I wrote two days ago to explain that America’s fiendishly complex tax system means we not only have to give lots of our money to the IRS, but we also have to endure aggravation, uncertainty, and expense as part of the process.
Two weeks ago, I wrote about the Trump Administration arbitrarily deciding that the federal government should take partial ownership of a semiconductor company, thus copying the preferred approach of Bernie Sanders.
Three days before that, I wrote that haphazard protectionist policies in Washington are causing lots of expense for consumers and businesses, but also generating massive wealth for lobbyists who know how to work the system.
These may seems like three completely separate issues, but a common theme in all these examples is that America is plagued by laws that are unclear, complicated, vague, and ambiguous.
Today’s column will consider the consequences, and we’ll start with visual showing the negative economic consequences of poorly written laws.
The above charts come from a fascinating study published by Germany’s Ifo Institute.
The authors (Tommaso Giommoni, Luigi Guiso, Claudio Michelacci, and Massimo Morelli) came up with a clever way of measuring the economic damage of sloppy laws.
For readers pressed for time, here’s the abstract of their study.
We develop a strategy to measure the economic costs of poorly written laws, a potential threat to the rule of law. Using the full corpus of Italian legislation, we show that legal uncertainty—measured by the probability of disagreement between the Supreme Court of Cassation and lower courts—is higher for cases involving poorly written laws and varies systematically across courts. To identify the economic impacts, we exploit a reform that reassigned firms to courts. We estimate that GDP would be 5 percent higher if laws had been written as clearly as the Constitution, with two-thirds of the loss accruing over the past 20 years.
Next are some passages describing key findings.
The rule of law is at the foundation of well-functioning institutions… It requires that laws “must be accessible, intelligible, clear and predictable… Despite these requirements, …laws are often poorly drafted and, in many cases, unintentionally ambiguous. Ambiguous laws, in turn, create uncertainty about rights and obligations…, discouraging investment, trade, and other economic activities… Long-run steady-state GDP per capita depends on the average firm growth rate as well as on the business creation rate, the firm exit rate, and firm size at entry. …We estimate that if all Italian laws were drafted with the same clarity as the fundamental principles of the Italian Constitution, current GDP per capita would be 4.9 percent higher.
And here’s some of what they wrote with regards to Figure 6 shown above.
In the years following the reform, the coefficient becomes significantly negative, consistent with treated firms slowing their growth in response to increased legal uncertainty. …To better characterize how legal uncertainty hinders firm growth, we examine its effects on capital accumulation and precautionary provisions. Because investment is often irreversible, uncertainty tends to have a strong negative impact on firms’ capital accumulation decisions… The divergence emerges…, consistent with treated firms responding to heightened legal uncertainty by reducing investment and increasing precautionary provisions, both of which contribute to the observed slowdown in firm growth.
Sadly, the problem is getting worse not better.
Here’s another chart from the study.
And here is some of what the authors wrote.
Figure 7, panel (a) plots the time series of the total number of new words of legislation enacted each year in Italy since the mid-sixties… The red solid line in Panel (b) of Figure 7 shows the average degree of poor drafting of all new laws enacted in a given year… Figure 7 indicates that the drafting quality of Italian laws has declined by approximately 40% since the late 1990s.
The study is about Italy, but there’s every reason to think that the problem is just as bad – if not worse – in the United States.
After all, consider the estimate that the average person unintentionally commits multiple crimes every day. In other words, a system that surely stifles entrepreneurship by creating massive uncertainty.
I’ll close with two quotes that summarize the problem. First, here’s the former head of the secret police for Stalin’s murderous regime.
