Bryan Caplan  

The Other Reason Big Business Supports Federal Regulation

Business Regulation and Econom... Government's Role in Health Ca...

Contrary to popular belief, Big Business often supports federal regulation. Economists' standard explanation: Regulation either directly restricts competition, or indirectly imposes a greater burden on smaller businesses. But there is another important reason why Big Business supports federal regulation that economists often overlook: To avoid the enormous transactions costs of dealing with 50 different sets of state regulation, and thousands of different sets of local regulation.

Case in point: See what ERISA regulations did for Wal-Mart:

On July 19, a federal district court ruled Maryland's "Fair Share Health Care Fund Act"--more popularly known as the "Wal-Mart law"--cannot be implemented because it violates a 32-year-old federal law.


In his decision, Motz found the Fair Share law "violates ERISA's fundamental purpose of permitting multistate employers to maintain nationwide health and welfare plans, providing uniform nationwide benefits and permitting uniform national administration."

Libertarians have often praised leftist historian Gabriel Kolko's Triumph of Conversatism for showing how Big Business supported Progressive-era regulation in order to suppress competition. When I re-read the book, however, I suddenly noticed a lot of evidence that the main motive of pro-regulation business was actually regulatory standardization.

In short, businesses often favor federal regulation as the lesser evil, rather than a positive good.

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COMMENTS (10 to date)
meep writes:

Another reason to promote some regulation, as a good to the business: guarantee of long-term promises -- i.e., insurance

Would anybody buy insurance if they couldn't be sure that the company could/would actually satisfy claims?

Of course, insurance is regulated at the state level, and there are several insurance companies that would like a federal level of regulation, as some states have onerous requirements, such as rate-setting. But solvency requirements, though regulated at the state level, are pretty uniform, due to the NAIC, which is how the states have fended off federal regulation of insurance -- by semi-federalizing the situation themselves.

James writes:

"Would anybody buy insurance if they couldn't be sure that the company could/would actually satisfy claims?"

Maybe some regulation requires that they buy it? I'd buy car insurance even if I knew that they would never satisfy a claim, only because the law requires it.

On the other hand, you seem to imply that insurers have to be regulated to maintain solvency. Why would that be necessary in a world where, as you suggest, no one would be willing to buy insurance without the confidence that their claims would be satisfied? If potential clients would be unwilling to do business with insurers that may fail to satisfy claims, then the greed of the insurer coupled with a ratings system would be sufficient motivation for the insurer to maintain solvency.

Anonymous2 writes:

Aha! This proves that Kevin Carson was right all along, namely that Big Business won't exist in a free market because of the enormous transaction costs of maintaining a large, nation-wide network of stores. Not only would the distribution costs be enormous - there being no interstate highway system in a free market - but the thousands of local regulations imposed by local communities would make their mass-exploitation business models untenable.

Vive la revolution!

meep writes:

Well, the promises being made in insurance can be extremely long-term (just ask the liability insurers about the asbestos claims -- these insurance contracts were from decades ago that are being called on to pay now.) Insurance companies are rated, just as corporate bonds are, but that only indicates the position of the company now. Not the position of the company (or whoever takes over their liabilities) in 20 years.

Insurance companies still go insolvent, and there are often state guaranty funds that will pay off some claims after an insurance company goes under. The regulations most people pay attention to with regards to insurance are the market conduct regs - how we set premiums (can we or can we not set car insurance premiums by credit rating of the individual? By their level of education? By their occupation? (doctors are notoriously bad drivers)), who we're allowed to market certain products to (this is coming up on deferred annuities - some shifty people were selling them to very old folks, for whom this is inappropriate), what kinds of products we're allowed to sell.

I'm an actuary-in-training, mainly dealing with annuities. To get lifetime payout annuities to work, you've got to convince people that you're actually going to be paying them a certain amount til they die - which can be 30 years or more. Annuities are a great way to protect against outliving one's savings, but you want to make sure the company will actually be making those payments. This is not a year-to-year decision of who to have insure your car. Once the decision to annuitize has been made, it's not like you can undo it.

Interestingly, to get the best rating (AAA) as an insurance company, you have to hold capital far in excess of the minimum required by the states. The solvency requirements give a threshhold at which the state can take the company over and make sure all legit claims are paid. One can't wait for it to go completely bankrupt and then sue - the recovery would be negligible. I suppose it could be written in the annuity contracts that if the company's rating were downgraded to B, then reserves would be released to contractholders pro-rata, but it would take an actuary to say how much protection you're getting in such a contract.

James writes:

meep, was your second post intended as an answer to the question I had originally asked you? If so, in which sentence should I find the answer?

Lord writes:

Regulation is frequently intended as a substitute for numerous lawsuits. In so far as it is successful, it can actually be a good, but sometimes is only a lesser evil.

James writes:

Lord, I've encountered that argument before but never understood it. If the activity prohibited by a regulation would have been legally actionable without the passage of that regulation, then whatever civil or criminal or civil statute would have made that activity actionable in the first place *is* a regulation. Any additional layer is redundant. And there is no reason to expect that it would be a substitute for lawsuits; rather, the plaintiff would sue for violation of the added regulation.

Lord writes:

Codifying past legal actions into regulations work to forestall future behavior. Lawsuits do this directly but are very expensive. The purpose of regulation is to inform, promote, and regularize behavior. A firm may be ignorant, negligent, or even malfesant. Regulation may be costly but still be far less costly than the legal system. Regulation may not stop a malefactor but offers a firm that uses it to advantage positive means of reducing their exposure. Why wouldn't they do this on their own? Most likely they would if they knew the best industry practices, the current legal framework, and the costs of failure.

Robert Speirs writes:

Unfortunately, regulation doesn't make the tort system go away, as the tobacco companies, who obeyed every law and regulation, have found out to their distress. I'm afraid all those supporting regulation are assuming that it works as intended by those with good intentions.

Lord writes:

Or industries that limit regulation for their short term interests only to find it not in their long term interests. Pharma 'complied' with regulations, but by limiting their independence have only undermined their ability to protect themselves through them. They considered the short term costs to be too high but are now discovering their long term costs are higher than they thought.

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