Archive for the ‘Regulation’ Category

George Will (Washington Post) has an interesting essay on “progressivism’s ratchet.” His “Cupcake Postulate” illustrates the dynamic: federal school lunch subsidies lead to regulation of food content,which justifies the regulation of competing foods from vending machines, and—finally—whether cupcakes sold at bake sales meet federal standards. Government authority spreads—“the cupcake-policing government” finds “unending excuses for flexing its muscles”– and soon we enter a world where officials exercise little discretion or forethought.

Swollen government has a shriveled brain: By printing and borrowing money, government avoids thinking about its proper scope and actual competence. So it smears mine-resistant armored vehicles and other military marvels across 435 congressional districts because it can.

For those interested in the connection between the regulation of school bake sales, police force militarization, and skepticism regarding foreign policy, Will has some worthwhile insights.

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Charting Regulation

Much of the work I do is in the area of regulation. It is always a challenge to convey how much the regulatory state has grown (yes, I know, we can count the pages in the Federal Register). Two scholars as the Mercatus Center (Patrick McLaughlin and Omar Al-Ubaydli) have developed RegData, a wonderful tool for measuring the size and scope of the regulatory state. The updated version of the program (currently in beta) allows one to chart the growth in regulatory restrictions between 1997 and 2012. For example, here is the chart representing the growth of regulations on an economy wide basis:


One can also examine regulations on specific industries and compare industries. For example, here is a chart on the growth of restrictions in (1) Primary and Secondary Education and (2) Scientific Research and Development Services.


As you will note, the charts do not include a legend—a flaw that I hope can be remedied. Here is a simple question on the above chart: which line represents education and which line represents scientific research and development? Hint: in one of these two sectors, the US a world leader. In the the other, it is a laggard. I wonder if we could move toward developing some testable hypotheses?

For a discussion of RegData 2.0, you can see a piece by Patrick McLaughlin at The Hill.

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The “license Raj” is an epithet often used for India’s byzantine code of rules and regulations on businesses under the central-planning system finally dismantled in part in the 1990s. The Economist applies the term to the United States, which buries entrepreneurs under layers of federal, state, and local red tape. According to the Competitive Enterprise Institute, the gross cost of federal regulations alone amounts to about $15,000 per household per year, and that doesn’t include the accumulated debt of lost growth due to regulation, which may be much higher. And none of that includes the costs of state and local regulations, such as occupational licensing, which has increased dramatically in the last 60 years, now covering up to 35% of the workforce.

The Economist cites thumbtack.com surveys showing that small business owners care more about the burden of regulation than taxation (about two-thirds of them say that they pay their “fair share” in taxes, as opposed to more or less than their fair share). This preference comes as no surprise to me. Apart from the soul-deadening effects of endlessly parsing legalese and filling out form after form, regulation also tends to substitute the grand (or petty) design of a bureaucrat or politician for the price signals the market provides. When regulation limits competition under the pretense of ensuring quality for the consumer, incumbent producers benefit, but potential upstarts lose, and so do consumers. There is a net cost to society. When local governments require construction companies to obtain permits for every little thing they do, rather than simply requiring them to post a bond and pay for any damage they may cause to local infrastructure or neighboring buildings, less desirable construction happens, and the costs of regulatory compliance are also pure loss.

The thumbtack.com ratings of state regulatory environment correlate highly with both Chief Executive magazine’s survey of CEOs on state regulation and with the regulatory index found in Freedom in the 50 States. CEOs of large companies and small-business owners really want the same thing: a streamlined government that works. We’re not as bad as Argentina or Belarus, but here in the U.S., we suffer from plenty of kludge, and everyone pays the price.

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In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Dodd-Frank was a massive piece of legislation (the Economist quipped that it was too big not to fail). One of the key criticisms was that so much of what Dodd-Frank aspired to do was delegated to rulemaking in the regulatory agencies. Ultimately, whether Dodd-Frank would prevent another financial crisis would depend on the quality and compatibility of some 398 rules.

One of the many targets of Dodd-Frank was the securitization process. In the days of traditional banking, banks financed their loans with deposits and then retained those loans until they matured (the “originate-to-hold” model). Because they had skin in the game, they had incentives to lend only to credit-worthy borrowers. But increasingly, this model was replaced by the “originate-to-distribute” model wherein banks would sell their loans to other parties that would, in turn, pool them and sell shares to investors (the securitization process). The securitization process changed the incentive structure. Lenders no longer had skin in the game and were thus far less interested in the question of whether borrowers could document their ability to meet their obligations. (more…)

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Roger Koppl argues this week at ThinkMarkets that “Income inequality matters.” He thinks it matters so much that he says it twice. He believes “Austrian,” pro-market, economic liberals should be speaking up more on this “central issue.” I think Koppl could not be more wrong. The issue deserves all the inattention we can muster for it.

The problem I think is not Koppl’s motives. He rightly says that we should “watch out for ways the state can be used to create unjust privileges for some at the expense of others.” He is certainly right about that. He argues that unjust state policies may be skewing market results in such a way as to increase inequality. He may be right about that. But he is wrong in suggesting that we ought therefore to be paying attention to income inequality. We ought therefore to be paying attention to those policies. Whether they produce greater inequality is neither here nor there.

Koppl gives four examples: (i) policies that privatize profits and socialize losses, (ii) bad regulation, (iii) collapse of the rule of law, and (iv) public schools. I can certainly join Koppl in a hearty wish that we not only attend to these unwarranted policies, programs, and tendencies, but that we do so with a degree of urgency prompted, in part, by their effects on the poorest and most vulnerable among us. But talking about inequality is precisely a distraction from doing so.

In a great paper of a few years ago, Harry Frankfurt argued that “Egalitarianism is harmful because it tends to distract those who are beguiled by it from their real interests.”* Frankfurt thought that focusing on equality was actually pernicious because it distracted us from attention to real harms, of which inequality is at most an indicator. And he was right. It may well be that, for example, the evisceration of the rule of law results in greater income inequality. But it also might not. Whether or not it does so, however, it is unjust, and it deserves our attention. Similarly for the increase in moral hazard and regulation, to say nothing of the deplorable system of public education. All of these need attention, and one prime reason they do so is because of their effects on those least capable of circumventing their evils. If we care about the poor, what we ought to care about is bad policy, not indicators that may or may not have anything to do with policies that are making people worse off. As long as we are worrying about income inequality, we are worrying about the wrong thing.

* In “The Moral Irrelevance of Equality,” Public Affairs Quarterly, April 2000.

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The standard account of regulation focuses on problems of market failure. One form of market failure stems from information scarcity or informational asymmetries. Regulations can deal with this kind of market failure by requiring information disclosure using standard metrics, often in a form that is assessable to relatively unsophisticated actors.  This form of regulation can be quite useful in promoting mutually beneficial exchanges between consenting adults.  Example: the Federal Trade Commission’s Used Car Rule requires dealers to post a buyers guide on used cars that inform the customer of basic information (e.g., is it being sold “as is” or is there a warranty). Presumably, this reduces informational asymmetries and facilitates exchanges.  Regulation by information can also reduce more intrusive expressions of government power. For example, the Securities and Exchange Commission requires firms to disclose their financials so that potential investors can make informed decisions. It does not, however, bar firms with a higher probability of bankruptcy from entering capital markets. Regulations facilitate exchanges and regulation by information does so with minimal state intrusion.

Paul Krugman has a piece today in the NYT (“Friends of Fraud”) decrying the GOP threats to block the confirmation of Richard Cordray as head of the Consumer Financial Protection Bureau created under Dodd-Frank.  Having lost the battle over Dodd-Frank, they want to strip the new bureau of its independence and are using the appointment to leverage the changes in question.  Krugman’s take:

What Republicans are demanding, basically, is that the protection bureau lose its independence. They want its actions subjected to a veto by other, bank-centered financial regulators, ensuring that consumers will once again be neglected, and they also want to take away its guaranteed funding, opening it to interest-group pressure. These changes would make the agency more or less worthless — but that, of course, is the point.

How can the G.O.P. be so determined to make America safe for financial fraud, with the 2008 crisis still so fresh in our memory? In part it’s because Republicans are deep in denial about what actually happened to our financial system and economy. On the right, it’s now complete orthodoxy that do-gooder liberals, especially former Representative Barney Frank, somehow caused the financial disaster by forcing helpless bankers to lend to Those People.

Elizabeth Warren (the policy entrepreneur who fought for a new consumer protection agency) was an expert in bankruptcy (before winning the Senate race) and she documented the large percentage of prime borrowers who were directed into subprime vehicles (I don’t recall the exact figure, but I believe it was around 25 percent). Others signed on to mortgages they didn’t understand, in part, because the terms of the agreement and the consequences were sufficiently obscured by the issuers. The problems of information asymmetry were significant, particularly for the less sophisticated borrower.

A few points of clarification: I think Dodd-Frank was bad legislation for a host of reasons that are beyond the scope of this posting. I do not think that the evil mortgage broker exploiting the hapless rube was the source of the financial crisis. Nor would I agree with Krugman’s portrayal of the crisis. There was so much more going on in this tale of crony capitalism, transfer-seeking, and failed regulation. But there is good evidence that many (not all) borrowers were exploited in ways that cost them dearly. I am at a loss to understand why the regulation of the kinds of mortgage instruments that are sold and the information provided to borrowers is so objectionable, particularly when (as noted above) it can facilitate functioning markets.

Quick question to the skeptics: when is the last time you read the information that was provided before you clicked “accept” and upgraded to the newest version of iTunes or installed the newest fix to whatever problem was discovered in your word processing or spread sheet program? Do you know what you agreed to? Now imagine a relatively unsophisticated borrower signing off on a 20-page document, having concluded that the mortgage broker told them all they needed to know about the agreement.

Bottom line: even those who support market governance can make  a compelling case for regulation, particularly when it involves the provision of information that facilitates voluntary exchanges.

Question: is there a credible argument to be made against the Consumer Financial Protection Bureau?  Note: the claim that all regulation is bad is not a credible argument.

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Regulating the Wrong Things?

As the debates over regulating guns continue to gain speed in the wake of the mass shooting in Connecticut, attention has turned (as one might expect given the circumstances) to assault weapons. One problem is the difficulty on defining one’s terms. As Erica Goode explains in an enlightening piece in the NYT (“Even Defining ‘Assault Rifles’ is Complicated”).

There is general agreement that an assault rifle is a semi-automatic with a detachable magazine (for those who have not spent much time around firearms, semi-automatics fire one bullet per pull of the trigger. This distinguishes them from automatics or “machine guns,” which are illegal). But there is any number of semi-automatics with these features that would not fall into the category in question. Thus, we move to additional features:

Those could include features like a pistol grip, designed to allow a weapon to be fired from the hip; a collapsible or folding stock, which allows the weapon to be shortened and perhaps concealed; a flash suppressor, which keeps the gun’s user from being blinded by muzzle flashes; a muzzle brake, which helps decrease recoil; and a threaded barrel, which can accept a silencer or a suppressor. Bayonet lugs or grenade launchers are also sometimes included.

Of course, none of this addresses the action or the caliber of the cartridge, and thus does not speak to the killing capacity of the rifle. This small fact did not seem to bother the authors of the Public Safety and Recreational Firearms Use Protection Act of 1994, which defined an “assault weapon” as a semi-automatic rifle with a detachable magazine that had two or more of the above listed features.  As critics might note, this was regulation by cosmetics.

Last weekend, I attended my first gun show outside of Milwaukee (largely as an anthropological experience). There were several tables selling kits that would allow one to add some of the features described above. Many rifle owners like to customize their guns. I can’t imagine that anyone who bought an rifle without the features listed above would have any difficulty adding the desired components in his or her basement.  I would suspect that even if by some miracle Congress reinstated the 1994 legislation, it would not constitute much of a barrier to those who want to customize their firearms.

At the same time, I can’t believe that new regulations would have much of an impact on the murder rate given the simple fact that most firearm-related homicides are committed with handguns.

The FBI Uniform Crime Reports inform us that in 2011, there were 12,664 murders in the United States. Of this sum, 6,220 were committed with handguns and another 323 with rifles. By way of comparison, 1,694 were committed with knives, 496 with blunt objects, and 728 with “personal weapons” (a category that includes hands, fists, and feet). In case you are interested, 2011 was not anomalous. I took the FBI data from the past decade and produced the following graph:

Handguns v Rifles

Should there be stricter regulation of handguns? This is a difficult question to answer with precision for two reasons. First, the FBI (to my knowledge) does not report data on what percentage of the handgun-related murders were committed by individuals who had acquired their weapons legally. Second, the regulations vary dramatically by state. In Connecticut, one has to attend a handgun training course, get fingerprinted, and go through a rigorous background check before one can purchase a handgun (certain categories of individuals—felons, those who have been hospitalized for mental illnesses, are under restraining orders, or were received a less-than-honorable discharge from the armed forces—are automatically excluded). In other states, the regulations are far less demanding.

Bottom line: while the current debates have been animated by “assault weapons,” the empirical evidence suggests that rifles (regardless of their cosmetics) are not the core problem.  Of course, a cynic might suggest that this fact only increases the likelihood of a new assault weapon ban.

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