Tuesday, August 13, 2019

Four Laws: Regulatory Capture

There are, I think, Four Laws, scientific principles, if you like, that need to be understood in relation to all proposals for More Government.

And nobody wants to be against settled science. Oh no. That's superstition and bigotry!

The First Law is that socialism cannot work because it cannot compute prices.

The Second Law is that the economy cannot be directed by the Man in Washington.

The Third Law is the law of regulatory capture. What on earth is that?

The idea of economic regulation is that the chaotic capitalist economy needs rules and regulations to keep it from ripping off consumers and polluting the land. So let's make a law, and set up a regulatory agency and staff it with experts. And make the capitalists conform to sensible rules, especially related to prices, to keep them from looting and plundering.

But there's a problem, and it is associated with economist George Stigler. The problem is even mentioned in the authoritative La Wik. It is called "regulatory capture."
Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
In other words, the corporations getting regulated learn how to game the system. They learn how to make friends with the regulators, how to get them to understand their world view, to sympathize with their problems, and even come to live in the same world as the regulated industry. Let's go back to La Wik for a more expansive description of the situation.
For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to the actions by interest groups when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest groups are implemented.
Look, let's ease off from the conspiratorial view of the big bad capitalist or the evil and corrupted deep-state administrative swampie. But people instinctively act in what they think is their self-interest. It's just natural that the folks getting regulated are going to have a life-and-death interest in the regulatory rules, and they are going to want those rules to be forgiving. And the regulators are mostly just administrative place-men -- of the kind that we have recently come to know in the Trump Russia Collusion game -- and their natural instinct is to play it safe, opt for a quiet life, and make sure that they don't risk their pensions.

We see the phenomenon of "regulatory capture" all around us. The green energy industry is perhaps the most egregious, because its interests align with our globalist elite. Everyone, from climate scientists to wind-farm manufacturers and owners, to electric car manufacturers, is in on the game, with subsidies and grants for all. But we've already had a couple of mega-failures with renewable energy, including a mega-blackout in South Australia where the swampies are now suing the renewable energy producers for the blackout. Imagine! The greenies force a crazy technology on the electric industry and then are shocked, shocked when it turns out that the subsidy bottom-feeders aren't quite up to snuff. And now there has been a major blackout in Britland involving renewable resources.

Then there is the health-care industry that is regulated up the ying-yang, but whose pricing is almost impenetrable. Why be surprised? The health-care industry must try to stay in business while being regulated by the government, forced to provide low prices to Medicare and Medicaid, having to deal with insurance companies, and last but not least, having credentialism and licensing up the yahoo for all its physicians and nurses. You don't think that the health-care industry is right in the middle of all political initiatives related to health care? Imagine if the health-care industry were not organized like an electric utility but instead like WalMart, with weekly specials and bargains and loss leaders and I know not what. How about this special: Free laser surgery with your colon surgery! Well why not? While you are recovering from cancer surgery why not get your eyes done?

Actually, what you have probably noticed is that the regulatory capture problem is not just a matter of a regulated industry corrupting its regulators. That, you might say, is the case of "pure" regulatory capture.

In many cases the regulated industry is part of a political movement. The politicians and the activists determine on some vital project that is going to cure cancer or save the planet. But what do they know? They must find the chaps with the business chops and the technical know-how, and co-opt them into the movement. So the idea that the industry is being rigorously regulated and kept honest is a lie from the get-go. The industry instead is a bunch of grifters and subsidy hounds that are twice as smart as the activists and politicians, and know how to milk a cow. Think of chaps like Elon Musk, who seems to have the rare talent of showing up wherever there are big fat subsidies to be lapped up. And know that for every public figure like Musk there are a hundred mini-Musks below the radar.

I worked for many years at a consulting engineering company that specialized in serving public (i.e. municipally-owned) electric utilities. Its first Managing Partner was a guy that was an activist in the public power movement in its hey-day in the 1930s.

In other words, regulatory capture is often not just the innocent corruption of a regulatory agency and its bureaucrats, but a deliberate act of loot and plunder by our modern equivalents of Vikings and Mongols, the politicians and the activists.

Nobody is saying that there shouldn't be laws regulating business and transactions between people. That we should just shrug our shoulders at "externalities" like air and water pollution. But the point is to try and diminish negative externalities by use of the price system -- such as by taxing pollution -- and the ordinary legal system -- by suing people that have harmed you -- rather than hand it off to a regulatory agency and its bureaucrats and their pals in the industry they are regulating.

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