David R. Henderson  

The Rule of Law in the Regulatory State

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What banker dares to speak out against the Fed, or trader against the SEC? What hospital or health insurer dares to speak out against HHS or Obamacare? What business needing environmental approval for a project dares to speak out against the EPA? What drug company dares to challenge the FDA? Our problems are not just national. What real estate developer needing zoning approval dares to speak out against the local zoning board?

The agencies demand political support for themselves first of all. They are like barons in monarchies, and the King's problems are secondary. But they can now demand broader support for their political agendas. And the larger partisan political system is discovering how the newly enhanced power of the regulatory state is ideal for enforcing its own political support.


This is from an excellent piece by my Hoover colleague John Cochrane. The piece is titled "The Rule of Law in the Regulatory State." He gets at something that I posted about here a few months ago: a gap in the theory of public choice. I didn't do it that well, focusing on the politicians and their interests and ideologies. He does it way better. He points out, with many examples, that the bureaucracy is its own lobby and that if you forget that, you will miss a lot.

This will definitely be a reading on my Executive MBA economics course this fall.

I highly recommend the whole thing.

In a section titled "A label," he writes:

I haven't yet found a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control.

Many people call it "socialism." But socialism means government ownership of the means of production. In our brave new world private businesses exist, but they are tightly controlled.

Obamacare is a vast bureaucracy controlling a large cartelized private business, which does the governments [sic] political and economic bidding. Obamacare is not the Veteran's Administration, or the British National Health Service. Socialism doesn't produce nearly as much money.

It's not "capture." George Stigler described the process by which regulated businesses "capture" their regulators, using regulations to keep competition out. Stigler's regulated businesses certainly support their regulators politically. But Stigler's regulators and business golf together and drink together, and the balance power is strongly in the hands of the businesses. "Capture" doesn't see billion-dollar criminal cases and settlements. And "capture" does not describe how national political forces use regulatory power to extract political support.

It's not really "crony capitalism." That term has a bit more of the needed political flavor than "capture." Yes, there is a revolving door, connections by which businesses get regulators to do them favors. But what's missing in both "capture" and "cronyism" is the opposite flow of power, the Devil's bargain aspect of it from the point of view of the regulated business or individual, the silencing of political opposition by threat of regulation.

We're headed for an economic system in which many industries have a handful of large, cartelized businesses-- think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on. Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build factory in unprofitable place, they do it. The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That's neither capture nor cronyism.

"Bureaucratic tyranny," a phrase that George Nash quotes Herbert Hoover as using is a
contender.


I have my contender for a label. It starts with "F" and ends in "ism."


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COMMENTS (19 to date)
Steve Fritzinger writes:

The Cato Daily Podcast covered a disturbing example of this recently. The EPA issued a bunch of costly new rules. The affected industry sued, but couldn't get an injunction against the rules.

After 3 years, the courts finally ruled that the EPA acted illegally. But by then, it was too late. Industry had already paid the cost of transitioning to the new regime so it was too late to go back.

http://www.cato.org/multimedia/daily-podcast/epas-new-kind-power-grab

Njnnja writes:

Serious question...are you calling it "fascism" or "feudalism?" I guess that you meant to say fascism but I'm actually thinking that feudalism works pretty well as a descriptor too. For example, you even talk about regulators as barons, which I guess could make the businesses knights?

Effem writes:

good piece. However, profit margins (record high) suggest to me that there is more "capture" than he thinks. The dream of regulators is to parachute into the private sector, not vice versa (where a stint is merely seen as a "revolving door" duty).

Hazel Meade writes:

The problem is lots of people are perfectly content for it to be that way. After all, business is evil. Why shouldn't it be under the thumb of our noble public servants?

Jon writes:

One enlightened moment in school was when the instructor gave the following definition of fascism : government control of the means of production under the guise of private ownership by means of regulation and coercive incentives.

R Richard Schweitzer writes:

"Grumpy" Cochrane's conclusion stops short of what must (repeat - must)be done. He ends with "reform."

The regulatory state replaces the Rule of Law with Rules of Policy.(see, comment to Caplan's piece this date)

The regulatory state must be contained and then constrained. To that end I have suggested elsewhere:

A New Court

Perhaps someone of the competence of Michael Greve might don the mantle of Richard Armey and undertake the design of a Judicial function ancillary to (1) the oversight responsibilities of Congress; and, (2) the “defense funds” suggested by Charles Murray in his “By The People.”

Congress has the powers to create additional courts of particular jurisdiction.
There is, for example, a Court of Claims. There are bankruptcy courts (or courts “sitting” in bankruptcy).

The existing legal system is clogged with matters of the operations of the Federal Administrative State; the blockages of those remedies serve as an instrument for administrative malfunctions of multiple origins.

Congress can create a Court that, upon submissions, can supply what should be the execution of appropriate oversight by Congress – just like “base closings,” that the political process stymies. Such a Court could be given that much jurisdiction and power subject only to legislative “veto” (up or down- no revisions) within a stipulated period (120 days? or the Court’s rule is final, no appeal, equivalent to legislative remedy).

The Court’s jurisdiction shall concern the actual (and demonstratively prospective) effects of the forms and conditions of enforcements (without regard to existing judicial precedents of a general nature) in specific instances. It shall have full injunctive authority through the facilities of the District Courts and may suspend or terminate any part or all of any regulations or “guidelines & interpretations” etc.. It may terminate an agency's exercise of any and all powers, or particular powers, or set enforceable conditions for their exercise; discipline or remove agency personnel, authorities and any contracting parties.

Only Congress, within stipulated periods of time (which might be in different schedules for different determinations) can set aside (but not modify) its decisions.

This Court might be administered in circuits. Conflicts amongst circuit judgments would be resolved by Congressional action.
Most important, parties affected (even prospectively) would have immediate access; an option to by-pass “agency reviews” and the APA (heart by-pass anyone), and apply for injunctive relief.

It will take some time; care for details; but supplant some of the deficiencies in Congress’s responsibilities – and begin to throttle back rampant regulatory metastasis.

It could begin to revitalize our legal system and timely public access for private litigation.

This would provide one answer to quis custodiet ipsos custodies.

otherwise -- Quo Vadis?

guthrie writes:

@David, your suggestion was also my first thought.

@Njnnja, good suggestion, IMO! It deserves some thought.

@Effem, perhaps, but then there might be some balance to your thoughts. I have a cousin who recently quit working for the IRS to work as an economist in the private sector. She said she'll be making more money, but her goal is to get back to her position in the IRS because it's 'more interesting work'. It seems to me that the 'revolving door' analogy is a fairly robust one.

JK Brown writes:

First of all, the definition of socialism as government ownership of the means of production is at best a very unintelligent simplification. Perhaps not terrible for 9th graders, but really, why does it persist in those who supposedly give thought to such things. It wasn't always so, prior to about 1920, many comprehended socialism as being state control and coercion and didn't confuse it with communism, i.e., none may have more than another. And this was after the experiments in municipal socialism in England and near total state socialism in Australia and New Zealand, circa 1890s.

I presume the academy adopted this simplified definition of socialism as a distraction. "It's not socialism because the deed holder is permitted to retain 60 cents of each dollar of income generated by the capital as personal income" The fact is, we have and really can't avoid some ratio of socialism to capitalism in modern society. The problem is the bureaucracy which seeks to assert its control over all as sooner rather than later, the control-freaks take over the bureaucracy.

That Communism is essentially negative, confined to the prohibition that one shall not have more than another. Socialism is positive and aggressive, declaring that each man shall have enough.

It purposes to introduce new forces into society and industry; to put a stop to the idleness, the waste of resources, the misdirection of force, inseparable, in some large proportion of instances, from individual initiative; and to drive the whole mass forward in the direction determined by the intelligence of its better half.

....

The Socialist, under this definition, would be the man who, in general, distrusts the effects of individual initiative and individual enterprise ; who is easily convinced of the utility of an assumption, by the State, of functions which have hitherto been left to personal choices and personal aims ; and who, in fact, supports and advocates many and large schemes of this character.

A man of whom all this could be said might, in strict justice, be termed a Socialist. The extreme Socialist is he who would make the State all in all, individual initiative and enterprise disappearing in that engrossing democracy of labor to which he aspires. In his view, the powers and rights of the State represent the sum of all the powers and all the rights of the individuals who compose it ; and government becomes the organ of society in respect to all its interests and all its acts. So much for the Socialist.

Socialism, under our definition, would be a term properly to be applied (1) to the aggregate of many and large schemes of this nature, actually urged for present or early adoption ; or (2) to a programme contemplated, at whatever distance, for the gradual replacement of private by public activity ; or (3) to an observed movement or tendency, of a highly marked character, in the direction indicated.
--Francis A. Walker

Keep in mind what was called Communism for most of the 20th century was not strictly communist at all. It was socialist. Specifically, it was socialism with gun control. Remember it was the Union of Soviet SOCIALIST Republics, and even at the height of its power never did it profess "that one shall not have more than another."

David R. Henderson writes:

@Njnnja,
Good point. It could be feudalism too, but I think we’re much further from feudalism than we are from fascism.

JK Brown writes:

If we wish to be polite, and with the regulators just outside the door at dawn, perhaps we must, we could adopt the term "government-guided enterprise" as related in this passage from 'The Big Change: America Transforms Itself, 1900-1950), Frederick Allen Lewis

Is the big and successful corporation its own master, then? Not quite.

To begin with, it is severely circumscribed by the government. as Professor Sumner H. Slichter has said, one of the basic changes which have taken place in America during the last fifty years [1900-1950] is "the transformation of the economy form one of free enterprise to one of government guided enterprise....The new economy," says Dr. Slichter, "operates on the principle that fundamental decisions on who has what incomes, what is produced, and at what prices it s sold are determined by public policies." The government interferes with the course of prices by putting a floor under some, a ceiling over others; it regulates in numerous ways how goods may be advertised and sold, what businesses a corporation may be allowed to buy into, and how employees may be paid; in some states with Fair Employment laws it even has a say about who may be hired. "When a piece of business comes up,' writes Ed Tyng, "the first question is not likely to be 'Should we do it?' but 'Can we do it, under existing rules and regulations?' "He is writing about banking, but what he says hold good for many another business. Furthermore, in the collection of corporate income taxes, withholding taxes, social security taxes, and other levies the government imposes upon the corporation an intricate series of bookkeeping tasks which in some cases may be as onerous as those it must undertake on its own behalf. Thus the choices of enterprise are both hedged in and complicated by government.

My personal preference is "government-throttled enterprise." I envision the strangulation definition of throttled in that term, but it could also mean the regulation.

=========
I've just been perusing 'Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute' by Frederic Jesup Stimson (1910).

It is an interesting discussion of the rise of popular law-making and the usurpation of Common Law, which arose mostly during the Progressive Era of the late 19th century. Although as we see, the tendency toward popular law-making abate even as progressivism has waxed and waned.

But no one, I think, has ever called attention to the enormous differences in living, in business, in political temper between the days (which practically lasted until the last century) when a citizen, a merchant, an employer of labor, or a laboring man, still more a corporation or association and lastly, a man even in his most intimate relations, the husband and the father, well knew the law as familiar law, a law with which he had grown up, and to which he had adapted his life, his marriage, the education of his children, his business career and his entrance into public life -- and these days of to-day, when all those doing business under a corporate firm primarily, but also those doing business at all; all owners of property, all employers of labor, all bankers or manufacturers or consumers; all citizens, in their gravest and their least actions, also must look into their newspapers every morning to make sure that the whole law of life has not been changed for them by a statute passed overnight; when not only no lawyer may maintain an office without the most recent day-by-day bulletins on legislation, but may not advise on the simplest proposition of marriage or divorce, of a wife's share in a husband's property, of her freedom of contract, without sending not only to his own State legislature, but for the most recent statute of any other State which may have a bearing on the situation.

--Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute, Frederic J. Stimson (1910)


JLV writes:

I've sung this tune before, but:

1) Cochrane doesn't actually do a very good job of showing that businesses are afraid to criticize the regulatory state.

2) Regulatory strategy is endogenous to: a) instructions from Congress as to the scope of things to regulate, b) the level of funding of regulatory agencies. For a number of reasons (I think its almost all asymmetric polarization, but opinions differ) Congress has generally reduced b) without reducing a. Cutting the EPA's budget but not its mandate, and then complaining when the EPA doesn't have enough money to pursue every regulatory action and instead prioritizes is... special.

D. F. Linton writes:

Ayn Rand framed it best: We are replacing the Aristocracy of Money with the Aristocracy of Pull.

Fascism is closer than Feudalism: the nobility represented competing centers of violent power which could, in concert, oppose or even subjugate the king. The modern federal government brooks no such competing centers; the centralized state is supreme.

R Richard Schweitzer writes:

Why all this struggle for a singular label?

We have a regulatory state operated by a managerial class.

We have managerial capitalism in the dominant sectors of our finance and business, operated by managers.

Motivations of managers (at both levels)are hostile to entrepreneurial enterprise; for differing reasons but with similar effects.

Managing requires degrees of stability (for predictability); stability requires degrees of uniformity to provide that predictability; by degrees that uniformity becomes the New Totalitarianism.

Phil writes:

Dwight Waldo referred to this as the Administrative State in 1948, noting that the heads of these agencies are not merely managers and policy implementers, but are de facto (enelected and unaccountable) politicians. I don't think he quite foresaw the extent to which his ideas would be true nearly 70 years later.

And this is not a phenomenon limited to the Executive Branch. GAO has been criticized for its practice of tracking how many recommendations it makes and how many are implemented. They claim a higher percentage implemented indicates improvement in government operations. That conclusion is unsubstantiated and it just as likely reflects the high cost of refusing to implement the powerful auditor's recommendation.

R Richard Schweitzer writes:

One reason the term Fascism comes to mind is because that same condition came into play in Italy, [Corporatism?]

It became the Nazi structure as well for Germany

In Russia, the third totalitarians had only the regulatory class of managers (of limited competence), but a passive population.

All totalitarian. All attained sufficient uniformities; sufficient stabilities for the objectives of the managers which were to expand their areas of power - basically, war and conquest.

What will become the objectives of our managers if they are not contained and restrained?

D. F. Linton writes:

Who contains the containers? Who restrains the restrainers?

R Richard Schweitzer writes:

@ DFL

Congress. Up or down. No appeal!

R Richard Schweitzer writes:

Sorry DFL

I should also have referred back to my original post suggesting a New Court.

ThomasH writes:

I am quite sympathetic to Prof. Cochran's grumpiness on the subject of regulation, but several caveats.

1. The warm up ("What banker can criticize the Fed?") is totally overblown and detracts from his more credible observations. Wall Street has been quite successful in criticizing and pushing back against Dodd-Frank, for example. Without evidence that it happens, I have great difficulty believing that firms fear criticizing health or safety regulations for fear they will be singled out for enforcement.

2. I think he underestimates the role of bad legislation in establishing framework in which bad regulations happen. We would not have EPA regulating the CO2 emissions of coal-fired electricity generation if we had a carbon tax or generally if its role was to impose Pigou taxes on polluters. This does not make problems of self-interested bureaucracies and regulatory capture go away, but it does, I think, limit the damage.

3. He does not analyse how certain tactical positions taken by Conservatives lead in practice to less Libertarian outcomes. My favorite is opposition to using explicit transfers (the EITC) leads to opaque and sub-optimal policies for income transfers (the minimum wage). The employer mandate of ACA is another example.

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