INSIGHTS: HOW THE VAPING BAN WILL HIT SMALL BUSINESSES
GUEST COLUMNIST: David Boaz, Executive Vice President, Cato Institute. Reprinted with permission.
Sudden concern over lung illnesses possibly associated with vaping has led to a rash of state and federal bans on flavored vaping liquids. Public attention has focused on the biggest e-cigarette company, Juul, which has taken to running full-page ads in newspapers proclaiming that its products are safe and only for sale to adults.
But in this case, like many others, the dirty little secret of regulation is that it ends up imposing more costs on small companies than on the biggest players. Juul, which received a $12.8 billion investment from Altria (formerly Philip Morris), can afford legal and regulatory compliance costs that may squeeze out its smaller competitors.
Travis Pritchard, manager at Vaporz in Whitesboro, N.Y., told the Washington Post, “After the mom-and-pop stores are essentially flushed out of New York, the only devices you’ll find are Juuls.”
If we want an economy and society characterized by innovation, progress, competition and upward mobility, let’s not regulate smaller businesses out of existence. University of Notre Dame economist Benjamin Pugsley agreed: “When you have regulations that are increasing the entry cost of any particular industry, that tends to favor the large incumbents.”
The same phenomenon has occurred in many industries over the years.
Prohibition in the 1920s shut down many small brewers and distillers, but the big companies such as Anheuser-Busch and Brown-Forman, the makers of Jack Daniel’s, had the resources to wait out the 14-year ban and emerged bigger than ever.
In 2016 the European Union passed sweeping new regulations on tech firms to protect data privacy. Big companies like Facebook and Google fought hard against the new rules. But once the legislation passed, they invested big in dealing with it. They mobilized hundreds of people in Europe and the United States, many of them highly paid lawyers, to study the detailed law and review contracts and internal procedures. They had frequent contact with EU regulators.
Smaller companies didn’t have such resources. Some online-ad companies including Verve and Drawbridge pulled out of Europe. Journalists began to report that the regulations were disproportionately burdensome to smaller firms. Investors worried that smaller firms couldn’t handle the compliance costs. The Wall Street Journal reported that “some of the restrictions are having an unintended consequence: reinforcing the duopoly” of Facebook and Google.
Meanwhile, about the same time, California legalized marijuana. As a libertarian, I applaud that move. People would no longer be arrested for buying, selling, or using marijuana. We can expect less crime, more legal jobs, and rejuvenated cities.
But there’s a catch. California didn’t just repeal laws and stop arresting people; instead, it set up a regime of taxes, licensing fees and regulation. And again we see that big companies are better prepared to deal with regulation and paperwork.
Scott Wilson of the Washington Post reported, “Fewer than 1 in 10 of [Humboldt] county’s estimated 12,500 marijuana farmers are likely to make it in the legal trade….Less than 1% of the estimated 69,000 growers statewide have received a permit to farm marijuana since the beginning of the year.” Large agricultural companies started planning to cultivate cannabis on an industrial scale. Long-time small growers saw the legalization law as just another way to put them out of business.
These aren’t isolated cases. As a Small Business Association study in 2010 found, “Small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations. . . . 36% higher than the regulatory cost facing large firms.”
Goldman Sachs CEO Lloyd Blankfein noted in 2015 that new regulations created a “moat” around his firm: “In some ways, and there are some parts of our business, where it’s very hard for outside entrants to come in, disrupt our business, simply because we’re so regulated. You’ll hear people in our industry talk about the regulation. And they talk about it, you know, with a sigh: Look at the burdens of regulation. But in some cases, the burdensome regulation acts as a bit of a moat around our business.”
There are some understandable rationales for regulations — to protect consumers or workers, safety or the environment, to ensure competition, to stabilize markets. The costs and benefits of each regulation — and the aggregate burden of regulations — should be debated. But one thing is clear: the more complex and costly regulations are, the more they will disproportionately burden smaller companies and start-ups compared to large incumbents.
If we want an economy and society characterized by innovation, progress, competition and upward mobility, let’s not regulate smaller businesses out of existence.
ON THE ECONOMY: NOBLE SURFER
John Dunham, Managing Partner, John Dunham & Associates
The surfers call him Noble, and that’s just what he is. He’s dedicated to the mighty sea. Surfin’ night and day, never twice in one spot. He’s somethin’ you and I would like to be. Noble (ain’t joshin’) Surfer (ain’t joshin’). This song opened the B-side to the classic Beach Boy’s Album Surfing USA. Written by Brian Wilson and Mike Love, this 1963 song was one of the classic surfing related songs released by the Beach Boys. Ironically, neither Wilson or Love actually ever surfed.
Its interesting to see that many economists write tomes of material about things that they have never done. This was as true at the beginning of the discipline as it is today. Adam Smith, who wrote in great detail about factories and production, never worked in one. He was actually a professor of Philosophy. So to, Karl Marx, who wrote so eloquently about the struggle of workers. Marx came from a wealthy family. His father was a lawyer, and his mother was from a wealthy family that eventually founded Philips Electronics. He was married to a Baroness.
In fact, most economists have never worked in the real economy at all. They theorize about production, capitalism, development and how banking works, with no actual experience working outside of the cloistered halls of a university.
But one of this year’s winners of the Noble Prize in Economics is different. Michael Kremer, a professor at Harvard, actually founded an organization known as WorldTeach that has placed over 7,500 volunteers in developing countries to teach things like English, information technology, mathematics, science, accounting, etc. Kremer, along with Abhijit Banerjee and Esther Duflo, two academic economists who are by the way married to each other, received the Prize for their work in experimental research in developmental economics.
While their techniques are prevalent in the discipline today, that was not always the case. Back in the Middle Ages when yours truly was learning about economics (my degree was actually focused on economic and transportation system planning), development economics was all about so-called stages of growth. In many ways this came from the Marxist tradition of historical materialism which claims that economies go through stages of development starting with hunter-gather structures and working toward communism.
By moving away from a macro, Marxist-based theory of development, to one focusing on micro economic level interventions, the three economists have helped make development economics much more effective and have helped redirect aid to more productive uses.
Interestingly, my Planning professor back in the day, Dr. Thomas Vietorisz, actually performed the vary types of field experiments that the three Nobel economists write about. He set up economic development and planning offices in countries throughout the world, and helped shift the traditional spending of resources on grand projects (like steel mills where neither coal or iron ore were available) to small, practical solutions (like artificial oases for Somali herders.)
What Dr. Vietorisz taught me, and what the Nobel committee has recognized in the work of Drs. Banerjee, Duflo, and Kremer, is that all economic systems are built from the ground up. Markets are an aggregation of thousands, often millions of individual firms, customers and suppliers, and markets determine what will happen with the overall economy. In other words, economics is about business, not macro cycles or monetary policies.
The field of economics is slowly changing, and more and more, experimental and micro-economic research is being recognized and acted on. While the media likes to focus on macro factors – what is the Fed doing? What’s up with the Yield Curve? Did GDP meet expectations? – in reality, economics is better suited to understanding the firm, the market, or the location.
We here at JDA would like to congratulate this year’s Noble Prize winners, and hope that their work continues to influence not only development economics, but regulatory economics as well. For the economy is like the mighty sea. It is always moving, surfin’ night and day, never twice in one spot.