How Capitalism Will Save Us (41 page)

Rather than increasing transparency and creating a better environment for investors, SOX has done the opposite—it has added to the regulatory tangle, increasing balance-sheet confusion. SOX helped to create an environment that destroyed far more wealth than was ever destroyed through the prior corporate scandals put together.

T
here’s no question that many government regulations have worked to promote public health, safety, and a cleaner environment. But some haven’t. Geology professor Seth Stein and engineer Joseph Tomasello write about the case of Memphis, Tennessee. The city is located in
the New Madrid seismic zone, an area of the central United States prone to earthquakes. The region experiences really big quakes “only every 500 years or so, far less often than in California. As far as we know,” they write, “no one has ever died in an earthquake in the New Madrid zone.”
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The last significant tremor to hit the area—a moderate 5.5—occurred a little more than forty years ago, in 1968.

Yet the Federal Emergency Management Agency wanted Memphis and the rest of the seismic zone to adopt anti-earthquake standards like California’s. That meant using expensive antiquake construction methods on new buildings, and retrofitting existing ones.

According to Stein and Tomasello, meeting the new standards “could increase a building’s cost 5 percent to 10 percent.”
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FEMA also wants to retrofit hospitals, highways, and bridges. Retrofitting just one of these projects, the Memphis Veterans’ Hospital, they say, would cost about $100 million, “comparable to the cost of a new building.”
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Stein and Tomasello raise the question, should hundreds of millions of dollars be spent on preparing Memphis for major earthquakes that occur only once every five hundred years? After all, so much spending on earthquake safety would divert funds from needs that are far more immediate:

FEMA’s building codes are among countless regulations from numerous government agencies whose costs drastically outweigh their benefits. Among the latest measures, and one of the most draconian in some time, is the new Consumer Product Safety Improvement Act. Passed in 2008 after the panic over tainted Chinese toys and lead paint, it requires expensive third-party testing to verify the safety of all products primarily intended for children under twelve. As Manhattan Institute fellow Walter Olson explains,

In short, Olson says that the list includes almost everything—even older products sold at thrift shops and, possibly, books.

Violators face criminal prosecution and fines of $100,000. Olson writes that the law promises “to wipe out tens of thousands of small makers of children’s items from coast to coast, and taking a particular toll on the handcrafted and creative, the small-production-run and sideline at-home business, not to mention struggling retailers.”
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How could such a heavy-handed, misguided piece of legislation have been passed by policy makers? Unfortunately, it is typical of the failure of bureaucrats to grasp how excessive, overbearing regulation can damage the economy and hurt people. Economist Robert W. Hahn estimates that more than 40 percent of American regulations impose costs on the economy that outweigh their benefits.

In a report for the American Enterprise Institute, Hahn asserts that insufficient analysis of the relative costs and benefits of health, safety, and environmental regulations has been a failure of both Republican and Democratic administrations.

He and others pose a sticky question: is it worth spending billions of dollars on rules that promise health, safety, or environmental benefits that, in some instances, may be realized by very few people?

Requiring third-party testing of library books and many other totally harmless items—as the new Consumer Product Safety Improvement Act does—is not only costly. It’s just plain dumb. In 2008, the Competitive Enterprise Institute published a list of “The Five Dumbest Product Bans.” Among them: the lifesaving Cardio-Pump, whose use in the United States has been outlawed by the Food and Drug Administration. This lifesaving device is commonly used in Britain, France, Israel, Chile, and a dozen other countries. In fact, according to one study published in the prestigious
New England Journal of Medicine
, survival rates of heart attack patients resuscitated by the plungerlike heart pump were much higher than those treated with traditional techniques. Why did the FDA ban the device? Apparently, for bureaucratic reasons: the FDA was unable to carry out its own study of the device because patients in the throes of cardiac arrest are unable to give “informed consent” to participate.

In other words, the FDA decided that the mere possibility that the device might not work perfectly in a minority of cases outweighed its already demonstrated benefits—that it raised the likelihood of heart attack survival by most people.

We’ve already mentioned CAFE standards. Yes, today’s cars burn less gas—they’re 50 percent more efficient than they were in the 1970s. But CAFE standards have major downsides, too. They’re a primary cause of the troubles that have hobbled the Detroit automakers. They’ve also resulted in lighter cars and more auto fatalities. A 2001 report from the National Academy of Sciences estimated that between 1,300 and 2,600 deaths a year may be attributed to the smaller passenger cars that were manufactured to improve fuel efficiency.

Increased fuel-efficiency standards actually encourage consumption. Believing their vehicles are energy efficient, people have fewer qualms about driving more and having bigger cars. The number of miles driven
and the number of vehicles have virtually doubled since the mid-1970s. The same phenomenon has been observed with refrigerators. As they became more energy efficient, people bought bigger and bigger models. In other words, government regulations have improved fuel efficiency, but they haven’t curtailed energy
usage
.

Robert Hahn says that regulation would be improved if lawmakers and others paid more attention to the Real World impact of proposed rules. Some laws are definitely more costly—or beneficial—than others. According to Hahn, laws mandating seat-belt use are a bargain, costing about $69 per “life-year” saved. Government-required airbag installation, meanwhile, costs about $120,000 per life-year saved. Requiring reductions in radiation exposure from X-ray equipment means $23,000 per life-year saved. All three regulations are more cost-effective than radiation controls at uranium fuel-cycle facilities—which require $34 billion per life-year saved. This doesn’t mean expensive safeguards aren’t needed, but the cost should be considered.

Cost-benefit analysis is receiving more attention in Europe, whose economy has stagnated under its regulatory burden. Hahn and his fellow economists have been criticized for placing a dollar value on human life. However, congressional economist Ike Brannon says that such analysis can be necessary in the Real World: “Because society has limited resources that it can spend on health and safety improvements, it should obtain the greatest benefit for each dollar spent, and ascertaining an appropriate value is necessary to that effort.”
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Danish author Bjørn Lomborg maintains that a lack of cost-benefit awareness is the problem with many environmental regulations. Lomborg’s controversial book
The Skeptical Environmentalist
gained notoriety for questioning the thinking of environmentalists. However, his critics miss the point. Lomborg acknowledges the possibility that man may have contributed to global warming. The problem, he says, is that the costs of the standard solutions far outweigh the benefits that may—or may not—be realized in the future: