April 3, 2002

The Regulation Scam

By: Timothy P. Carney

I no longer blame the media for being biased. I’ve realized it’s not their fault.

Some concepts New York Times writers and CNN anchors just cannot process. Their brains won’t allow it. One prime example: regulation helps big business, and nowhere is the benefit of an expanding federal government felt more than on the bottom line of large corporations.

I know that fact won’t be enough to persuade most conservatives that regulation is bad. Hopefully, a love of freedom is sufficient to do that. But, especially for those of us on the right, it is important to remember that the lobbyists and string-pullers in business are not free-market swashbucklers. They are beholden to the stockholders. They have one, simple fiduciary responsibility: increase profits.

In the long run, of course, nothing makes people better off and wealthier than free markets. But in the short run, corporations know that government can be a boost.

The best recent example is the Enron case. Enron had the ear of important players in the White House and on Capitol Hill, as countless column-inches of our country’s newspapers have made clear. The question is: what was Enron whispering into those ears? The answer is surprising to many, and simply incomprehensible to the crusty old liberals who run American media outlets. Enron was whispering: “Ratify Kyoto.” Yes, one of Enron’s top policy goals was to pressure the White House and Congress into approving an international regime to stop global warming by reducing greenhouse gasses.

But this should surprise no one. After all, Enron did not supply or generate energy. Rather, it established itself as the middleman in the energy market.

If carbon dioxide emissions are curbed by treaty, it would take the form of a cap-and-trade system. That means that power plants would be given individual allowances of CO2 emissions, and if one came under the cap, it could sell its emission credits to a producer who was having trouble coming under the limits.

Who would connect supply and demand in this system? Enron figured it was better positioned than any other firm to be the emissions-credit broker. Basically, the cap-and-trade scheme was creating an artificial market, and Enron planned on cornering it.

Also consider that Enron owned a natural gas pipeline, which would be in greater demand once Kyoto effectively outlawed coal and oil as sources of energy. The decision was an easy one for the company. The Kyoto treaty, however, didn’t come through for Enron. If it had, Ken Lay would still have a job, and people might still think Arthur Andersen’s numbers were legitimate.

This story falls outside of the paradigm the media sees in such issues. They imagine philanthropic, altruistic environmentalists or “reformers” who want to save the earth and protect the worker from ruthless greedy corporations, who fight for a free market where they can kill their prey mercilessly.

Perhaps the media think this way because they don’t understand the way the economy works. The greater the overhead in any market niche, the more difficult it is for an entrepreneur to enter the field. Government regulations — taxes, employment laws, building codes, paperwork, minimum wage laws — all add to the overhead. I call these “barriers to entry” when I want to sound like an economist.

If you were the only shoemaker in town, employing ten workers, you could charge a much higher price than your unit cost for each pair because you would have no competition. Your profits would be high. If the town government, meanwhile, wanted to “help the working man,” it might consider a bill requiring you to feed your workers lunch everyday. At first you might dislike this idea. It would clearly cut into your profits. But then you would look down the road at the rascal who’s sick of paying too much for shoes and wants to start a competing shop that undercuts your prices. You would realize that buying lunch for 10 workers is cheaper per worker than buying lunch for one. Paying the same wages as your upstart competitor, you would get ten times the productivity at much less than ten times the cost. The cost of the daily lunch would likely pale in comparison to the cost to your bottom line if you had to slash your prices to compete with the upstart. If you lacked scruples and conservative principles, you would support the bill, and your profits would be saved.

Enron is a specific story, and the tale of the shoemaker is a generic one. Neither story is new, nor particularly complicated, but both elude the grasp of the media.

Here’s one such story that is new. There is a consulting firm that has clients in the government and clients in the private sector. The government pays this firm to see if “industry X” needs to be regulated. The firm does a study, comes back, and says, “You definitely need to regulate X.”

But all this time, the firm has been consulting private companies saying: “although you’ve done fine without our consultation so far, you need it now, just in case the government regulates the X industry. We’ll tell you how to handle that regulation.” I will come forward with the details of this story once my investigation is complete. But I guarantee that there is not only one such scam against freedom going on in our government right now.

Let us hope conservatives can transcend the bogus paradigm the media propagates of government versus business. Pro-business does not mean pro-freedom, because pro-business often means pro-one-particularly-influential-business. Helping one business at the expense of principles and the economy as a whole is no different from stealing. Sadly, we must make sure to count the silverware every time big business comes to the table.

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