In his column in The New York Times on June 25, 2009, Judge Richard Posner
wrote that "The most promising reform would be to give the Federal
Reserve, the National Economic Council or the president’s Council of
Economic Advisers the ability to collect and analyze financial
intelligence and do emergency planning. Regulators failed to prevent the
financial collapse not because they lacked adequate powers but because
they lacked information, a culture of inquiry and a contingency plan." But
then he immediately adds that "There were abundant warnings of impending
economic disaster. Had they been investigated rather than ignored, we
might not be in the fix that we are in today."
The confidence shown in regulators in the first statement seems to me to
be plainly undermined by the historical claim in the second, one that
seems to follows from a certain plausible understanding of public choice
theory, actually--ignoring rather than investigating warnings would come
naturally to those who are, whether consciously or not, embarking upon
vested interest dealing, in this instance working for regulations to
continue instead of doing what might make them unnecessary in time.
Regulators have a good job and it is no surprise that they might work not
so much to fix problems they perceive in the market place but to keep
working at what keeps them employed and well fed.
In free markets, to the extent that they exist, such vested interest
dealings are checked by competition and budgetary constraints (to the
extent these are not thwarted by government policies that often produce
monopolies). A shoe repairer may be tempted to fix shoes not quite as well
as they need to be fixed but just enough that they will last a while but
need to be returned for further repair. Indeed, automobile repairers are
often suspected of this. What, apart from conscientiousness, keeps such
folks on the straight and narrow is competition, the knowledge that if
they don't do the work well enough someone else will jump in to do so. One
main reason that bureaucracies are generally sluggish and unenthusiastic
about serving the public--as distinct from private vendors--is this
element of constant competition, combined with the fact that bureaucrats
gain their income from taxes which can often be raised with impunity by
those who hire them.
What public choice theorists claim is that bureaucrats have a far better
opportunity to yield to the temptation of malpractice than are those in
the private sector. The theory does not claim that all bureaucrats are
cheats and all those in the private sector are professionally responsible.
But it identifies an evident tendency and shows it to exist through the
study of economic and political history. Common sense supports this, as
well, when most people notice that if they go to, say, the Department of
Motor Vehicles (one of the more visible government outfits), they mostly
get a reluctant, bored, at times even curmudgeonly treatment, whereas in
the private sector the routine tends to be eagerness to serve, to generate
and keep business.
There is an element about public choice theory that economists do not
emphasize often enough, namely, that the objectives of regulators are
often very obscure, unclear, even contradictory. For example, governments
often embark on historical preservation but at the same time they are
supposed to make sure that building and other facilities are properly
managed, kept safe, etc. But historical preservation mostly require
keeping things in their original form, while the pursuit of safety
involves making use of the most up to date technology and science. One can
generalize this kind of conflict within government policies all over the
place--which is what accounts for vigilant propaganda against smoking
while tobacco farmers keep receiving government subsidies.
As far as I can tell, entrusting to government officials anything other
than the job the American Founders understood as theirs, namely, securing
our basic rights, is seriously misguided. Not only is most government
regulation a violation of due process, meaning it acts preemptively by
restraining professionals in various fields of endeavor who have not done
anyone any wrong. But it is also an ineffective devices, just as Judge
Posner points out in his article.
