Regulatory Capture

Although we complain a lot about the influence of lobbyist, lobbying is a legitimate function in a democracy. When a law or regulation is being proposed by government, those that will be affected have a right to express their concerns either positive or negative. When we write our Congressmen or Senators about a proposed bill or regulation, we are lobbying. Lobbyist on K Street, of course, have a lot more money and influence than the average citizen, but, in the most case, their activities are legal. The influence that big corporations have via lobbying is indeed worrisome. But, there is something else that should worry us even more. What I am talking about is when people with special interest are employed within the regulatory agencies or on the staffs of our law makers. This is particularly bad because these people don’t have to lobby for what they want; they can just write the laws and regulation to their favor. If they favor a certain business or industry, they write laws or regulations that favor that business or industry. Likewise, if they are against a certain business or industry, they write law or regulations that work against the business or industry.

In Regulators Gone Wild, an article by Gary Jason at American Thinker we learn that there is a name for the behavior of biased government employees. He starts his article with a question:

How  do we explain a government regulatory agency gone wild, turning viciously on its  subject and seeking to destroy or impair it, regardless of the harm done to the  general public?

The author goes to talk an economic theory postulated some years ago to describe political behavior that was called the “public choice theory”. For more information on this theory, please read the linked article. Included in public choice theory is a concept: the notion of regulatory capture.

…In regulatory capture, as commonly defined, the biggest players (companies) in  an industry manage to put people favorable to their views in control of whatever  regulatory agency is supposed to monitor that industry.

I suppose an example of this definition of regulatory capture would be if we believed that the Dodd-Framk bill to regulate Wall Street and the TBTF banks was actually written by people who had a bias in favor of the Too Big To Fail banks. Obviously when this happens the public interest is not being served. As Mr. Jason correctly points out:

Regulatory  capture is repellant because it violates an important feature of any political  system: impartiality.  We take the purpose of any regulatory agency to be  that of a neutral umpire looking out to make sure that the players in the  industry under its oversight stay within reasonable bounds.  We expect the  agency to act impartially for the public good, which entails minimizing  negative externalities while allowing industry to make the profits necessary to  stay in business and produce positive externalities (like wealth, jobs, tax  revenue, and so on).

The author continues

But  what is not often noted is the phenomenon which, for lack of a better name, I  will term “reverse regulatory capture.”  I mean by this cases where the  agency that regulates an industry is taken over by special interests in an  adversarial relationship with that industry.  Specifically, reverse  regulatory capture occurs whenever a regulatory body is run by people allied  with either unions in that industry or groups (such as environmentalist activist  funds) that oppose the very existence of that industry in the first  place.

I understand why the author felt the need to come up with a new term. The original definition of “regulatory capture” was too narrow. Bu, we really don’t need a new term. Regulatory capture is just as repugnant if it is pro-business or anti-business.

Mr. Jenson then goes on to point out what we all know to be true. President Obama has deliberately staffed all regulatory agencies with anti-business people. We see it in the EPA, the NLRB, the DOJ and, every other agency. We conservative bloggers post about the negative effects of this all the time. Now we know it has a name: Regulatory Capture.

Regulatory capture is problematic in the extreme. But how do we stop it? Every president, when filling the heads of agencies is going to look for someone who is knowledgeable in the area the agency regulates.  When someone is knowledgeable, there is a high probability that they have a bias one way or the other. The best we can hope for is that they are guided by the principle of impartiality and are on the lookout for bias from their staffs. And, this points to an even more serious problem. A new administration can replace all the agency heads; but what about the lower echelons of bureaucrats that have personal agendas? They are very hard if not impossible to fire. So, for example, if Ms Jackson, a very biased EPA head has loaded the agency with like minded people, what is a new administration to do? It makes you wonder if even a so-called limited democracy  can long endure. All governments will eventually act against the interest of those that they govern.

Well, that’s what I’m thinking. What are your thoughts?

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13 thoughts on “Regulatory Capture

  1. This is why instead of armies of bureaucrats, we take the libertarian path that simply makes companies pay for their own mistakes and suffer the consequences of their actions and decisions with no prospect of a taxpayer bailout.

  2. What Silverfiddle said … there is NO company “too big to fail.”

    I’ve been thinking of “government’s proper role.” I wonder if you can agree in principal. Begin with the supposition that society becomes more complex with the growth of human population. So then, suppose rather than directing roadblocks where police officers can stick their nose inside your mouth to see if you’ve been drinking, we instead encourage federal and state government to work with auto manufacturers to install alcohol sensors prohibiting a car from operating upon detection of alcohol. More freedom for people, more safety for the public, and less police officers looking to win this month’s quota drive for traffic tickets.

    1. In general, Sam, I don’t like government mandates. Educating the public is fine. Taking your example, there are a lot of people who do not drink and yet they would have to pay the additional cost when buying a car. It’s not easy to know where to draw the line on the role of government.

  3. I think Dodd-Frnks congressional authors and Tim Geithner, its primary actual author, all had vested interests to cover up their own culpability in the financial crisis of 2008. As a result, the legislation doesn’t fix the real problem.

    I’ll make up my own term to describe that situation… “regulatory coverup”!

  4. The solution for the idiots in the EPA is to close down the agency, and lay off all the employees. In the case of the DOJ, it may well be beyond the pale. I believe the SEC is a different problem.

    This agency has pretty much always suffered from Regulatory Capture with Goldman Sachs alumni, as has the office of the Treasury. A good many of the lawyers employed there spend their time looking at porn, an understandable past time for the bored. After all, most were probably fired from a major investment house or bank before taking up public service with the federal government.

    The boys at the SEC may miss a Bernie Madoff, or a bank industry collapse every now and then, but at least they are not actively destroying our nation. We know what to expect from them. If only the EPA employees could be a little more bawdy in their work habits.

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