Three contentious questions face Congress and the Obama Administration: How to regulate business and financial institutions to prevent future economic meltdowns? How to regulate the healthcare system so that it affordably covers everyone and provides choice? How to regulate the energy markets to promote energy independence and clean air? We adamantly debate greater regulation or de-regulation of private enterprises without a clear understanding of regulation itself. In a series of posts I will systematically address: 1) how regulation works, its benefits and limitations, 2) the variety of available methods to regulate systems and the tradeoffs produced by each method, 3) a response to the first question: my recommendations for a package of financial regulations that strategically balances performance and soundness.
I’ll use three everyday examples to help explain regulation: a comfortable home, a reliable car and a healthy person. I’ll do my best to keep it clear and interesting. Feedback is welcome, nay encouraged.
Examining the Political Debate about Regulation
Some experts and politicians advocate ever less government regulation, loudly asserting on faith rather than evidence that unregulated markets produce the best results and that more regulation inhibits competitiveness and healthy growth. Even those seeking new regulations seem to accept these faith based assertions and treat new regulations as necessary evils needed to prevent system-wide failure. Almost everyone is timid about more regulations and afraid of going too far. They needn’t be, as I intend to demonstrate. Vigorous steps are decades overdue.
From my vantage point, the political and business advocates of greater de-regulation lack any concrete evidence to support their beliefs while they blithely ignore a host of evidence to the contrary. For example, they readily accept the need for those government enforced regulations that enable big behemoths to exist and grow such as: corporate charters, copyrights, patents, contract law, employment agreements, inheritance laws and private property rights. Yet, they are reluctant to pay to operate a government which enables and enforces these laws and provides the stable currency, the peace among nations and the domestic tranquility that banking and commercial giants require.
What regulation’s opponents selectively oppose are those laws and law enforcement tools which they see as inhibiting to business and finance such as: taxes, anti-monopoly and anti-bundling laws, the SEC, public disclosure requirements, limits on risk taking and credit manipulation, fair trade practices, health and safety requirements, minimum wages and benefits, and limits on executive compensation. However, their knee-jerk opposition is strange because enabling regulation for one constituency is frequently another’s inhibiting regulation. For example, software copyrights owned by Microsoft enable it to exist and continue to dominate in spite of an increasingly out of touch management and a decade long dearth of innovations, while they inhibit its competitors from selling improved and less expensive versions of their software to the detriment of customers.
Without government regulations that both enable and limit, there would be no major corporations or financial institutions and we would still be in the age of crafts and barter.
Advocates of de-regulation often cite the demonstrated advantages of market economies over planned economies to push for ever more de-regulation. Instead, they should ask themselves: What is it about market based economies that produce revolutionary improvements? What role does government regulation play in creating and sustaining these advantages over the long haul? What is that role worth to the economic system in terms of taxes and social responsibilities?
In a planned economy, a central authority makes the key economic decisions, coordinates them with its political objectives and regulates their execution ―the central authority in the Soviet Union was the communist government and in most other nations was a king or emperor. Whenever a large pool of resources is controlled by a central authority― be it a government, a religion or a private enterprise ―its first objective is to maintain control of those resources at all costs. Risky decisions and innovations that produce profound changes or increase the system’s complexity threaten that control and must be avoided or even suppressed when they occur. Authority is passed on by inheritance, either biological or by reputations earned by working submissively within the system. Leadership competence decays, decisions become simpler and an economic and political stagnation takes hold within the system until either a reformation sweeps through its halls of authority producing a brief period of innovation, change and vulnerability or a revolution demolishes it and sweeps it away.
In stark contrast, market based economies rely on diversified and localized decision makers who manage relatively small pools of resources, who sometimes succeed and who more frequently fail and who don’t make political decisions. Taking risks and aggressively innovating produces change and causes established alternatives to fail at an ever increasing rate, but stimulates overall growth and creates new forms of wealth. A market economy spreads wealth on the basis of competitive successes as opposed to inheritance, and creates new forms of wealth while educating an abundance of capable leaders for business and for government.
Massive pools of resources and decision making bottlenecks stifle growth and innovation in planned economies and large private enterprises because they limit choices and compromise actions. The CEO of a business behemoth is no more willing to support innovations that will cannibalize his organization’s products or policies and destabilize his control than a dictator would support revolutionary political ideas or a Pope would support heresies that challenge his authority.
However, over the last 30 years, it is de-regulation on a global scale that has encouraged markets to recentralize on a global scale, dominated by ever fewer and ever large behemoths with central authorities anxious to maintain control of their pools of resources ― government protected but largely out of government control― that innovate more slowly, are loaded with parasites and pathogens, produce fewer and fewer tested leaders, gobble up smaller competitors, treat the consumers shabbily, avoid taxes and use their massive resources to manipulate markets and governments.
Advocates of greater regulation need not be so timid; they can enhance the health and effectiveness of markets with appropriate regulation and oversight. Nor should they limit themselves to direct controls which are fairly easy to get around and are unlikely to work for very long without intense and costly enforcement protocols. A few direct controls are necessary, but in the manner of natural systems, multiple layers of indirect and proactive regulations are more strategically effective, more self-managing and more impervious to destructive gaming. Both kinds of regulation are at the core of what I will recommend.
A note of caution: our political system is just as vulnerable to over-centralization, to parasites and to pathogens (among them political parties, lobbyists and third term Senators) as are large businesses. Our Founding Fathers built Constitutional checks and balances between the branches of government and with the Bill of Rights between the government and citizens. These built in regulations― these governmental immune systems― have worked reasonably well to prevent an unregulated migration to a rigid and unresponsive government. To those regulations we’ve recently added some term limits to political service which further strengthens the immune system. However, as the government takes on more responsibility for regulating the economy, we risk recombining political and economic decisions under one authority. The three questions that began this post have to be answered through the government because, right now, it is the only institution with the resources to solve them. We must live with this risk for a while because we have no short-term alternatives, but we can reduce the long term risk and I’ll explain how in a future post.
To use a medical metaphor: we are calling on our government to provide medical assistance to economic institutions with unhealthy eating habits, parasitic loads and fatally flawed immune systems. While the government plays doctor, we must address its eating habits, parasitic loads and immune systems because we’re the only ones who can keep that puppy healthy.
Stay tuned!
Related Posts
Mr. President: Break up the financial behemoths now! (6/19)
Laws of Natural Selection; laws that can sustain civilization (5/27)
“Too Big to Fail” is Un-American (5/5)
Economic over-centralization driven by tactics and weak executives! (5/1)
Stop whining about taxes, we’re in serious trouble! (4/22)
Management Bottlenecks: primary source of institutional failures (4/10)
To Preserve our Bill of Rights we need a Bill of Obligations (4/7)
Economic Regulation and the Myth of Free Markets (3/28)
Executive Compensation and Other Parasitic Loads (3/13)
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Mr. Lee gives a thoughtful argument in favor of regulation as a way to maintain free, competitive and thriving economies. Allowing the most powerful interests to grow at the expense of competition is akin to allowing a cancerous tumor to fester; one that saps the strength of the bodies vital systems.
Whatever happened to our antitrust laws?