The Libertarian Who Accidentally Helped Make the Case for Regulation

Published in the April/May/June 2018 issue of the Washington Monthly
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Alex Tabarrok is no one’s idea of a big-government liberal. A libertarian economist at George Mason University, he’s best known for cofounding Marginal Revolution, one of the most popular economics blogs on the internet. A deep skeptic of government bureaucracies, he has written favorably of private prisons, private airports, and even private cities.

That’s why a study he co-published earlier this year is so noteworthy. When Tabarrok and his former grad student Nathan Goldschlag set out to measure how federal regulations impact business growth, they were sure they’d find proof that regulations were dragging down the economy. But they didn’t. No matter how they sliced the data, they could find no evidence that federal regulation was bad for business.

Economists—like politicians, arguing spouses, and, yes, journalists—tend to interpret evidence in a way that corroborates their existing worldview. And the dynamics of academia weigh against publishing findings that fail to support a researcher’s original hypothesis. But Tabarrok published his study anyway. That makes him something of a rarity.

Tabarrok came by his libertarianism early. When he was growing up in Toronto, his family would debate political and ethical issues over dinner every night. One evening the Tabarroks were debating the moral value of rock and roll. “I said, ‘Well, look at this band, Rush: they even quote this philosopher Ayn Rand in their songs,’ ” he recalled recently. “My mother said, ‘Oh yeah, you’d probably like her,’ and I felt embarrassed because I was using this in an argument and I actually hadn’t read any Ayn Rand before.” Tabarrok thinks his mother probably regrets her suggestion to this day.

Tabarrok made his way to the U.S. for graduate studies at George Mason, returning there as a professor in 2002. He now directs its Center for Study of Public Choice and is the economics chair at GMU’s Mercatus Center, a research institute heavily funded by Charles Koch and cofounded by Richard Fink, a former Koch Industries executive. The center, which boasts ties to prominent right-wing groups like the American Legislative Exchange Council, funds research to promote free-market policy solutions and the rollback of regulations. (Mercatus is Latin for “market.”) The Wall Street Journal has called Mercatus “the most important think tank you’ve never heard of.”

A few years ago, Tabarrok got a new toy to play with. Until recently, there was never great data available for researchers who wanted to empirically study the effects of regulation. But, in 2014, two other Mercatus Center research fellows developed a new public-use database called RegData, which captures everything published in the Code of Federal Regulations each year. Measuring regulation has always been surprisingly tricky, because when an agency puts out a rule, it can contain any number of new individual legal requirements. RegData addresses that problem by scrubbing the Code for key words such as “shall,” “required,” and “may not.” The theory is that this more accurately measures the number of regulations than simply counting the total number of pages in the Code, as past studies tended to do. RegData also uses artificial intelligence techniques to predict which industry each regulation will affect. The upshot is that, for the first time, economists could more confidently measure federal regulations over time and by industry. In theory, that would make it easier to build the case that regulations were hurting the economy.

For his first paper using the database, Tabarrok decided to analyze the effect of federal regulation on “economic dynamism”—a catch-all term referring to the rate at which new businesses launch and grow, and at which people switch jobs, lose jobs, or migrate for work. There has been a notable and somewhat mysterious decline in dynamism over the last few decades. The rate at which start-ups form is half of what it was forty years ago, the fraction of workers who bounce from one job to another—a sign of competitive labor markets—has plunged, productivity has slowed, and adult employment remains well below its early-2000 peak.

Armed with RegData, Tabarrok and Goldschlag set out to show that regulations were at least partly to blame. But they couldn’t. There was simply no correlation, they found, between the degree of federal regulation and the decline of business dynamism. The decline was seen across many different industries, including those that are heavily regulated and those that are not. They tried two other independent tests that didn’t rely on RegData, and came to the same conclusion: an increase in federal regulation just could not explain what was going on.

“I was pretty surprised that we just kept coming up with nothing,” Tabarrok told me. “I’m a free-market type of person, so it wouldn’t have at all surprised me to find that government regulation is causing decline in dynamism. Ideologically, it fits my priors of the way I would see the world, so, yes, I was expecting to find something.”

Tara Sinclair, an economist at George Washington University who studies labor market issues and didn’t have any connection to Tabarrok and Goldschlag’s study, said she would rank their paper as one of the most important to emerge thus far around regulation and dynamism. “In this space, in this research, there are a lot of advocates—and they can really make the data say lots of different things if you cherry-pick,” she said. “That they chose to report a result that was against their priors is really commendable.”

Indeed, the new paper undermines one of the most deeply held convictions of the American right, one that unites libertarians like Tabarrok with mainstream conservatives: that regulations inevitably impose “deadweight loss” on the economy and are therefore an enemy of economic growth. This idea has been a mainstay of Republican politics since the Reagan era, and the Trump administration has taken to deregulation with missionary zeal. In fact, it’s probably the policy objective that the administration has pursued most successfully—rolling back the Clean Power Plan, repealing net neutrality, freezing the fiduciary rule, and on and on.

The premise that regulations come at the expense of economic activity—that we must always make trade-offs between safety and jobs—is so pervasive that even the American left tends to accept it, defending regulations as necessary evils to promote other social goods. Yet there has never been strong evidence that these trade-offs actually exist. To the contrary, federal regulations have often driven growth and innovation, whether it’s fuel standards spurring new electric cars and solar energy, or the Dodd-Frank law causing an entirely new industry—financial technology—to appear out of whole cloth. (See Anne Kim, “Deconstricting the Administrative State,” June/July/August 2017.)

Not that Tabarrok himself has become a booster for regulation. He doesn’t think much of government’s ability to spark innovation through setting standards; the first thing he did when he last bought a new shower head, he said, was remove its federally mandated flow restrictor. Nevertheless, his research has convinced him that Trump’s aggressive deregulatory agenda is unlikely to reverse the trend of declining dynamism.

If federal regulation isn’t behind the dynamism die-off, then what is? Tabarrok’s paper suggests that economists need to look elsewhere. Eli Lehrer, head of the pro-deregulation think tank R Street Institute, argues that some of the most burdensome regulations are state and local—zoning, building codes, occupational licensing, and the like. Tabarrok and Goldschlag agree that more attention should be paid to the potential effects of non-federal regulations.

But a more likely explanation—one that has been gaining purchase among both think tanks and elected Democrats—is rising corporate concentration. (See Gilad Edelman, “The Democrats Confront Monopoly,” November/December 2017.) The trend of declining dynamism since 1980—along with wage stagnation, rising inequality, and a host of other ills—has tracked a parallel rise in monopolization, as the economy becomes increasingly consolidated in the hands of a few giant businesses. As New York Times columnist Eduardo Porter put it recently, “By allowing an ecosystem of gargantuan companies to develop, all but dominating the markets they served, the American economy shut out disruption. And thus it shut out change.”

This hasn’t happened by accident, but is, rather, the result of deliberate decisionmaking, beginning under Reagan, to dial down the enforcement of antitrust law. In other words, it is a consequence of deregulation, not overregulation.

Tabarrok said he’s open to the theory that consolidation has hurt dynamism, but deeply skeptical that antitrust enforcement can fix it. So he may not become a liberal lion anytime soon—and that’s all right. He deserves praise for his willingness to publish findings that go against his priors and, if not his ideological agenda, then at least the agenda of the people who help pay his salary. These debates get tough because it so often feels like there are warring studies on each side. If more people are willing to stand by research findings that go against their own camp, debating public policy will be a lot more worthwhile.

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