Thursday, July 7, 2011

Why government regulation is always a bad thing

I'm going to make a simple argument. If it's too long, check the short summary at the bottom.

Think of a federal regulatory agency. Like, say, the FDA. I highly doubt you know who the director of the FDA is. Neither do I. Now what percent of people in the US actually know the answer? I imagine, and I hope it's not a huge assumption, that you also think it's not even close to 1%.
So then what does the average person know about the skills/qualifications of anyone else working there, the latest regulation they've instated (have they read ANYTHING from this agency?), the success of their regulation, the failures, etc. The point - no citizen cares about what the FDA is doing as long as their food isn't poisoned (and even if it is, they have very little power to change it).

Now on the opposite end, those being regulated, the ones who are supposed to be held in check by this regulation - they clearly know essentially ALL of the previously listed facts about the agency. They are the ones who are force to follow the regulations, so of course they know them.

Now, two simple assumptions:
One - A regulatory agency, like the FDA, is given some power of the market, e.g. the power to tell people what they can and can't sell concerning food and drugs. It is, of course, supposed to use those powers for the benefit of the people and to use them fairly, while keeping businesses in check. It should be clear though, that if corrupted, this power could be used to place regulations unfairly, unevenly, or simply for adding extra costs to small businesses. No one should want that (except the corporation doing the corrupting).
Two - Business will want to do whatever they can to get more market share than their competitors and that includes corrupting government to their benefit. Even if that's not true, and they're benevolent, they'll know that someone else will do the corrupting and if they don't play along, they'll simply go out of business. A good product/service and low prices can only go so far...

So then, using those assumptions, the regulated have essentially every incentive to corrupt the regulators to their benefit (it's called regulatory capture). And if they don't, someone else will - and turn it against them.

So on one end you have people with no incentive to care about the regulation as long as that area of the market isn't noticeably dysfunctional. On the other end you have business that, by the nature of the regulation, know everything about that regulation and have every incentive to bend it towards their own designs. So why in world do you want regulation when everything about the nature of the regulatory system tells you that it will be highly corrupt?

Recent example of regulatory capture: the FCC approved (4 to 1) a large merger between Comcast and NBC and soon after one of those voting for this left the FCC for a job at Comcast (I assume a nice high paying, very little working kind of job). She likely wasn't the only corrupt one:

Much older example: The first federal regulatory agency, the Interstate Commerce Commission (ICC), was formed in 1887. In 1889, one of the original appointees, Aldace F. Walker, resigned to become head of J.P. Morgan's Interstate Commerce Railway Association.

This has been happening as long as monopoly power has been granted over the market (i.e. for a long, long time).

TL;DR - Why trust regulators with power over the market when the people the regulation is supposed to benefit have essentially NO incentive to make sure they're regulating properly and corporations have essentially EVERY incentive to corrupt the regulation to hurt their competition?