The Problematic Incentives of Government Regulation Presentation by Prof. Howard Baetjer Econ 640, April 21, 2009

Incentives in government regulation Kirzner assumes that regulators are well- intended—that they want what is best for the general public. Here we relax that assumption. (See Kirzner p. 445)

Contrast the incentives Unhampered market Private ownership Freedom of contract Regulation by market discipline Government intervention Common ownership Restriction of freedom to contract Regulation by bureaucrats

Hairdresser licensing What is its avowed purpose? How does it work -- what are the institutions? What groups are most affected by it? Sharissa’s story What are the incentives for licensed hairdressers under this institution?

Hairdresser licensing What appears to be the actual purpose of hairdresser licensing? Some detail on Maryland’s licensing law The capture theory of regulation

Legal institutions Informal institutions Market (for profit) institutions Are there civil society alternatives to hairdresser licensing?

Legal institutions –tort liability Informal institutions –reputation –word of mouth “Time wounds all heels” Market institutions –intermediaries that provide information salons beauty schools (certification) –information vendors like Consumer Reports –insurance companies Civil society alternatives to hairdresser licensing

Legal institutions Informal institutions Market institutions Are there civil society alternatives to pharmaceutical regulation?

Legal institutions –tort liability Informal institutions –reputation for all parties (connected directly to stock price) –word of mouth “ Time wounds all heels” Market institutions –intermediaries that provide information hospitals pharmacists doctors –information vendors e.g. Consumer Reports Underwriters’ Laboratory equivalent –insurance companies for intermediaries for drug companies Civil society alternatives to pharmaceutical regulation

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots Interleukin-2* treats kidney cancer Misoprotol prevents bleeding ulcers AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 years Interleukin-2* treats kidney cancer Misoprotol prevents bleeding ulcers AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Misoprotol prevents bleeding ulcers AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May 1992 Misoprotol prevents bleeding ulcers AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months8000 – deaths AmbuCardioPump** Emergency room CPR device Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months8000 – deaths AmbuCardioPump** Emergency room CPR device not approved Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months8000 – deaths AmbuCardioPump** Emergency room CPR device not approved 7000 deaths annually Home HIV test * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months8000 – deaths AmbuCardioPump** Emergency room CPR device not approved 7000 deaths annually Home HIV test5 years * Already available in Europe ** Available in most industrialized nations

Examples of Type II errors by FDA Drug or device Length of approval delay Estimated consequences Thrombolytic therapy dissolves blood clots 2 yearsup to 22,000 deaths Interleukin-2* treats kidney cancer Nov – May deaths Misoprotol prevents bleeding ulcers 9 ½ months8000 – deaths AmbuCardioPump** Emergency room CPR device not approved 7000 deaths annually Home HIV test5 years10,000 infections * Already available in Europe ** Available in most industrialized nations

Fifty years ago, one in 20 Americans needed a government license to work in their occupation. Today that number is close to one in three. In 1981, there were roughly 80 occupations that required a license in at least one state. Today there are 1,100. Source: Institute for Justice:

More examples of the “capture” of regulation by the regulated group Bootleggers and Baptists Texas Interior Design Maryland Horse massage Minneapolis taxis 65 Campaign finance law Minimum wage laws The USA and the RSA compared

The special-interest effect: Concentration of Benefits and Diffusion of Costs Special interest group members Enjoy concentrated benefits --individually large benefits--  Each has a strong incentive to keep informed, organize, lobby, spend a lot, for the policy. Taxpayers/consumers Bear diffused costs --individually small costs—  Each has a weak incentive to oppose the policy “Rational voter ignorance ” So whose voices do the politicians hear?