It's not exactly a great surprise that a libertarian leaning free marketeer like myself blames regulation and bureaucracy for the slow growth in the economy. It's pretty standard in fact: blow up that regulatory bureaucracy and watch growth boom and bloom. However, as this story about Zenefits shows while I might be guilty of the occasional piece of zealotry on this point the basic point itself does in fact stand. There really is too much bureaucracy around and it really does hold back economic growth. Yes, most certainly, there's plenty of regulation that it's just fine and dandy for us to have: I'm entirely cool with the idea that Second Amendments rights have been constrained so as to not include personal ownership of nuclear weapons for example. However, there's other regulation out there of possibly less value which is rather constraining that ability of the economy to grow.
The story about Zenefits is that they were in an industry that is rather heavily regulated, insurance sales for example, and that they tended not to take much notice of that regulation. It was Buzzfeed which originally reported the story:
Zenefits, the $4.5 billion startup whose CEO resigned this week, created a secret software tool to let California sales reps fake the completion of an online training course that health insurance brokers must take before getting a license, according to an email sent to staff on Thursday.
The program, known as a macro, made it appear that aspiring health insurance brokers were completing a mandatory online course, while in fact allowing them to spend less than the legally required 52 hours on the training, said David Sacks, who took over as Zenefits CEO this week, in the staff email.
The problem with this was:
Zenefits offers cloud HR software designed for small businesses and gives much of it away for free, making money by selling insurance and other HR products. "We sell insurance in a highly regulated industry. For us, compliance is like oxygen", Sacks said.
Now, as I say, there's most certainly regulations out there which it is important that we keep. Yet we also have an economic problem here: it's entirely possible for special interest groups to use regulation to create rent seeking opportunities within the economy. And we don't like rent seeking and we most certainly don't like people using the regulatory bureaucracy to create them.
Our deeper problem here is that economic growth depends upon rising productivity. But the big strides in productivity do not come from extant firms gradually becoming better at what they do. There is that process that they do become better: it's a standard observation in the field that a factory will, over the years, increase productivity by about 50% without anyone really doing very much of anything. The people within that system just become better at organising what they're doing and how and that increases productivity. However, what has lifted us up from peasant penury to the current riches we all enjoy is not that sort of rise in productivity. As Brad Delong has said, it's reasonable to assume that living standards increased some 80 to 100 times in the 20th century alone. 8-10 times from the increase in GDP, another 10x again from the utility of the new products we all enjoy. That's not something that's done by 50% increases in productivity.
The big leaps that enable that tend to come from new market entrants outcompeting the extant producers and providers of whatever it is. And obviously those current providers would very much prefer not to be competed into bankruptcy, which is why if we give them the chance they will use the regulatory bureaucracy to erect barriers to entry and thus create those rent seeking opportunities.
There is, for example, in one state a requirement that anyone wanting to open a house moving business gain the permission of all the other house moving businesses in the state before they may. This obviously limits the number of companies that can enter the market. This also pervades the medical industry where something called a "certificate of need" is quite common. You want to open a new facility, provide a new service, then the other medical facilities you'll be competing against have to agree that you may. In yet another place in order to be a hair braider you must complete a three year course in cosmetology. There the idea is that by making it boring, tiresome and expensive to enter the market there will be fewer people who do so: thus keeping high the incomes of the current providers.
And in this specific Zenefits case that's what it looks like too. The specific regulation breached was that people wanting that
And that is our public policy and economic problem here. We need to have a way to distinguish between those needed and necessary regulations (the no personal nuclear weapons ones) and the regulations that are just there to limit competition. Because it is exactly that competition from market entrants which drives the increased productivity of the economy, economic growth, and thus our own increasing incomes.
My own suggestion is that we use the commerce clause. It's really within statehouses and state capitols that we find the breeding grounds for these unwelcome regulations. So I would simply make all such licencing decisions and statutes mutually recognised. If California says you are competent to sell health care insurance they you are in CA, RI and MS. And equally if Mississippi says you are then you can sell in CA, RI too. The advantage of this is that it really is licensure which is the biggest drag on economic growth: some 30% of all jobs in the US now require such a state licence. Adopt the European Union idea of any licence being recognised anywhere and we can be sure that among the 50 states plus DC there will be at least one that doesn't get captured by those rent seekers and thus restricts the licence requirements to only what is actually needed. Maybe it is sensible that doctors know one end of a scalpel from another, that hair braiders know what human hair is and which part of the body it grows upon. But those second really don't need to prove the government any more than that, do they, so let's not insist that they do.
