Welcome to Washington, Mr. Smith, and welcome to the Agency. I salute your determination to apply common sense in Washington, to fix what’s broken in order to serve the public interest and the common good. Weirdly enough, everybody in Washington wants to do that: Republicans, Democrats, Tea Party patriots, Barney Frank. These guys don’t agree on much, but they all sincerely want to do what’s best for the country, pretty much to a man. I know, I know: Counterintuitive, right? But you’ll see.
In fact, one of the shocking things about Washington is how little cynical self-service there turns out to be. Okay, Charlie Rangel I’ll give you, and those ethanol bastards. But Rangelism is rarer than you’d think. The head-clutching paradox is that 536 elected Washingtonians and endless phalanxes of well-meaning appointees such as yourself wring such hideously wretched results out of such idealistic intentions. There is an explanation for that — so, if you’ll forgive me for the spoilsportsmanship and for tempering your understandably high post-appointment spirits with some gritty reality, it is my duty to inform you: You do not know what you are doing. Probably never will. You do not even know what you are talking about, and I mean that literally.
When you said in your hearing that you wanted to enact common sense reforms to protect the public interest, what I heard was this: “I want to regulate.” When you said “I want to reduce the red tape,” what I heard was, “I want different tape in a different shade of cerise or persimmon or coquelicot.” That is what it’s really about, even though Washington, D.C., is full of people denouncing all the damned regulations coming out of Washington, D.C. These new yokels may want to repeal Obamacare — I hope they do! — but they are going to replace it with something. Many elected officials in Washington stopped using the word “regulate” around 1984 (a 49-state landslide will get Washington’s attention) and started using it again around 2008 (so will a 49-state financial crisis). (The outlier was Minnesota in the first case, Texas in the second. Executive Summary: Swedes and Garrison Keillor types in Minnesota, 20 percent down payments in Texas. Have your staff bring you up to speed.) When you say “regulate,” normally you mean regulate private enterprises, whether those are businesses, voluntary associations, or other aspects of private life. Why do you want to regulate private enterprises? (No, that was rhetorical.) Because you want them to serve the public interest.
But you have no real idea what the public interest is. Nobody really does. How could you? How would you find out? (No, not rhetorical.) You could take a poll and see what the public says it wants, but what the public says it wants at any particular moment is not identical with the public interest. The public is made up of individuals, most of whom have no better idea what is in the best interest of people they have never met and know nothing about than you do — and practically all of whom will lie when asked what it is they really want: They’ll say they want opera broadcasts and educational programming and organic chard and more foreign news in the newspaper, but in real life their revealed preferences are pretty much classic rock, fantasy-football stats, and those heinous seven-layer burritos from Taco Bell.
So Washington’s understanding of the public interest is a little hazy, inevitably. It’s hard to see the big picture, but you can sometimes get a look at a tiny slice of the public interest. Private enterprises, and businesses especially, usually do serve something that might deserve to be called the public interest or the common good, because they create social value. How do we know they create social value? Mostly because of this so-obvious-it’s-ingenious, but still kind of counterintuitive, idea that comes from economics: If people in society did not in fact value what these businesses were producing, they would not give them their money. Social value = the stuff society actually values. The counterintuitive part, at least for you guys who graduated near the top of your classes at very prestigious law schools and made a lot of money in litigation or bond-counsel work or whatever but have not spent a lot of time selling hotdogs or landscaping or painting houses, is this: Profits are evidence of the creation of social value, not deductions from the sum of the common good. Washington totally flubbed that one during the health-care debate. Enormous profits come from the creation of enormous social value. Exxon, for instance. Americans may not have cozy feelings toward Big Oil, but given a choice between free gas for a year from the local Exxon station or lunch with a bigfoot politician, most Americans would just pick up a Slim Jim on their way to fill up on gratis high-test and motor on down the road and take a rain check on the coq au vin with Senator Snout.
Businesses do not create social value because they really want to, usually. Some do really want to: Whole Foods is a company with a pretty clear-cut do-gooder agenda, and so is BB&T, and Chevron, and a few others. But businesses do not necessarily know what the public interest is, either: Ben & Jerry’s tries really hard to serve the public interest as they understand it, but sometimes they get it really, really wrong: You start paying above-market rates for aboriginally harvested South American nuts, and South Americans of both the aboriginal and the European-import variety will clear-cut a bunch of rainforest acreage for industrial-commercial nut plantations, as it turns out, since your average traditional indigenous bone-in-the-nose-type nut-gathering operation does not produce nuts sufficient to keep Ben & Jerry’s nutted up. Do not ask those hippies about that Rainforest Crunch fiasco! They meant well, though. (Just like you.) But normally, businesses create social value as a byproduct of the relentless Darwinian pursuit of profit — and the ones that fail to create much social value do not achieve much profit.
It’s kind of interesting, a sort of society-wide science experiment: Nobody really knows what will create social value, so businesses just throw their best ideas out there into the marketplace, which is basically a big social-value laboratory, and see which hypotheses fly. A lot of success happens by accident: Take eBay, which was not really meant to be eBay, originally: The company’s founders thought that the underlying Internet-retailing software was going to be their profitable product, and the actual auction site was set up mostly just to demonstrate how well the software worked. (Seriously: The name “eBay” started as a joke about ebola — not exactly a Harvard case study of a marketing plan.) Some businesses get it right, some get it wrong. Some entrepreneurs have really good ideas, some are daft, and some are really lucky in spite of themselves — but nobody knows in advance how things will turn out. What really helps to ensure that businesses create social value is competition among firms. If a business is not producing social value (social value = what society values), it fails, and its competitors succeed. So goes the theory. You know how theories are.
When you propose to regulate, then, what you are saying (without saying it) is that you do not trust competition among firms to ensure that businesses produce social value. Maybe you have 19th-century monopolists on the brain (though you might notice that most of those old robber-baron monopolies were at least in part created or protected by regulation, as are practically all modern monopolies) or you are haunted by visions of the Triangle Shirtwaist fire, or you think Exxon’s profits are obscene rather than a measure of the social value that Exxon creates in the world. So you want to pass a regulation or two — to apply common sense and serve the public interest.
Sometimes, a regulation is really straightforward, simple, not terribly onerous to comply with, and not terribly destructive in its consequences. (Sometimes.) Take the federal minimum wage. It’s a simple rule — you have to pay everybody at least x – it applies to all employers (in theory; you know how theories are!), its raison d’être is pretty obvious, etc. The minimum wage is going to have some consequences you do not like, unavoidably — consequences that are unintended but not unpredictable — but it isn’t earth-shakingly disruptive, as regulations go. A pretty fair share of the jobs that pay wages in the minimal range are service-oriented, in-person jobs of the sort that are really hard or impossible to outsource to China or India, where the cost of labor is low. Or to Germany, where the cost of labor is even lower. (That’s another one of those counterintuitive economics things: Germany and Japan have high wages, but the cost of labor is not wages, it is wages relative to output. A German factory worker may earn $80,000 a year while a Chinese factory worker earns $4,000, but if the German produces $1 million worth of BMW bumpers a year while the Chinese guy produces $10,000 worth of flip-flops, the German is cheaper: You’re paying him only 8 cents on the dollar, while you’re paying the Chinese 40 cents on the dollar. The German inexplicably does not feel exploited to make only one-fifth of what his coddled Developing World competitor earns. Strangely, the Chinese guy probably wishes he were exploited as ruthlessly as that poor German. Executive Summary: Economics is hard.) Other than drop-kicking a lot of marginal workers out of the job market and onto the welfare rolls, the federal minimum wage is probably not going to have that much of a negative effect on the economy, because 7-Eleven is not going to ship its Slurpee machines to India for cleaning when it can pay Indians to clean them here.
But the federal minimum wage is not the only regulation affecting 7-Eleven. Not by a long shot. The states have their own minimum wages, in some cases, and that complicates things. 7-Eleven is not going to move all of its stores from New York to New Jersey if New York has a higher minimum wage, but it might decide to locate its warehouses and distribution centers and massive Slurpee-mix mixing facilities and such in a neighboring state with a lower minimum wage. (Or lower taxes, which amounts to the same thing: Cost of Labor ≠ Wages; Cost of Labor = [Wages + Related Expenses, Such as Payroll Taxes] ÷ Productivity.) Beyond minimum-wage regulations, you have a bunch of non-wage regulation, too: OSHA, EPA, IRS, Medicare/Medicaid/Social Security compliance, Davis-Bacon, workman’s comp, FDA, etc. And there are state and local versions of all of that, because the state and local versions of you do not trust competition among firms to produce the results you want, especially vis-à-vis how companies pay their workers and what conditions the workers work in.
A really simple regulation like the minimum wage doesn’t have much effect on how companies compete with one another, but a really complex body of regulation does. That’s because McDonald’s doesn’t compete just for burger-buying customers — it competes for all of the resources it needs to sell burgers, including pimply-faced-kid labor resources. Think about it: If the clown can figure out a way to get all-beef patties for 20 percent less than the king pays for them, then the clown has a real business advantage. He can cut prices or offer bigger burgers. He can spend the money on advertising. Advantage: Clown! Same thing with pimply-faced teenagers, who are a lot like a stack of USDA-certified all-beef patties, except slightly more articulate. (Sometimes.) Like most big businesses, McDonald’s spends millions and millions of dollars a year looking for really good workers, studying how to make its workers more productive, and trying to keep them happy in their jobs so they don’t defect to the king or the little red-headed girl. It is kind of weird that McDonald’s spends millions of dollars figuring out how to make low-wage workers happy, but there you have it. McDonald’s brass probably does not care about pimply-faced happiness in the abstract — it just wants to make more money, and it needs good workers to do that. It does not need low wages, per se — it would rather pay $80,000 a year to German fry guys to sell $1 million worth of Big Macs than $4,000 to Chinese all-beef patty assemblers to sell $10,000 worth of those 99-cent double cheeseburgers. Low wages are not the goal — high profits are the goal. (Which is to say, creating lots of social value is the goal, which is kind of counterintuitive in the case of McDonald’s, but society values what it values, just as if it had a mind of its own.)
Wages are not the only cost attached to labor for McDonald’s, or even the biggest one. Complying with all those regulations takes a lot of time — and to make it worse, the guys whose time all that regulatory compliance takes up are not making minimum wage: They are managers and HR gurus and junior vice presidents, and, God help the poor shareholders, lawyers and lawyers and lawyers. McDonald’s wants to do all that regulatory compliance as efficiently as it can, for the same reason it wants to produce cheeseburgers and French fries as efficiently as it can: the rapacious pursuit of obscene social value. In much the same way that negotiating a 20 percent discount on all-beef patties or secret sauce would give McDonald’s an important competitive advantage over Burger King, figuring out a way to comply with all of its regulations at 20 percent less time and expense would be a big deal, too: maybe a bigger deal, since a lot of fast-food companies spend more on pimply-faced labor than they do on food. (Gross, right?) To say nothing of the lawyers and junior vice presidents and all of the other people who do not make hamburgers but nonetheless have to be employed because of regulation.
You can see the problem: You want to regulate because you do not trust competition among firms to serve the public interest. But regulation becomes just one more arena for . . . competition among firms. Round and round we go: Instead of competing to sell people the tastiest hamburgers at the lowest price, or competing to hire the most productive Teutonically efficient burger-slingers at the most efficient wage, companies compete in the field of regulatory-compliance efficiency, which does not shovel any greasy social value into anybody’s ravening public-interest maw at all. The weird thing is that the more you regulate, the more McDonald’s will discover that its most important profit-controlling variables are only tangentially related to selling people hamburgers. The clown finds out that Jack in the Box got himself a waiver from Obamacare, and now he wants one for the Hamburglar and Grimace, and we’re right back to the original competition among firms that you didn’t trust in the first place, but with a perverse twist: Instead of competing to provide social value in the marketplace, firms compete to wring profit out of politics.
Which brings us, and them, to you.
Populist rhetoric aside, you and your colleagues are not buffoons or villains. But I don’t think you know as much about running a burger joint as McDonald’s does, and McDonald’s doesn’t even know all that much — remember the McDLT, or the Arch Deluxe, or the McLean Deluxe? (No, that is not a McMansion in Virginia.) Companies get it wrong like clockwork: New Coke, Apple’s hockey-puck mouse and the Newton, Coors’s “Rocky Mountain” bottled water. Sleeping pills for children, ye gods. Ben & Jerry’s is just jam-packed with nut experts presiding over a vast archive of nut lore and nut arcana, with indigenous Brazilian ethnologists and top-flight Amazonian agronomists on speed dial, but they vigorously screwed the pooch on the Rainforest Crunch deal. You sincerely well-meaning and unquestionably smart guys in Washington, crafting regulations with love and care and deep regard for the common good: You know even less about almost everything you deal with than the least smart guy at Jack in the Box knows about Jack in the Box.
And you are going to be busy in Washington, Mr. Smith, because Washington has a finger in every pie imaginable: Iraq, Wall Street, Afghanistan, corn subsidies, roads and bridges, putting corn juice in gasoline, font sizes, the death penalty, cloning, Pakistan, Poland, peacock plumage, alliteration, etc. You are going to need help on that stuff.
So, where do you find help writing and administering the regulations — help to help you apply plain common sense to serve the common good? Take the banks, for instance: The guys who know a whole lot about how banks work work in banks. So, you might disco on down to Goldman Sachs, where they scrupulously seek to accumulate evidence of the production of social value in great quantities, and try to hire yourself some staffers. And when they are done laughing at you, you can head down to some lower-tier, south-on-the-food-chain bank, where you’ll find some guys who got their MBAs at Eastern Michigan and who might want to spend a few years in government work. There’s job security, for one thing, and the pensions and benefits are great. Also, they know that Goldman Sachs cares a lot about how the bank regulations are written for the same reasons that McDonald’s cares a lot about how the all-beef-patty regulations are written, and so a third-tier banker who becomes a government regulator might in five or ten years be a pretty good candidate for a job at Goldman Sachs, which will shunt great fresh roaring streams of social value at people who can help it outcompete its rivals in the regulatory arena, Eastern Michigan grads or no. That’s because the most efficient form of regulatory competition known to man and Goldman Sachs is to make sure that the regulations are written the way you want them to be written in the first place. Lloyd Blankfein does not much care whether there is a new regulation; he cares whether there is a new regulation that puts Goldman Sachs at a disadvantage vis-à-vis J. P. Morgan or whomever. Which is to say, Lloyd gets his Underoos backward only if there’s a regulation that costs Lloyd money, because Lloyd is big on competition among firms, and will compete just murderously in whatever regulatory arena he finds himself in, like a gladiator with a smokin’ hot date the next night. You don’t really know what the public interest is, and neither does Lloyd — but Lloyd is the world’s leading Ph.D.-level expert in Lloyd’s interest. He also knows a little bit about banking. Advantage: Lloyd.
You’re getting where I’m going here, right? It’s not that there shouldn’t be any regulation. It’s just that we have to keep our expectations excruciatingly modest, because you, Mr. Smith, are not going to be very good at it. But you’re what we’ve got. You don’t know what to do, the elected guys sure as hell don’t know what to do, the whole econo-politico-epistemological deck is stacked against you, and Lloyd is dealing. It’s Lloyd’s deck. Common sense is not going to get you through this, and you do not have adequate information to make decisions in the public interest. Nobody does. But here’s the thing: Betamax and the Arch Deluxe and Clairol’s Touch of Yogurt Shampoo (seriously, that existed) just get yanked off the shelves when hordes of people don’t buy them, and the great big milling laboratory of the marketplace tells Joe Businessman, who is really a research scientist seeking social value, to shelve that particular hypothesis and maybe not expect a bonus this year. But there’s no feedback mechanism like that in government, which means that when you do stupid, you do immortally stupid. You might find yourself asking why Alabama has a law against having an ice-cream cone in your back pocket at any time or chaining your alligator to a fire hydrant. (What was the precipitating episode there, Bubba?) You get Americans in the 21st century still paying the temporary emergency telephone tax to fund the Spanish–American War (1897–98). On and on it goes. Forever. Deathless stupidity tends to accrete and clog up the system, over time, and Washington is a factory whose workers produce deathless stupidity like it’s their job, like they’re getting paid for it. Because it is. Because they are.
Welcome to the machine.