What is Government Regulation Trying to Accomplish?

December 30th, 2009

A few months ago, the Federal Reserve made a bid to enlarge its current responsibilities. Not content with control of monetary policy, the Fed proposed to tackle the problem of “systemic risk” – the question of which firms should be bailed out by taxpayers in order to prevent economywide collapse.

Now Democrats in the U.S. Senate have entered a competing bid. They have proposed not one, but three brand new federal government agencies to handle financial regulation. The chief proposer was Senator Christopher Dodd, who when last heard from was trying to escape responsibility for having helped to engineer the housing bubble while personally profiting from it.

Which is the proper agency to oversee financial regulation – Congress or the Fed? That question presupposes that financial regulation is a good thing. What is the underlying purpose behind it, anyway?

Avoiding Crises?

Well, this season, financial regulation is ostensibly focused on avoiding financial crises.  Credit crunches. Liquidity traps. Bubbles. Ghastly mistakes that lead to business failure, mortgage default and bankruptcy. Regulators spent last season giving money to investment banks, commercial banks and automobile companies in order to – to – well, versions differ, and the story changes every few months. The bailouts were either to prevent another Great Depression or to get us out of a Depression we were already in or to save jobs or to create jobs or for any of various other purposes. The only common denominator in the various versions has been that certain businesses are unsuccessful and it is necessary to give them money. Our money.

Expropriating Profits?

Not so long ago, however, regulators were frying altogether different fish. The public was outraged by the so-called “record profits” earned by oil companies. Regulators were trying to resuscitate the “windfall profits” taxes of the 1970s. In other words, the problem was that businesses were too successful and the purpose of regulation was to penalize their success by taking money from them.

Controlling Prices?

At other times, the focus of regulation was on the prices charged by businesses. Usually the problem was that the prices charged were too high. Occasionally, for variety, the prices were too low. So, government regulators had to tell the businesses what prices to charge, or at least put ceilings on or floors under their prices. Railroads, trucks and airlines were among the businesses whose prices were set or approved by federal regulators.

Ensuring Service?

On still other occasions, the preoccupation was on ensuring provision of the good or service to consumers. The mantra followed by regulators then was “universal service.” Government had to set prices to make sure that everybody was able to consume the good or service. Of course, government also had to make sure that the companies earned a “fair profit;” otherwise, nobody might be available to provide universal service to consumers. Electric, gas and telephone companies were among those favored with this regulatory attention.

Dictating the Menu?

Ah, but we haven’t touched on that perennial favorite of regulators – which goods and services businesses should be allowed to provide. For example, regulatory agencies determine what medications doctors can make available to patients. Why? Left to their own devices, the implication runs, doctors will provide too many medications. Some medications will be harmful, others will be redundant, and still others will be useless.

Choosing Suppliers

Say – those businesspeople are pretty slippery characters. If they can’t be trusted to provide the right goods and services in the right amounts, we’d better make sure that we have the right people in business. Occupational licensure is the means to do that. Incumbent businesspeople get to decide who will, or won’t, be allowed to compete with them. Typically, state or local regulators get to have this fun, although federal regulators get to horn in as well.

All of the Above – and More

By this time, the pattern should be obvious. As a British Labor Party politician once put it, “the purpose of government is to eliminate all sources of discontent.” The job of government regulation is to fix whatever seems to be wrong as the moment, scratch where it itches, oil where it squeaks.

Is there anything that isn’t the job of government regulation? If an American slips getting out of bed in the morning and fractures his skull, is it a failure of government regulation? Does the unregulated status of arisings from bed constitute a prima facie case for government regulation? Do we owe it to the children of future skull fracturers to protect their fathers from themselves via government regulation?

The question is neither frivolous nor rhetorical. The Consumer Protection Agency already regulates the kind and quality of consumer goods. Everybody who earns income from employment must pay taxes to the Social Security System, ostensibly to provide for their future retirement but actually to pay benefits to current retirees. Meanwhile, nobody any longer doubts that an employee could enjoy a substantially more comfortable retirement by contributing those F.I.C.A. towards the purchase of an annuity issued by a private insurance company.

Government regulation is supposed to do anything and everything. That is the same thing as doing nothing in particular. It is long past time to ask ourselves whether government regulation does anything at all worth doing.

The Best Fox to Run the Coop

This is obvious when we stop to consider that the two agencies that are wrestling with each other for regulatory control of financial markets are the two agencies responsible for causing the financial crisis that gave rise to the demand for regulation. The housing-market bubble that resulted in skyrocketing prices, questionable marketing tactics and instruments and massive mortgage defaults was the direct result of years of money creation by the Federal Reserve. The looser loan and credit standards that lubricated the bubble were the direct result of policies created by members of Congress, some of whom personally benefitted from them.

Competition or Regulation?

Stop someone on the street and ask them if government regulation has a purpose. What a crazy question! Of course it does! What is that purpose? Well… To keep businesspeople honest, to keep them from charging outrageous prices, to make sure they provide useful goods, use the best production techniques and don’t skimp on product quality, to keep crooks out of the business and to make sure that they don’t make too much profit.

Any economist – or any textbook on microeconomics – will verify that these are exactly the things that competition is supposed to do. Assigning the job instead to government regulation means that regulation is replacing competition.

There are now over 100 federal-government regulatory agencies. Every time something goes wrong (or is perceived to), it is blamed on lack of regulation or deregulation. The remedy is always more government regulation. The fact that things keep going wrong suggests that competition works better than government regulation.

Category: Annuities, Economic Analysis, Economic News | Tags: , , ,

One Response

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