Monday, May 14, 2012

How protecting the consumer is hurting consumers

After the financial system meltdown of 2008, Congress and the executive branch decided to "clamp down" on risky trading by large financial institutions and enact reforms aimed at making them more transparent and solvent. More consumer protections were put in place, including the elimination of certain fees and stricter reporting requirements. They also decided to go after tax cheats by requiring foreign banks to keep more detailed records of transactions in American accounts overseas. These and other measures are supposed to protect consumers from the evil greedy capitalists, but like Joan Robinson said "The only thing worse than being exploited by a capitalist is not being exploited by a capitalist." Consumer protection measures have actually hurt the very people is was supposed to help.

Banks and financial institutions that once had no minimum account requirements have had to impose them. The cost of paperwork and record keeping for smaller accounts makes offering them for free unfeasible. Banks have had to raise requirements for borrowing, taking many would be borrowers out of the game. Financial institutions that have never had foreign branches in the past have had to open them, because doing business in the United States has become too expensive. Many foreign banks have stopped opening accounts for U.S. citizens due to regulatory burdens. The net result has been a reduction in credit and services available to the average Joe. Sure banks are making money. But, they're making it on foreign investments and sovereign debt, not on small business and consumer loans.

It's not just the financial sector that's affected by consumer protection laws run amok. In health care, many doctor's practices have the majority of their employees working on one thing; processing paperwork related to Medicaid, Medicare and other third-party payers. If you were to go to the doctor's office for an ear infection and pay in cash, you'd be saving them a tremendous amount of time and paperwork, and therefore money. However, they are forbidden by law to charge cash patients less than they would charge a Medicaid patient. They are not allowed to pass that savings on to you. The intent is to keep costs lower for Medicaid. The actual result is to remove any incentive to cut costs by offering a discount for cash payments. Nobody wins. The only out is to stop accepting Medicaid and Medicare patients, which many practices are now doing.

Protections put in place to protect us from the free market, more often than not have a negative affect on our choices and our economy. They stifle entrepreneurs and income mobility by ensuring that only those who can afford the cost of compliance can enter and remain in an industry. In most of the country, you can't start a business in your garage and become a huge success because you can't start a business in your garage.

One of the main issues the government was supposed to address after 2008 is the "too big to fail" problem. That is, when so many people and companies are so dependent on a single business entity, that it simply cannot be allowed to go under. There's really an easy fix for that which I haven't heard anyone propose. The government can simply state in no uncertain terms, or even pass legislation that forbids the government from providing financial assistance to a failing business, regardless of size. The markets would take care of the rest. Money would be spread out in order to spread the risk. Companies can afford to put all their eggs in one basket right now, due to the implied guarantee that the Feds will make them whole in the event of disaster. Take that guarantee away and they will take evasive action. This hasn't been done simply because most of the egg heads in Congress and our regulatory agencies really don't understand how a free marketplace works, although they truly believe they are geniuses on the subject.

Perhaps part of the problem is that free markets require that bureaucrats, regulators and legislators hold the default position of: do nothing. But you can't show how smart you are or make headlines by doing nothing. The natural impulse of a public figure is to do something; to guide, to manage, to control. When they do, they get accolades and awards for doing so, regardless of the actual result. The important thing is that they cared enough to act, not that their action had the desired effect.

I don't know if the governing cycle of "regulate, fail, repeat" can be broken. It's tough to get elected or appointed by promising to do less, but I sure wish they would.