Examining the Rules

Examining the Rules

by Benjamin Gleisser

The costs of government regulation can be especially burdensome on the poor, a Creighton professor believes

Laura and Bob — she a lawyer, he a doctor — placed their two children in a state-licensed daycare center where the ratio of toddlers to teachers is 3:1. They can afford the $850 per month per child cost. But the couple will go out to fewer movies and dinners for awhile.

Meanwhile, Bonnie, a single mother with two children, needs to find an affordable daycare center for her kids so she can go to work. Unfortunately, Bonnie’s monthly gross income from her job at a fast-food restaurant is slightly more than what it would cost to enroll her children in an approved childcare facility. So, her only option is to put her youngsters in an unregulated “underground” center — a private home where the ratio of infants, toddlers and preschoolers to adult supervisors is about 20:1.

Actually, Bonnie has another choice: she could not work, stay home to raise her children and apply for government assistance.

Why is Bonnie forced into this seemingly no-win situation? Because under her state’s law, a childcare facility must maintain a ratio of one supervisor for every three children. This drives up the price of childcare (qualified supervisors are expensive) and forces parents of low-income families to grab whatever option is available — even if it’s illegal and possibly dangerous.

Diana Thomas, Ph.D., associate professor of economics at the Heider College of Business and associate director of the Institute for Economic Inquiry at Creighton University, has studied scenarios like this, and sympathizes with Bonnie’s plight.

“Many states’ regulations regarding daycare centers are inefficient and counter-productive,” says Thomas, who has a child in daycare. “Centers should be allowed to pick their own rules about child-to-teacher ratios, so parents can choose which center is most affordable for them. Doing this would present different childcare options, so that parents in lower-income households can choose their best option. For example, if a 3:1 option is too expensive, they could try a daycare center with, say, a 5:1 ratio.”

In fact, Thomas adds, research suggests that a larger children-per-teacher ratio has little effect on child care quality. She suggests a ratio of infants to providers of 4:1 and toddlers to providers at 5:1. In her work with Devon Gorry, Ph.D., of Utah State University, she has found that an increase in the infant-to-staff ratio requirement by one infant is associated with a decrease in the cost of care of up to 22 percent, which translates into a reduction in the annual cost of child care of up to $2,168.

Thomas is currently researching this topic, and is preparing a paper with Gorry on “Regulations and Cost of Childcare.”

But childcare regulations are just the tip of the iceberg for Thomas. Every year, she says, federal and state governments pass thousands of regulations on everything from airlines to zambonis. Lawmakers believe these rules will protect consumers and members of the workforce.

But do they?

Are Regulations Necessary?

In her study “Regressive Effects of Regulation,” published by the Mercatus Center at George Mason University in Arlington, Va., Thomas argues this about regulations: Those who are least able to afford a hike in the price of a product or service are often forced to bear a disproportionate share of the burden of the implementation of a new regulation regarding that product or service. She believes this, in the end, especially hurts low-income households that are already working to stretch their dollars.

In other words, she says, regulations tend to favor wealthier consumers, who can afford a price increase and want regulation, and put less affluent consumers who do not have the financial resources to pay for regulation at a disadvantage.

Thomas doesn’t believe all regulations should be eliminated. There are many worthy rules governing food production, the environment and public safety, to name a few.

The benchmark, she believes, is if the regulation results in a high cost but offers a low benefit to consumers, it should be scrapped.

An example she offers: In Toronto, Canada, the Toronto Board of Health is contemplating spending up to $690 million to retrofit 69 subway stations with anti-suicide barriers around the tracks. There were 243 suicides in the city of Toronto in 2009, the last year statistics were available. Critics of the plan say the money would be better spent on mental health services, especially in crisis intervention and suicide prevention programs.

“It’s important to look at what’s more effective — barriers or other forms of suicide prevention?” Thomas asks. Even if the barriers were in place, “people might choose to take their lives in another way. It’s always better to help people with a problem, rather than prevent them from doing something.”

And she says Toronto mass transit users can expect to pay higher fares as the cost of the barriers is passed on to them.

Inhalers and Rearview Cameras

Thomas says there are plenty of examples of regulations in the U.S. that hurt low-income families. One of the costliest involves asthma inhalers.

In 2005, the Food and Drug Administration banned the use of ozone-depleting chlorofluorocarbons (CFCs) that are used as propellants in medical inhalers, which are used by people with asthma. Medical inhalers had been exempted from a 1987 ban on CFCs, because they only contributed negligible amounts of CFC to the atmosphere. Thomas says that while the 1987 ban of CFC was important and resulted in a recovery of the ozone layer, the 2005 ruling ended up tripling the cost of asthma inhalers from $15 to $45. So, many people who needed inhalers found it tougher to afford them.

Research from the early 2000s suggested that banning chlorofluorocarbons from devices like inhalers would produce only “small improvements” to the ozone layer, and concluded that nonindustrial sources of chlorofluorocarbons were “insignificant” to the problem. The regulation eliminating chlorofluorocarbons from medical inhalers was a low-benefit, high-cost move that discriminated against low-income consumers, Thomas says.

“What was the trade-off?” she asks. “Did the move end up saving people’s lives? Fewer people used inhalers, which was a detriment to their lives. And those who continued using inhalers found their income reduced.”

Another example she gives is the National Highway Traffic Safety Administration’s (NHTSA) mandate requiring automakers to put rearview cameras in all passenger vehicles by 2018. Currently, such features are found in luxury models or are part of upgrade packages, an option that is mostly affordable to higher-income households. The cameras, lawmakers believe, will reduce the number of fatalities resulting from drivers backing up and hitting pedestrians.

Thomas’ research indicates that about 228 individuals die annually in such accidents (44 percent are under age 5). The Department of Transportation believes the regulation will cut the number of fatalities by up to 50 percent — equivalent to a reduction in the risk of being a victim of a back-over accident from 1 in every 200,000 children under age 5 to about 1 in every 400,000 children under age 5. In comparison, the mortality risk associated with pregnancy is about 1 in every 300,000. In other words, the risk of being in a back-over accident is much smaller.

Is rearview camera legislation cost-effective? The NHTSA estimates the auto industry will have to spend about $2.7 billion to bring all vehicles up to snuff. That comes out to adding another $200 per vehicle, and that price would be passed on to consumers, Thomas says, adding that low-income households will have the most difficulty absorbing that cost.

“That extra charge could push some people out of the market to buy cars,” Thomas says. “In turn, that could keep them from pursuing employment opportunities, or force them to take transit, which has its own risks and would cost more in the long run.”

Thomas says there is also a more foundational issue with the regulation in terms of the cost-to-benefit ratio.  

“Another way to think about it is the $2.7 billion total cost of the regulation translates to $23.7 million per life saved,” she explains. “That is a lot of money that could be spent on reducing other, more significant risks and potentially save a greater number of lives.”

Suggested Solutions

In June 2013, Thomas testified on the pitfalls of over-regulating before a U.S. House subcommittee on regulatory reform. In her Mercatus Center paper, she argues that the best way to improve the public’s health and safety is for people to make their own decisions about buying the goods and services that best serve their individual needs. When politicians make decisions about health and safety issues, she says, they often end up ignoring the needs of lower-income households.

She says regulators must consider the unintended consequences and hidden costs of their rules, and realize who ultimately bears the costs of regulation and suggests:

  • Regulations should respect people’s ability to determine their own needs and work to improve the options of consumers, rather than limit them.
  • When considering a regulation, lawmakers should consider whether the costs expended on reducing small risks could be better spent more cost-effectively for larger risks.
  • Policymakers should consider not only the total costs of a regulation, but who will actually be forced to bear those costs.

“The two questions lawmakers need to ask themselves when considering new regulations are, ‘Are people able to pay for this?’ and ‘Does this regulation make sense?’” Thomas says. “If Congress considered that the benefits of a regulation should be greater than the costs involved in implementing it, that would be the first step in the right direction.”