Ezra Klein on Regulation and Uncertainty

In a recent post,  Ezra picks up on my concern about regulation, mostly approvingly. But he also raises some concerns.

Michael Mandel is waging a one-man war against the government’s tendency to pile on regulations during economic downturns. I worry his approach is a little indiscriminate: Genetically modified crops can still contaminate non-genetically-modified crops even if the economy is weak. So there either need to be standards for how to handle that problem or GMO producers will be laden with legal threats and uncertainty over regulations they know will come eventually, but whose content they can’t yet predict. That’s a much worse position for a young industry.

Ezra is making me think out loud here.  Regulation of innovative industries is essentially about balancing out four types of impacts: Short-term knowable benefits,  short-term knowable costs, long-term unknowable gains, long-term unknowable damages. (I use different terms for the short-term and long-term to emphasize that we are really talking about very different beasts).  The place where we get into trouble is where we confuse the short-term and the long-term trade-offs.  In the long-term (say 10-20 years), innovation is always associated with uncertainty–there’s no way to eliminate it.  On the pro-innovation side, you never know which innovative effort is going to pay off big over time. (Could you have guessed that the invention of the laser would lead to fiber-optic cables? No one did.) On the anti-innovation side, you never know the potential negative side-effects of any innovation, and it’s always possible to imagine the worst. (Can particle collisions at the Large Hadron Collider destroy the earth? Possible, but very unlikely. Can motor vehicle accidents kill more than 1.2 million per year worldwide? Yes, according to the World Health Organization ).

So when it comes to the long-term consequences of innovation, we always have  White Swans warring with Black Swans. The long-term uncertainty is intrinsic, and no regulation can really reduce that.  The best we can do is balance out our worries about the long-term harm from innovation against our  belief that innovation, by opening up the set of human possibilities, will generally bring big gains in the long run, creating economic growth, generating jobs, and generally improving the standard of living.  In short, progress is never easy but it’s the best we’ve got.

However, regulators need to bring  a different thought process for balancing out short-term benefits and costs of regulating innovation.  There we have specific workers, companies, and consumers  that will be affected by changes in regulation, and it behooves the regulators to pay attention to the larger economic climate as well.  Here we are asking a very short-term question: In tough times, if you have a sector that’s growing, why mess with it?  In general, there’s no good reason to impose additional regulations on a growing innovative industry in a downturn unless there is significant new information that greatly changes the assessment of long-term gains and damages.

To put it another way: We’ve learned that to fight deep and persistent periods of economic weakness,  policymakers must temporarily put more weight on the short-term. The central bank must cut interest rates, without mixing in the valid worries about inflation over the long-term. The president and Congress must stimulate the economy with spending increases and tax cuts, without mixing in the valid  fears about the deficit over the long-term. And regulators must  focus on encouraging growing innovative industries while the economy is weak, without mixing in the valid  debate about gains and damages over the long-term.

Comments

  1. I like how you segmented regulation into balancing 4 types of impacts. Perhaps there is another type of impact to consider though. I usually fall on the less regulation side of the debate, but I think regulation can have a role in reducing long-term unknowable damages.

    Just because we aren’t sure what possible damages GM crops might cause, doesn’t mean we should let such crops be planted everywhere. I think it makes sense to be a little cautious at first. If we have GM crops everywhere and we acquire more knowledge about the long term damages, we might want to be able to contain that damage. In other words, we might want to keep the risk contained and not let it become too widespread.

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