Wednesday, August 1, 2012

The United States: An Over-Regulated Nation?

The British journal, The Economist, is an excellent publication that provides its readers with coverage of an incredibly broad range of topics. One of its most frequent subjects is the health of the US, both politically and economically. The concern for our welfare is appreciated—we do need all the help we can get. The topical discussions are generally balanced and quite good, but there are areas where the conservative economic bent of the magazine seems to go a bit over the top: government regulation—business unfriendly almost by definition.

An article on big government and the differing views on the government’s role espoused by the two presidential candidates provided us with this wonderful chart.

The left panel illustrates a critical point about government jobs: the number of government workers has been following the population growth; it is the fall in the number of workers in the private sector that makes the government sector look larger.

The article then segues, awkwardly, into the evils of regulation. In so doing, it provides the informative right panel with the breakdown in regulatory employees by area of focus.

"Regulatory staffing has risen by 14%, or 34,000 people, since 2008, according to figures compiled by the Regulatory Studies Centre at George Washington University. More than half that increase, however, was within the Homeland Security behemoth, in particular immigration and border protection....areas where conservatives have clamoured for more, not less."

A 14% rise in four years is not all that large considering that most went into Homeland Security. Although the numbers are a small fraction of the total, there is growth in the positions devoted to regulating banking and businesses. The article is sure they are up to no good.

"Staffing levels at regulatory agencies have ballooned, and they churn out more and costlier rules than their predecessors."

The journal provides us with a lesson in regulation philosophy in another article: Over-regulated America.

"The problem is not the rules that are self-evidently absurd. It is the ones that sound reasonable on their own but impose a huge burden collectively. America is meant to be the home of laissez-faire. Unlike Europeans, whose lives have long been circumscribed by meddling governments and diktats from Brussels, Americans are supposed to be free to choose, for better or for worse. Yet for some time America has been straying from this ideal."

That is a curious statement. Shouldn’t we want to learn from experience and teach ourselves how to choose the "better," and, hopefully, avoid the "worse." Are they suggesting that economic theory should add "creative randomness" to "creative destruction" as an attribute of the ideal economic system?

"Two forces make American laws too complex. One is hubris. Many lawmakers seem to believe that they can lay down rules to govern every eventuality."

"The other force that makes American laws complex is lobbying. The government's drive to micromanage so many activities creates a huge incentive for interest groups to push for special favours. When a bill is hundreds of pages long, it is not hard for congressmen to slip in clauses that benefit their chums and campaign donors."

The first statement makes a valid point: one cannot anticipate all events. But what do you do with the events that have already occurred? Does not the diligent regulator have to update regulations to insure that a new unanticipated event has an appropriate response associated with it? Consider airline safety. There are presumably new situations that occur as airline traffic grows and new technologies are introduced. Shouldn’t one expect regulation to grow and become more complex as the industry grows and becomes more complex?

The second point seems to be suggesting that a good piece of regulation might become unworthy of legislating if someone slips in a benefit for a sponsor. While it is correct that each new addition increases the complexity, it does not follow that the regulations are thus rendered useless.

Complexity seems to be the major gripe. Mainly because businesses don’t like complexity—unless you are a banker and it is profitable to befuddle a client.

"Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too....But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929."

But isn’t it possible that the world of finance is 23 times more complicated than it was in 1929? Or, in other words, have financiers found 23 times more ways to cause trouble? Perhaps Dodd-Frank needs to continue growing?

The author of the article pleads for simplicity in hopes of creating a more business-friendly environment.

"....all important rules should be subjected to cost-benefit analysis by an independent watchdog. The results should be made public before the rule is enacted."

"All big regulations should also come with sunset clauses, so that they expire after, say, ten years unless Congress explicitly re-authorises them."

In regulating the airline industry, for example, who knows enough about the issues other than the industry and the government agency involved in the regulation? Where would you go to find an independent watchdog? And would one really want to refight healthcare legislation every ten years?

The author then comes to this astonishing conclusion:

"Far better to lay down broad goals and prescribe only what is strictly necessary to achieve them. Legislators should pass simple rules, and leave regulators to enforce them."

What would be a broad rule for the airline industry: Try not to bump into anything while in the air? When I climb on an airplane and something is found to not be working correctly—an indicator light may have malfunctioned—I want a team of experts to have considered all the possible issues associated with that malfunction, and I want a specific response to have been mandated for the pilot and crew. I don’t want somebody who might be in a hurry to go home to be in the decision loop and assessing risks. Make the regulations as complicated as you wish—please!

When I go to my healthcare provider now and report a set of symptoms, a protocol is initiated that has been determined by a set of experts using past experience. That protocol defines a progression of tests and procedures that has been defined to most expeditiously figure out what the cause of the symptoms might be. View this process as a form of regulation. I am much more comfortable with this approach than having to depend on whether or not an individual physician is having a good day, or if he/she might make a good guess.

Let us praise the regulators! They receive little thanks, but they are desperately needed.

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