Lord help me! I agree with Robert Reich:
Regulations don’t work if the underlying structure of an industry — be it banking or health care — got us into trouble in the first place. Wall Street’s big banks are just too big, and their ability to draw on commercial deposits for investment banking activities, including derivatives, will make them even bigger. It will also subject the economy to greater and greater risks in the future. No amount of regulation can cure that.
Similarly, the underlying system of private for-profit health insurance is a key driver of America’s bloated and ineffective health care delivery. We can try to regulate it like mad, but no amount of regulation will cure this fundamental problem.
A regulatory rather than structural approach to deep-seated problems in complex industries like banking and health care is also vulnerable to the inevitable erosion that occurs when industry lobbyists insert themselves into the regulatory process. Tiny loopholes get larger. Delays get longer. Legislative words are warped and distorted to mean what industry wants them to mean.
It isn’t just lobbyists that are the problem. It’s the nature of regulation. I think that the Obama Administration has undeserved regard for regulators. In the real world under real conditions regulators inevitably come to identify with those they’re intended to regulate rather than with the rest of us. Insurance regulatory boards operate for the benefit of insurance companies. The Federal Reserve operates for the benefit of banks. The Securities and Exchange Commission aligns with large, publicly held companies.
Big banks, big companies, and big unions have many advantages. They’re in a position to make big political donations. They’re more likely to offer sinecures to political operatives on their way to or from their next political job.
In separate news the House Ways and Means Committee has approved the American Jobs and Closing Tax Loopholes Act. The overwhelmingly largest amount of money in this obfuscatingly titled appropriations bill goes to Medicare physician payments, thereby effectively increasing the cost of the ACA beyond the CBO’s assumptions.
As Megan McArdle implied yesterday, we may be heading to a national health system analogous to BNH by default. A single-payer system alone won’t staunch the spending of our current system. Sharp restrictions on physician and hospital compensation would be needed as well and, once you’ve knocked down the private health insurance system, replaced it with a system of public insurance, and cut compensation to the level that would be needed to bring the whole shebang within our means, you might as well have a national health system.
I am largely in agreement here, with a few minor quibbles. I think that some regulations do contribute to structure. The New Deal banking regulations did change structure. The deregulations of the 80s, 90s and 00s did change some of the structure. These were not the sole reasons for our problems, but they did contribute. Would requiring derivatives to go through a clearinghouse and be bought and sold on an exchange be a regulatory change or a structural change?
On medicine, the private health insurance system has never done anything about costs, except pass them on (aside from a brief period in the 90s). I can understand what goes on with Medicare since the old folks lobby has so much influence, but the inability or unwillingness of insurance companies to hold down costs is more complex. The balance of negotiating power between providers and insurers is complicated. The political component makes it less amenable to market approaches than one would hope. I dont see us going to a British system, but a French/German/Taiwan system, maybe. We are performing the experiment.
http://theincidentaleconomist.com/what-regulation-can-do/
Steve
I paritally agree with him, but if you read between the lines Reich is attacking the free market. He is ultimatley arguing for government take over. Reich is a technocrat. Ask yourself this, “Why isn’t he looking at why banks have gotten too big to fail?”
Could it be that government stands by ready to intervene even in good times if one of these “too big to fail” financial firms gets into trouble. Suppose you are thinking of lending to a financial company, do you worry about their ability to pay it back like you would with John Doe? No. If you are, you are being way too cautious. You know that the government at the very least will put together a bailout plan. Maybe with federal dollars or private, but there will be a bail out of some sort. In fact, we are looking at enacting as formal official policy legislation that will ensure that this always happens. So you should be willing to lend to the financial institution. If they get into trouble you’ll get out whole, if they don’t and they succeed you’ll make billions. Little to know down side, and you get whatever upside there is, why not lend and who cares what the real risk is.
As for health care we have a situation where regulations are massive, they are both broad and deep. Consider that inter-state competition is minimal at best. Does this have an effect? Sure, look at another similar situation: gasoline. We should have a national market for gasoline, but we don’t. We have regional markets. Why? Because of regional blend requirements. This takes a national market that could respond to shocks (hurricane, unexpected refinery problems, etc.) more quickly and replaces it with much more severely supply constrained regional markets. Sound familiar? Isn’t Dave talking about the supply side of health care? How come we can’t train enough nurses in this country and have to essentially import them from places like the Philippines? What about doctors? How is the supply of doctors determined? It certainly isn’t anything approaching an “unfettered market”. And we’ve mixed it all up. We have profit seeking on one hand, and the government on the other saying, “Go ahead, do whatever you want we’ll cover a very significant chunk of the costs”–i.e. medicare and medicaid. Putting those two together is a recipe for overspending and out of control budgets. It is like giving a 5 year old the cookie jar then leaving the house for a couple of hours. Of course the cookie jar is going to be empty when you get back.
And Medicare carries with it another problem, a huge disincentive to save. If you were born in say….mmm…1935 you’d be a complete and utter moron to save for health care for retirement. You’d retire in 1990. Medicare will be there for you, so why save. Instead, spend that money and enjoy the utility right away vs. postponing it and spending it on things that aren’t nearly as fun like treatment for some health problem when you are 69. Savings tends to end up as investment. Investment is what helps drive economic growth. So we set up a program that is has crappy incentives both in terms of spending and also savings and that would reduce economic growth over time.
But we are to turn to government the very same schmucks who set all this up in the first place to fix it? That is Reich’s position. He isn’t some radical free market type, he is a technocrat of the worst kind. He is one of the technocrats that thinks that the government can manage just about every aspect of the economy. He isn’t talking about regulatory capture here, he is talking about something wildly different.
This is the problem, at its root, and in a free society where you have a democratically elected representatives this problem will not go away and in fact will only get worse the more and more regulation you put in place.
Reich doesn’t see it that way though. He’s got part of it right, for example,
But it isn’t just regulators, it is everywhere in government. Where is Tom Daschle working right now? From wikipedia,
And he was on his way back into government as Obama’s head of HHS.
I mean WTF people, you keep thinking there is some kind of pony in here. Get a clue.
I first became aware of “regulatory capture” while reading Milton Friedman’s ‘Free to Choose’ in something like 1975. His example? The railroad industry. Seems this isn’t a recent phenomenon, eh?
As for Reich. I’m with Steve V. Ugh.
And, as we’ve seen, The MMS
operates for the benefit of oil companies. So, what are we left with, the “Free Market”? What would be the market solution to the Gulf oil spill? I mean, I do agree that there is regulatory capture, but to say that the market will automagically take of or prevent catastrophes like the one unfolding now strikes me as nuts. And I disagree with Steve to the extent that I don’t see why we wouldn’t have some version of the problem he outlines in a nonregulatory environment. Come to think of it, we did have a lot of problems involving bribes and corruption and such in the, largely unregulated, 19th century. The really real problem, and the brutal fact, is, that in a capitalist system, big money interests will always find a way to work the system in their favor regardless of the existence or nonexistence of a regulatory regime. The existence of a regulatory regime means they will use these tactics, in a nonregulatory regime, those tactics.
Well, in a situation where you have no regulatory apparatus there is no regulatory apparatus to capture, now is there?
You guys are doing a chicken-egg argument, but just haven’t figured it out yet.
Really? Credit Moblier? A government related scandal? Or did you have a different example in mind? Maybe Standard Oil…with railroads, an industry that had lots of government intervention for that time. Amusingly enough, Standard Oil still exists today….ExxonMobil, broken up nearly a century ago, now back together. And curiously contrary to what we’d expect with a monopolist Standard Oil lowered the prices of kerosene considerably and was a highly innovative company (instead of dumping gasoline they saved it and used it to power their own machines and developed commercial uses for beeswax and developed vasoline). Its monopoly status is debatable since merely being big is now seen as insufficient grounds for being a monopoly.
When there is a regulatory structure it is even easier as the monied interests can then go capture the people who are sanctioned to use violence and make the rules.
“You guys are doing a chicken-egg argument, but just haven’t figured it out yet.”
Well, short of anarcho-capitalism, would you be happy with futarchy?
Heh, that is an interesting idea, not sure if it is implementable since it would obviously cut against alot of current special interests, but interesting.
Credit Moblier?
Te-he
“In fact, we are looking at enacting as formal official policy legislation that will ensure that this always happens.”
Where is that in the finreg? Did the Republicans manage to gut it that far?
“This is the problem, at its root, and in a free society where you have a democratically elected representatives this problem will not go away and in fact will only get worse the more and more regulation you put in place.”
History does not support that. Unregulated industry had created massive amounts of pollution. Air and water quality were awful. If you remember driving the highways in the 50s and 60s, they were covered in litter. Regs were changed, and that improved. Acid rain was a big problem. That was readily improved. Business ran amok in the 20s. The financial system was reformed and was relatively stable until a lot of those old barriers were removed, and , yes, the regulators were captured.
If you want to go back to the 1800s, come visit coal country here. Go through the old mines. Look at the old records and how they planned for lots of deaths since it was cheaper than making mines safer. How they had 7 y/o kids working 10-12 hour days in the mines. That is the natural state of business left to its own devices.
Which is what I assume you want since you only complain about regulations. They are never any good. What is your alternative scheme to keep us from returning to monopolies and worker abuse once regulations are gone? What will we do when companies start polluting again? Once we remove all leverage limits from banks, then let them fail, what will we do with 25% unemployment? That is the historical model, and that was when there were more people still in agriculture. I am glad that you have such faith in big business. There are way too many cynics among us.
Steve
Its the $50 billion bailout fund. It will be used to make creditors whole. Oh, I know you’ll tell me that that is not the intent of the bill, and that creditors are supposed to take a “hair cut”, but there is nothing in there ensuring they take a hair cut, and given how the government has ignored the language of things like TARP who cares what the bill actually says.
Yes it does. How do unions exist? Government. How have financial institutions gotten so big? Government. Lobbying has grown as the size and scope of government has grown. Look at the literature on rent seeking and public choice theory.
What monopolies? As I noted the most notorious monopoly was supposedly Standard Oil, but at the time when it was broken up its market share had fallen dramatically. How is that possible for a monoply? It didn’t act like monopolist (constantly looking for ways to keep costs low and improve efficiency and engage in innovation). Price of kerosene declined in general and output increased. The case for monopoly is actually very weak.
And yes, child labor is often very common in countries where their markets are relatively new or weak. Look at places like the Philippines and you see conditions where children work long hard hours. Take it away via regulation and you could very well plunge the family into horrifying poverty. But as things improve and the economy grows and people gain more income and wealth will it always be that way?
If all the anti-child labor laws were struck down tomorrow would there be a flood of children into the work force? I seriously doubt it. Similarly with environmental issues, the only problem there is that our legal and property rights system can’t handle those issues so well.
If we went by a micro-economics textbook and limited government to issues of real externalities (pollution) actual public goods (non-excludable and non-rivalrous in consumption) and possibly dealing with some of the worst cases of assymetric information (publishing things like unemployment numbers, inflation, etc.) our government would be vastly smaller than it currently is. But there is nothing to keep government in check and focusing on just those areas where the private markets fail. Our laws, regulations, and jurisprudence has evolved over the last 100 years to remove a great many checks on government power. Recently we’ve seen serious erosions in the Posse Comitatus Act.
You can believe that foolishness that but for all these laws we’d go back to 1875 in terms of how business works, but I’m not buying. I’m not buying that an advanced market economy with over 200 years of scientific break throughs is going to return to a state when the economy was moving from predominantly agrarian economy to an industrial economy. That just ridiculous. But hey, who cares, lets just expand government power willy nilly. After all, those assholes in business can’t ever make it into government. Naw them government guys they really care….like in Dave’s post about the Dept. of Ag. and puppy mills, or the guys at MMS taking yummy kick backs from industry, or the SEC wiling away the work day on porntube.