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A Practical Alternative to Government Regulations

27 Jun

An Engineering Thinking Solution For Protecting The Public

Let’s challenge the assumption that we need the government to protect us, by regulating commerce at all levels.

Why Regulations Are Not Effective (proof by counterexamples):

a. The Food & Drug Administration is supposed to protect us from tainted foods and harmful drugs. It does neither, by its own admission (“FDA Science and Mission at Risk“).

b. The Security and Exchange Commission is supposed to protect us from financial crooks. It doesn’t (remember Bernie Madoff?).

c. Restaurant inspections are supposed to protect us from food poisoning. They don’t (you’ve seen the newspaper reports of folks getting ill at restaurants, all of which are regularly inspected).

Here’s the basic underlying reason why regulations are ineffective: Although the government is never shy about dipping into the pockets of the taxpayer, there will never be enough money to pay for enough inspectors to inspect businesses often enough to eliminate the problems that the inspectors are supposed to find and stop. Why? Because there is no financial incentive built into this open-ended regulatory system. Regulators are not able to make a profit at regulating, unless they are corrupt and take bribes. Unfortunately, such corruption is not uncommon.

A second reason is that the public says, “Yeah, but we have to at least try to stop the problems or they would get completely out of hand. So even though regulations are not completely effective, we’re still better off having the regulations.” This reasoning, however, will not stand up to analysis.

One, it assumes that other factors, such as loss of business and potential lawsuits, are not significant. To the contrary, these free market incentives are very powerful motives for keeping businesses honest, even in the absence of regulations. In fact, for the great majority of honest and competent businesses, government regulations amount to a useless added burden that drives up costs. And these costs are ultimately paid by you, the consumer.

Second, it assumes that there is no better alternative. To answer this, Engineering Thinking offers the following plan:

The ET Plan For Eliminating Costly Regulations

Replace them with the following single requirement:

Each business shall be required to prominently post an easily readable  certificate at the entry to their place of business (or on their web portal, or on their products, etc.)

-A red certificate if they have no liability insurance

-A green certificate if they have liability insurance (as certified by the applicable government accounting agency, with the insurance carrier and amount of coverage noted on the certificate).

Failure to post a certificate, or posting a false green certificate, will be punishable by a minimum jail term and fine.

That’s it. You buy products or services from a “red certificate” business, you’re largely on your own. Its prices might be lower because they carry no insurance, but your risk will be higher if you have a problem. If so, you will still be able to sue, but you will have had fair notice that the business will likely not have enough assets to cover any damages.

The red certificate also allows small start-up entrepreneurs such as taxi drivers or hair stylists to get a foot in the door with clients who are willing to accept lower prices at increased risk. Presently, licensing and regulations often amount to a corrupt system where established wealthier businesses, through contributions to public officials who pass restrictive licensing/regulation laws, effectively block competition by making it too expensive for potential competitors to start a business. This limits consumer choice and drives up costs.

On the other hand, you may prefer to buy products or services from a “green” business. The prices might be somewhat higher, but you will have financial recourse if something goes wrong. Plus, you will be assured of obtaining safer products or services. Why? Because insurance companies do not like to pay for losses. An insurance company will not provide liability insurance to an unqualified person, so if someone claims to be, for example, a medical doctor, they will need to convince the insurance company that they are qualified to practice medicine. Plus, the insurance companies will provide their own ongoing inspections and monitoring to ensure that their clients maintain safety standards.

The new role of the government? To certify/monitor the financial health of insurance companies, to decertify/prosecute those companies that exhibit unethical behavior regarding claims, and to prosecute businesses who operate without an appropriate certificate. All of the licensing and regulatory nonsense simply drops away, because it is no longer relevant. Insurance companies will now provide the regulatory function in a cost-effective fashion.

The advantages of the above red/green plan are numerous: Lowers the cost to the consumer; eliminates the governmental regulatory bureaucracy and related inept  micromanagement; increases consumer choice; offers entrepreneurs a chance to get a business started; eliminates corrupt artificial barriers to competition; and last but not least, enhances consumer safety.

-Ed Walker

 

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2 responses to “A Practical Alternative to Government Regulations

  1. Barb

    June 28, 2011 at 12:46 pm

    What about minimum standards? What rules and regulations will businesses follow if there are no regulatory agencies? And, finally, what’s to stop businesses from posting the wrong color certificate?

    I agree that government run things don’t work very well in general, but I think you may be over simplifying the problem.

     
    • engineeringthinking

      June 30, 2011 at 9:15 pm

      Thanks for the feedback 🙂
      Minimum standards: whatever is claimed by the business offering a product or service. E.g. a doctor claims to have certain qualifications, as stated on the green certificate, and backed up by insurance, as verified by the government.
      Rules & regulations: none, other than being legally liable if they don’t meet the standards they claim to have.
      Wrong color: as mentioned, it would be the government’s responsibility to approve and monitor certificates, and to prosecute those who post an invalid one.
      Over simplifying the problem: the proposed solution is over simplified perhaps to keep it readable, but I believe the problem is essentially as stated. As mentioned up front in the post, at present we have a regulatory system that doesn’t work. Basically the regulators are all just big expensive binkies that make us feel good. Instead, I propose a method to achieve rational and cost-effective regulation without the unqualified government busybodies, by shifting to a check-balance system (for green certificates) that relies on proper insurance, and government verification of that insurance.
      Example: A lot of folks have gone broke because of financial scams; i.e. often the government is only able to recover a few pennies on every dollar invested. With a green certificate, the business would be required to carry insurance adequate to cover all investments they handle commensurate with any claims they make with regard to safety of the investments.

       

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