by laying smart regulations.

The biggest problem with “free” markets is the stupidity of the common people. How can they possibly know what they want, or what they want to achieve when they have not attended prestigious universities like Oxford, Harvard, or Yale? Without help from central planners working with fact-based information derived from simulations, mathematical models, and empirical studies the common people will never be able to make informed economic choices. Thanks to the genius of central planning for the common good — as well as the hard work and self-sacrifice of central planners — the common people are liberated from making difficult economic decisions. They can concentrate on what they are qualified to decide — what to have for lunch (so long as its contents have been approved by central planners for consumption), what to name their children (so long as it comes from a list of names pre-approved by central planners), or what to watch on television (so long as the transmission has been approved by government censors).


Happy April Fools’.