As a way of thinking about whether junking the system is really so unthinkable, join me inimagining that tomorrow Congress passes a new law and the President signs it. The new law leaves the current regulatory apparatus and the current list of regulations untouched. It offers the innovation: Businesses may choose to opt out of the regulatory system. To make the issue clearer, let us assume that businesses are permited to opt out of state and local regulations as well.###
The only requirement of the law is that any business choosing to opt out must identify itself, like Hester Prynne with her scarlet letter A. An unregulated store must post a large sign reading UNREGULATED where it cannot be missed. Manufacturers who choose to opt out must stamp the word UNREGULATED on the package or the shipping container. UNREGULATED must be prominently visible in every television or print advertisement for unregulated good or service. By contrast, businesses that choose to remain within the regulatory system are free to display equally proiminent signs reading something like this, THIS BUSINESS PROUDLY COMPLIES WITH ALL GOVERNMENT REGULATIONS.
If this law is signed tomorrow, what will begin to happen the day after tomorrow?
There are a few outcomes. First, just about every small business will want to be unregulated. No more forms to fill out, reports to file, government lawyers to fight. No more OSHA inspectors or endless waits for an agency to process your plea. No more building inspectors, elevator inspectors, or restaurant inspectors. Owners of unregulated small businesses will have to answer to no one but their customers.
I specify small businesses, because many large corporations will not be thrilled with the new system. For them regulation is often part of a cozy partnership with government. They can absorb regulatory costs better than small businesses and thereby gain a comparative advantage. They have the lobbying clout to have the regulations tilted their way and to get tailor-made tax breaks as a quid pro quo. But many large corporations will nonetheless opt out of the regulatory system once their smaller competitors are no longer hamstrung because they will see the competitive handwriting on the wall.
Namely: Unregulated businesses can offer their customers a much better deal than can their regulated counterparts. Lower prices are one obvious lure— anything from a few percent to more than half off regulated prices, depending on the product or the service. But lower prices are not the only advantage. Unregulated businesses can also take some of their cost savings and plow them back into the business— offering a more atractive store, better service, or a better product.
If an unregulated business can offer both lower prices and a better product, the contest is over for a wide range of enterprises. Few people will choose to pay an extra dime for a candy bar because they know it is made in a regulated factory, and the same goes for everything from paper towels to computers. Few people are going to choose an overnight delivery service or a dry cleaner on the basis of whether it complies with government regulations. For a few services it is hard to predict what happens. Do many people think that city restaurant inspectors have any meaningful effect on the quality of restaurants? I doubt it, but an attractive feature of the thought experiment is that we do not need to predict. Inspected and uninspected restaurants are both free to seek out their markets.