Source: Government Accountability Office
Regulation is inefficient. No one ever hired a compliance officer to increase productivity. And regulation creates moral hazard. During the “blue law” era, the most energetic advocates for restricting alcohol sales on Sundays were both Christian ministers and bootleggers. The bootleggers got more sales if legal sales were restricted. This is called the “Bootlegger and Baptist” phenomenon.
This creates opportunities for disruptive, entrepreneurial enterprises. Uber or AirBNB are taking advantage of the highly regulated taxi and hotel industries to lower consumer prices and improve convenience. By using the internet and mobile technology these startups look to produce 90% of the output with 10% of the overhead.
But local governments mistrust the upstarts: they get a lot of revenue from regulated local businesses. Also, local regulatory bodies are dominated by the current incumbants who don’t want competition to depress their margins. That’s why florists and hair-braiders can have ridiculous licensing rules. Finally, there are legitimate safety concerns: we really do want inspectors to certify that the planes we fly on are safe and the drugs we use aren’t snake oil.
As long as we have regulated markets we’ll have folks working to get around those regulations – some in order to innovate, some for more nefarious purposes. In many cases – like bitcoin – it’s a mixed bag. It takes some wisdom to sort these out.
Douglas R. Tengdin, CFA