Regulation Adds to Cost, Benefits The Regulated

George Stigler at the University of Chicago fifty years ago noted that regulatory bodies, -- contrary to popular myth --  exist to serve the interests of those they regulate. Examples abound.  From the sugar cartels to the American Bar Association, regulators protect incumbents from new competition and lower prices for consumers.

Jim Bessen from the Boston University School of Law recently published a new study providing evidence of this. In his study he estimates the regulation and other political activity accounts for about 40% of the increase in the rise of profits in the last 15 years.


Contribution to Rise in Operating Margins, 1971-2014, US public firms

For large corporations today the most productive investment they can make is not in R&D or marketing or cost-reducing capital improvements, but in influencing government regulators to insulate them from new competition.  In his paper, Bessen provides a striking specific example of effect of the laughably named* 1992 Cable Television Consumer Protection and Competition Act. 
The act, of course, did nothing of the sort and predictably increased the relative value of cable firms.


Rise in Corporate Valuations / Assets around 1992 Cable Act;7 Cable TV firms and 2,137 other firms

So the next time you hear someone promising to "protect consumers" by regulating some business, remember that they are seeking just the opposite result.

* I am still struggling with whether the name of this act exceeds the Laughability Index of the Affordable Health Care Act. Pretty much a toss-up.

Understanding the Minimum Wage Over a Cup of Coffee

An article yesterday in the Seattle Times pointed this out:

"Last July, Starbucks raised its prices 3.5 times as much in Seattle as in the rest of the country. It raised the price of its typical coffeeshop purchase across the U.S. by 1 percent, but in Seattle by 3.5 percent."

Gee, now if there only some sort of theory that would explain the effects of Seattle's $15 minimum wage law. We could call it Economics 101 or something.

Do Black Lives Really Matter?

The push for higher minimum wages in big cities has had exactly the effect you'd expect if you'd taken Economics 101 -- reducing the demand for low skilled, inexperienced labor.  We’re now going to have lots of young black men sitting around with nothing to do. What could possibly go wrong? For liberals, black lives only matter when there's a shooting. Otherwise, who cares?

Tax Rates Matter to Scientists

A recent paper by Ufuk Akcigit and Salome Baslandze examined the effect of tax rates on the mobility of "superstar scientists" -- the top 1% of inventors with the most valuable patents -- found that countries enjoyed a "26% increase in foreign superstar inventors for each 10 % decrease in top marginal tax rates."

What this means is that top performers (in this particular case, scientists who can do their work in lots of places) tend to move from locations that tax their earnings heavily to places that tax them lightly. This is the same basic economic reason that people are moving out of  high tax states like California and New York to low tax states like Florida and Texas.

Sometimes the empirical evidence of basic economic principles is complicated, but the principles are rather simple -- and predictable.  If you want top talent to stay in your country, don't drive them away with high taxes.