Arnold Kling  

Cannon's Law

Ability Bias vs. Signaling Aga... Not in My Interest...

This story got picked up by several outlets.

Soon, "mystery shoppers" may come to medicine. And doctors are outraged.

The Department of Health and Human Services proposes using them to figure out why so many new patients are having problems obtaining a primary care physician.

The way I would state Cannon's law is that any reform that might work will, if implemented by government, be diluted by special interests.

Mystery shopping is a potentially great regulatory tool. If somebody made me the head of the new consumer financial safety thingy, I would opt for principles-based regulation and mystery shopping, rather than putting out rules for products.

Rules for products do two bad things. One is that they stifle good innovation. The other is that they create strict boundary between what is allowed and what is not allowed, and the bad guys can always find ways to rip off consumers using what is allowed.

Principles-based regulation says, a la Google, "Don't be evil." You explain what is evil by listing examples. Examples I would enlist would include "biweekly mortgage conversion programs," where the conversion fee wipes out any saving you would get from converting your mortgage from monthly to biweekly; or "funeral insurance;" or some of the stuff perpetrated in this article.

Then, you do mystery shopping. If companies are marketing harmful financial products, or they are marketing financial products to really inappropriate customers, or they are marketing in really misleading ways, you come down on them. You might start with a warning, and if that does not work impose a fine, and if that does not work send folks to prison. Or, if the evil is blatant enough, go right to the prison option.

But Cannon's Law says that if it will work, then the government won't do it. If regulation would really bite, the regulated parties will work the political system to kill it.

I call it Cannon's Law because yesterday I listened to this event, which discussed a proposal for something like real health insurance, as opposed to what I call insulation. In his comments on the proposal, Michael Cannon suggested that real insurance might emerge in a private health care market, but he thought that in the context of a government program it would be hopelessly distorted by the political process. I thought his comments were articulate and persuasive.

And perhaps today's news is an illustration.

COMMENTS (6 to date)
Steve Sailer writes:

Mystery shopping by the government mostly is used to look for disparate impact discrimination in lending, which doesn't exactly lead to safer lending.

Blackadder writes:

Wouldn't principles-based regulation" lead to major regime uncertainty?

Wouldn't principles-based regulation" lead to major regime uncertainty?

If the principles are simple, known to the market participants, and applied consistently, then there would be a low probability of significant regime uncertainty.

James writes:

Why assume that principles based regulation will be well implemented? Discretion in enforcement generally leads to selective enforcement.

PrometheeFeu writes:

I think Arnold confirms my suspicion about libertarians in general: Libertarians are liberals who realized that there are no philosopher kings. Of course Arnold can trust himself to run consumer protection agencies and send people to jail when they are doing something that is "effectively" fraud. Of course, I could trust myself to run this country's regulatory agencies. But 1) neither Arnold nor I will run anything (we both have better things to do) and 2) I don't really trust him with that power and neither does he trust me with the same. Liberals also want to do good in this world and they know that at least some if not many politicians are corrupt/have poor incentives. But they don't want to throw the baby out with the bathwater. They just haven't realized that when it comes to the government, there is no baby, it's all bathwater.

Granite26 writes:

Doesn't the rule of law require a bright line between acceptable conduct and criminal?

Forget require, isn't it defined that way?

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