Andrei Shleifer explains [Download Here] the relative success (and omnipresence) of regulation in modern economies by the relative failure of private alternatives (contract enforcement, tort adjudication). Christopher DeMuth, president emeritus of the American Enterprise Institute and a former crusader against regulation in the Reagan administration, has very different ideas. Indeed, to read his recent analysis [Download Here], is to wonder whether they live on the same planet.
DeMuth sees regulation in broad terms as the imposition of government provisions on otherwise private contracts – e.g. credit card issuers may not charge interest exceeding X percent; airlines may not charge less than $Y for a seat from Cleveland to Seattle; automakers may not sell vehicles without airbags. And such rules, he argues, virtually always trigger private responses that undermine the nominal intent (credit card issuers collect much of their income from late penalties) or generate truly perverse impacts (unemployment increases among low-skilled workers with increases in the minimum wage). Actually, there is no way to do justice to the paper in a thumbnail sketch: DeMuth offers a rich and generally convincing case against regulation. His analysis of the political economy of regulating greenhouse gas emissions is worth the price of admission alone.