The economy does not need regulation, it needs efficient regulation

Regulation is a very necessary tool for the State to correct situations in which there is no well-being. However, an excess of regulation, in the same way, could cause the same well-being as a total deregulation.

Thomas Sowell, an economist at the Chicago school, used to say that the success of economic policies does not depend on their application and the intentionality with which they were applied, but rather on the effect, whether positive or negative, that they transfer to the population. And the fact is that the existence of phenomena such as the charge effect, Lucas’s criticism, among others, are the proof that what a priori could be a good economic policy, when applying it, might not have the effect that is expected. search the population. In other words, it confirms the existence of State failures, just as the existence of market failures is recognized.

Something very similar happens with regulation. What a priori may seem like a well thought out regulatory proposal that, if it has an impact on the economy, could be very beneficial in its application; in the same way, and if it has not been evaluated correctly, we could find effects on the population that, as has happened on numerous occasions, take us further away from the initial objective. This is what happens in regions such as Latin America, with the informal economy, where, despite the regulation applied and the constant efforts of the agencies, the rate of economic informality is increasing.

And it is that regulation as such is not the solution, as many economists have defined in numerous papers. Regulation is a tool that the State has to correct situations in which the economy, by itself, cannot achieve the situation of maximum well-being. However, in the same way, overregulation in an economy could have as many negative effects as absolute deregulation. For this reason, in recent years, many economists, as well as jurists, among other profiles closely related to this issue, have begun to extend and recommend what they call “intelligent regulation”; referring with this concept to a more efficient regulation.

Regulation: a paradox?

“In Spain, unlike what happened in Latin America – despite the fact that this region needs greater regulation – overregulation meant that certain policies, finally, did not have the desired impact.”

As we know, the intervention of the State in the economy, for the rulers, is a very tentative practice. With the power to make decisions, the rulers, and always in line with their voters, try to implement policies in order to satisfy the needs of the people. But this does not mean, as we said at the beginning, that this way of satisfying them, even if the intervention is for this reason, is the correct one. Let us look at the case of the regulation of rental prices in many countries, where studies in this regard conclude that there are as many negative results as there are different policies applied all over the planet.

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In the same way, this is observed with the proposals that try to regulate the labor market. In this sense, the introduction of an interprofessional minimum wage, according to the existing literature and which was very correctly exposed by fellow economists from Nada es Gratis, has not had a very beneficial impact on workers after its analysis. Studies in this regard tell us that wage regulation has had both positive and negative effects. However, as is also shown in these studies, the success of the policy, and returning to the phrase at the beginning of Sowell, is conditioned to the demands of these policies; in other words, it could be successful if applied correctly, but overregulation could end up with very negative effects.

As proof of this, we have the aforementioned economies of Latin America, where we find examples that help us to observe what I am citing here. Well, taking into account the studies offered by the International Monetary Fund (IMF), if we were to analyze the link between variations in GDP and unemployment, it would be observed that the informal market, unlike the obvious, which would be regulation, plays a role important during the business cycle.

In this sense, it is striking that the response of the unemployment rate to the variations that occur in the economic cycle is weaker when the country has higher levels of informality. Furthermore, it is observed that informality in the region decreases in periods of strong growth and increases in periods of low growth. In other words, the possibility that citizens have to enter and leave the informal sector protects, in part, workers from situations such as the current one, mitigating the impact of said cycle on the unemployment rate. For example, in situations where an emerging market economy enters a recession, as workers who otherwise would have been employed can find informal jobs.

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To this, the example of Spain is contrasted with the rise in the SMI. Greater regulation, in this case overregulation, has meant that, with the rise in the SMI above expectations, the Spanish economy has picked up job destruction that, a priori, is justified by this rise in the SMI. In this sense, the reports that the Bank of Spain shows, de facto, collect about 12,000 people who, because they were affected by the rise, lost their jobs as a result of this policy. And the fact is that, unlike what happened in Latin America – despite the fact that this region needs greater regulation – this over-regulation meant that the policy applied, finally, did not have the desired impact; although, as Sowell would say, the intention was good.

For efficient regulation

“In the same way that there are market failures, we also have State failures, and there are situations in which an excess of regulation, as reflected in the existing literature exposed throughout the article, fosters a more hostile environment.”

What happened in Spain is explained by the application of inefficient regulation. Companies from very different sectors coexist in Spain. A generalized application of the SMI, where increases were applied to sectors in which productivity was even falling, has ended up generating an asymmetric impact in these. While it is observed that there are sectors that can benefit from this policy, many others, where productivity is stagnant, where benefits are very tight and where the informal economy is a great alternative, could fare badly; taking people out of formality and into the informal economy, as the central bank study concludes.

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And it is that, regulation, in the same way that it can reduce the informal economy; that it can improve the situation of workers; that it can correct externalities and market failures; and that can, in short, improve the situation. Also, if applied inefficiently and excessively, it could further damage the economy. In this sense, generating higher rates of economic informality due to excessive regulation of the labor market; generating tax evasion due to excessive tax pressure, as well as generating situations in which, for example, excessive regulation of competition may even end up stunting the competitiveness of the productive fabric. A fabric that would lose its appeal in an increasingly global market.

Thus, we must know that efficient regulation must follow a series of criteria when applied. In this sense, we are talking about a regulation that must present a need, which must provide security, while improving transparency. However, on many occasions, this regulation, instead of providing security, generates more fear in investors due to excessive bureaucracy. Likewise, this bureaucracy, on many occasions, ends up generating greater corruption. A corruption that, incidentally, de facto ends with that transparency that, a priori, it must provide. And, as we have seen throughout the article, not just any regulation is valid.

In short, regulation is necessary to correct situations in which a market failure prevents the achievement of well-being. We cannot say that regulation has not created environments in which opportunities were more and more varied. However, in the same way, it is about emphasizing that, just as there are market failures, we also have State failures, and that there are situations in which an excess of regulation, as reflected in the existing literature exposed to it. Throughout the article, it fosters a more hostile environment, where opportunities disappear in search of more flexible environments, and where regulation does not try to be the total substitute for the free market.

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