The Deregulated Straw Man
In the current “Credit Crisis,” the news is once again talking about the “failures of deregulation.”
It makes me cringe whenever I hear this, and I hear it a lot. Whenever anything goes wrong with a controlled system, the people who want more control blame the problem on the last attempt at “deregulation” and hold this up as proof that more regulation is the answer to any given problem.
So why don’t I accept this explanation?
Because there never has been real deregulation - just a change in regulations that politicians have labeled as “deregulation.” Regulations may have been reduced in some sense, but you can bet that they were also simultaneously increased or changed in some substantial way as part of a political compromise, and that many many existing regulations still remain.
And there will always be a recent attempt at “deregulation” to blame for any problem. The people involved in any regulated industry will always be trying to reduce the restrictions on their free actions, and will be using the normal governmental channels to do this. Some of the time their efforts will succeed and sometime they will fail, but there will always be some recent reduction of regulations to point to. Of course there are always recent regulatory increases as well. Without a more in-depth analysis, it is impossible to tell whether recent increases or decreases in control are leading to a given problem.
You can’t just look at the order in which the new rules were imposed or removed, because changes in rules can take some time to have good or bad effects, and because the addition or removal of a rule may well only produce good or bad effects in an environment of existing rules, so it is often difficult to judge which rules get the credit or blame for a given set of results.
If you just go by what was the last change, when a problem occurs it is quite likely that the last change was indeed one removing a regulation rather than adding a regulation. But this does not justify the belief that removal of regulations is dangerous and adding them brings safety - rather it is a natural effect of the existence of this very same belief.
In an environment where problems are seen to be fixed by regulation, the standard cycle runs like this:
1.) If things are going smoothly, it is difficult to justify restricting people’s freedom, so regulations are likely to be slowly removed where some people perceive that greater good can be achieved without some existing regulation.
2.) If a problem occurs, it is unlikely that people will analyze the situation well enough to say, “Removal of regulation X did bad things because we did not also remove regulation Y which without X unbalanced the system. If we had removed both X and Y things would have worked fine.” So…
3.) Regulation X is re-instated and/or a bunch more regulations are added in the ensuing panic because it is believed that a lack of regulation is the problem.
4.) If these new regulations cause additional problems, the removal of regulation X can still be blamed and changes can be made in a continued environment of distrusting “deregulation.”
5.) Eventually things stabilize and the cycle can start over.
This is how we can live in a world where government regulations are always increasing, yet somehow “deregulation” can still be blamed for any problems that happen to occur within a highly controlled system.
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October 17th, 2008 at 7:10 pm
Additionally, whenever anything goes noticeably wrong and thus generates a lot of interest in what is going on, everyone always tends to point out how this is because their own pet ideas about how things should be done have been ignored, and how their ideological opponents are fully to blame. Any major noteworthy event always seems to confirm everyone’s previous opinion about everything. This is known as the “confirmation bias.”
So when Democrats are blaming Republicans, and Republicans are blaming Democrats, how is it that I can honestly examine my own beliefs and know that I am not just doing the same thing - blaming collectivist behavior because I am an individualist?
I submit that I am pointing out a flaw in common collectivist logic, and not doing the same thing at all. The flaw is in pointing out that a crisis happened following some event that is labeled as “deregulation” and therefore asserting that more regulation is generally a good thing. I am different because I am unwilling to jump from the specific (that some new regulation has caused problems) to asserting the general (that all regulation is bad) even though I might believe the later statement for entirely different logical reasons.
I have no problem believing that where one regulation might cause catastrophe, that this same regulation plus some additional regulation to curb its effect might produce a more stable result. I would merely point out that each regulation has additional enforcement costs, so if a stable solution that requires fewer regulations can be found, it is going to be better - if only because it is less expensive to maintain.
If people, when told that some “deregulation” has caused a problem, could learn to examine the system and see if the removal of a few more rules might remedy the situation as easily as the reinstatement of the previously removed rule - I would have a great deal more hope for humanity. If they could just be limited to the knee-jerk response of reinstating the original set of rules and not taking the opportunity to add even more rules, I would be somewhat satisfied.
And it would be nice if people only blamed the removal of rules when that was actually the logical cause of the problem - rather than totally ignoring the smoking gun of a newly imposed rule or the interaction of an old rule with a new situation.
October 26th, 2008 at 6:18 pm
People seem to operate based upon the rules and incentives that pertain: official and unofficial. The balance between transparency and privacy is altered by rules changes. It seems to me that being humans ourselves we should be able to perceive potential failure points in our systems. But instead of examining empirical evidence, we tend to operate from belief. That impedes our ability to understand what happens and to remake our model. We set up a system that allows for abuse in secret then act surprised that abuse has occurred. Collapses are actually inevitable in this circumstance, we assume because it doesn’t happen instantaneously that we have a sound system.
So we are usually playing craps but kidding ourselves into believing in some awesome new paradigm. What tended to be eliminated in the financial services industry has been compliance and oversight, and to allow mixing of different non equivalent, competing fiduciary responsibilities in the same entity, and to let accountability dissolve through special accounting practices that are manipulative. Additionally federal guarantees affect behavior by encouragingly gambling style risk.
At this point we should probably move away form rules based regulations that seem prone to legal manipulation and move to principle based regs.
December 16th, 2008 at 2:06 pm
Of course “principle based regs” are by their nature less specific and more open to interpretation. This generally creates an environment for abuse by prosecutors looking to “make their bones” by taking down some high profile target or institution.
Even with more specific “rules based regulations,” whenever a business fails in a big way, there is always some politician suggesting that the very same people who just got their ass handed to them in the market, and had their reputations destroyed, should now also go to jail because of what happened. These politicians look for any way they can to stretch the existing rules to call what happened a crime after the fact. What do you think they would do if allowed to enforce vague principles rather than specific laws?