Unintended Consequences of Regulations on Small Business

The governments of the United States, from the small local level to the large federal level, have legitimacy in the eyes of the people.  This gives their laws credibility and power, informing citizens that governments institute the will of the people.  When enough people care about a specific issue, naturally some turn to government to attempt to solve it.

However, things are never so simple.  Well-intended policies come with consequences, most of which are not known before they occur.  Even though these consequences are common and can have lasting effects, they often are not intuitive or are buried beneath a mountain of details.  Examples of the law of unintended consequences are unlimited, like how the European Union’s attempt to prevent over-fishing by adding penalties actually resulted in an increase in over-fishing.  Or how the Smokey Bear ad campaigns by the United States Forest Service resulted in megafires decades later.

Not only do unintended consequences of a policy frequently make the problem the policy attempts to solve worse, but they also occur as a new, complicated system with loopholes available only to those with enough capital to bypass the regulations.  Everybody else, like small businesses, are left to bear the burden of the regulation.  A famous manifestation of this is the “chicken tax.”  In the 1960s, the United States responded to Europe’s tariff on chicken imports with its own tariff on delivery van imports.  Even though the trade war has long since subsided, the tariffs remain in place to this day.  In a stroke of irony, Ford navigates loopholes for this tariff created in part to try to help Ford.

At the RCAW bi-annual dinner on May 10, former Republican Attorney General of Washington and Republican nominee for Governor of Washington in 2012, Rob McKenna, illustrated more than just an understanding of this concept, but an understanding of why unintended consequences from government policy can be so numerous and impactful.  He discussed how people responsible for writing regulations don’t bear the costs of applying the regulations.  It’s the small businesses and their customers that bear the costs.  Policymakers in government may have good intentions even as they are insulated from the impact of those intentions.

Skin in the game

McKenna’s point is in the same vein as a discussion quickly growing on social media: “skin in the game”.  Popularized by author and mathematician, Nassim Taleb, the concept of skin in the game is essentially that when a person has downside risk regarding the outcome of a decision, that person has skin in the game.  Put in less abstract terms, if you’re spending your money on something, you’re likely to be more frugal and pay more attention to important details.  If the transaction doesn’t provide you what you hope, you lose.  But if you’re buying something with somebody else’s money, making a poor decision doesn’t lose you any money.  In that case, you’re likely to be less frugal and pay less attention to important details.

Skin in the game acts as an incentive and a disincentive, influencing the person to take on only as much downside risk as he or she can handle.  Over time, this acts as a filter.  Taleb illustrates this clearly when explaining why highways don’t have rogue drivers. They literally have their own skin in the game, meaning that their recklessness results in them no longer being with us or having revoked licenses.  The end result is highways with very few rogue drivers.

This principle is not unfamiliar to most Americans.  We know that we each make better decisions when it’s our own skin in the game.  Yet this dynamic all but vanishes at the level of large government.  Politicians and bureaucrats may mean well, but they don’t have the skin in the game it takes to make the right decisions for each individual family or business throughout the nation.  When top-down regulations attempt to solve an issue for a large number of diverse people, the regulations typically fall short and cause more harm than good.

Does this mean governments shouldn’t regulate? 

Some people might take it there, but no, this doesn’t mean government regulation is wrong.  Local, small government officials can have skin in the game.  Where politicians at the federal level may experience little impact from a policy gone wrong, at the local level, politicians are more easily held accountable for their policy actions.  At the federal level, politicians deal with such a vast quantity and variety of concerns that it’s hard to say how their actions are perceived.  By contrast, at the local level, politicians can be close enough to their constituents that they both have a clearer view of what constitutes policy success.

McKenna hit on this dynamic when he discussed how the strength of America is decentralization of governments, where each government — local, state, federal — operates within the domains they are best suited.

The City Council of Seattle having just passed the “head tax,” what unintended consequences might we be in for?  The tax could decrease incoming business capital, thereby decreasing job growth and wage growth.  Or, if used to build dwellings for homeless people as declared, it could increase the number of homeless.

The dinner was a wonderful experience and we thank the RCAW for putting it on.  Meeting friends in the industry and listening to Rob McKenna speak was a real treat!

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Check out Mr. McKenna’s full speech here!