Pursuant to a discussion of regulatory capture in the comments of this post, let’s talk about regulatory capture a bit. “Regulatory capture” means the tendency for regulating bodies to become dominated, captured, by the very institutions they are chartered with regulating. Insurance regulating boards, present in every state, tend to be dominated by the insurance companies that operate in those states. Bank regulation bodies have been dominated by banks or at least bankers. Energy regulation agencies are often dominated by energy producers. And so on.
I think that the tendency towards regulatory capture is inevitable while the fact of it is not. You can see how it would arise. Who knows more about insurance than people in the insurance business? And companies certainly have incentives to capture regulatory agencies. Once they’ve done so they can ensure or, at least, try to ensure that regulation doesn’t hurt their business.
That regulatory capture is a serious problem can hardly be denied. I’ve previously posted that there’s good reason to believe that regulatory capture was proximally responsible for the financial crisis of 2007 to date and the character and structure of policy responses have certainly reflected the viewpoint of the banks and bankers.
Addressing regulatory capture presents a thorny problem. The anarcho-capitalists’ strategy is less or no regulation. I think it’s a flawed strategy: we’ve seen that movie before. I see no good reason that, without regulation, we can be confident in the food that we eat, the pharmaceuticals that are prescribed for us, the devices we use, or that our banks will be run in honest, businesslike ways and the money in our accounts will be available to us when we need it and we know from experience that without some degree of regulation abuses will be widespread. That there are flaws in how all of these things are regulated in the real world does not negate that we’re better off today than we were a century ago.
The technocrats’ solution is better, wiser, more highly compensated experts. This flies in the face of the entirety of human experience which, time after time, has seen smart people do stupid, short-sighted, self-serving things. Selfless all-knowing philosopher-kings are in terribly short supply and are likely to remain so.
The bureaucrats’ solution is another layer of bureaucracy to guard the guards. This is largely how we got to the point at which we have arrived. Without changing the bureaucrats’ incentives, which lie at the heart of the problem, I see no reason that more bureaucrats will solve a problem created by corrupted bureaucrats.
At least here in Illinois, possibly the least populist of the states, I think more populism might help. So, for example, I think that the voters should be able to remove any elected or appointed official from office by a simple majority vote without extraordinary roadblocks being thrown in the way of starting such a campaign. At the very least it should be no more difficult to be removed from office than it is to be put in office. “Sunshine” provisions, openness in government, might help, too.
I honestly don’t think that our core problem is one of too much regulation or not enough regulation. Rather than “do more” or “do less” I think we need to “do differently”.
This is not to say that there is no regulatory excess. I heard recently of a court case in which, as I understand it, a farmer was denied the right to consume unpasteurized milk from his own cows as a public health measure. Brucellosis, the primary reason we pasteurize milk in the U. S., is practically unknown here, there are only about 100 cases a year (most of the cases among slaughterhouse workers), and the mortality in untreated cases is around 2%. I have known enough dairy farmers and kids who grew up on dairy farms over the years to know that the consumption of unpasteurized milk by these farmers and their families is very commonplace (many won’t drink anything else). If there were a substantial risk from farmers drinking unpasteurized milk from their own cows, we’d know about it.
I think an initial observation would be that almost all, if not all, regulatory agencies are charged with multiple agendas that include some degree of pro-business purposes. The agency primarily responsible for regulating BP was charged by Congress with the task of both promoting domestic oil production and safeguarding against the pollution risks. If that agency passed regulations that cost industry too much money, shut down wells, etc., it would have failed in one of its tasks. For that agency to do its job, it needed to understand and appreciate the business. My initial suggestion would be for greater recognition that the trade-off btw risk and profit that agencies are delegated responsible for is not strictly speaking a technical issue, but a policy issue. Congress should be forced to grapple more with the policy issues and only delegate to the agencies truly technical issues. There is a role for the courts under the non-delegation doctrine.
A second observation would be that the EPA is considered far less subject to regulatory capture than say the Dept. of Interior. I think the primary reason is that EPA as primarily constructed is not industry-specific — its concern is the chemical composition of what comes out of the stack or pipe and only secondarily does it become interested in the industry the discharge is connected to, whether it manufactures paper or plastic. I believe the broader the regulatory program, the less the risk.
I think that departmental culture has something to do with that too, PD. My direct knowledge of internal EPA workings is pretty antique now but back in the day the EPA folks frequently saw their work as a sacred calling rather than a job interview which appears to be the view of those who work for the SEC.
And then there’s the now-defunct Minerals Management Service, which seemed to incorporate all of the best elements of nepotism, crony capitalism, and the East Texas-Louisiana culture of corruption.
One of my favorite early EPA stories was during a Congressional oversight committee hrg in the early 70s, the EPA administrator was asked why the EPA had not come into compliance with the civil rights laws like all of the other agencies, to which the response was that protecting the environment is a civil right for everybody. Translation: We’re too important for that. (That is until the Clinton administration, when it dusted off the mandate, created the concept of environmental justice and attempted to extend its mandate to promote fairness) There are not just regulatory capture problems, but problems of self-serving bureaucratic expansions.
BTW/ I read that Wisconsin dairy opinion whenever it was linked over at Marginal Revolution — I don’t think the excerpts explain what happened very well. About 30 people in 20 different households got ill from this cow’s milk, and the owner was trying to avoid licensing/regulatory requirements by charachterizing what had happened as personal, intimate activity that the Constitution forbids regulating. The problem was the owner had bought a cow, hired a farmer to stable it (and possibly milk it) and then sold club memberships to people who wanted to consume unpasturized milk from it. The owner was trying to charachterize this as a personal, intimate issue between owner and his cow, and the judge saw it as a dairy operation.
PD Shaw,
That’s a great point. The USDA is probably the poster child.
Right because every business has a planning horizon on zero. Tomorrow is irrelevant, next month will never come, and next year is just a complete myth made up by religious fanatics. The discount rate is 1.
Yes, and time inconsistency of selfless all-knowing philosopher-kings is still going to be lacking.
But if you want, the second article by Kydland and Prescott showed the way towards dealing with this problem to some degree. An optimal policy is basically a rule based policy….rules that only change when various circumstances change and they change in a formulaic manner. That is, the human factor is removed from the equation almost entirely. You don’t try and formulate policy on the fly, you set up a process that will determine policy in advance given various states.
But good luck getting politicians, technocrats and bureaucrats in giving up their power.
Thank you for reminding me of that, Steve. I’d intended to include that as one of the alternatives in the body of the post. In practical terms I read that as “fewer regulations, more laws”. I support that idea in principle but in practice, given the condition of the legislative branch, it frightens me.
Another thing I’d intended to mention: I honestly don’t see how our system can endure without a predisposition against legislation and regulation. I think we’ve lost that and it’s one of the reasons that our growth, other than bubbles, has been more like that of our European cousins than our historic growth rates.
“The anarcho-capitalists’ strategy is less or no regulation. I think it’s a flawed strategy: we’ve seen that movie before. I see no good reason that, without regulation, we can be confident in the food that we eat, the pharmaceuticals that are prescribed for us, the devices we use, or that our banks will be run in honest, businesslike ways and the money in our accounts will be available to us when we need it and we know from experience that without some degree of regulation abuses will be widespread. That there are flaws in how all of these things are regulated in the real world does not negate that we’re better off today than we were a century ago.”
Brilliant. First invoke “anarcho,” then go to “some degree,” dilute the issue with “flaws” and finish with invokations of practices a century ago.
The issue is one of degree, which clearly has become an overwhelming and job destructing problem today, not the straw man of yesteryear. The slight of hand with words is worthy of the best 3 shell players on the streets of NY. So where’s the pea?
I think that we probably misregulate, but it is difficult to know for sure. The body of literature on regulations is not as strong as one would hope. My general take is that we probably over regulate small businesses, greatly under regulate large financial institutions and are hit or miss on larger corporations. It should be noted that a lot of the regulations creating adverse issues for small corporations are written by and for the benefit of larger corporations.
Another part of the regulatory issue seldom mentioned is the influence of local and state rules. These are often the most intrusive for me and the local business guys I talk with complain about them a lot also.
Steve
“It should be noted that a lot of the regulations creating adverse issues for small corporations are written by and for the benefit of larger corporations.”
With this modification: “….larger corporations, or to regulate the unwarranted practices of large corporations.” (Read: Dodd-Frank) this is exactly correct.
By the way, David Friedman has given considerable thought to anarcho-capitalism, when it will work, how to transition to it, and so forth. For example, in the fact of significant public goods problems, externalities, and even asymmetric information it wont work, or will work poorly.
He also points out that if we set up government to deal with the above issues (public goods, externalities, asymmetric information) we’d have a government much, much smaller than we see currently. For example, there would be no Social Security as we know it since it is neither a public good, an externality, nor does it really address problems with asymmetric information.
In fact, any kind of Social Security/forced savings program is one that is, in the end, welfare reducing on average. We give up some of today’s consumption to (very) inefficiently try to increase future consumption often times over the desire of the consumer (it is funded via a tax after all). So the idea of, “We are going to do this for your own good,” pretty much fails unless you have a rather bizarre definition of “your own good”. That is, another person’s welfare depends on my feelings as well–i.e. I feel better that I’m making him do this (against his will) therefore that person also feels better off. Either that or you have to start from the premise that people don’t know what is good for them–paternalism. Which of course raises this question…why let these people vote? They can’t take care of themselves, but you’ll let them pick the person(s) who will take care of them. Okay, I’m sorry, but that strikes me as going full retard. What is to stop them from picking the person who is going to let them eat bad food, drink, do drugs, watch inappropriate movies, and then go to bed late and after not doing their homework (metaphorically speaking)? Oh wait, look at the last 40 years. That is exactly what we did.
Don’t worry, I don’t expect a reply other than crickets.
Yes, it is called rent seeking and it was an idea due to the infantile libertarian minded economists like Gordon Tullock and James Buchanan.
That may be an adequate technical economic explanation, but the purpose of social security was to keep the elderly from living under bridges and dying in ditches. Secondly, your slippery slope argument regarding paternalism leaves little room for any kind of middle ground.
There are some pretty big caveats to this though. A rule-based system is just a variation of technocracy IMO because you need a visionary philosopher-king type to anticipate all the circumstances the rules will have to account for and then craft the rules so they are clear and fair and cover all the bases. How often does that actually happen? The human equation can’t be removed from the rule-making process and there are plenty of examples where rule-making regimes that take away the human factor are failures: “Three stikes” laws and “zero tolerance” policies are two that come to mind.
If the last 40 years of policy making is the middle ground, than I’m sorry, but the middle ground is a failure.
And while I like the evocative rhetoric, elderly living under bridges, I don’t think that was ever really the case, not on a wide spread scale.
And when you get right down to it, it is really exactly as I describe it, “You are too stupid to plan for your old age, so we’ll force you to do these things.” You’ve just admitted it.
You don’t need to anticipate all circumstances you need to develop a rule that can handle all circumstances. In optimization theory Bellman’s equation works (and this is exactly how Kydland and Prescott tackled the problem in their theoretical work). Problem is translating that from a very simple setting of mathematical optimization to the real world is the hard part. That and then getting the powers that be to surrender much of that power over to such a formulaic approach to dealing with policy. In this regard you are almost surely not going to end up with zero tolerance or three strikes.
I hope it somewhat obvious at this point, that I don’t see much hope for this approach either. The issue of dimensionality alone is a pretty big problem even in theoretical settings. Bringing it into real life would tend to make it even harder to deal with for typical policy issues. And getting a politician to agree to reduce his own power….yeah not gonna happen easily or frequently.
“And while I like the evocative rhetoric, elderly living under bridges, I don’t think that was ever really the case, not on a wide spread scale.”
Living in sheds and abandoned chicken coops also. If you still have living relatives who survived the Great Depression get them to talk to you.
Steve
Ahhh yes, the anecdotes. Sorry, but D-.