That which is not forbidden . . .

The US might well have more regulations than any other country on Earth.  Just think of all the IRS regs, for instance, or medical care, banking, etc.  This calls into question the claim that our problems are due to laissez-faire.  But it does allow for the possibility that we have the wrong set of regs.

So why does the US rate fairly high on various indices of economic freedom?  (Yes, I know that we are dropping, but we’re still around the 90th percentile, or higher.)  Perhaps it has to do with that comparison people used to make between the US and the Soviet Union:

In the US, that which is not explicitly forbidden is allowed.  In Russia, that which is not explicitly allowed is forbidden.

Unfortunately this is no longer quite as true of the US, but it’s probably still more true of the US than Russia.  Of course the Russian approach is a blueprint for corruption.

I thought of this comparison when I read this article about the new Shanghai free trade zone.  The article is a bit cryptic, but I think it’s saying that China is trying to become more like countries where everything not explicitly forbidden is allowed.  I’d appreciate any comments, have I misread the article?

There has been a lot of chatter in the market about the new Free Trade Zone to be set up in Shanghai soon. In this insight piece, ChinaScope summarizes the key workings and impacts of the new zone for investors in China.

According to people familiar with the matter, when vice Premier WANG Yang first handed the free trade zone proposal over to Premier LI Keqiang, the name on the cover page was ‘Shanghai Free Trade Zone’, and LI changed it into the version we’re now familiar with – China (Shanghai) Free Trade Zone. This tells us two things: 1.) The Chinese policymakers will be establishing more than one FTZ in China; 2.) The ‘Shanghai FTZ model’ must be replicable nationwide, which explains the reason why Beijing seemed to be so prudent by announcing a long ‘negative list’.

Going through the unprecedented ‘negative list’, which specifies the things that cannot be done in the Shanghai FTZ, we see the biggest change made by the new leadership so far – a clear directive to stop approving things from the very beginning of the process and start identifying the ‘red lines’ in the first place. Some may call it ‘administrative deregulation’, but we prefer to name it ‘efficient governance’. The Government has sent out a clear message to the world that the first thing requiring change is China’s inefficient project approval system, which historically seemed to be a breeding ground for bribery and corruption.

Knowing that Premier LI stated at the executive meeting of the State Council on October 25 that China will remove the registered capital floor set for startup companies, and the current ‘top-down’ annual review system will be replaced by a more efficient annual reporting system. Such measures were expected to be first implemented in the Shanghai FTZ, and clearly the regulators had just decided to move a bit faster.

As for the financial sector, the general development plan released on September 27 confirmed that the Shanghai FTZ will help accelerate China’s capital account convertibility, interest rate liberalization, and yuan internationalization; additionally, it mentioned that a trading platform for overseas investors will be allowed to be built within the Shanghai FTZ and overseas companies will gradually be allowed to trade commodity futures, further to the approval that has been given by the China Securities Regulatory Commission to the establishment of futures exchange within the Shanghai FTZ.

In our view, as the Government starts to shorten the ‘negative list’ after using the Shanghai FTZ as a testing ground to streamline the nation’s inefficient administrative system, foreign investors will find doing business and investing in China becoming easier. More doors will be open in addition to the current QFII and RQFII system, as interest rates and eventually currency floors break down the capital wall over time.



18 Responses to “That which is not forbidden . . .”

  1. Gravatar of Mark Mark
    30. October 2013 at 07:26

    “In the US, that which is not explicitly forbidden is allowed.”

    Seems that the US and my three-year old have a lot in common.

  2. Gravatar of Dan W. Dan W.
    30. October 2013 at 07:42

    In the US a person has expansive economic freedom until another person objects and hires a lawyer or a government official shows up demanding compliance.

    What has changed in the US in the past 30 years is that there are a lot more lawyers, a lot more government officials and a lot more rules. All this and digitization of economic activity makes it far more difficult for a person to remain anonymous “just doing his business”.

  3. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. October 2013 at 08:43

    The general question of why the US has such detailed laws and regulations has been one I’ve been thinking about for a long time. The issue has been one I’ve encountered as a lawyer working in various European countries. Those European tax codes could often fit in one slim paperback volume and, prior to the digital age, one would have to lug around 3 thick CCH volumes of Federal Code and 5 or 6 equally squat books of regs and proposed regs. Not to mention the small type and thin paper.

    How and why did the US tax system get that way, along with many other areas of law?

    It’s a historical puzzle because the US actually started out with a very concise Constitution–a model of brevity and relative clarity. Along with that, a system of “common law” based on historical court decisions and “precedents”. In contrast, the European Continental system, with historical roots to the Roman Code and later the Napoleonic Code was supposed to be all written down in those Code books. But, over the next 200 years our Codes become many times the size of those of Europeans! How did that happen?

    I would posit a couple of possible reasons, although there may be others:

    1. Inherent distrust in government and indirectly government bureaucrats. Detailed laws and regulations grew, I think, in part because US citizens distrusted the discretion an relatively open-ended and ambiguous Code open to interpretation might give those in power;

    2. Later, an inherent belief in government by one party that led to the desire to expressly give powers to those bureaucrats via laws and the power to write regs;

    3. The “common law” provided guidance (and still does) on areas of contract law, property law, criminal law, trusts and estates and a few other areas, but was ill-equipped to deal with the complexities created by a modern economy.

    I think 1 and 2 can actually exist side-by-side in different factions leading to the same perverse result. Conservatives or libertarians or both might favor regulations aimed to limiting power and discretion while Progressives tend to use regulations to expand authority. Regs can work to service either aim.

    3. The desire for greater clarity and predictability and our inherent Puritanism (as opposed to European Pragmatism)–the former will not tolerate any injustice or unequal treatment however trivial and no matter what the cost. This might be a sub-set of distrusting government, but it sometimes has an inherent virtue. My experience was in dealing with European counterparts on complex questions, the answer was much more frequently (“on the one hand. but on the other”). The American system still contains inherent ambiguities and complexities, but those trained to deal with the latter could give high probability answers much more frequently. The job of European colleagues largely consisted in going to their governments to get “rulings” due to their inability to give precise answers. Despite its inherent byzantine complexity and shortcomings, I’m convinced that the US tax system at least has served the American economy well compared with most of our major competitors. That, and the complex legal system we’re so fond of complaining about has actually been one of our greatest strengths. Those laws and regulations we’re fond of complaining about normally get a pretty open and thorough hearing with opportunities to comment and provide suggestions as required by the APA. Cynics would call this “lobbying” but there is also quite a lot of constructive and well-intended comment that takes place.

    The aphorism quoted above “that is what is not expressly forbidden is allowed” might actually be a fairly accurate, albeit imperfect, description of the US system in large part based on the Constitutional framework and the Bill of Rights. If you are going to err on the side of something, this is, actually, the mistake one would want to make.

    That said, recent developments are troubling to me. The ACA in particular has thus far has not been up to the standards we’ve been accustomed to the past century or so. .

  4. Gravatar of Steve Steve
    30. October 2013 at 09:32

    “that comparison people used to make between the US and the Soviet Union:”

    Now, it’s going to be ThinkProgress = Pravda!

  5. Gravatar of TravisV TravisV
    30. October 2013 at 09:47

    Brad DeLong > Eugene Fama

    “Fama thinks that, by pure coincidence, at that exact moment when when Bernanke talked about the “taper”, the market’s underlying utility function shifted to be less patient and more averse to risk.


  6. Gravatar of benjamin cole benjamin cole
    30. October 2013 at 09:51

    China may have a good idea in the FTZs…of course, that depends on how it ends up in practice…politically, China is becoming more repressive…the fact that the CCP controls every traded company thru board seats or voting stock is not commonly understood…let alone the SOEs…seems unlikely that the CCP will easily ungrip China…of course, if the CCP pushes the People’s Bank of China to be pro-growth, that might salve a lot of friction

  7. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    30. October 2013 at 10:42

    I like the following variation, which applies to most of Southern Europe:

    “That which is not subsidized, is forbidden.”


    The US is still the tallest pygmy, but Northern Europe has been deregulating for years and will soon overtake it.


    The word “misregulation” is under-used, as in “the misregulation of the financial sector caused several banks to take excess risk”.

  8. Gravatar of TravisV TravisV
    30. October 2013 at 11:22

    Prof. Sumner,

    You know what we need? A list of the most important issues where you and Yglesias disagree.

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. October 2013 at 11:36

    Luis: ‘Misregulation’ — love it, will adopt it immediately.

    The Australian tax system will give anyone a run for their money. We probably have the world’s highest rate of tax returns by accountants because it is so complicated. And we use the same land use system as Britain–anything not allowed is forbidden, when it comes to building.

    Micromanaging judges is one reason why regulation has got more complex.

  10. Gravatar of Edward Edward
    30. October 2013 at 13:56

    (Re-posted from Bob Murphy’s website)

    The health care disaster, if it shows one thing shows the breathtaking stupidity of Ted Cruz and his band of wing nuts. All the Tea Party and Cruz had to do was wait, and they would have had an incredibly unpopular president facing the scandal of the website WITHOUT government shutdowns, and possible defaults, for which people blamed Republicans.

    Its also important to ascertain which intervention leads to which bad outcome. Its not enough to say, “violence and coercion is bad,” stomp one’s foot, and then go home.

    Conservatives were offering no real solutions to the problem of health care in this country, and in many cases, worse solutions, like Heritage in the 80’s

    Its simple. three things cause the terrible inefficiency in health care that we have today.

    1. Community Rating- treating healthy and sick people the same. No other insurance industry allows group coverage like that. Imagine if there was a law that stated that home insurers had to charge the same rate to people from bad neighborhoods as they did from good neighborhoods. Enough said.

    2. Employer based Health Insurance. The dumbest, stupidest thing on the face of the planet, created by accident by a 1940’s IRS. Cut the corporate tax to zero, and get rid of this employer socialism. (At least Obamacare is good for one thing.) EBHI also ties in with community rating. In order to qualify for the tax loopholes in the corporate income tax, companies have to offer policies that cover all types of employees as a group. Insanity.
    Unfortunately, I never heard conservatives complain about this! They probably think EBHI is a GOOD thing!

    3. occupational licensure- Which severely restricts the supply of physicians out there.

    Instead of focusing on these three evils like a laser, conservatives have offered completely irrelevant solutions, like HSA’s and allowing you to buy insurance across state lines.

    Also, instead of challenging the individual mandate, they should of challenged community rating on Fourteenth Amendment grounds. Community rating punishes the young and healthy, and those who make good life choices, in favor of the accidentally and willfully sick

  11. Gravatar of ssumner ssumner
    30. October 2013 at 14:36

    Vivian, I think it’s also our political system. We have 535 fiefdoms and they all must be placated. In other countries the parties are centralized, and determined policy at the center. It allows them to create more streamlined polices.

  12. Gravatar of Doug M Doug M
    30. October 2013 at 16:20

    First you tax it, then you regulate it, then you subsidize it.

  13. Gravatar of Peter Drake Peter Drake
    30. October 2013 at 17:11

    Scott, you wrote “In other countries the parties are centralized .. it allows them to create more streamlined policies.”

    So true. Not just streamlined policies, but unpopular ones in the “cod liver oil is good for you” kind of way. In Canada we elect kings for 4 years at a time. The two main benefits are the possibility of consistent direction, and accountability. If you’ve been running the country unimpeded and things aren’t working then you have nobody to blame but yourself.

  14. Gravatar of J.V. Dubois J.V. Dubois
    31. October 2013 at 02:29

    The reason I think is that number of regulations is not nearly as important as the quality – especially for the most important ones.

    So yes, having to take-off your shoes on every flight may be obtuse and embarrassing, but then being able to start business quickly and with low cost may be more important.

  15. Gravatar of Bob Bob
    31. October 2013 at 10:32

    The US has a lot of regulations, and many that are industry specific. It’s not like the US builds that many barriers of entry to doing any business at all.

    The indices test how hard it is to start a business, not how hard it is to become a barber, or to start a new health insurance company. So lots of US regulations might not be counted.

    Still, by any measure, lots of countries do worse than the US. Just look at this:

  16. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. November 2013 at 07:58

    “That which is not forbidden is allowed”

    I just read an article in the NYT that suggests regulation may eventually enable corporations to lay off massive numbers of personnel whose jobs used to be to determine what consumers that shop for their products want. Who needs them, when you’ve got Gary Flamm?

    “Regulators are getting involved, too. The Environmental Protection Agency recently finished overhauling lighting standards for its Energy Star program, making it easier for more LEDs to qualify for generous discounts. And California, a leader in all things green, is going even further, with elaborate new requirements to control not just how much electricity the bulbs use but how the light feels.

    “We want a lamp that people fall in love with,” said Gary Flamm, supervisor of the building standards development unit at the California Energy Commission, adding that with compact fluorescents the push toward low prices and high efficiency had sacrificed light quality. “Once they fall in love with it, they can all save significant energy over the incandescent.”

    The “Once they fall in love with it” remark also reminds me of the ACA….

  17. Gravatar of MichaelM MichaelM
    3. November 2013 at 22:17

    Vivian: The other thing that has changed is that the distinction between common law and civil law at one time in the past has become more and more academic over time. The common law as it existed at the time of the adoption of the Constitution is essentially completely gone. We’ve kept some of the forms up but the common law of today has a lot more to do with the codification movements of the 19th and 20th centuries than the jurisprudence of a Blackstone or a Coke.

    Not to mention the absolutely immense portion of the regulatory state that doesn’t have any reference to common law courts at all and, instead, is handled by judicial processes internal to the regulatory agencies.

  18. Gravatar of MichaelM MichaelM
    3. November 2013 at 22:18

    that should read:

    “…the distinction ‘that existed’ between common law and civil law at one time in the past…”

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