Lest the true moral of the New York Times story on how companies that have been recipients of federal largesse have found clever ways of circumventing Congress’s putative intentions in banning earmarks from private companies that were showing a profit be lost in the rush to condemn Republicans, Democrats, politicians, lobbyists, or private companies, this should come as no surprise. A few years ago a couple of economists received the Nobel Prize for Economics for their work demonstrating how limited public policy is in achieving its goals because human beings are intelligent actors and will always find ingenious ways around a regulation, often with dramatic and unforeseen adverse secondary effects.
Getting around the intentions of Congress while adhering scrupulously to the terms of the law is not fraud. It just demonstrates the limitations that policy makers should acknowledge. It is not a corruption of the system. It is the nature of the system. Here is the operative section of the article:
“It reminds me of the line from “Jurassic Park†— ‘Life will find a way,’ †said Representative Jeff Flake, Republican of Arizona, who has pushed for nearly a decade to curtail earmarks. “When you have easy money like this, it finds a way, and members find a way to enable. And that is happening again.â€
In ignoring the spirit of the ban, some lawmakers are leaving it up to Congressional committees to block them, a prospect that both Democrats and Republicans on Capitol Hill concede will be near impossible.
“No matter what they tell you, there is just no way they can police all that,†Mr. Flake said. “They just don’t have the time or resources.â€
The best regulations are those which align incentives with goals rather than putting up barriers and the most effective government is one that attracts people to strive for the objectives it sets out (soft power) rather than imposing bans, quotas, or limits, or providing subsidies (hard power).
So how would we give incentives to Congresspersons NOT to spend pubic money? Perhaps the Congressperson who appropriates the least amount of government money wins a Survivor-like immunity bracelet that lets them win one free re-election!
Seeing self-interest a little more broadly than bringing home the bacon and voting profligate officeholders out of office might send a signal.
However, that’s the essential problem with expanding the role of government beyond its limited and enumerated powers.
“The best regulations are those which align incentives with goals rather than putting up barriers and the most effective government is one that attracts people to strive for the objectives it sets out (soft power) rather than imposing bans, quotas, or limits, or providing subsidies (hard power).”
Give an example of one that would have helped prevent the financial crisis or BP just by aligning incentives.
Steve
Although I’m not a finance guy, it seems to me that a major factor in the crisis was the conviction that however badly they screwed up the major players wouldn’t be allowed to fail, a view that has been fully substantiated. Rather than alter that view our legislators have elected to double down on it. As a result of financial reform we’ll probably be left with even fewer players, more of whom will be too big to be allowed to fail. The only reason we should have bailed them out is to break them up. Too big to fail is too big to exist.
As to BP, there are a lot of factors to disaggregate there. Why was BP drilling in mile-deep water? Why didn’t the regulators intervene before the blow out despite ample warning? Why was BP able to create a problem bigger than it could handle? Why is BP so large to begin with?
The short answer to all of those is that the situation is completely wacky because of a host of interventions and screwed up incentives over more than a century.
Over at a post on OTB I responded to the wish of one of the commenters for public-spirited “civil servants” by making the analogy to perpetual motion. Wouldn’t it be keen if we could create a perpetual motion machine?
His response was that we should keep trying. That’s hooey. The reality is that we need to recognize that the bureaucracy will always be self-serving, contain it, and mitigate the risks of its bad behavior rather than longing for a better bureaucracy.
I also should add that I’m not opposed to regulation or standards. The phrase “the best” in the sentence you quoted doesn’t necessarily mean “the only”.
“Although I’m not a finance guy, it seems to me that a major factor in the crisis was the conviction that however badly they screwed up the major players wouldn’t be allowed to fail, a view that has been fully substantiated. ”
Interesting POV, as the system really crashed after they let Lehman fail. Also, we have had a couple of hundred (need to check CR) banks fail. We have a history of bailing out the largest financial institutions, but we do let the smaller banks fail. Those smaller banks engaged in a lot of the same risky lending. They had no reason to believe they would be bailed out, yet they joined the herd.
I can think of no soft power solutions to keep banks from creating another crisis. Same with BP actually. You have them drill in deep water because of Ixtoc, so that you have time to respond if there is an accident. The regulators in this case may simply not be there when things go bad. They will always be dependent on industry to tell them what is happening in this highly specialized industry. We cannot stop all accidents. They are going to happen. We need to make sure a couple of back up plans are set. We also need to decide if anything other than a relief well actually works.
Sure, get rid of dumb regs and try to align incentives. Just remember that industry’s incentives are not the same as those of the general public. The incentives of CEOs and workers may be different than those of the corporation.
Steve
Hmmm…Kydland and Prescott?
How about a bond with a large value. The current law puts a penalty of $75 million on oil spills. I think we’ve seen far, far more damage than $75 million. A large bond would help ensure that the firm in question pursues proper safety and environmental precedures. Would it be perfect? Of course not, but are we going to let the perfect be the enemy of the good, cuase if so you should oppose every single thing the government does.
Oh ffs. We’ve been over this before.
Timeline:
Bailout
Bailout
Bailout
No Bailout
Panic.
So…what do we see? That the failure to bailout Lehman presented many in the financial markets with a moment of Whiskey Tango Foxtrot followed by a panic to get out while the getting was good. It was a bit late to send a message of, “We wont bail you out.” Many, many investments were made on that very assumption. Investors do not like uncertainty and the government upped the ante by a huge margin there. Really bad policy.
Another policy failure, but probably not like you are thinking. The policy was in setting up a policy regime that would allow some banks to get so large as to be too big to fail.
So what? Those that figure the problem out will do will, those that don’t wont and will likely fail.