Saturday, May 28, 2011

Stifled by Regulation

Judging from the reviews, I was among the few who liked Curtis Hanson’s HBO film: Too Big to Fail.

I am not a drama critic or a movie critic or even a television critic, but I thought that Hanson did an excellent job of rendering the financial crisis. And, William Hurt’s portrayal of Henry Paulson was exceptionally good.

Of course, I have a caveat. The movie does not just dramatize the crisis;  it also offers a moral lesson.

This charming piece of entertainment serves as a propaganda vehicle promoting a system of moral values, one that is anything but anodyne.

Trying to pretend that it is bipartisan, the movie begins with clips of Ronald Reagan and Bill Clinton extolling the virtues of deregulation.

Near it’s end, Cynthia Nixon, playing Paulson’s assistant Michele Davis, offers the supposed moral of the story when she says: Where were the regulators?

In case you missed the message, the movie closes with Barack Obama signing the Dodd-Frank financial reform bill, thereby introducing hundreds of new regulations on the banking system.

The drama contains a clear message: deregulation is bad; Barack Obama will save us from our badness.

“Where were the regulators?” is a rhetorical question. The movie assumes, as do many left thinking people, that none of it would have happened if the regulators had been given sufficient power and authority.

If you have the opportunity to exploit a near-catastrophe for partisan reasons, why not.

The problem with the movie’s moral is simple: the regulators were not asleep at the wheel; they were on the job. One might argue that that was the problem.

The banking system may have been less regulated than at other times in our history, but it was certainly more highly regulated than the hedge fund industry, which was not on the brink of insolvency.

The argument for enhanced regulation rests on a dubious psychological theory. Actually, it is a fiction more than a theory, but it is passed off as an ultimate truth.

This theory posits that human beings are naturally rapacious, naturally led by their emotions and impulses. Without strict external regulation we would fall into a dog-eat-dog, law-of-the-jungle world.

The theory assumes, without any real evidence, that human beings cannot self-regulate. Lacking an innate moral sense, human beings merely want to loot, pillage, rob, cheat, and destroy.

They are certainly not to be trusted.

Given our fundamental badness, we are sorely in need of regulation. Our appetites must be regulated by a group of people that is wiser and more rational than the rest of us: bureaucrats and public interest lawyers.

You might think that bureaucrats are just human beings like the rest of us. If so, you would have missed the larger point. Or, better, you would have missed the plot line.

Bureaucrats are supposed to be better than the rest of us because they are not lusting after filthy lucre. They are morally superior because their only interest is the public good.

As it happens, this picture severely distorts reality. Not only that, but it creates the kind of reality that empowers it.

If you presuppose that human beings cannot be trusted, and thus that their activities require strict regulation, these same human beings will be induced to conform to cultural expectations. They will place their own personal interests over the common good because they have been told that that is the norm for human beings.

If human beings have the capacity to self-regulate, to control their behavior to serve the general good, they have now been relieved of the necessity to do so. They can allow their moral sense to go dormant, because an external, bureaucratic authority has been charged with providing moral direction for them.

Thus, presupposing that human beings are not to be trusted will produce a situation where they cannot be trusted. They will set out to game the system, get away with what they can, and outsmart the regulators.  

By the way, who do you think is smarter and more resourceful, the average Wall Street banker or the average government bureaucrat?

When they sense that they are losing their battle with the private sector, bureaucrats hunker down and produce even more regulation. They are willing to stifle the economy if that means that they can protect their turf.

Two recent articles illustrated this fact.

Today the Wall Street Journal editorialized about the burden that bureaucratic regulation imposes on our economy. Link here.


It explained: “In research sponsored by the federal Small Business Administration, Lafayette College economists Mark and Nicole Crain have estimated that Americans were spending more than $1.7 trillion annually just to comply with federal regulations—and that was before Mr. Obama took office.

“The best measure of the overall regulatory burden comes from Wayne Crews of the Competitive Enterprise Institute in his annual ‘Ten Thousand Commandments’ scorecard. Mr. Crews recently reported that there are more than 4,000 new regulations now in the pipeline, and he notes that in 2010 the bureaucrats set an all-time record by churning out 81,405 pages in the Federal Register, where new and proposed rules are published.”

Instead of seeing bureaucrats as a class of enlightened individuals sacrificing personal reward for the chance to do the public good, perhaps we can try to wrap our minds around the possibility that they are human beings who are sometimes motivated by their sense of the public good but who might also resent those they regulate.

How powerful do you feel when you make businesspeople jump through one hoop after another? Should you really feel surprised when some of those people decide to look for loopholes.

Hoops and loopholes... that is the name of the game.

Bureaucratic regulation, like lawsuits, does not produce anything. Those who live by regulation often seem to be at war with those who produce. 

How powerful would you feel if you, a minor bureaucrat, could reclassify a smelt as an endangered species, and shut down farming in California’s central valley, putting tens thousands of farmers out of work?

Is it really about the smelt or is it about the unproductive class exerting its power over the productive class?

A country that shuts down farming and throws people out of work in order to save a smelt is simply not a serious country.

But it would not be happening if the public had not been convinced, by alarmist prophets masquerading as scientists, and by alarmist movies, that losing the delta smelt will be an unspeakable environmental catastrophe.

From the macro to the micro level, Yale Law Professor Stephen Carter was sitting across from a businessman on a recent flight. The man ran a successful business, but still he was not hiring new workers.

Carter wanted to know why.  Link here.

Carter was sitting across from a businessman whose business is good, but still he refuses to hire new workers.

The man replied: “Because I don’t know how much it will cost. How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

Carter explained: “He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.”

The businessman is not against all regulations; he is not against all government activities. He is against the power grab that leads regulators to keep imposing new rules, new standards, new procedures to follow. 

Carter draws a good lesson from his conversation: “As an academic with an interest in policy, I tend to see businesses as abstractions, fitting into a theory or a data set. Most policy makers do the same. We rarely encounter the simple human face of the less- than-giant businesses we constantly extol. And when they refuse to hire, we would often rather go on television and call them greedy than sit and talk to them about their challenges.”


David Foster said...

The scary thing is, There are now so many environmental extremists..some of whom make their livings in this way and many more of whom get their sense of self-worth from it...that it's hard to see how it will ever be brought to rationality. I don't think Obama could turn it off if he wanted to. Think Sorcerers Apprentice with Mickey and the brooms.

Stuart Schneiderman said...

Exactly right. At the risk of joining you in sounding alarmist, they have infiltrated the bureaucracy, the courts, the legislatures... and now, as you so aptly point out, their jobs, their careers, and their lives are on the line.

Besides, how many people really care to challenge the courts and the bureaucrats over California's agriculture.

I know that some have, but in truth these people are being punished, their lives ruined, for a smelt... and no one is marching on the state houses or protesting in the streets.