Regulation and the Natural Progress of Opulence

AEI Newsletter

Posted: Wednesday, September 22, 2004

ARTICLES

Publication Date: October 1, 2004

On September 8, Sam Peltzman, a professor at the University of Chicago and a member of AEI's Council of Academic Advisers, delivered the 2004 Distinguished Lecture of the AEI-Brookings Joint Center for Regulatory Studies. Edited excerpts follow.

The title of this lecture comes from a chapter--"On the Natural Part of Opulence"--in Adam Smith's Wealth of Nations. The "natural" part of his chapter title conveys an important part of Smith's answer to the mystery of steady growth. His message is that when unregulated, undistorted rewards are higher in one activity than another, economic progress is usually promoted if resources flow toward the high-return use. And resources will flow that way if we are left alone to pursue our happiness. When regulators do things that change those market signals or prevent us from responding to them, the nation as a whole usually ends up poorer.

Natural progress strikes back through the tendency of regulatory changes to create incentives for behavior that offsets some or all of the intended effect of the regulation. Modern examples include the auto-safety legislation that began in the 1960s and the Americans with Disabilities Act of the early 1990s.

There was considerable progress in automobile safety before the U.S. Department of Transportation established its Motor Vehicle Safety Standards. That progress came from the natural progress of opulence: growing wealth was producing growing demand for personal health and safety, and markets were finding ways to meet the increased demands.

Nevertheless, the unified view that has informed auto-safety regulation since 1966 is that safety depends critically on design features of cars that protect occupants from the consequences of accidents and that the discovery and deployment of these features is to be centrally determined.

Almost thirty years ago, I argued that this regulation would encourage greater risk-taking. In effect, the greater protection had reduced the price of risky driving. If you are in a hurry and tempted to drive faster or more aggressively, part of the price you would pay for that is the extra risk of getting into an accident and then suffering injury or even death. The mandated safety devices would reduce this price by reducing the severity of the consequences you could expect if you got into an accident.

Another example of offsetting behavior comes from the Americans with Disabilities Act (ADA) of 1990. This law prohibits discrimination against the disabled in hiring, pay, promotion, and firing, and it mandates the "reasonable accommodation" of disabled workers by adapting the workplace to their disabilities. Thus the law is trying to increase the employment and well-being of the disabled.

It is reasonably clear that the natural progress of opulence was producing this laudable result long before the ADA. The gradual shift of economic activity from brawn power to brain power, from producing goods to providing services, virtually guarantees that employment opportunities for the disabled were increasing over time.

However, two recent studies conclude that employment rates for the disabled fell perceptibly after the ADA was implemented. Not only did employment rates for the disabled fall after the ADA, they fell more for young workers who would be more likely to be seeking employment than older workers.

Offsetting behavior has compromised both of these significant attempts to improve our lives, yet each of them is a sacred political cow. It has become routine, especially in the area of social regulation, for economists to search for regulations with compromised benefits, or with negative net benefits. There must be a very powerful force that protects such regulation.

Overcoming Opulence

Ironically, it is the natural progress of opulence itself--which these regulations reject--that sustains them politically. Even if the rate of progress is no better under regulation, as with auto safety, there is a crucial difference. One era of progress happened after the regulatory enterprise was created. That permits the regulators to point with pride to the progress and to claim credit for it. An economist looking at the entirety of the historical record may say "regulation has nothing plausibly to do with the progress." But there was regulation, there was progress, so why mess with it?

There is then a symbiosis between the progress of opulence and much regulation, even ineffective or counterproductive regulation. As long as the thing being regulated is seen to be working tolerably well--and that will often be the case in a growing economy--then the regulation is usually safe politically.

Regulation begins as an attack on gradual progress but is often overwhelmed by it. The natural progress of opulence will remain hard to overcome. You will not find an Endangered Species Act or a decade-long drug approval process in poor countries. The costs of such luxury are too palpable in such societies, but in ours they are dissolved by the progress of opulence. There is accordingly no natural progress of truth in these matters. That kind of progress will require our constant attention.