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  • Regulatory capture is normal, and that’s the problem

    Posted by Chicago Boyz Archive on October 3rd, 2014 (All posts by )

    portraits of Julian Sanchez and Megan McArdle

    You must read this excellent piece by Megan McArdle, It’s Normal for Regulators to Get Captured. “regulatory capture is not some horrid aberration; it is closer to the natural state of a regulatory body.”

    This is true. That is why the entire modern administrative state has to be re-thought, re-configured and replaced. It does not work, it never worked, it cannot work.

    The regulatory state is the defining feature of the Industrial Era, America 2.0 state. It needs to be shut down, wrapped up and replaced.

    This does not mean return to the law of the jungle. It means making laws that actually align incentives with desired ends, as imperfect as that always is.

    Fortunately the entire Industrial Era legacy government in the USA is at this very moment visibly failing to accomplish its goals, while costing more and more, and becoming increasingly heavy handed and punitive. Incumbents and government employees are OK with this. Everyone else hates it.

    The motivation to do a once-in-a-century overhaul is growing. The point is to be there with better ideas when it happens.

    America 3.0 will, we hope, have a very different regulatory framework.

    Luigi Zingales

    The superb book by Luigi Zingales entitled A Capitalism for the People: Recapturing the Lost Genius of American Prosperity addresses the issue of regulatory capture, and how it is getting worse, rapidly, in recent years. One criticism of the book is that Prof. Zingales has good reform proposals scattered through the book, but they are never pulled together or fully thought out. As Walter Russell Mead observed in his short review of the book: “At times, the policy discussion seems a bit disjointed.” Yes.

    Another reviewer noted: “Zingales is desperate to save competitive, meritocratic capitalism from the clutches of crony capitalism. And in this desperation, he suggests dozens of policy proposals.” Someone needs to go through and pull out all the policy proposals, and write it all up and post it somewhere. (That someone might be you: Used copies of the book are only $.25 on Amazon, so grab one.)

    Perhaps Prof. Zingales next book will be a developed list of policy proposals to help us overcome the problem of regulatory capture.

    In the meantime, we are developing ideas on alternatives to the current regulatory model with its inevitable capture by incumbents, including some ideas derived from Zingales.

    Stand by.

    Incidentally, Prof. Zingales is on the faculty at the University of Chicago Booth School of Business. The University of Chicago, and the Graduate School of Business — the “GSB” as it used to be called — have a long history of engagement with this problem. One of the first people to investigate what regulatory agencies actually did was George Stigler, who was on the faculty of the Economics Department and the GSB.

    Stigler

    Stigler began examining this question in the early 1960s. A seminal essay was “What Can Regulators Regulate? The Case of Electricity,” George J. Stigler and Claire Friedland, Journal of Law and Economics, Vol. 5, (Oct., 1962), pp. 1-16. Stigler’s essays on this subject were compiled into The Citizen and the State: Essays on Regulation, published in 1975.

    Citizen and the State

    I got my hands on a copy of this when I worked at the GSB Development Office in 1986. Stigler won the Nobel prize a few years before in 1982 and they gave away copies of his books to alumni, and there were a few leftover copies in the basement. (Yes, I asked if I could have it before I took it.) Some of the math was beyond me. But the basic idea reinforced my insight, from reading The Logic of Collective Action: Public Goods and the Theory of Groups by Mancur Olson a few years earlier, that the regulatory state was going to grow like a cancer and destroy our freedom and prosperity — and I saw no way to stop that from happening.

    I now think it is in the process of self-destruction, on one hand, and being superseded and transcended by emerging technology. But we can’t yet know how it will play out.

    Incidentally II, Megan McArdle’s columns are reliably good and should be on your regular “to read” list if she is not already.

     

    14 Responses to “Regulatory capture is normal, and that’s the problem”

    1. Michael Hiteshew Says:

      I don’t know how many Leftists you’ve had conversations with, but to them the idea of something NOT being regulated is tantamount to saying, “Just kill me, already, with your toxic waste and dangerous products and destroy the environment while you’re at it!”

      Also, many of them are fed Marxism all through school, and are taught government is the only trustworthy and benign source of power and authority. All you need is the right people, smart people, educated people, people who give good speeches and say the right things. They’ll fix everything. You’ll see!

      No amount of pointing to things that don’t work or are actively destructive, or where historical examples demonstrate that what they believe doesn’t work seems to have any effect whatsoever. That’s been my experience.

    2. Lexington Green Says:

      You have to tell them about how evil, greedy businesses are using the government to rip them off.

      That may penetrate the thinking of a few of them.

    3. MikeK Says:

      I just had another example of the change of heart by medical students concerning government medicine. Ten years ago, I was asked by students to be their adviser for a group interested in single payer. They thought I was for it after some conversations. Yesterday, one of my students told me he is the president of a health policy study group and asked if I would give them a talk. This was after a discussion of Obamacare, which I loathe. It’s interesting to watch the loss of enthusiasm for government medicine among this very idealistic group in ten years.

      Medicine is surely the most regulated industry in the country and the incompetence is breathtaking.

    4. Michael Hiteshew Says:

      Incumbents and government employees are OK with this.

      The motivation to do a once-in-a-century overhaul is growing. The point is to be there with better ideas when it happens.

      I don’t have to tell you those two statements are contradictory, since it is the government employees who do the overhaul. My hope is that we don’t have to experience economic &/or social collapse before that can happen.

      Has anyone here heard a viable presidential candidate talking in those terms? I haven’t.

    5. Whitehall Says:

      This is not what I’m seeing at the US Nuclear Regulatory Commission.

      There are three players here – the nuke plant owners, the anti-nuclear activists, and the NRC. The anti’s contribute nothing but noise, frivolous law suits, and deliberate economic warfare against the nukes. Their goal is the elimination of nuclear power in the US and elsewhere (through export controls.) They can’t win in Congress as they don’t have public support for shutting down the industry so they try bureaucratic subterfuge.

      The nuke owners just want to get on with making cheap electricity and paying off their mortgages. Building new reactors would be nice but risky so the utilities probe but don’t push. Nukes are also a hedge against carbon taxation.

      Congress created some perverse incentives. 90% of the NRC budget comes from billing the regulated entities for reviewing their applications at $279 an hour http://www.nrc.gov/reading-rm/doc-collections/cfr/part170/part170-0020.html.

      A typical NRC engineer gets paid about $120k base salary so do the math.

      So where there was one NRC resident inspector per plant site, since the billing law came into effect, one will find 3 to 5 inspectors plus an admin person, all in office space provided at utility expense.

      While we’ve continued to refine nuclear safety of our plants, the fundamental technology is reaching its limits and marginal improvements are increasingly expensive, as modeled by Zeno’s Paradox.

      I don’t see regulatory capture of the agency by the industry, I see government parasitism.

    6. Lexington Green Says:

      “Has anyone here heard a viable presidential candidate talking in those terms? I haven’t.”

      Not yet.

    7. Lexington Green Says:

      “I see government parasitism.”

      That too. It’s not exclusive.

      Activists capture regulatory agencies sometimes, too.

    8. Whitehall Says:

      The anti-nuclear activists have been able to use the NRC administrative law procedures to add costs without value so there’s some of regulatory capture by the antis at the NRC.

    9. Death 6 Says:

      Regarding Nuk power. If the activists are preventing new entry into the market without the current regulated owners having to buy off the regulators or the politicians who keep regulators expanding, why would they expend on the effort. They get the benefits of capture (barriers to entry and guaranteed monopoly profits without the costs, other than the dead weight losses that are paid by consumers. In effect they have all the economic rents with reduced lobbying costs. Activists are generally active in every case of regulation. The more they drive up entry costs, they serve the same function as capture.

      Where is the funding coming from for the activists. How about overseas petroleum producers? Can these activists and the captured regulators kill the industry? Sure, it just takes competition from a less regulated substitute. You can see similar capture with regards to the restrictions on new refineries as well as on new nuk generation plants.

      I trying hard to think of significant areas of regulation where capture is not operative. Based on the rational outcome in the struggle between the defused general interest versus the significant concentrated interests of the regulated, activists and bureaucrats, don’t we get decisions in the interests of the concentrated interests? The only thing I see information technological advances doing to the basic incentive structures in regulation is expand the practical scope of regulation into areas that are simply too difficult to monitor at present. The expansion of regulation (may I say explosion of regulation) is the rapid increase in information technology which also leads to concentration of political power.

      Mike

    10. Veryretired Says:

      Whether it’s favorable regulatory capture or capture by the “antis”, as is very much the case with EPA And the NRC, the fundamental issue is the massive warping effect that these endless state intrusions cause.

      Large amounts of money, time, and managerial energy are wasted attempting to comply with page after page of intricately complex regs, requiring corporate lawyers who must approve every new step, no matter how trivial.

      It would be utterly fascinating to somehow visit an alternate universe in which the 19th and 20th centuries weren’t convulsed by the repeated wars which so empowered the collectivist state, and observe what additional innovative steps might have occurred in a society which was not crippled and misshapen by the ever increasing demands of internal and external collectivist threats and crises.

      The unseen damage of any statist/authoritarian system is in the countless times that energy and effort that could have contributed to some positive step toward making people’s lives better and healthier are instead diverted to some statist project, military or otherwise, which only serves to enhance and expand some state cadres’ power and influence.

      The poisonous influence of collectivist ideology, and it’s debilitating effects, cannot be overstated.

    11. vxxc2014 Says:

      It is not self-destructing as in going away nor – and this is the inescapable main point – are the people who have burrowed their way into it. Nor their political masters, nor and especially the Power Lawyers who are our true government in terms of POWER.

      Politics being POWER.

      However the Regulatory and Blue State is morphing into an actually more true technocrat friendly state as we speak.
      It’s simple Crony Corporatism, you hire professionals instead of idiot GS-11s and below.

      For instance ACA Health Care -once the crony idiots of Computer Associates was replaced by the Professionals of Arthur Anderson -is up and running smoothly. This is because it has been handed over to competent corporations, for instance Mercer [in fact Marsh McLennan] is a major underwriter of ACA policies. They got the taxpayers end up front. The problem here is the people remain the same criminals, Mercer is getting it’s end up front but the marks have signed out of pocket costs of up to $1 Million. The underclass aren’t the target, the middle class will be. The Hub by the way does work as advertised, every bit of data on the population in existence is indeed in there, for ACA is all about MONEY.

      Also the VA has now been turned over to McDonald, which means P&G, which means TEVA from Israel. TEVA already got caught and fined for hand in the Medicare Jar. MONEY.

      What were developing into is a less chaotic, free-for-all looting criminal over-class that we have now into more professional and disciplined criminal elites. We’re making the jump from street gangs to organized crime.

      That’s your transformation.

      However the smoother running corporatist model will still inherit the same problems, there being only one worth mentioning: MONEY. Or the lack of it and DEBT. The DEBT will have to be settled.

      And it will be settled on our backs, or our graves.

      Our elites are criminals. It’s not complicated. But we can’t think or policy propose our way out of the predicament.

      It’s not by the way the “once-in-a-century overhaul” it’s the 150 year housecleaning.

      Or lay down and die.

    12. vxxc2014 Says:

      In fact our economy’s regulation is moving in many areas already into say 1934 – 1935 Germany, the golden age of the technocrat is almost at hand. We simply need to complete the transfer of government [horrifically incompetent] to Corporatist Competence [how ACA was saved] before something either sets off the peasants or the money crashes so hopelessly the enterprise of America.gov.inc.com can’t be saved.

      In many ways were fortunate that they’re so venal, so weak, and so overextended. If this were the New Deal Crew I’d get my entire extended family out of America for there’d be no hope.

    13. ErisGuy Says:

      So much of life seems to be a struggle to find a trusted third party.

    14. Exasperated Says:

      My forbears arrived in Chicago just prior to 1850, so I was born knowing that government is a form of racketeering, albeit sanctioned and necessary. It always has been, from the time that the first prehistoric elders cajoled/coerced the first chumps to build the first stick stockade to keep the live stock in and the two legged and four legged predators out. Add graft, nepotism, protection rackets, featherbedding, and voila, you have Chicago.
      Since this isn’t news or even unique to Chicago, the founders realized this, of course, and that’s why the checks and balances, the limits, and the decentralization of power. They understood that human nature “is what it is”.
      That said; there is a profound difference between then and now. I recall the names and faces of the Chicago pols of my childhood, and yes, they were crooks, and greedy, but not nearly as perverse, malignant or stupid, as today’s coiffed, and credentialed suits. They mostly knew better than to kill the golden goose, or eat the seed corn.