Monday, May 05, 2008

Regulations Killed by Secondary Objectives

Avinash Persaud's mention that a bank tax related to the price of the 'price of risk', or Tyler Cowen's mention of better regulation of derivatives, or Joe Stiglitz's idea that the UN take over financial regulation, I think misses a very practical problem. That even when regulation has a good objective, it gets overloaded with other objectives. For example, we want to lower our energy dependence and lower carbon emmissions, and help US farmers! So we are building massive infrastructure for ethanol. When everyone figures out what a nightmare it is in terms of total costs, environmental costs, and the impracticality of this lousy alternative (low octane, not storable, corrosive), it will have to be written off on the taxpayer's dime.

I went to a baseball game Saturday night. Minneapolis's public transportation has several objectives, one of which is obviously to save on traffic and fuel. But there's also the hope that people will work, live, and spend more money in cities, which social planners think is great. So, they have 13 stops prior to getting downtown, hoping you stop along the way and spend money at the quaint, uh, strip malls, in the city. Further, you don't want to disrespect the vibrant city dwellers with express routes. So guess what: no one uses the train, because it stops every mile, and takes twice as long as driving. It's basically free ($1 for a round-trip downtown), and people only use it on big games. I could be very valuable, but given every major public action has multiple objectives, they take something that could be good, and make it worthless.

Any proposed regulation should be expected to become saddled with myriad other objectives, helping address the root causes of poverty and other inequities creating a solution worse than doing nothing. Like ethanol as a solution to our energy problems.

1 comment:

Anonymous said...

Besides total costs and environmental costs, let's keep in mind the millions of people who are effectively starving while ethanol hysteria pushes us up the inelastic (in the short term anyway) agricultural supply curve.