Dear Friends,
It seems to me that In all matters it is best if government use incentives instead of regulation. Incentives work universally. Regulation is bypassed universally.
Take the new banking regulation. While I haven’t read the 2000+ page bill I am no less ignorant of it than most (If not all) the people who voted for it. It seeks to move power to the Fed to regulate certain actions. But it is no different than the SEC. Remember the SEC who’s employees were looking at porn while the banking system burned? I have heard (on Bloomberg radio) the SEC as the most captured unit of government.
Industry capture is always an omnipresent pernicious force. It undermines the people’s trust in fairness of the financial system lowering GDP growth. Regulators, consciously or subconsciously, start to believe that their job is protecting the companies or industry they oversee, (an example of normalizing deviance), not protecting the consumer. This capture is especially prevalent where companies have access to huge amounts of capital and legal resources. They over awe the people who are tasked with keeping them honest.
But if the incentives are set up thoughtfully… I heard an excellent idea the other day. Unfortunately I don’t remember who said it but it was on Bloomberg Radio. He said that if banks or institutions grow beyond a certain size the amount of capital reserves would have to grow at a faster pace. Thus reducing the incentive to grow out of proportion. Basically like a transmission in a car.
In a transmission the ratio between the engine speed and the drive shaft speed changes given the gear ratio. In his idea the capital needed to be tied up unproductively as M1 money would change as the capital size of the corporation changed. An incentive like this would make growing too big to fail too expensive. The amount of capital needed to grow would make it more productive to spin off a division to handle a new opportunity. Reducing the risk to society if the new (or old) company fails.
Today there is no personal risk to management if a company were to fail that was too big to fail. The government would certainly step in to rescue them. In fact that in itself is a pernicious incentive to grow to be too big to fail. Once your company is too big to fail it will have a tacit free safety net. The precedent has been set on numerous occasions.
Regulation is always full of pernicious incentives. They are inevitable when extremely complex transactions are regulated. No person or group is omniscient. There will always be pernicious incentives when activity is regulated. No matter the activity.
The wise lawmaker keeps the law simple and thinks it through. A few years ago there was a spike in falls from aerial lift vehicles in the USA. The spike lasted a few months and the companies that were involved addressed the situation. (People not wearing their fall protection devices or lanyards). The Occupational Safety and Health Administration (OSHA) stepped in.
They did millions of dollars of taxpayer funded research and decided that the answer was to shorten the length of the lanyard and increase the fine to companies that didn‘t comply. The fine was the same whether the wrong lanyard was worn or not at all. The incentive for the person using the aerial lift vehicle was not to use the new shorter lanyards because they are far more restrictive. So the incentives the new rules set up were pernicious. They undermined the solution to the actual problem. Which was, people not wearing their lanyards while operating aerial lift vehicles. The result was lower productivity from the employees, higher operating costs to implement the new rules, (buying the new equipment) and I bet not one more lanyard was connected than had been done after the companies involved had addressed the situation in house.
Results are irrelevant when government is involved. It is good intentions that counts. Regulation that produce the worsening of a situation requires more government intervention. It’s obvious. If the result of the new government intervention make things even worse, then it requires a cabinet post in the Executive branch…
Government’s ineptitude and outright corruption coupled with good intentions always result in more government. Regulation is simply the road to it…
