Regulation

Second thoughts just before publication, after reading about the thuggish treatment of BP by Obama today. He knows that he can kill them on the PR front, just by saying "they won't agree, they won't sign, they don't care," so he can go far beyond what's legal in threatening them. As Joe Biden said "You have no choice." It's pretty close to true. Fair doesn't matter. The law doesn't matter. The Constitution coesn't matter, because BP dares not do anything but capitulate, for fear of destruction. A thoroughly despicable act by the president - I have waited until now, a year-and-a-half into his presidency, to start saying such things, wanting to give him as much objectivity as I could.

So maybe, the correct preface to this essay is the possibility that many in government are not merely miscalculating, or easily mislead, or easily intimidated by polls and loss of dollars, or mildly corrupt. Some are simply sociopathic. Remember Willie Sutton, robbing banks because "that's where the money is?" So, where is there more money or power to be gained - via corruption in corporate America, or in government? And you think the brighter sociopaths aren't aware of this?

Update: I find I am not the only person who thought of the Willie Sutton analogy. And the article highlights, for those who might be tempted to think that this is only wild conservative accusation, that James Carville is saying the same thing.


There are good things about regulation. Conservatives and libertarians don’t like to admit it, but of course it solves some problems. Here’s the thing: there is a law of diminishing returns with regulation. It is great at picking off the low-hanging fruit of incompetent or sly people trying to game the system or deceive the public in some way. Initial regulation is so good that the costs are disregarded as unimportant.

From time to time I receive short rant that circulates on the internet of all the great things about government regulation that conservatives benefit from, such as food and drug safety, medical licensure, labor laws, road safety and the like. James Carville had a whole list of government programs that worked great to counter all the small-government rhetoric. They make a good point as far as it goes. It pays to remember that enforceable standards, even those dreaded top-down enforceable standards, often do a great deal of good.

It is a very natural reaction go back for another bite at the apple. And that is an excellent image, because sometimes many bites at the apple are productive. Yet eventually, regulation comes up against the core of the apple – things that neither government nor informal community agreement can eat or digest very well. To increase regulation at that point– to make people keep taking bites - with the hope of realising the same gains as one got at the beginning is a waste of energy. It is here that David’s comment on Heresies a few posts ago “The leading cause of problems is solutions,” comes into play.

That’s all very general and not very original. This observation about government intervention is not a bold new approach, it is a principle that those who govern need to be reminded of constantly. Everyone knows that red tape, whatever it is, is a bad thing. The problem is noticing its creation. What is the cost/benefit analysis? What might come back to bite us in a decade?

Yet there is a second problem, well-known in Washington and other capitals but conveniently not mentioned. It is the exceptions and exemptions to regulations that cause so much mischief. Politicians love to identify something that has gone wrong and preen before the public with declarations that We will make those bastards in the insurance/auto/pedicure industry pay so that we don’t have any more of this going on. They’ll find they messed with the wrong hombre. But as the legislation goes forward, sectors of the industry are quietly exempted at the behest of one Senator or another, responding to pressure from one lobbyist or another. Some of these exemptions make sense. I work at a psychiatric hospital which is exempted from some requirement that medical hospitals have, because they don’t apply to us and create a lot of cost and headache with no patient benefit. All of these exceptions can be made to look as if the make sense. Laws that say Coke has to jump through this hoop but Pepsi doesn’t are transparently unfair, and no one wants that reaching the news. So they disguise the exceptions as something that looks nice. Everyone who lends money for mortgages has to adhere to Rules 1-10. But if you are lending to lower-income people you are exempt form Rules 3 & 7; lending in distressed areas exempt from 6 & 7; lending to people under 27 exempts you from 3 & 6; if you lend across state lines from Delaware, you can ignore all three. Your type of company gets a competitive advantage, sometimes a large one, over other banks/manufacturers/minigolf courses. It doesn’t matter to you if the whole industry is made less efficient, so long as you keep your advantage.

The name Countrywide may come to mind.

It’s fun to blame lobbyists, but what would you do? Your client has been playing by the rules, but the new rules will put her out of business, in favor of one of Chris Dodd’s friends who gives him cool stuff. Your options are to blow the whistle, seek a similar exemption, find a new exemption, or buy your own Senator.

And when it all blows up, it is not a problem for Senators, because they get to call for more regulation. Which means more exceptions, which are very lucrative. The national debate is We need to regulate (control) these bastards versus Government needs to bug out and let the market work. That’s a very good discussion to have, but it’s not the one congress and lobbyists are having behind the scenes. They are calculating chances of passage, and whether they need to put their energy into passing/blocking the legislation or creating some carveout or loophole.

We want to see these things as a clear choice. But lobbyists, advocacy groups, and legislators have an interest in making things murky to each other to get what they want. Congresswoman X wants to get something in that makes one industry happy without ticking off a related industry enough to yelp. The industry lobbyists want to make it as expensive as possible to oppose them and easy as possible to go along, even reluctantly, so they get Congressman Y to add in an exemption that clouds the issue.