The Perils of Regulation
I have collected several excellent pieces detailing the problems with regulation.
The first takes a look at the Sarbanes-Oxley regulations which attempted to regulate accounting practices after Enron. He writes:
FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its website shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm. Yet, FASB mandates the Generally Accepted Accounting Principles that corporations must use to report to their shareholders. The Securities and Exchange Commission enforces FASB mandates with the threat of criminal prosecution.
This is no doubt an example of ‘experts’ given way to much power in determining how an industry should operate. Bureaucrats and politicians love experts because it gives them access to legitimacy in their political dispositions when attempting to implement their intuitions into policy.
The focus of this this author post is to argue, rather convincingly, that despite the intentions of the legislators to force more transparency in corporate account reporting, the new rules in fact do quite the opposite. Its hard enough to craft effective legislation in an environment in which their is little political pressure, however when you have the powder keg of a scandal creating effective regulation is virtually impossible. This author’s arguments do a nice job of proving this position.
Here is an example of how regulation even in a relatively peaceful political environment leads to bad policy.
The Energy Policy Act of 1992 (EPAct) mandated that government agencies purchase flex-fuel vehicles for 75 percent of light duty fleets, hoping to spur automakers into building more fuel efficient vehicles and decrease gasoline consumption.
This leads to:
Problem was, replacement flex-fuel vehicles had larger engines in their predecessors and often ran on gasoline, usually due to difficulty obtaining E85…So, despite all good intentions, the result is an increase in government gasoline consumption.
One of the problem with arguing against regulation is that at the time of the passing into law its relatively unknown what kind of damage they can do. Additionally, rhetorically, its easy to cast regulations is a positive light. Its easy to cast regulation as a simple set of fair rules that will insure some kind of positive outcome. Those arguing against regulation find themselves cast as partisian unwilling to allow a set of simple rules that will insure fairness for most everyone.
The problem is that regulation quite often fails to bring about the promises its supporters advance and many times will bring about undesirable outcomes. This is because its virtually impossible to determine how applying a large set of rules to a massive organizational structure will affect it. The problem of prediction is compounded based on what level the rules are applied and the scope of the application. Thus specifically targeted regulations by an individual directly affected by a problem applied to the neighborhood he lives in is much easier to predict than regulation passed by a majority of senators voting to manage climate change.
One of the reasons regulations appeal to the educated left is because they foolishly believe they can predict the future. It has been my experience the more educated you become and the more intelligent people think you are, the more likely you are to think you can predict things that one can clearly not predict. I think this is one of the reasons why regulations among those on the left seem so reasonable and acceptable. Since ‘experts’ can predict the future it makes sense to implement regulations that will bring about a more desirable future.
But as they two links show, predicting the outcome of regulation is extremely difficult, and if you ask me, its just better to not mess with the system than to try and regulate it. But then again, unlike many of my readers, I’m smart enough to know I’m not smart enough to predict the future.
December 22nd, 2008 at 9:12 am
So, you say one area of regulation sounds fishy to you, and one gigantic energy act had a single silly consequence? Hell, lets shut down the FDA right now.
The problem is you’re not differentiating between oversight, mandates, enforcement, etc etc. Obviously there are stupid mandates all the time that are made for political purposes or to appease lobbyists or just because the legislators are being dumb. And obviously the government succedes some times and not other times, and we already have way to much regulation in some areas and not enough in others. But many of the problems that led up to the current financial crisis were clearly problems of fraud, and the type of oversight and enforcement that would have allowed that fraud to be detected and prosecuted is also regulation. Requiring that children’s toys don’t contain enough lead to cause brain damage is also regulation, because it’s a law that shapes business practices. Truth-in-advertising legislation is regulation.
Sure we can’t predict the consequences of THESE regulations, but we can’t predict the consequences of outlawing murder either. We can’t predict the consequences of ANY ACTION. Sometimes you just have to do the right thing, as best as you can figure.