The first concept an economics student learns is that for every benefit there’s also a cost — or, as my longtime colleague and friend Nobel Laureate Milton Friedman has put it, “There’s no free lunch.” While the person who receives the benefit might not pay or even be aware of the cost, as sure as night follows day there is a cost paid by someone.
One of the effects of competition is that of revealing costs and least-cost methods of production. When the government gave AT&T a monopoly over much of the telecommunications industry and the Civil Aeronautics Board sponsored the airline cartel, both telecommunication and air travel were far more expensive than they are today. The introduction of competition not only revealed that the services could be provided more cheaply, but brought about massive innovation, as well.
International trade is a form of competition, and as such it also reveals costs and least-cost methods of production. American workers are the most productive workers in the world. According to the Bureau of Labor Statistics, in 2002 the United States led the world in worker productivity: U.S. workers averaged $71,600 in output each (in 1999 dollars). The next highest country was Belgium, where each worker averaged $64,100. But worker productivity can be sabotaged.
Suppose an American textile worker is paid $100 a day, while his Indian counterpart earns $20. If the American is 10 times as productive as the Indian worker, then the wage costs of using the American worker is lower. However, $100 in wages is not the only cost of hiring the American worker. There are numerous federal and state regulations that add to worker costs, such as: OSHA requirements, EEOC mandates, Social Security and Medicare, Family Medical Leave and many other workplace regulations. Added to worker costs that businesses incur are: Americans With Disabilities Act, Clean Air Act, Endangered Species Act and many other regulations.
Then there are all sorts of frivolous and not-so-frivolous lawsuits brought against businesses. According to an Office of Advocacy of the U.S. Small Business Administration study, “The Impact of Regulatory Costs on Small Firms,” federal regulatory costs on U.S. businesses were $451 billion in 2000. They cost small businesses (20 or fewer employees) about $7,000 per employee; medium businesses (20 to 499 employees) paid about $4,300; and large businesses (500 employees or more) paid about $4,400.
There’re no two ways about it: There are benefits from all the costly federal, state, and local regulations imposed on American businesses. But we must also acknowledge that our federal, state and local regulatory agencies have no jurisdiction in India, China, Southeast Asia, Mexico and Latin America. That means for many products and services, people who are far less productive, in a physical sense, than we are can beat us in the global marketplace.
We all can agree that there’s no benefit that’s worth any cost. If that weren’t true, we’d do practically anything that has a benefit, and that would include mandating a 5-mile-per-hour speed limit. Why? The benefits would be enormous in terms of the tens of thousands of highway fatalities and injuries avoided. We don’t have a 5-mile-per-hour speed limit because we’ve decided that its benefit is not worth the enormous cost.
As said earlier, competition reveals costs and least-cost methods of production. One need not take a position one way or another on the worthiness of the benefits of regulation to acknowledge that there are costs associated with them. But I think that intelligent decision-making requires that we take their costs into account. It’s not intelligent to stick our heads in the sand and deceive ourselves by pretending that others are to blame for our lack of competitiveness in some areas.
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