The Corner

Special-Interest Politics and Regulatory Complexity

Over at Mother Jones, Kevin Drum has a piece where he says, essentially, companies may complain about complex regulations but the truth is that they love them, because they can use complex regulations to their advantage when competing with other businesses. In fact, Drum argues, companies lobby hard to turn simple rules into complex ones:

Businesses don’t like simple rules, because simple rules are hard to evade. So they lobby endlessly for exemptions both big and small. This is why we end up with tax subsidies for bow-and-arrow makers. It’s why we end up with environmental rules that treat a hundred different industries a hundred different ways. It’s why financial regulators don’t enact simple leverage rules or place firm asset caps on firm size. Those would be hard to get around and might genuinely eat into bank profits. Complex rules, conversely, are the meat and drink of $500-per-hour lawyers and whiz kid engineers. If the rules are complicated enough, smart lawyers can always find ways around them. And American corporations employ lots of smart lawyers.

Keep this firmly in mind the next time you hear someone from the Chamber of Commerce complaining about how many thousands of pages of regulations they have to comply with.

Drum’s possible over-generalization is nonetheless a sad truth about the way many companies interact with regulators. Yes, companies are trying to get stuff from the government, and this ends up making regulations more complex than they would otherwise be. I would even argue that there are regulations that only exist because companies lobbied for them (the same way Warren Buffet is asking for his taxes to go up).

Obviously, this flies in the face of complaints about complexity and uncertainty brought about by the regulatory regime. But we often forget the other side of this equation. The fact that these companies manage to get what they want from regulators also flies in the face of the notion of independent regulatory agencies. It takes two to tango: Some regulators are more than happy to grant exemptions and special rules to given companies that will benefit from the resulting complexity.

Unfortunately, Drum seems to think that this means we shouldn’t take talk about regulatory complexity seriously. Yet this complexity is still a real problem. Some companies benefit from this unhealthy marriage between private companies and government, but there are many other companies that don’t and many people out there suffering from this union. Special-interest-group politics (which includes regulatory capture and crony capitalism) is often bad for consumers, taxpayers, and the overall economy. It isn’t exactly corruption, but it is terrible, because it creates bad incentives, moral hazards, and often inefficient outcomes (think about “too big to fail” or the Solyndra scandal). Special-interest politics leads to privatized benefits and socialized loses. It leads to a destruction of the private profit-and-loss system that should be guiding companies’ decisions about how to run their business.

My colleague Adam Thierer at the Mercatus Center has started cataloging what experts have said about regulatory capture:

I thought it might be useful to begin constructing a compendium of quotes from various economists and political scientists who have studied the regulatory process throughout history and identified regulatory capture or client politics as a major problem.  I would greatly appreciate having others suggest additional quotes and studies to add to this list since I plan to update it frequently and eventually work all of this into a future paper or book.

He’s right, and he is leading by example. Here are a sample of the quotes he has already collected:

Woodrow Wilson, The New Freedom: A Call For the Emancipation of the Generous Energies of a People (1913) at 201-202:

“If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it. Are you going to invite those inside to stay? They don’t have to get there. They are there.”

Anthony Downs, “An Economic Theory of Political Action in a Democracy,” 65 Journal of Political Economy 2 (1957), 135-150, at 136:

“…even if social welfare could be defined, and methods of maximizing it could be agreed upon, what reason is there to believe that the men who run the government would be motivated to maximize it? To state that “they should do so does not mean that they will.”

Ronald Coase, “The Federal Communications Commission” 2 Journal of Law and Economics (1959), 1-40, at 37. In commenting on the fact that many lawmakers bemoaned “the extent to which pressure is brought to bear on the [FCC] by politicians and businessmen,” Coase said “that this should be happening is hardly surprising.”  He continued on:

“When rights, worth millions of dollars, are awarded to one businessman and denied to others, it is no wonder if some applicants become overanxious and attempt to use whatever influence they have (political and otherwise), particularly as they can never be sure what pressure the other applicants may be exerting.”

Harold Demsetz, “Why Regulate Utilities?,” 11(1) Journal of Law and Economics (Apr., 1968), at 61.

“…in utility industries, regulation has often been sought because of the inconvenience of competition.”

George Stigler, “The Theory of Economic Regulation,” 2(1) Bell Journal of Economics and Management Science, (1971), 3-21 at 3:

“…as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits.”

The whole thing is here. Please add your suggestions and examples to the list.

For more on this topic, Tim Carney’s book Big Ripoff is a must-read. Also, I wrote an article in Bloomberg almost a year ago about “Why Businesses Can’t Stand Free Markets.”


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