Sunday, February 22, 2009

Of Regulations, Red Tape, and the Trade Deficit

The great economist Frederic Bastiat, one of the guiding lights of this blog, worked as an exporter. Here's some more info on his career from :

Bastiat was orphaned at age ten, and was raised and educated by his paternal grandparents. He left school at age seventeen to work in the family exporting business in the town of Bayonne, where he learned firsthand the evils of protectionism by observing all the closed-down warehouses, the declining population, and the increased poverty and unemployment caused by trade restrictions.
I work in the shipping and logistics industry. I've seen the same "evils", and this is one of the many reasons I've started supporting the Libertarian Party.

My friend and fellow blogger Stephen M. Smith works in the shipping and logistics industry. I mentioned this to him about a month ago, and asked for his thoughts on why people in the shipping industry often have Free Market leanings.
This is what I got back from Stephen.
(Please bookmark his website - A Beginner's Guide To Freedom. In a just, rational world, Stephen's words would be carved into marble.)

Of Regulations, Red Tape, and the Trade Deficit
- by Stephen M. Smith

A number of pundits lately have declared that the recent housing-related chaos in the financial and banking sectors is proof that deregulation doesn’t work, or that markets can’t regulate themselves. Clearly, they argue, what we need is more government regulation and oversight. Evidently the same government that specifies the size of the holes in Swiss cheese and mandates the number of toilets each building must have just isn’t doing enough in the area of regulation.

The people calling for more red tape obviously don’t work in logistics. If they did, they would understand that the United States is already the most heavily regulated society in the history of man. The finance and banking industries are without a doubt the most heavily regulated sectors of the most heavily regulated society, but I suspect the logistics and transportation sectors aren’t too far behind.

Granted, my evidence is anecdotal rather than empirical, but given the fact that my entire job is dedicated to regulatory compliance, I think I speak with some authority. When I’m not busy annoying socialists with free-market blog posts, I spend most of my waking hours making sure my company complies with all of the relevant federal regulations covering exports.

And there are a lot of them. So many, in fact, that the bureaucrats hold a conference in Washington, D.C. each year just to review the changes in the regulations. The conference doesn’t cover all the regulations, mind you, just the changes from the previous year. But even that takes three full days. Last year there were well over a thousand attendees (and they were just the ones who managed to get in - demand for the conference routinely outstrips capacity). That’s at least 24,000 man-hours of lost productivity just so we can understand what’s different this year from last.

One of the many focus areas of the latest conference was a new electronic filing requirement mandated by the US Census Bureau. You probably thought that Census only existed to count the number of people and identify the languages spoken in your household once every decade. But it turns out that they are also responsible for compiling all of the statistics that go into those weighty government reports that are ignored by your elected representatives as they vote to separate you from your money.

But the boys and girls from the Census bureau were all fired up for this latest conference. And why were they so excited to see us this time? Because their new regulations increase the penalties for errors. In the past, the most Census could fine a violator was a paltry $1000 per mistake. Now, though, the penalties can include fines of up to $250,000 and - this is where it gets really exciting – jail time! The folks at the Census Bureau couldn’t be happier. They finally get to throw people in jail, just like the big kids in the other branches of government.

Now I know a lot of non-libertarians just roll their eyes when they hear us yammer on about the “gun of government,” but I can assure you it is not an exaggeration. Seriously – the guy with the gun actually gave a one-hour PowerPoint presentation about all of the terrible things he was willing to do us if we stepped out of line. Ironically, he was the most engaging and entertaining speaker of the entire event.

So what could be so important about this new filing requirement that they’re willing (and eager) to put people behind bars over it? It’s not about national security – that’s covered by a whole host of other government bureaucrats (who also carry guns). As I mentioned earlier, the Census bureau compiles statistics. And one of their most important (in their minds, at least) functions is to calculate the trade deficit. The fact that the US has been running a trade deficit for years is a horrible state of affairs according to the bureaucrats in D.C. To correct this “problem,” they drop a thousand pages of new regulations on our desks each year, threaten us with fines and imprisonment if we screw up on any of them, and then tell us we should export more. And at the end of the conference, they give us pocket calculators made in China. No kidding.

A lot of people get all torqued up about the trade deficit, of course. Take Lou Dobbs (please). Lou has made a fortune complaining about the trade deficit, but at least he’s not pointing a gun at anyone to make it go away (as far as I know). I’m not sure why the trade deficit evokes such a fierce reaction in so many people, since any first-year economics major can tell you it’s a completely meaningless number. To see just how ridiculous the whole thing is, allow me to summarize an illustration originally provided by my favorite economist, Frederic Bastiat. (It seems they were torqued up about the trade deficit in 19th century France as well).

A French merchant ships goods valued at €200,000 to the United States. After freight, insurance, and cost of goods sold, the merchant clears €40,000. He then imports American goods valued at €320,000, which he turns around and sells for €400,000. Foolishly, he believes that he has made a profit of €120,000 from these two transactions - €40,000 from the first shipment to America, and another €80,000 from the sale of the imported American goods. To the layman, this may seem like a pretty good business model and the kind of thing one might wish to continue. But there’s a problem, you see. France now has a trade deficit with the United States – after all, she wisely exported €200,000, but then foolishly imported €320,000. All the politicians start whining that France has “given away” €120,000 to foreigners.

Later, the same merchant ships out another €200,000 worth of French goods. But the ship is lost at sea. For some strange reason, the merchant records this as a loss of €200,000. But how can that be? After all, the trade deficit is now greatly improved. French Customs recorded €200,000 of exports, and there were no corresponding imports. Not only has the previous trade deficit with the United States been erased, but France now finds itself in the eviable position of having a trade surplus of €80,000.

Based on the logic of the balance of payments, it becomes obvious that France can easily double its capital at any moment. All the French have to do is load their goods onto ships, and once they’ve cleared Customs, dump them into the ocean. France will gain all that the sea swallows up.

With Bastiat’s illustration in mind, worrying about the trade deficit doesn’t seem to make a lot of sense. So does it make any sense to threaten people with jail time over it? And even if we were to accept the primitive notion that exports are good and imports are bad, why would we wish to increase the regulatory burden associated with exporting from the United States? If the trade deficit were the demonic force most people believe it to be, then surely we would want to reduce the costs associated with exporting, not increase them.

The regulatory burden is by no means limited to the export sector. All areas of economic life in the United States are burdened by miles of red tape – to a far greater degree than most people realize. Every one of these regulations increases the cost of doing business in the United States. Presumably we should be looking for ways to cut the cost of doing business in this country so that we could afford to do more of it. This should be standard practice even in the best of times, but given the depressed state of the economy these days, it is more important now than ever.

I wish I'd said that.
The only thing I might add? If an American firm purchases something from China, what are the Chinese given in return?
Little green pieces of paper with Benjamin Franklin's picture on them.
What is the only use for these green pieces of paper? Where can they be redeemed for something else?
Thank you, Stephen. The world is a better place with you in it.


Dr Ralph said...

I love reading Stephen's pieces: they're always so passionate and well-written, and as often as not, wrong.

I'll ignore the appeals to authority, straw man arguments and ad hominem attacks on those pesky regulators and tin-horn bureaucrats that vex him so and keep this as simple as I can.

Most regulation seem to be about reducing risk of one kind or another: safety risk, environmental risk, economic risk, and so on. It also adds overhead and arguably may decrease productivity. Reduce regulation and while overhead goes down, risk typically goes up.

It's a little like safe sex. Is giving up condoms worth the risk of AIDS? Only until you test HIV positive.

Believe me, I feel your regulatory pain: I have to deal with Sarbannes-Oxley madness on a daily basis.

Are we over-regulated?


Things are a lot easier to get on the books than off the books -- I'll grant you (and him) that. Part of the legislation that creates a regulation should also include a mandatory review and sunset policy.

But that's not the same as saying regulations need to be done away with. Regulations don't work if they're not enforced. And we've just finished with 8 years of a unabashedly business-friendly administration that gave the wink to ignoring enforcement across the board.

Seatbelts don't do a damned thing if you don't buckle them. The solution is not to jerk the seatbelts out.

The Whited Sepulchre said...

Most of the regulations that vex us the most are the ones that many perceive as "business friendly".

Some businessman/donor pays his congressperson to increase the tariff on item A. Well, you can't just expect the Bulgarians to always pay it, so you have to have inspectors. And collectors. And someone has to pay them. And they have to document that it's been inspected.

The whole process might save the businessman/donor perhaps 5 or 6 million bucks. But it costs the overall U.S. economy 10 million bucks. And we all get nibbled to death by ducks.

Believe me, there were plenty of import regulations that the previous administration enforced to the letter, and wouldn't have dreamed of allowing to lapse. (All done in the name of protecting Americans, BTW.)

Dr Ralph said...

As I said earlier, I'll freely concede there are unnecessary regulations on the books.

But the point it seems is being made here is that all (or at least most) regulation is unnecessary. Surely that's not what you are saying?

(But I suspect it is...)

Is it possible that the narrow lens you and Stephen are seeing through has blinded you to the possibility that there may actually be legitimate areas of concern?

Or maybe we are talking about different things. What sort of regulations are you talking about? Give us a few concrete examples. As a show of good faith, how about some examples of where regulation is necessary and appropriate?

The Whited Sepulchre said...

Up until recently, a small percentage of shipping containers were scanned/x-rayed for nuclear weapons.
I guess I'm okay with that.

But an even larger percentage were scanned, opened, unloaded, checked and reloaded for items not on the manifest.
This wasn't to ensure that everything was "safe", but to ensure that Uncle Sam got his pound o' flesh.

We bring most of our imports in from California. Guess what's happening now? The number of our containers inspected has tripled. Not because of safety, not because of an elevated threat level.
They're guaranteeing full employment for California's civil servants.

Sorry to go off on that rant. Back to the topic at hand.... Maybe I could make a case for scanning random shipping containers for nukes.

Anonymous said...

The problem with regulators is that once their agency is created, it develops a life of its own. It no longer exists to help the regulated or their constituents, but to endure and grow.

Since we are agreed that we may be over regulated, lets start dismantling regulatory efforts. Say close two agencies for each one created.

It is far better to risk eliminating a few too many, than to continue allowing them to destroy innovation, productivity, and our futures.

We can always add one back if they actually were discovered to have value. As long as we close two others at the same time.

Dr Ralph said...

BFU Rector - rather than just assign an arbitrary reduction ratio, I'd still prefer a mandatory review/sunset date.

Not sure I agree that it's better to risk eliminating too many because we can always add them back. That's a little like saying you can always re-install the seatbelts after you've gone through the windshield.

WS - I guarantee you can't hate what you put up with more than I hate Sarbannes-Oxley.

Still, for every regulation you decry as witless and unnecessary, there is probably something you do somewhere in your life that you are convinced is absolutely critical that others consider complete goofiness.

Since I know you have a wife and child, I can make that statement with absolute certainty. That's how it works in my house. Nothing makes me more suspicious than doing something and having my wife suppress a guffaw.

TarrantLibertyGuy said...

First of all... Stephen Smith. I love you.

Second, Dr. Ralph: I LOVE Sarbanes-Oxley. Why? Because it 'deregulated' the fiancial sector? NO!! The incredible amount of regulatory overhead mandates that banks buy and deploy high dollar security/monitoring/remediation software - SOLD BY ME!!! woo hoo!!

SOX costs industry billions in having to pay for high dollar enterprise IT gizmos! That's a drop in the bucket to the legal and administrative overhead...

And Dr. Ralph, I looked and saw that Stephen Smith's strawman is packing a gun.

Seriously, why Smith doesn't write for Reason or The Economist or more likely, Forbes, I don't know...

Dr Ralph said...

TLG -- So you're the bastard getting rich off SOX!!!

I shouldn't bitch; being forced to deal with SOX does encourage us (as IT drones) to improve and document processes, and as mature, I see the virtue of this. "Tribal knowledge" and undocumented processes will be the death of me yet.

Dr Ralph said...

PS -- TLG, are you saying you find your personal economy "stimulated" by SOX? This sounds dangerously close to being a foot fetish.

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