A theory of regulation

Tyler Cowen laid out a very weird theory of regulation:

The number of laws grows rapidly, yet the number of regulators grows relatively slowly. There are always more laws than there are regulators to enforce them, and thus the number of regulators is the binding constraint.

The regulators face pressure to enforce the most recently issued directives, if only to avoid being fired or to limit bad publicity. On any given day, it is what they are told to do. Issuing new regulations therefore displaces the enforcement of old ones.

If the best or most fundamental regulations are the ones issued first, over time the average quality of regulation will decline.

Let’s review what "a regulator" does (sticking to the federal level, since that’s what I’m familiar with).

As we were taught in basic civics (or social studies as it was called when I was in school), government has three functions: executive, legislative and judicial.

The modern regulator in USG performs all three of the roles. (Hint: this is the problem, not the number of regulators or regulations).

"Issuing new regulations" is a legislative function. I know you believe you vote for law-makers, but your notions of how your government works are stuck in the 19th Century.

Modern regulations are written vaguely since the agencies that write the rules are – in many cases – tasked with the judicial function as well. In other words, the guy that writes regulations also interprets them. Nice work if you can get it.

Modern regulators also serve an executive function, but this function is outsourced when possible, since it’s boring by comparison to the other two. For example, much of what happens on an airplane is required by FAA regulations. All procedures are followed even though I’ve never been on a plane with a regulator from the FAA as far as I know. Another example, changes to financial reporting rules are enforced during audit processes. To cut to the point, old regulations generally don’t need to be enforced as aggressively, since they’ve already become part of industry practice. I would be willing to argue that the executive function occupies the smallest portion of the average regulators time (though the line between executive and judicial gets blurred by the current practice).

Finally, Cowen claims that regulators are pressured to enforce recent regulations most strongly. This is wrong for 99% of regulations. Generally, the only people paying attention to a regulation (except in extreme cases) are the people being regulated. They generally want weaker regulations and weaker enforcement.

If you followed my explanation, you’ll see that our regulatory system is retarded. It polices itself according to its own rules, which it then judges. Worse, if policies fail, nothing happens. Failure and success, in fact, have identical pay outs (arguably failure is rewarded more highly). What we see here isn’t just retarded, it’s . You can’t change the number of regulators of the number of regulations in such a way to make such a system work. It’s broken by design.

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8 Responses to A theory of regulation

  1. Tschafer says:

    Yet another reason not to take Tyler “Cheap Chalupas” Cowan seriously. I mean, has this guy ever been right about anything nontrivial? He’s sort of a one-stop shopping outlet for bad ideas on the Right. Of course, Matt Yglesias fulfills this function on the Left…

  2. Jeffrey Shuren's Conscience says:

    Foseti: I think this frame of reference probably works for financial sector regulations. Unlike the energy and pharmaceutical sectors, the financial sector is demagogued but the regulations are ultimately toothless at the very highest ends (as the banks are bailed out).

    By contrast, businesses under the tender mercies of the FDA and EPA tend to just be killed rather than bailed out. By way of explanation, here is a lengthy example of the FDA randomly asphyxiating a company, Darth Vader style:

    http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm273283.htm


    FDA requests that International Immuno-Diagnostics immediately cease marketing, promoting, and distributing all in vitro diagnostic products that require PMA approval or 510(k) clearance and do not have FDA approval or clearance. The adequacy of your corrective actions will be evaluated during our next inspection…Please notify this office in writing within 15 working days from the date you receive this letter of the specific steps you have taken to correct the noted violations, which may include notification of your current and past customers.

    Understanding this snippet requires some terms to be defined. Long story short, there is this term called “RUO reagents”. Formally, it means “research use only” reagents, as opposed to those that are FDA cleared. Informally, it means “pretty much every single reagent used in clinical practice”.

    Basically, the FDA came up with this impossibly costly path for getting a reagent approved, but “allowed” an entire parallel $100B industry of RUO reagents to grow up.

    http://lists.utsouthwestern.edu/pipermail/histonet/2006-December/026469.html

    Terri, yes, it is crazy.CLIA enforcement arms (including CAP) have ignored this for years, but FDA has not changed it’s stance. This affects antibody vendors as well. Why go the the trouble and expense of FDA registration (which requires a quality control system and FDA inspections) if RUO-only companies can sell to the same labs, not have any quality control, no FDA oversight, and no consequences? Apparently CAP simply made up their RUO policy and never even asked FDA about it. I guess you can do as everyone else does: ignore it.

    Now, however, the FDA’s budget has recently doubled and it is feeling its oats. It wants to expand into new territories and is now actually dropping this RUO Swords of Damocles that it’s been hanging over everyone’s heads.

    So how does it decide to begin this campaign of enforcement? By simply randomly choosing one company and killing it in broad daylight, to encourage all other manufacturers to comply.

    The bureaucrats responsible (Elizabeth Mansfield, Alberto Gutierrez, Courtney Harper, and Jeffrey “The Perjurer” Shuren) did this intentionally and very cynically. They knew that pathologists themselves at nonprofit labs were more sympathetic. Going after them directly could cause political backlash.

    So instead they went after the pathologists’ suppliers, those dastardly black hats running for-profit factories.

    They kill one company brutally like this, and a thousand other scurry into “compliance” by submitting an FDA application — or simply abandon production of RUO reagents. Because the FDA process costs several million dollars, is quite uncertain in its duration, and greatly reduces the flexibility of the manufacturer… this cost must be baked into the reagent.

    If annual sales are not sufficient to pay for this bureaucratic overhead the reagent is simply discontinued.

    And now you start to see why people are dying from record drug shortages[1], which is about as much of a mystery to us in the field as the curious persistence of the NAM test score gap.

    [1] “Authorities perplexed by drug shortage spike”: http://www.reuters.com/article/2011/10/14/us-drugs-shortages-idUSTRE79D4GI20111014

  3. RS says:

    No one can get em all… I actually think he’s the best guy GMU guy on the internet, though I could be wrong.

  4. RS says:

    Of course I utterly disagree with him on chalupas, but it’s not a question of fact. He pretty much confesses hbd. I think he knows immigration will worsen life for Americans and Europeans including non-Europids already here. However that is basically not decisive for him, because he’s a univeralist utilitarian or what have you.

  5. More Anon says:

    “Modern regulators also serve an executive function, but this function is outsourced when possible, since it’s boring by comparison to the other two.”

    You mean these are “outsourced” to the private sector’s regulatory compliance officers, internal auditors, etc., correct?

    One obvious Cowen mistake is not to count these positions as regulators. If we counted these folk, how large would the “regulation industry” be?

    Has anyone examined these positions in detail? Are they distinct from Burnham’s “managerial class”?

    These private-sector regulatory officers are in part clients of the government and enforcers of the government and depend on government regulation for continued employment. Does that really mean they generally want weaker regulations and weaker enforcement? Do they really trend anti-regulation or pro-regulation? Won’t they often take the path of least work and most power, and act as advocates on behalf of the regulatory system, not necessarily their employer?

    • asdf says:

      Indeed they will take the side of the state.

      Mya Thomae is a particularly sycophantic and corrupt FDA bootlicker. Read her blog at myraqa.com/blog to see how she exults at every increase in federal power and advises her clients to just shut up and go along (and pay her) rather than fight back.

      She represents the true voice of the FDA, sort of like Obama or Bush had underlings say what they couldn’t.

    • Foseti says:

      Yes, I mean it’s outsourced to private sector compliance officers, etc.

      I completely agree that these people should be considered government employees.

  6. I got stuck on the concept of there being ‘best’ or, especially, ‘most fundamental’ regulations. These are bizarre notions to me. The only real observable test for a good regulation is whether they gave a politician deniability/cover/bragging rights (“I addressed that problem by passing law ___”), and meanwhile created/sustained some paper-pushing jobs (which is what gives those politicians support among the bureaucratic class), because that’s all they’re really designed to do. By that metric a regulation is ‘good’ if it’s simultaneously complicated/opaque/stupid/irrational and if the DC workforce implementing is able to bid on nice houses in Montgomery County.

    More Anon has it right that the regulations get outsourced to stealth-government-employees in the private sector. All the people who work in “HR”, most of the people who work as “COOs”, and obviously staff lawyers, etc., fulfill functions 95% of which wouldn’t exist without government regulations making them necessary. These are the enthusiastic implementers of new regulations, sometimes without even being asked or without those regulations existing yet (‘let’s get ready for Basel III’). A ‘good’ new regulation or regulation-threat can mean job security for these people for years.

    It is a worthwhile exercise to try to envision just how many stealth-government-jobs will be created in the financial industry by the mind-boggling ‘Volcker rule’, for example. And Foseti & his colleagues will not be the ones having to lift a finger 🙂

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