Who should regulate our world?

Businesses find federal regulation most cumbersome

When thinking of the legislative process in democracies, most economists first ask, “Can the market, responding to the whims and preferences of people, solve the problem, or must we legislate?”  Assuming legislation leading to regulation is warranted, the question then becomes at what level of government should a particular problem be solved? 

The debate between state and local control is perhaps the greatest source of jurisdictional conflict in this nation, as many cities attempt to enact policy only to have it reversed by state legislatures. This conflict between federal, state and local governments is escalating.         

Surveys of business owners reveal that the most cumbersome legislation is federal. Workplace rules, including OSHA, tops the list. Local laws tend to be second most problematic to businesses, especially local land use and building laws. In terms of legal priority, federal law trumps all other laws in these United States.

For instance, in hiring, if there is an inconsistency in federal laws and local laws, then federal rulings take precedence. Strong advocates of personal rights might prefer dominance by local laws, since deliberation takes place closer to home. So, how do economists view these challenges?

While we tend to think in terms of government imposing regulations on business, the truth is that it’s often business associations lobbying legislators to create laws that are more favorable to a specific industry.  In many cases, they do this to fend off attacks through the courts. In some cases, industries try to increase efficiency while complying with regulation.  Greater efficiency and effectiveness may result by regulating commerce at the state and federal levels rather than locally. 

The hog industry offers a good illustration. It operates across the country. The production process negatively impacts local ecosystems, which cannot handle the volume of waste produced. As a result of the negative environmental impacts locally, hog operations are regulated.  While all regulation could be approached at the local level, several problemsemerge.

First, the ability to influence legislators and bureaucrats in a business’ own neighborhood is greater as they are more intimate with businesses and constituents. Second, because the local government may lack the technical expertise to effectively legislate and monitor, the simple solution in the hog-farm example may be a ban, unless the employment created is significant to the local community; in which case local governments might tolerate excessive pollution.

Third, the rules will differ from community to community, thereby requiring companies with operations in multiple zip codes to contend with a much wider set of rules. Several years ago, national and international hog companies, working with environmentalists, pursued national legislation to simplify compliance across the country. 

Perhaps the greatest challenge presented to local legislators comes from a mismatch of the beneficiaries of an operation and those who bear the cost. Current efforts by some groups to ban hydraulic fracturing in Colorado provide a solid example. Having failed to achieve a ban through the legislative, judiciary and executive branches of state government, opponents must now pursue constitutional referendums to establish local control over the industry.

At the local level, legislators are more likely to discount the national benefit of lower polluting energy relative to coal, less global military engagement, and lower consumer prices, especially if the opposition is vocal and persistent. This is the common NIMBY phenomenon (Not in my Back Yard) where private rights are emotionally debated and property rights are regulated, with the “locals” often winning.

At the end of the day, economists recognize the beauty of market freedom in the way it simply prices and determines efficient and effective allocation of resources. But most economists also acknowledge that spillovers or market failures must also be addressed through regulation. The challenge is determining which spillovers need to be addressed and at what level of government.­h a wonderful

Categories: Economy/Politics, Magazine Articles