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Regulations: Friend of the Powerful

November 19, 2014

by J. Andrew Zalucky

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More regulations? Yes, please!

There’s a meme that often gets passed around, mostly by progressives, about business and its relationship with the state.

It goes a little something like this:

Private enterprise, particularly the finance organizations, “hates regulations,” because they make it harder for them to dominate the economy. Therefore, any calls for deregulation are insane and will only “bring back the economic policies that got us into this mess.”

From this, progressives assume we need a large, intrusive and activist regulatory state. What they fail to realize however, is that the very things they wish to remedy (e.g. huge concentrations of power among the wealthy, poor job environment for the working class), are actually exacerbated by over-regulation.

Big corporations don’t hate regulations, they love and thrive off them. If they don’t love them, they are at least willing to play along, because the state is on the same team. Why is this? Large companies have no incentive to fight state regulation, as they are uniquely positioned to take advantage of the new rules and (unlike small/emerging companies) can afford to soak up the extra cost of doing business. At some of the country’s largest companies, there are entire business units or departments dedicated to regulatory compliance. This has creates whole floors of workstations and offices with lawyers, consultants and executives whose primary focus is Sarbanes-Oxley, Dodd-Frank, Basel III and the countless rules handed down from the various agencies: the SEC, CFTC, CFPB, The Federal Reserve and many, many others. These rules deal with everything from prudential supervision, asset-backed securities, derivatives, consumer protections and so on.

In order to implement and follow these rules, a company needs lawyers who can interpret them. Does your company’s product count as a swap or a derivative? Not sure? Better call a lawyer. Beyond understanding the law, it takes a ton of administrative work to implement it. Since hiring a completely new department takes time, companies will opt instead to pay out large sums to consulting companies (e.g. PWC, Accenture, Ernst & Young) to assist with implementation. And since rule-making is done by the agencies and not written into the laws themselves, companies are left with a lot of guesswork and will invariably miss deadlines, resulting in penalties paid to the government.

Who has the money, resources and access to legal counsel to make this work?

Large businesses.

Keep in mind, some of those same businesses generate capital through the buying and selling of government securities (bonds) tied to government debt…which has only grown larger since many of them were bailed out during the great recession. Nice deal, right?

Anyway, so who lacks these resources?

Small businesses.

How do small businesses compete? Innovation and price. This allows new ideas to flood into the marketplace and puts downward pressure on prices, depending on the state of demand for consumer and capital goods. If you use state coercion to make it more difficult or expensive to buy/sell goods and services, this will almost always result in higher prices and lower quality. This is why Jimmy Carter (yes, you read that correctly) chose correctly when he signed legislation to deregulate the home-brewing industry, along with trucking, railroads and the airlines.

None of this should be news to anyone. A recent article in C4SS details how Benjamin Tucker, the old market-anarchist thinker, was able to see through the facade of benevolent government regulation (emphasis my own):

the State’s regulations, laws, licenses, and permits in fact acted to consolidate power in the hands of great, monopolistic trusts. The dominance and market power of these large entities, combined with the government’s theft of the land and preclusion of self-sufficiency, allowed the “captains of industry” to acquire wage labor at an extortionate reduced price…Like Comte and Dunoyer, Tucker would have treated as laughably absurd the notion that our political overlords would want to hobble the rich. Attacking the “band of licensed robbers called capitalists,” Benjamin Tucker nevertheless advocated consistent free market competition

Many of the people heading up the regulatory agencies once worked for the very companies they’re supposed to regulate. In this way, big business actually sets its own regulations. This is unavoidable. Writing in in the Wall Street Journal, the editorial board addressed the idea of regulatory capture (i.e. when a regulatory agency advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating) and set out a simple idea for what regulations to keep:

Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can’t be gamed by the biggest firms and their captive bureaucrats. This means repealing most of Dodd-Frank and the so-called Basel rules and replacing them with a simple requirement for more bank capital—an equity-to-asset ratio of perhaps 15%. It means bringing back bankruptcy for giant firms instead of resolution at the discretion of political appointees. And it means considering economist Charles Calomiris’s plan to automatically convert a portion of a bank’s debt into equity if the bank’s market value falls below a healthy level.

There are some other ones that make sense as well, particularly those dealing with improper payments, fraud and anything that relates to the possible damage of personal/private property. But beyond these types of simple rules and standards, a regulatory state cannot help but degrade into the world of coercive central planning. Central planning doesn’t work, or at least not in the way that produces the egalitarian society many progressives claim to want. If anything, it works best for those who are well-connected, have access to expensive lawyers, and who generally have the very unearned privileges the left find so morally obnoxious.

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3 Comments leave one →
  1. November 19, 2014 9:27 am

    Progressives, anarchists, egalitarian, regulations…big ideological categories ultimately distract from the issue rather than define it. Regulations are necessary in economic life just as in most other human behavior. Whether we have the right regulation is a pragmatic and concrete question that defies categorical analysis.

  2. November 19, 2014 5:37 pm

    Here’s the latest attempt to deepen the “regulation capture” you rightly criticize:

    http://www.salon.com/2014/11/19/house_republicans_just_passed_a_bill_forbidding_scientists_from_advising_the_epa_on_their_own_research/

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