FDA and the costs of regulation

The Wall Street Journal has had two recent articles on the FDA, "Why your phone isn't as smart as it could be" by Scott Gottlieb and Coleen Klasmeier on how FDA regulation is stopping health apps on your iphone, and Alex Tabarrok's review of "Innovation breakdown," the sad story of MelaFind, a device that takes pictures of your skin and a computer then flags potential cancers. The FAA's ban on commercial use of drones is another good current example.

One of our constant debates is how much regulation or the threat of regulation is slowing economic growth.  Over the weekend, for example, Paul Krugman, finding the New York Times itself too soft on libertarians,

Actually, the cost of bureaucracy is in general vastly overestimated. Compensation of workers accounts for only around 6 percent of non defense federal spending, and only a fraction of that compensation goes to people you could reasonably call bureaucrats. 

And what Konczal says about welfare is also true, although harder to quantify, for regulation. For sure there are wasteful and unnecessary government regulations — but not nearly as many as libertarians want to believe. When, for example, meddling bureaucrats tell you what you can and can’t have in your dishwashing detergent, it turns out that there’s a very good reason. America in 2014 is not India under the License Raj. 

Well, maybe, maybe not. Nothing in the FDA or FAA articles mentions the cost of the bureaucrats' salaries as the drag on growth, so that's a classic red herring.

The cost of regulations is the new businesses that don't get started -- or that fail as MelaFind nearly did, because the Raj would not grant a license -- the innovative products they would bring us, the employees they would hire, and so on.

The trouble is, these costs are awfully hard to measure. In the big demand vs. distortions debate (e.g. here) for our current stagnation, how do you put numbers to anecdotes such as these, and then add them up over the whole economy?  So far, it hasn't been done. Like the Laffer curve, we sort of know where the end point is -- even Krugman understands the stagnation of the License Raj, and Hernando De Soto is pretty convincing on regulatory-induced stagnation in other countries. But where are we on that spectrum? Krugman has no evidence that it's small. And I have no solid, quantifiable evidence that it's big. How do we do a "Potential GDP" that adds up these costs, as the CBO attempts to add up capital and people?

For the problem is not really in the cost of the regulation as written down. The problem is the cost of the regulatory system, the cost of the whimsical, political, and discretionary actions taken by regulators, as in this instance.

An important lesson in economics, and in science is, that which you can't measure you tend to ignore. So it's quite easy for us to go on, with economists such as myself reading these anecdotes and inferring we have a major problem, and others convinced that there's nothing here that a trillion dollars or so of "demand" wouldn't cure. Finding a way, even a conceptual framework, to add up these anecdotes would be a big breakthrough.

It matters for the big macro debate. It also matters as we think about financial regulation.

I can't resist a late snarky note on my dialog a few years ago with Glen Weyl and Eric Posner over their proposal that the government create an FDA-like agency to evaluate all financial products before the government allows companies to market them.  I wonder, after more and more stories like this come out if they still think it's such a great idea!

Prodded by Glen and Eric, I've been struggling with the idea of cost-benefit analysis for financial regulation. We need some sort of structure to evaluate all the clever proposals agencies are unleashing un us. But how do you add up these kinds of costs? And not end up, like Krugman, counting paperwork hours and bureaucrat salaries that are specks on the tip of the iceberg of the real costs?