The tsunami-driven crisis at Japan’s Fukushima nuclear power plant in March reinforced Washington Post columnist Harold Meyerson’s conviction that governments the world over must devise more regulations and enforce them with greater vigor. The Fukushima disaster, following hard upon the Deepwater Horizon oil spill in the Gulf of Mexico in 2010 and the financial panic in 2008, should be enough, Meyerson insisted, to disabuse us of our “deeply rooted faith” in “our own infallibility.” Such “systemic failures” demonstrate the need for “active, disinterested governmental regulation” as a corrective for “the human capacity for mistake and self-delusion, not to mention avarice and chicanery.”
Meyerson’s view is a perfect distillation of the widely held belief that the cure for the ailments of regulation is, simply, more regulation. This quasi-theological commitment has been integral to American liberalism since the Great Depression. A leading New Deal theoretician, the legal scholar James Landis, argued that if American government were to meet its responsibilities in the Industrial Age, it would have to break free from the constraints of the Constitution’s checks and balances and enter a new epoch in which the administration of public policy would not only be distinct from politics, but also steadily supplant it. In his influential 1938 book, The Administrative Process, Landis urged us to dispose of “the casual office seeker” and entrust government to “men of professional attainment” who “envisage governance as a career.” In this way, “armies of men dedicated to the idea of justice” would fashion and enforce public policy.
The disasters Meyerson uses to make the same case Landis made in 1938, however, actually show that modern regulation is as much a part of the problem as it is the solution. Americans spent the 1980s listening to lectures contending that Japan’s governmentally directed industrial policy was superior to the Wild West capitalism being foisted on us by the Reagan administration. That belief in “industrial policy” was precisely an outgrowth of the notion of rule by experts, and the Tokyo Electric Power Company was one of the hallmark businesses that demonstrated the viability of this idea to influential neoliberals like Robert Reich and James Fallows. Now, however, the Tokyo Electric Power Company is best known as the owner and operator of Fukushima—and from being a shining example of the benefits of a regulated economy, it has suddenly been transmuted by Meyerson and others into a paradigmatic corporate renegade in an unregulated industry.
Similarly, the Deepwater Horizon accident in the Gulf of Mexico revealed that the Minerals Management Service (MMS), the chief federal regulator of the offshore drilling industry, was corrupt and inept. In the aftermath of the oil spill, Secretary of the Interior Ken Salazar found MMS irredeemably compromised by cronyism and disbanded it in favor of three new government agencies.
As for the subprime lending bubble and meltdown, there are compelling reasons to doubt the quality of our financial regulatory structure, but no one could argue that there were an insufficient number of regulatory bodies at work. The financial services industry is superintended by 115 government agencies, according to the economist Laurence Kotlikoff.
These three disasters are but a few examples in a long record of stunning failure in highly regulated realms, and one might think they would lead a thoughtful person to ask a fundamental question: What, exactly, are gargantuan regulatory regimes for?
The question ought to compel America’s liberals, and Americans in general, to confront an insidious dilemma from which there is no logical escape. Presumably, regulation exists to protect ordinary people and to prevent catastrophes. Neither, of course, happened in the course of these three recent examples of regulatory breakdown. That is because the political power vested in interventionist government bureaucracies responds to those most adept at exerting pressure and making appeals—and those adept players are rarely the ones most in need of assistance.
In fact, gargantuan regulatory regimes both sustain and are sustained by an unholy alliance of big-government liberals and the cunning corporatists who have learned how best to game the system and use it to their advantage. This conduct, often called “rent-seeking,” is the result of a metastatic spiral. The growth of activist government has made necessary the growth of a vigorous, shrewd, activist lobbying sector.
Supporters of more onerous regulation have taken account of this unsavory state of affairs. In a 2009 Wall Street Journal column, the leftist social critic Thomas Frank contended that because there are “powerful institutions that don’t like being regulated,” they have “used the political process to sabotage, redirect, defund, undo, or hijack the regulatory state.” If the Obama administration and liberals generally want to “vindicate the regulatory state,” Frank advised, they must disabuse themselves of any notion that mere “organizational tweaking” can “solve the problem” of “bad or bought regulators.”
In the same vein, the political scientists Jacob S. Hacker and Paul Pierson argue in Winner-Take-All Politics, published last year, that liberalism’s regulatory advances in the 1960s were met and bested by American industry’s massive and successful counter-attack beginning in the 1970s. “The number of corporations with public affairs offices in Washington grew from 100 in 1968 to over 500 in 1978,” they record. “In 1971, only 175 firms had registered lobbyists in Washington, but by 1982, 2,500 did.” They decry “the enormous imbalance in organizational resources between the chief economic beneficiaries of the status quo and those who seek to strengthen middle-class democracy.”
Hacker and Pierson are more restrained than Frank, who considers conservatism a philosophy that “elevates bullies and gangsters and CEOs above other humans.” According to his latest book, Wrecking Crew: How Conservatives Rule, “Lobbying brings a constant pressure in a single direction”—for the rich and for big business, and against the ordinary people who are the nation’s consumers and employees.
But many of the same conservatives Frank condemns offer similar arguments about the corruption of the regulatory process. Conservatives want to live in a country where enterprises flourish by gratifying their investors, lenders, suppliers, employees, and, above all, their customers. They don’t want an America where the biggest factor determining whether a business thrives or falters is how well it gets along with its regulators. It should be no mystery that, after Congress launched what Frank calls “the greatest wave of regulatory endeavors in American history” in the 1960s and 70s, the number of lobbyists and public affairs offices in Washington exploded. The dramatic expansion of regulatory oversight meant that business and industries had compelling, in some cases existential, reasons to concern themselves with every detail of the regulatory process.
Their focus was less the lucrative things that government could do for them than all the costly or even ruinous things government could now do to them. Corporations or industries that behave the way Frank, Hacker, and Pierson implicitly endorse, meekly submitting to whatever laws or regulations the government hands down, would be at a competitive disadvantage against rivals that proved to be better at working the phones and corridors. And that is the great flaw at the heart of the argument for more regulation: its proponents do not understand, or refuse to understand, that there is a deep connection between their policy prescription and the unintended consequences that have followed from it.
Frank’s morality play pitting “powerful institutions that don’t like being regulated” against valiant but hopelessly outnumbered reformers crusading in behalf of the public interest ignores more quotidian, less sinister reasons why businesses would try to shape legislation and regulations. Corporations and industries have specific interests, often conflicting with those of other corporations and industries. These interests have a claim on practicing capitalists’ attention that is far greater than any general interest in opposing regulation or exploiting the public.
UPS and FedEx are both Fortune 100 corporations, for example, and have spent years waging what the Washington Post described as “one of the fiercest lobbying battles in recent memory.” UPS, together with the Teamsters union, campaigned to change current law so that the National Labor Relations Act, which makes unionization somewhat easier, would cover Fed-Ex drivers, just as it does UPS drivers. FedEx wanted its drivers to continue to be covered by the Railway Labor Act, which makes union organizing more difficult. UPS increased its lobbying expenses by 60 percent during its ultimately unsuccessful battle to change the law, spending more than $8 million in 2009, while FedEx spent $1.5 million a month on lobbying in 2010. There was no principle at stake here; merely a war over competitive advantage.
Similarly, the financial-services industry is currently massing its well-connected lobbyists to battle the retail industry’s equally well-connected lobbyists over the question of swipe fees for debit cards. Banks contend that the 12-cents-per-transaction limit proposed by the Federal Reserve and, so far, left in place by Congress would not cover the costs of issuing and servicing the debit cards. Because no one ever cheers for Goliath, as Wilt Chamberlain observed, each of the antagonists is emphasizing the gargantuan size of the corporations…in the other industry. “I am appalled that our members will shoulder tremendous financial burden[s] and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” the president of a Michigan credit union told a House subcommittee. “Banking lobbyists eagerly point to a conference call in which a Home Depot executive told financial analysts the proposed rule would lower its debit fees by about $35 million a year,” according to the New York Times. In rebuttal, convenience store owners were prominent among those arguing that the unregulated fees, averaging 44 cents per transaction, generated more than $20 billion dollars in revenue last year, much of it going to financial giants like Bank of America.
The contradiction at the heart of the liberal project is that as government addresses a widening circle of social problems, the increasing size and complexity of its work guarantee a growing return on the ability to work the system. This is a skill concentrated among those who have already acquired and demonstrated the capacity to fend for themselves and forge strategic alliances—to make things happen.
In 2006 the New York Times described how the New Orleans city government’s rebuilding plans after Hurricane Katrina were meant “to put every neighborhood on the same footing” by making “a neighborhood’s ability to draw back a ‘critical mass’ of its people…a crucial indicator of whether it can be redeveloped and receive city services.” The Eastover neighborhood, described by the Times as “a gated subdivision that was home to some of this city’s wealthiest black residents,” quickly hired an urban planner to present its revival agenda to City Hall. Poor neighborhoods, in the meantime, were struggling with the basics of forming associations, such as writing bylaws and selecting officers. “You had doctors and lawyers and your successful entrepreneurs in Eastover,” said a resident of the impoverished Lower Ninth Ward. “Here you had just hard-working people. You have your mechanics and waiters down here, people not used to working the system.”
It’s impossible to see how the “wholesale renovation of the federal apparatus” Frank calls for will ever be effected, or even intelligibly described. No government program or bureaucracy, however idealistically launched or enthusiastically reformed, will stay unaffected for long by entreaties from the astute and the connected.
Once, in an effort to commiserate with an executive in one of New York’s largest real-estate development firms, I said that complying with the city’s endless property regulations must be an ordeal. As patiently as he could, the developer explained that I was not just wrong, but exactly wrong. His firm’s great strength was that, since its founding by his grandfather, it had established an institutional capacity for building and managing real-estate projects within a specific, demanding business and regulatory context. There was, accordingly, no rationale for it to build an apartment complex in Phoenix, for example; whatever it did in Phoenix would not be any more profitable than any other developer’s work because it did not take esoteric knowledge to do business in that market. But in New York, his company could and did prosper because it had mastered a regulatory obstacle course—one that defeated most competitors.
To regulate means to “make regular,” and the use of the word ought to connote practices that conform to clear, comprehensible, and predictable government standards. What we get instead are “rules” that are complex and often indecipherable. “Complex rules necessarily confer a large measure of discretion upon those who enforce and interpret the law,” writes the libertarian jurist Richard Epstein, “thereby increasing the level of uncertainty and error when the rule is honestly applied, and the level of abuse when it is dishonestly or incompetently applied.”
Even worse than being complex, many regulatory “rules” are utterly malleable and endlessly negotiable. The legal scholar David Schoenbrod and the political scientist Theodore Lowi have warned us that a necessary and sufficient condition for this corrupt, chaotic regulatory regime is for elected legislators to delegate lawmaking power to unelected administrators. Legislatures write “laws” that are really assignments of responsibility to others accompanied by guidelines so vague as to be useless for bureaucrats or citizens trying to determine what it would mean to perform their assignment well. The heart of the dispute over debit-card fees, for example, is a provision in last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act ordering the Federal Reserve Board to limit swipe fees to a “reasonable and proportional” level. No definition is given to “reasonable and proportional.”
Similarly, the law created a new Consumer Financial Protection Bureau (CFPB) within the Federal Reserve, directing it to ensure “that markets for consumer financial products and services are fair, transparent, and competitive.” The law gives CFPB the power to make rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws.” If this sounds nebulous, you can take comfort from Dodd-Frank’s provisions for “rulemaking standards,” such as the admonition that the Bureau “shall consider” the “potential benefits and costs to consumers and covered persons,” as well as the “impact of proposed rules on covered persons.”
There’s little danger the new agency will be hamstrung by these exacting requirements, however, since the law also stipulates, “The Bureau, by rule, may conditionally or unconditionally exempt any class of covered persons, service providers, or consumer financial products or services, from any provision of this title, or from any rule issued under this title, as the Bureau determines necessary or appropriate to carry out the purposes and objectives of this title.” It would have saved everybody a lot of time if Dodd-Frank had simply told CFPB to do whatever it wants, however it wants, to whomever it wants.
In response to these distortions of logic and reality, observers like Harold Meyerson are still summoning up the fantasy of brigades of philosopher-kings who can spare us the trouble of self-government. The great libertarian fear is that by combining roles the Constitution separated, and eviscerating its checks and balances in favor of giving administrators broad powers to seek their own solutions, the regulatory state can engender tyrannical governance.
In fact, the more common result is feckless and contemptible governance. In our get-along-go-along political culture, a law’s enactment marks the beginning of an open-ended process, whose ultimate purpose is to make sure that every “class of covered persons” always has ample opportunities to bring its views and concerns to bear on the formulation, application, and interpretation of regulations, and never has reason to feel aggrieved because its interests weren’t given due consideration by regulators.
Sometimes participants are happy, as the oil industry was with the Minerals Management Service, whose fecklessness allowed the industry to serve as its own regulator. Sometimes they’re unhappy, as are the private jitney-van operators serving the poor neighborhoods in the outer boroughs of New York City who have had to sue to prevent the city from regulating them out of business. The loss of economic vigor because of excessive, murky, and protean regulation is regrettable, as is the loss of effective oversight. But the loss of republican integrity is deplorable.
In Power Without Responsibility: How Congress Abuses the People Through Delegation, David Schoenbrod writes that because America has “never dealt with the modern world” through a legislature that legislates rather than outsources its authority and duties to bureaucrats, we inhabit a regime that “reduces our participation in lawmaking, our understanding of how government works, and our power to hold legislators to account when the government fails to provide timely, balanced resolutions of regulatory disputes.” Fallible humans, who have no choice but to entrust government power to other fallible humans, should withdraw their belief in the chimera of disinterested regulation. They should, instead, commit themselves to the rigors of self-government, and insist that the fellow citizens they elevate to public office do the same.