"Regulation isn’t an obstacle to thriving free markets; it’s a vital part of them" (James Surowiecki)

The FDA, Surowiecki says, demonstrates how regulation can succeed. "Regulation," he argues, "by filling information gaps and managing risk, fosters confidence in the safety and honesty of markets, which in turn makes them bigger and more robust. The pharmaceutical industry, for instance, would be much smaller if people were seriously worried that they might be poisoned every time they took a new drug."

"Franklin Delano Roosevelt, when he hired the famed stock manipulator Joseph P. Kennedy as the first head of the S.E.C., said, 'Set a thief to catch a thief.' [The Interior Dept.'s Minerals Management Service's] modus operandi was more like setting a thief to help other thieves get away with the loot."

-- James Surowiecki, in his current (June 14 & 21) New Yorker

Financial Page piece, "The Regulation Crisis"

by Ken

Like the rest of my friends on the Left, I haven't been thrilled with the Obama administration with regard to the mess in the Gulf of Mexico, but it's kind of hard to make it out as "Obama's Katrina" unless you still have no idea what went wrong with Katrina. Luckily, the American Right brings all the right tools to that job: ignorance, stupidity, dishonest, and an ideology that's as obsessively oblivious to reality as it is savage -- and not only willing but eager to screech lies in snarling denial of facts. And in any case, what they really mean is that they hope this will be "Obama's Katrina" in the sense that the Bush regime's tangle with Katrina sealed its doom.

At the same time, there have been enough deficiencies on the administration's part that anyone with half a brain and a shred of decency would be ashamed at its points of correspondence with Bush anti-environmental and anti-government policy. Luckily again, the heart and soul, such as they are, of the administration, Master Rahm, has barely half a brain and no measurable trace of decency.

For starters, what if anything was the administration planning to do about the Minerals Management Service (MMS)? When Ken Salazar was tapped to be interior secretary, it was widely noted that he's dangerously close to the very business interests against which our interior needs protecting. Before the oil-rig explosion, if there was any significant overhaul of the operation of MMS, it was kept well hidden. Was there really any mystery about the need for a substantial overhaul? As james Surowiecki reminds us early in the above-cited piece:

[D]uring the past decade, MMS officials had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating. When the industry protested against proposed new regulations (including rules that might have prevented the BP blowout), MMS backed down.

Surowiecki is quick to point out, though, that the problem goes way beyond minerals management:

MMS’s bad behavior was unusually egregious, but it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.

These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized, seen as little more than the tool of Washington busybodies.

Unfortunately, Americans let themselves be brainwashed on the subject of regulation, and for once it wasn't just the usual subjects, the moron-thugs of the Right. That regulation is evil was also an article of faith for the surging neo-liberals, and suddenly across the aisle the children were gleefully dismantling our regulatory system in every way they could.

Undoubtedly there were all sorts of flaws in that system which could and should have been fixed. But then as now, surely, the biggest problem was the invariable one: the regulators getting too close to the regulated. That problem, of course, wasn't addressed, unless you count setting the regulated free of even unvigilant regulators "addressing the problem." Only morons solve problems that way, but ever since the Reagan presidency, large segments of America had discovered that it's fun to be a moron -- and so much easier than trying to make your brain solve problems, which is, you know, hard -- ouch! And at that point the Right really went to work. What political point couldn't be scored by denouncing regulation?

One obvious consequence, Surowiecki, points out, is that Congress tends to starve regulators. Those great minds have decided that it's an elective, easily cut-back form of spending, and anytime the spotlight isn't on, cut back they do, leaving the regulators starved for funds to do their job. Oh, periodically a crisis results from underregulation, and then suddenly the funding for regulatory agencies flows a little more freely, but only while attention is focused on it, and we all know how long the American attention span is. The result: Regulators are unable to plan meaningfully, never knowing what resources they'll have available in the next budget, and knowing there's no constituency they can appeal to to right the funding wrongs.

A less obvious consequence of the demonizing of regulation affects both the people we charge with doing the job and the public's perception of that job. It's bad enough, Surowiecki argues, that so many of the regulators are appointed on a political basis, which undermines the morale and motivation of the people on the job. Worse, there is, he insists, an abundance of historical and sociological evidence that the country's contempt has a surprisingly direct effect on the regulators. "The history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do."

Surowiecki points out that the one notable exception among scorned American regulatory bodies, the Food and Drug Administration, has a very different relationship with the public, which more or less understands how much it depends on the FDA. He cites a "magisterial" new history of the FDA, Daniel Carpenter's Reputation and Power, which --

argues that a key to the F.D.A.’s success has been its staffers’ dedication to protecting and enhancing its reputation for competence and vigilance. That reputation, in turn, has made the companies that the F.D.A. regulates more willing to respect its authority.

"Social psychologist Tom Tyler," Surowiecki writes, "has shown that acceptance of a law’s legitimacy is the key factor in getting people to obey it."

So reforming the system isn’t about writing a host of new rules; it’s about elevating the status of regulation and regulators. More money wouldn’t hurt: as the conservative economists George Stigler and Gary Becker point out, paying regulators competitive salaries (as is done, for instance, in Singapore, which has one of the world’s least corrupt, and most efficient, bureaucracies) would attract talent and reduce the temptations of corruption. It would also send a message about the value of what regulators do. That’s important, because what the political theorists Philip Pettit and Geoffrey Brennan have called “the economy of esteem” is crucial to making public service work. Offering regulators the kind of reputational rewards that, say, soldiers or firefighters get will make it easier for them to develop a similar sense of common purpose.

That doesn’t mean that the government needs to start putting out “Men of the S.E.C.” calendars, but it does need to instill in regulators the sense that their actions matter. As Carpenter argues in a recent essay, successful regulation, by filling information gaps and managing risk, fosters confidence in the safety and honesty of markets, which in turn makes them bigger and more robust. The pharmaceutical industry, for instance, would be much smaller if people were seriously worried that they might be poisoned every time they took a new drug. And though executives chafe at financial regulation, the protection it provides makes investors far more likely to hand them money to play with.

And he concludes:

"If we want our regulators to do better, we have to embrace a simple idea: regulation isn’t an obstacle to thriving free markets; it’s a vital part of them."

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