Tuesday, June 22, 2010

New-Style Regulations' Effects On Business

Gerald O'Driscoll, a senior fellow at the conservative Cato Institute, wrote an editorial in an issue of last week's Wall Street Journal entitled The Gulf Spill, the Financial Crisis and Government Failure. The theme of O'Driscoll's piece was government regulatory failure.

He wrote,

"There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.

The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy."

The rest of the article provides more detail in how the increasingly granular and detailed regulation of industries such as financial services and oil exploration have only led to more regulatory failure.

O'Driscoll ends the piece citing University of Chicago law professor Richard Epstein, who has noted that

"we need simple rules for a complex world. The complexity of rules is self-defeating because that complexity requires more knowledge than can be acquired."

Thus, the current FINREG bill, which will be a disaster the moment it ever becomes law. Much like the vaunted omnibus healthcare overhaul bill.

Along with these increasingly microscopically-controlling regulatory bills/laws is another new approach to regulation/law that I suspect will chill economic activity in the US.

It is the open-ended nature of these laws which leave the actual details of regulation to various commissions, boards and agencies to be established and operated later.

As bad as some of the 1930s-era regulations were, at least they actually specified what rules and regulations were to be. ERISA legislation was very specific, too.

Now, however, we have healthcare, energy and climate, and financial so-called "reform" legislation which each run into thousands of pages, without definitive rules. Instead, industry players are invited to lobby and bribe various agency and commission officials to write detailed regulations in their favor.

Of course, what an agency write today, it can rewrite tomorrow. Witness the current FCC chairman trying to singlehandedly overrule Congress, the courts and public opinion, never mind his fellow commissioners, by subjecting the internet to the restrictions of the telephone industry in the Communications Act of 1934.

Is any of this even Constitutional?

Whether it is, or not, it must be chilling for businesses and investors to contemplate risking their capital under rules which may be changed at the literal stroke of an unelected, bribeable Washington bureaucrat's laptop.

Vigorous, robust capital markets and economies like as much certainty of environment and frameworks of rules and regulations as possible, in order to leave the remaining business operation uncertainties as the major ones.

Instead, we are now embarking on an era of explicitly-vague federal regulation and legislation, leaving businesses to wonder just what the rules are, or will be, and for how long.

This cannot be good for the US economy going forward.

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