The proper role of government in the regulation of business and the economy is an issue that is as old as the Republic itself. This essay begins with a brief overview of the two basic schools of thought regarding the role of government regulation and societies general attitudes toward regulation of business. I also provide brief summary of the two core areas of economic and social regulation. Finally, I conclude that, over the long-term, the most sustainable role for government in the regulatory realm is to serve as a referee. That is, agencies and regulators should work with stakeholders to effectively achieve macro-economic and social goals while ensuring that all players are treated fairly.
Over the past sixty years there have been two basic views of the proper relationship between the private and public sectors when it comes to the government’s proper role in the regulation of business. The left has argued that the public sector represents the repository of popular consent without which all private activity is suspect. As the repository of consent, government is better able to consider all the interests of society and can command the private sector to producer optimal results (Kennedy. 2001). The other view maintains that private markets increase freedom and that the legitimacy of market solutions comes from their voluntary nature rather than from government sanction (Kennedy, 2001). These diametrically opposed views are the foundation from which most arguments regarding government regulation are born.
While it is true that private markets have both strengths and weaknesses, both schools of thought outlined above remain ingrained in the American psyche. Throughout their history Americans have been leery of excessive government power and have generally sought to limit it. On the other hand, many people continue to believe that corporations must be “reigned in” when necessary. These beliefs extend to the realm of regulation and its impact on business development.
As noted by the Pew Research Center, “The public has long had conflicted attitudes toward the nation’s corporations. There is broad agreement thatAmerica’s strength is largely attributable to the success of business.” However, the report goes on to note that “most people also believe corporations are too powerful and more interested in making a profit than in serving the public interest.” (ThePewResearchCenter, 2004). The government essentially exercises their regulatory authority in areas of economic and social regulation.
Economic regulation consists of actions that seek to level the playing field in the business arena. In their publication How the U.S. Economy Works, the United States Department of State notes that the federal government seeks, either directly or indirectly, to control prices either through prevention of monopolies or via antitrust actions.
The government also exercises control over private companies to achieve social goals in the other core area – social regulation. Examples include agriculture, public health, workplace safety, and the environment. Congress has also recognized the need for competition in areas such as housing and agriculture and, therefore, Government Sponsored Enterprises (GSEs) such as Fannie Mae and the Farm Credit System have been created. These are privately held entities that have the implicit backing of theU.S.treasury because they are fulfilling a congressionally-mandated mission. In Farm Credit’s case, it is to provide a reliable and competitive source of credit regardless of conditions in the rural economy.
So how does one quantify the impact of government regulation on business and the economy? Attempts have been made over the years, most notably by President Reagan’s first Chairman of the Council of Economic Advisors, Dr. Murray Weidenbaum. Dr. Weidenbaum utilized a simple formula that first looked at the “costs of compliance” (how much business pays to conform to government regulations), as well as an estimation of the federal administrative or bureaucratic costs of regulation that were derived from the budgets of the various regulatory departments and agencies (Schwarz, 1988, p. 92-93). Although gauging the direct and impact of regulations on the cost of doing business, this methodology emphasizes the fact that someone pays the bill in some way at some time. As Higgs points out, “In regulation we come face to face with the invisible hand of government at work imposing largely hidden costs.” (Higgs, 1990). He goes on to emphasize that, “The costs are hidden in part because they are borne by private parties in the process of compliance – meeting prescribed standards, avoiding prohibited actions – and spread across the consuming public in the form of higher prices for goods and services.” (Higgs, 1990)
Obviously, one cannot overlook the human element in the promulgation and enforcement of regulations. To a certain extent I agree with Foer that, “political actors are just like everyone else;…they should be viewed as rational individuals who act in self-interest.” (Foer, 2002). Given the fact that there will always be a fundamental component of the regulatory process, it is worth reminding regulators that their actions do have a real impact on the vitality and innovative spirit of businesses.
In conclusion, regulations have a real and measurable impact on business and the U.S. economy. While neither of the core areas of regulation is inherently bad, the reason I have placed an emphasis on the hidden costs of regulation is because I firmly believe that regulators must remember that their actions can have a tangible and long-term impact. It is important to remember that public policy developed on a theoretical plane does not always lead to outcomes that work in the real world. Naturally, there can be tangible benefits to government regulation of business. As Schwarz points out, “regulation produces a product, whether it be cleaner air and water or goods that are less hazardous to the consumer. (Schwarz, 2002, p. 99). While this may be true, it is critical that government make the rules of the game known, ensure that the playing field is level, and that all interested parties have a chance to succeed in a manner that is fair and equitable. In a broader sense, government must remember that for every initiative undertaken in the regulatory arena, there is a real cost to the economy and the consumer.
Bodenhamer, D., (October). Federalism and democracy. Democracy Papers. United States Department of State. Retrieved October 10, 2004 from www.usinfo.state.gov.
Foer, A., (2002). Public choice and public choices: consumers and the politics of antitrust. Presented to the 47th Annual Conference of the American Council of Consumer Interests on April 7, 2001. Retrieved October 20, 2004 from www.antitrustinstitute.org.
Higgs, R., (1990). The growth of government in the united states. In The Freeman: Ideas and Liberty in August 1990. Retrieved October 20, 2004 from www.fee.org.
Kennedy, J., (2001). A better way to regulate. In Policy Review, Number 109. Retrieved October 20, 2004 from www.policyreview.org.
Schwarz, J.E., (1988). America’s hidden success. New York, N.Y: W.W. Norton and Company
The PewResearchCenterFor The People & The Press. (2003). Evenly Divided and Increasingly Polarized, November 5, 2003. Washington,D.C.
United States Department of State. (2004). How the u.s.economy works. Retrieved October 20, 2004 from www.usinfo.state.gov.
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