Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

other hand, economists have asked whether this kind of regulation is less of a “helping hand” for society and more of a “grabbing hand” for corrupt bureaucrats whose opportunities to extort bribes rise along with the number of government permits and licenses required for any endeavor.

A group of economists studied the “helping hand” versus “grabbing hand” question by examining the procedures, costs, and expected delays associated with starting up a new business in seventy-five different countries.10 The range was extraordinary. Registering and licensing a business in Canada requires a mere two procedures compared to twenty in Bolivia. The time required to open a new business legally ranges from two days, again in Canada, to six months in Mozambique. The cost of jumping through these assorted government hoops ranges from 0.4 percent of per capita GDP in New Zealand to 260 percent of per capita GDP in Bolivia. The study found that in poor countries like Vietnam, Mozambique, Egypt, and Bolivia an entrepreneur has to give up an amount equal to one to two times his annual salary (not counting bribes and the opportunity cost of his time) just to get a new business licensed.

So are consumers safer and healthier in countries like Mozambique than they are in Canada or New Zealand? No. The authors find that compliance with international quality standards is lower in countries with more regulation. Nor does this government red tape appear to reduce pollution or raise health levels. Meanwhile, excessive regulation pushes entrepreneurs into the underground economy, where there is no regulation at all. It is hardest to open a new business in countries where corruption is highest, suggesting that excessive regulation is a potential source of income for the bureaucrats who enforce it.

India has over a billion people, many of whom are desperately poor. Education has clearly played a role in moving the nation’s economy forward and lifting millions of citizens out of poverty. Higher education in particular has contributed to the creation and expansion of a vibrant information technology sector; however, a recent shortage of skilled workers has been a drag on economic growth. So it’s no great economic conundrum as to why a pharmaceutical college in Mumbai would seek to use empty space in its eight-story building to double student enrollment.

The problem is that this action turned the college administration into criminals. It’s true—the Indian government imposes strict regulations on its technical colleges that protect against something as reckless and potentially dangerous as using empty space to educate more students. Specifically, the law stipulates that a technical college must provide 168 square feet of building space for each student (to ensure adequate space for learning). That formula precludes the Principal K. M. Kundnani College of Pharmacy from teaching more than 300 students—regardless of the fact that all the lecture halls on the top floor of the building are padlocked for lack of use.

According to the Wall Street Journal, “The rules also stipulate the exact size for libraries and administrative offices, the ratio of professors to assistant professors and lecturers, quotas for student enrollment and the number of computer terminals, books and journals that must be on site.”11

Thankfully, governments sometimes roll back these kinds of regulation. In November 2008, the European Union acted boldly to legalize…ugly fruits and vegetables. Prior to that time, supermarkets across Europe were forbidden from selling “overly curved, extra knobbly or oddly shaped” produce. This was a true act of political courage by European Union authorities, given that representatives from sixteen of the twenty-seven member nations tried to block the deregulation while it was being considered by the EU Agricultural Management Committee.12

I wish I were making this stuff up.

Let’s step out of our cynical mode for a moment and return to the idea that government has the capacity to do many good things. Even then, when government is doing the things that it is theoretically supposed to do, government spending must be financed by levying taxes, and taxes exert a cost on the economy. This “fiscal drag,” as Burton Malkiel has called it, stems from two things. First, taxes take money out of our pockets, which necessarily diminishes our purchasing power and therefore our utility. True, the government can create jobs by spending billions of dollars on jet fighters, but we are paying for those jets with money from our paychecks, which means that we buy fewer televisions, we give less to charity, we take fewer vacations. Thus, government is not necessarily creating jobs; it may be simply moving them around, or, on net, destroying them. This effect of taxation is less obvious than the new defense plant at which happy workers churn out shiny airplanes. (When we turn to macroeconomics later in the book, we will examine the Keynesian premise that government can increase economic growth by stoking the economy during economic downturns.)

Second, and more subtly, taxation causes individuals to change their behavior in ways that make the economy worse off without necessarily providing any revenue for the government. Think about the income tax, which can be as high as 50 cents for every dollar earned by the time all the relevant state and federal taxes are tallied up. Some individuals who would prefer to work if they were taking home every dollar they earn may decide to leave the labor force when the marginal tax rate is 50 percent. Everybody loses in this situation. Someone whose preference is to work quits his or her job (or does not start working in the first place), yet the government raises no revenue.

As we noted in Chapter 2, economists refer to this kind of inefficiency associated with taxation as “deadweight loss.” It makes you worse off without making anyone else better off. Imagine that a burglar breaks into your home and steals assorted personal possessions; in his haste, he makes off with wads of cash but also a treasured family photo album. There is no deadweight loss associated with the cash he has stolen; every dollar purloined from you makes him