The trust fund theory of regulation
As a result, many people reasonably conclude the system must be working pretty well. In fact, this measure — what the public is willing to pay for the benefits regulations create — is a critical way the government justifies its rules.
This logic is problematic, however. To understand how regulations impact overall welfare, we need to know more than just how much someone might be willing to pay for a rule’s benefits. We must also understand how those benefits, and their corresponding costs, evolve through time.
It may sound funny, but each time our government issues a regulation, we as a society are a little like a rich kid with a really big trust fund.
On a personal note, when I was 19, I moved to New York City and ended up living there over a decade. Though I came from a reasonably prosperous Boston suburb, I was unprepared for the wealth I saw in Manhattan. I came to know people who, if they chose to, would never have to work. The reason was simple: inherited wealth.
Most of us can only dream of being so lucky. But in a sense, Americans are fortunate in just the way those rich kids were. We’ve all inherited a trust fund of sorts through the accumulated wealth that society has amassed during the course of human civilization.
Some of us have to struggle more than others to access it, but most ordinary people throughout history weren’t nearly so fortunate.
How does this relate to regulation?
Each time the government implements a new regulation, there are costs. An individual might pay higher prices for a regulated good. A business owner pays more in compliance. An agency spends more taxpayer money to enforce the rule. Some portion of this spending draws from society’s accumulated wealth.
In other words, regulation displaces some investment. It’s not unlike that rich kid who sells off an investment in his trust fund to spend the cash on something he wants. But what that something is ends up mattering a great deal.