Reasonable regulation

Friedrich Hayek wrote, “In no system that could be rationally defended would the state just do nothing. An effective competitive system needs an intelligently designed and continually adjusted legal framework.” Government needs to be simple. Every regulation should be subject to cost benefit analysis; it must produce a net benefit or it should not be enacted.

When government imposes costs on "business" it is passed that cost on to the consumer. Regulations should be designed with performance standards in mind rather than design standards and there should be fewer rules and more common sense. Rules should be clear enough for people to understand because we people are confused they do nothing.

Some people dislike the cost-benefit approach and instead embrace the "precautionary principle." This is silly. The basic idea is to impose a margin of safety and impose heavy burdens on those who would impose risks. In its stronger forms, it means that people cannot go forward with any activity or product until it be shown it is perfectly safe. The precautionary principle is paralyzing and self-defeating.

No choice is risk free. We need to make choices.

All these insights came from an interesting book I just finished reading about the future of government. I think both conservatives and liberals should read it.

Posted by Christine & John at May 6, 2013 11:34 PM
Comments
Comment #365447
Simpler government arrived four years ago. It helped put money in your pocket. It saved hours of your time. It improved your children’s diet, lengthened your life span, and benefited businesses large and small. It did so by issuing fewer regulations, by insisting on smarter regulations, and by eliminating or improving old regulations.

Really?

Posted by: Weary Willie at May 7, 2013 4:49 AM
Comment #365448

Weary

I don’t agree with everything in the book. But I think it is interesting that his goals, whether or not you think they have been achieved, as consistent with what I think are mainstream conservative goals.

I have read his other books and they are also interesting. My whole professional life I have been involved in these kinds of systems theories. One of the criticisms of liberalism is that they are not systemic, don’t understand complexity and don’t account for the secondary effects nor the “unexpected” consequences.

Hayek’s critique of big government was exactly that. No officials could ever knew as much as the market. I believe that firmly and from what I read in this book and others I think Sunstein does too.

You no doubt read the chapter referring to Glen Beck. I am not a fan of his, not because I don’t think he sometimes is right, but rather because he sees the world in such stark terms. I think we need to embrace the nuances.

IMO there is a practical alternative to many of the ideological wars. We can agree that market forces, because of their dispersed but aggregated decision making mechanisms and access to information will always be able to make better decisions in a statistical way, but that government needs to provide things like rule of law and direction. As Hayek says (paraphrased), markets need the rules and the stability only a strong government can provide. Governments need the wealth and innovation that only markets give us. There is a dynamic tension between them, but also a symbiosis. Our goal should be balance and good function rather than thinking one side should obliterate the other.

Posted by: C&J at May 7, 2013 5:57 AM
Comment #365450

You don’t see a need for un-necessary bureacracy? Rules for the sake of rules? Reports that nobody reads? Spending Money because it will evaporate at the end of the fiscal year? Filling a position because it’s there?

Well these things are the hallmark of government and that especially includes DoD. In our state we recently got a R governor and legislature for the first time coming in with a lot of talk about a smarter and more effective government. The result: legislation thats pro guns and religion, anti public schools; and operationally business as usual.

Posted by: Schwamp at May 7, 2013 9:35 AM
Comment #365453

The problem, C&J, is that Republicans often ‘say’ they want small business, but they continue to vote for larger business with more regulations in place. We didn’t get to being one of the most heavily regulated economies in the world because of the Democrats alone.

The party that actually supports Hayek’s economic policies are the libertarians… Perhaps you are more libertarian than you are republican? You obviously are not of the anarcho-capitalist ilk…

Why I Am Not A Conservative - F. Hayek

At a time when most movements that are thought to be progressive advocate further encroachments on individual liberty, those who cherish freedom are likely to expend their energies in opposition. In this they find themselves much of the time on the same side as those who habitually resist change. In matters of current politics today they generally have little choice but to support the conservative parties. But, though the position I have tried to define is also often described as “conservative,” it is very different from that to which this name has been traditionally attached. There is danger in the confused condition which brings the defenders of liberty and the true conservatives together in common opposition to developments which threaten their ideals equally. It is therefore important to distinguish clearly the position taken here from that which has long been known - perhaps more appropriately - as conservatism.
Posted by: Rhinehold at May 7, 2013 12:20 PM
Comment #365454
Conservatives feel instinctively that it is new ideas more than anything else that cause change. But, from its point of view rightly, conservatism fears new ideas because it has no distinctive principles of its own to oppose them; and, by its distrust of theory and its lack of imagination concerning anything except that which experience has already proved, it deprives itself of the weapons needed in the struggle of ideas. Unlike liberalism, with its fundamental belief in the long-range power of ideas, conservatism is bound by the stock of ideas inherited at a given time. And since it does not really believe in the power of argument, its last resort is generally a claim to superior wisdom, based on some self-arrogated superior quality
Posted by: Rhinehold at May 7, 2013 12:28 PM
Comment #365456

Whose cost, whose benefit?

We cannot simply assume that if we only regulated the big boys when when it doesn’t cut into their bottom line, that we will be doing what’s in the public’s interests. All too often, corporations have engaged in policies that have ended up becoming a problem for millions of other Americans.

In the Gulf, oil and drilling companies got their way, and that certainly profited them. Did it profit the nation at large when huge swaths of the coast, and large areas of the sea floor were contaminated with oil?

The Pharmaceutical industry made a fortune on COX-2 inhibitors. It was in their interest to keep the terrible side effects of these drugs quiet. That made them money. Did it profit all those people who ended up having heart attacks and strokes because of them?

The Wall Street companies, the banks, the hedge funds, just about everybody made money hand over fist selling people mortgages they couldn’t afford, and selling their debts to each other. Has America profited as much from the consequences of their actions?

My sense, really, is that we ought not to be designing our government around reinforcing the wealth and power of the already powerful. The interests of the public should come first, whether that’s good or bad for the bottom line.

The few should not be able to profit by putting the interests of the many in danger.

Posted by: Stephen Daugherty at May 7, 2013 12:54 PM
Comment #365458
In the Gulf, oil and drilling companies got their way, and that certainly profited them. Did it profit the nation at large when huge swaths of the coast, and large areas of the sea floor were contaminated with oil?

Got their way how exactly? The specific instance you are talking about was a company in violation of existing regulations. How would adding more regulations have helped prevent it?

Now, had they actually gotten their way, they wouldn’t have had to drill so far off shore, in which case such an incident would have been much easier to cap, causing much less damage (if any) to the environment. In effect, it was the decision to push drilling out farther that caused the accident to cause as much damage that it did.

The Pharmaceutical industry made a fortune on COX-2 inhibitors. It was in their interest to keep the terrible side effects of these drugs quiet. That made them money. Did it profit all those people who ended up having heart attacks and strokes because of them?

They had to pay a fortune as well in compensation to those affected, so they lost much of the profit that they made. And further, those drugs went through the FDA to ensure their safety, and those regulations failed. It doesn’t seem like regulation here helped much. What difference could have been done to prevent this from happening?

“Analysis of clinical trial data revealed that there was a significant increase in the rate of vascular events with COX-2 inhibitors compared with placebo; “vascular events” are non-fatal myocardial infarction (MI), non-fatal stroke, and death from a vascular event such as MI or stroke. These results led Merck to voluntarily withdraw (Rofecoxib) from the market in September 2004 and to regulatory authorities imposing black box warnings on the label of celecoxib.[11] Traditional NSAIDs were also found to have cardiovascular risks, leading to similar black box warnings.”

When the side effects were discovered, Merck VOLUNTARILY pulled the drugs from the marketplace. They did not want to put out drugs that hurt people, they were trying to help people. You are making an accusation that they KNEW that the drugs were hurting people and went to sell them anyways, when the evidence does not back up your assertion.

The Wall Street companies, the banks, the hedge funds, just about everybody made money hand over fist selling people mortgages they couldn’t afford, and selling their debts to each other. Has America profited as much from the consequences of their actions?

Again, all of this was regulated and many of the mortgages that were sold to people who ‘couldn’t afford them’ was done because of regulations telling banks that they had to make those loans, most banks are very reluctant to loan money that they will not make money on. But because many of those people who ‘couldn’t afford them’ were minorities, they were not allowed to discriminate against them.

And also we know that the banks didn’t lose that much on those mortgages, they will still backed by real houses that had real value. The real problem came in when they had to mark the value of those mortgages to zero, wiping their ability to loan other funds to other worthy borrowers because of regulations that prevented them from counting those assets on their balance sheets.

The few should not be able to profit by putting the interests of the many in danger.

You keep missing the point of people saying that we need to prevent people from doing that, but we shouldn’t overly regulate to create more harm, as we can see happened in EVERY example you presented. No one is saying we shouldn’t regulate and we shouldn’t protect rights of individuals who might be harmed by a company’s actions. Quit using straw man fallacies and think you’ve been making some point or other…

Posted by: Rhinehold at May 7, 2013 2:31 PM
Comment #365460

Stephen

You did follow the links, right? And you know that the author of those things is Cass Sunstein, President Obama’s regulatory Czar and that the part about the precautionary principle is from President Obama himself?

Once again you are running to the left of President Obama, but your reaction also indicates the problem Republicans might have working with liberals. I write something that fundamentally agrees with the Obama approach and you attack.

Swamp

RE “You don’t see a need for un-necessary bureaucracy? Rules for the sake of rules? Reports that nobody reads? Spending Money because it will evaporate at the end of the fiscal year? Filling a position because it’s there?” This is one reason why I think we need to shrink government, since some things cannot be fixed.

Government function and must function by means of rules-based bureaucracy. Rules-based bureaucracy work for lots of things and they don’t work for others. That is why we should deploy them only where necessary.

Posted by: C&J at May 7, 2013 6:24 PM
Comment #365461

Rhinehold-
You tell me: if the regulatory environment wasn’t lax, then how the hell did they get away with an emergency plan that mentioned walruses and polar bears? Those aren’t exactly species we’ve had to deal with around here.

The permitting process is legally required to take place within 30 days. You think anybody can do due diligence on a project this complex in that time period?

Now, had they actually gotten their way, they wouldn’t have had to drill so far off shore, in which case such an incident would have been much easier to cap, causing much less damage (if any) to the environment. In effect, it was the decision to push drilling out farther that caused the accident to cause as much damage that it did.

You don’t live on the gulf coast, do you? We got oil rigs all over the place here. I remember seeing them offshore when I was a kid.

What’s pushing the oil drilling offshore is the fact they’ve exploited the easier stuff already.

And yes, they got their way. They got a nice, cozy relationship with their regulators, very little supervision, etc. Government out of the way.

As for COX2? Sure they got sued. But there were opportunities long before then to stop thousands of Americans were affected. It’s cold comfort to get money in a class action lawsuit after your love one has passed away, or been weakened by a worsened heart condition.

The side effects were discovered beforehand. And Vioxx wasn’t the only medicine in that time period to turn out to be unnecessarily dangerous.

As for your claim?

God, how many times do I have to repeat this? First, the CRA regulations only applied to one of the 25 top lenders in full. Most were non-bank lenders. Second, those loans where the CRA regulations did apply did not default at any appreciably higher rate than your average mortgage. If you were covered by the CRA and had a Subprime loan, your risk of delinquency and default was actually better than average.

Not so with non-bank lenders. The GSEs, if you’re after them, were also not appreciably up there in defaults.

No, at the end of the day, the vast majority of these bad loans were made by underregulated shadow banks, supported by derivatives.

You’ve bought into Wall Street’s narrative, hook line and sinker, but you fail to ask a key question: how did we get a boom at all, if that was the case?

Wouldn’t the market have immediately corrected against that? It didn’t. There were other layers, and I’ve written about them extensively. That’s why the derivatives market matters, because it’s what allowed the loans to be done in the first place. You could have never made so many bad loans without these proprietary derivatives markets, hidden from the sight of God and everybody.

Posted by: Stephen Daugherty at May 7, 2013 6:59 PM
Comment #365462
Wouldn’t the market have immediately corrected against that?

If the market were free to work it would have yes. But it isn’t, as I’ve tried to explain to you. Had the interest rate not been artificially lowered so low, derivatives would have made no one enough money to do it. Don’t you get that, the derivative market only existed because the FED had forced rates so low that to continue making money those entities had to find another method.

In fact, the idea of derivatives was thought up a decade before but was tossed out as a bad idea because it was safer to make the same money by just doing standard mortgages.

God, how many times do I have to repeat this?

You can keep repeating it all you want but you are repeating, again, against something I am not arguing about. It’s like you have a one track mind and keep repeating that there is ice at the north pole when I am talking about Hawaii…

Of course there were ‘layers’ to what happened, in fact very few even saw it coming, like Greenspan and Bernanke. But there is no doubt as to why it was so devastating to the economy. Because the regulations in place forcing those banks to mark those assets at near 0 on their balance sheets, preventing them from loaning out ANY MORE MONEY. That is when the problem that would have killed a few businesses and banks and allowed for others to take over those loans at lower prices blasted into the rest of the economy and caused all of the damage. It was the hole in the dyke.

if the regulatory environment wasn’t lax

Of course it was lax. Do you know why? Because when you overregulate, you start causing problems in the operation of most businesses. In order to ‘get’ those who are doing evil things, you impact hundreds of other good businesses. So when that happens, regulators are overworked and can’t keep up on everything and violators are given wrist-slaps because you can’t tell minor violations from ones that might cause real harm…

It’s like the background checks. We check every purchase and the majority of violations (small number that there are) are either minor or wrong, so much so that we only prosecute a handful of them. Most of the time people who are legally allowed to own guns are on the list wrongly and flag as a hit because of the inability of the system to maintain itself appropriately. By trying to regulate that no one will ever do anything wrong we end up over regulating a vast majority of people trying to do right and getting mired in red tape. Red tape that add costs to doing business that ends up getting passed on to the consumer. This isn’t anything new…

Posted by: Rhinehold at May 7, 2013 7:25 PM
Comment #365463
What’s pushing the oil drilling offshore is the fact they’ve exploited the easier stuff already

And here I was thinking that the reason we weren’t drilling closer to shore was because it is AGAINST THE LAW TO DO SO.

http://www.discover5oceans.com/2010/02/florida-oil-drilling-threatens-tourism-industry-and-ocean-ecosystem/

http://www.kvue.com/news/Texas-sues-federal-government-over-ban-on-off-shore-oil-drilling-100538859.html

http://content.usatoday.com/communities/greenhouse/post/2010/12/ap-obama-oil-drilling-ban-florida/1#.UYmOhrWG3_c

http://tbo.com/news/huge-gulf-divides-oil-drilling-opinions-46692

Why would oil companies be wanting to drill where there is no oil, Stephen? It doesn’t seem to make much business sense to me…

Posted by: Rhinehold at May 7, 2013 7:33 PM
Comment #365469

If the federal government was restricted to live within the letter of the constitution, rather than some rationalized interpretation, then big business would have less influence and our politicians would be elected because of there virtue and not because of power or money. Thus laws would not have been written that allowed selling of bad loans nor would the banks have written those loans in the first place.

Posted by: Clark at May 7, 2013 10:45 PM
Comment #365483

Rhinehold-
What would have been an appropriate level of interest? 2%? 5%? 8%?

If you were arguing that interest rates should have been raised earlier to cool off the market, I would have agreed with you. But you’re arguing something quite naïve there. You’re arguing that folks on Wall Street would have been happy just making single digit returns.

The equally naïve argument is that this was something that bankers were forced into. The reason for this argument is plain, if you think about it: otherwise the responsibility falls on the Wall Street banks. Then letting them have their wish on regulation is suicidal.

I’ve kept track of the financial markets over the years, if only in the back of my mind. As a kid who watched plenty of prime-time PBS shows, the Nightly Business Report was a consistent feature. The impression I had, even before the crash, was that real estate and its derivatives were basically propping up the economy.

You complain about how they were forced to account for those derivatives, but what you don’t complain about is the fact that they lobbied for those accounting standards, so they could claim the big profits on their inflated investments.

You need to realize that the real estate market was just the pretext for a huge amount of proprietary trading.

You’re right about the complexity, but wrong about it simply being some sort of accident. Part of it is, you have lawyers on the side of the regulated constantly straining at the regulations to do what they want, a result of a culture in which the defiance of constraint is seen as good for business. On the other side, the regulated bodies also lobby for the complex rules so they can lawyer the compliance to death.

Simplicity in law is easier when you don’t have to be constantly closing up loopholes, or making exceptions for businesses.

We’ve encouraged a culture that believes that constraint is the enemy, that if they were allowed to be Gods, this all would be utopia. Law should be followable, but it has to be firm, and we can’t be farting around tiptoeing around their bottom line.

My Sensibility is simple: the private sector has its job, the government has its own. The government shouldn’t be in the business, necessarily, of helping the private sector, or hurting it, but instead doing what is appropriate for the public good. If that means helping, or subsidizing big business, so be it. If that means curtailing a profitable but problematic behavior, and that causes harm to the company, so be it. The government should not have a dog in that particular fight, and that is what I believe is most corrupting in government.

I don’t believe in total government control, bureaucratic or otherwise. I do believe elegance in law and regulation is to be admired, and the goal of lawyer-proofing regulations impossible to achieve. But the question is, how do we get from here to there.

I don’t believe deregulation, per se, is the answer. I believe reform is needed, and that may involve removing or adding things as necessary.

I’m not a libertarian, but my research on the matter, on the way power actually plays out in reality, tells me that the informal process of how people work things out is often far more important than the formal rules. I don’t believe, though, that the constant push for more freedom from constraint in the business community does us much good, because quite frankly, they haven’t earned it. They haven’t demonstrated the kind of judgment that would justify letting them police themselves.

I can’t tell you the exact shape of what I want, but I can be clear on what the goal is: We need a market that performs more like it’s ideal, where supply and demand constrain behavior more effectively, where our economy doesn’t depend on everybody keeping quiet about some big lie in order to remain stable.

I’d also say that businesses need to be kept small enough in market share, whether they’re a bank or a software company, that if they screw up and die, we’re not in a world of ****. There also need to be firewalls between different, critical portions of our economic engine so that if something like what we just suffered in terms of the housing industry occurs, we’ll see the damage mostly isolated to that sector, instead of raging like a firestorm across sectors, like depository banking, that weren’t so unstable.

Blaming everything on government is a defense mechanism for the right. They need to realize that they wanted many of the things they now decry. They wrote the legislation that let the banks become too big to fail. They wrote the legislation that let well-regulated depository operations create the big hedge funds.

My sense is that by allowing this, we allowed much of the economy to become a abstract game in the financial industry, rather than a more grounded set of interactions in the real world, dealing with real business, real wages, and real economic activity. Everything’s become derived, a fiction based on a fiction, and like many such fictions, it’s incomplete, apt to collapse under the weight of its own logic without warning, if pushed too hard.

Human beings are creative creatures. Fiercely so. If allowed, we all have the tendency to try and win by cheating the system. In part, it’s what we do in reality with our science and technology. Also, like any creature, we do what we have to, in order to survive.

If we let folks get too creative in the wrong way, everybody has to get creative like that, in order just to negotiate with them. Folks join in tacit cooperation with the accepted general fiction. That’s how you get the big bubbles.

If we don’t set followable rules, people have to deal with the environment in which these rules don’t operate, and their behavior distorts to adapt to it. Thus distorted, people become part of the problem.

Or in plainer language, situations in which the rich and powerful get away with doing dishonest or overly risky things corrupt folks further down the line, as they feel it necessary to adapt to the overall tone of things in order not to lose out or get caught underfoot.

People look at the forbidden fruit, and with it held that much closer, they grab for it. They go for that mortgage to get the house they’ve always dreamed of. They see those who refuse struggle, and those who don’t refuse awash in money. They’re not expert enough to avoid being manipulated, or if they do know enough, they’re still vulnerable to peer pressure, despite the fact they know better.

My understanding of these dynamics power my sense of how laws should be set. We need to constrain the powerful, not just to prevent the harm they do, but also, to prevent the corruption of society, the harm done to it, as the wrongs of one side justify the wrongs of others.

Government helps us set the standard, where we might be too weak to do so with our own willpower, in the fact of greater, corrupting influences.

As for your sources?
All of them talk about post-oil spill policy, that is, policy done in response to the Deepwater Horizon accident, which was itself an extreme deep-sea well.

Put another way, BP and all the others already decided to do deep sea drilling before any bans or moratoriums took effect.

So, your sources do not refute the notion that it is problems in near-to-shore supply that are driving the drilling offshore. They instead illustrate what folks are not willing to sacrifice for the sake of that drilling. Florida wouldn’t exactly profit, given its tourism industry, from a big spill on its shores. Louisiana and other Gulf Coast areas don’t either.

Clark-
And we would all go tiptoeing through the tulips with Tiny Time and enjoy tea together afterwards.

Seriously? The letter of the law, in conventional wisdom, is often contrasted with the spirit of the law. Why? Because there is always more than one way to interpret mere words.

Look at the Fourth Amendment. We can say, if we take it too literally, that electronic communications, never having been mentioned in the amendment, are fair game for search and seizure without a warrant. But that would ignore the underlying intent. Likewise, we could exclude blogs like this from First Amendment protection, on the basis of there being a protection for the Press (that is, a particular technology), or for speech (you know, literal talking), but not anything for electronic publications.

Fortunately, most people operate with a certain level of common sense, and recognize that there’s an underlying message in both amendments: That in general, people are free to express themselves as they see fit, to worship or not worship as they please, to publish as they see fit, etc, and that their property, their persons, and their communications are privileged from search and seizure unless there is a warrant or probable cause given.

Both a lifetime of being autistic, and the training of my media degree course in college has taught me that a retreat to literalism is no defense against misinterpretation, or unjust and unwise interpretation. Why? First because people interpret what they read or what they see anyways. you can’t prevent people from taking different meanings. The point of our judicial system, in fact, is to mediate between the different meanings people might give to the law.

And law must be interpreted to be used. We must apply it to circumstances that are not necessarily all anticipatable. I mean, we could go blind listing each and every permutation of events in the real world, but as Rhinehold points out, that only makes it even more burdensome to write and enforce laws.

Stop pretending that all the problems in the world are reducible problems! That getting your way would solve everything! It will always be a process. There will always be valid uncertainty, and nobody’s pure political ideology will bring us everlasting peace and prosperity. Politics in my view is just your viewpoint on how problems are best solved. Ideologies are not perfect guides for how to solve everything, and never will be.

Posted by: Stephen Daugherty at May 8, 2013 12:28 PM
Comment #365490

Stephen, remove the money influence from politics/gov’t if you really want to achieve such a relationship between gov’t, taxpayers and corporations.

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