Saturday, August 1, 2015

Rule of Law in the Regulatory State

About a month ago, I participated in a conference at Hoover, inspired by the 800th anniversary of the Magna Carta. There were lots of interesting papers.

I participated in a panel on "The Future of Freedom, Democracy, and Prosperity" with Arnold Kling and Lee Ohanian, with Russ Roberts moderating, which Russ has posted as an econtalk podcast.

The podcast gained a bit of traction, most recently with nice coverage in a Holman Jenkins Editorial in the Wall Street Journal.

All of which has finally motivated me to a neglected project, which is to polish up the essay I wrote in preparation for the panel. It's longish for a blog post, and you might prefer the formatting of the pdf version here.


The Rule of Law in the Regulatory State

1. Introduction

The United States’ regulatory bureaucracy has vast power. Regulators can ruin your life, and your business, very quickly, and you have very little recourse. That this power is damaging the economy is a commonplace complaint. Less recognized, but perhaps even more important, the burgeoning regulatory state poses a new threat to our political freedom.

What banker dares to speak out against the Fed, or trader against the SEC? What hospital or health insurer dares to speak out against HHS or Obamacare? What business needing environmental approval for a project dares to speak out against the EPA? What drug company dares to challenge the FDA? Our problems are not just national. What real estate developer needing zoning approval dares to speak out against the local zoning board?


The agencies demand political support for themselves first of all. They are like barons in monarchies, and the King’s problems are secondary. But they can now demand broader support for their political agendas. And the larger partisan political system is discovering how the newly enhanced power of the regulatory state is ideal for enforcing its own political support.

The big story of the last 800 years of United States and British history, is the slow and painful emergence of our political institutions, broadly summarized as “rule of law,” which constrain government power and guarantee our political liberty. The U.S. had rule of law for two centuries before we had democracy, and our democracy sprang from it not the other way around.

This rule of law always has been in danger. But today, the danger is not the tyranny of kings, which motivated the Magna Carta. It is not the tyranny of the majority, which motivated the bill of rights. The threat to freedom and rule of law today comes from the regulatory state. The power of the regulatory state has grown tremendously, and without many of the checks and balances of actual law. We can await ever greater expansion of its political misuse, or we recognize the danger ahead of time and build those checks and balances now.

Yes, part of our current problem is law itself, big vague laws, and politicized and arbitrary prosecutions. But most of “law” is now written and administered by regulatory agencies, not by Congress.

Use of law and regulation to reward supporters and punish enemies is nothing new, of course. Franklin Roosevelt understood that New Deal jobs and contracts were a great way to demand political support. His “war on capital” [see Amity Shlaes' "Forgtten Man"] hounded political opponents. The New Deal may not have been an economic success [an example], and likely prolonged the Great Depression. But it was above all a dramatic political success, enshrining Democratic power for a generation. Richard Nixon tried to get the IRS to audit his “enemies list.” But the tool is now so much stronger.

A label?

I haven’t yet found a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control.

Many people call it “socialism.” But socialism means government ownership of the means of production. In our brave new world private businesses exist, but they are tightly controlled. Obamacare is a vast bureaucracy controlling a large cartelized private business, which does the governments political and economic bidding. Obamacare is not the Veteran’s Administration, or the British National Health Service. Socialism doesn’t produce nearly as much money.

It’s not “capture.” George Stigler described the process by which regulated businesses “capture” their regulators, using regulations to keep competition out. Stigler’s regulated businesses certainly support their regulators politically. But Stigler’s regulators and business golf together and drink together, and the balance power is strongly in the hands of the businesses. “Capture” doesn't see billion-dollar criminal cases and settlements. And “capture” does not describe how national political forces use regulatory power to extract political support.

It’s not really “crony capitalism.” That term has a bit more of the needed political flavor than “capture.” Yes, there is a revolving door, connections by which businesses get regulators to do them favors. But what’s missing in both “capture” and “cronyism” is the opposite flow of power, the Devil’s bargain aspect of it from the point of view of the regulated business or individual, the silencing of political opposition by threat of regulation.

We’re headed for an economic system in which many industries have a handful of large, cartelized businesses— think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on. Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build factory in unprofitable place, they do it. The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That’s neither capture nor cronyism.

“Bureaucratic tyranny,” a phrase that George Nash quotes Herbert Hoover as using is a contender.

Charles Murray, writing recently on the status of the regulatory state notes many of these issues. He totals 4,450 distinct federal crimes— just the law, not including regulations with criminal penalties, or the vastly greater number with civil penalties. He adds up the 175,000 pages of the Code of Federal Regulations, and the vagueness of the enabling legislation — Congress only decrees that rules are “generally fair and equitable,” “just and reasonable,” prohibits “unfair methods of competition” or “excessive profits.” He notes the absence of judicial rights in administrative courts. He notes the wide scope of regulation and the comparatively tiny — but ruinous to those charged — enforcement:
the “Occupational Safety and Health Administration has authority over more than eight million workplaces. But it can call upon only one inspector for about every 3,700 of those workplaces. The Environmental Protection Agency has authority … over every piece of property in the nation. It conducted about 18,000 inspections in 2013—a tiny number in proportion to its mandate.
Murray advocates civil disobedience with insurance for the few zebras who get caught by the regulators.

But by and large Murray deplores merely the silliness of and economic inefficiency of the regulatory state. This misses, I think, the greatest danger, that to our political freedom. Just who gets that visit from the EPA can have a powerful silencing effect.

And it also misses, I think, an explanation for how we got here. Regulators and politicians aren’t nitwits. The libertarian argument that regulation is so dumb — which it surely is — misses the point that it is enacted by really smart people. The fact that the regulatory state is an ideal tool for the entrenchment of political power was surely not missed by its architects.

Likewise, Alex Tabarrok and Tyler Cowen make a good case that most of the economic rationale for regulation has disappeared along with information. Uber stars are far more effective than the Taxi Commission. But the demand for protection and the desire to trade economic protection for political support will remain unchanged. “Protect the consumer” is as much a distracting argument in the Uber vs. Taxi debate as it was when the medieval guilds advanced it.

Rule of Law: the Devil in the Details

“Rule of law” and “regulation” are dangerous Big Vague Words. The rule of law is so morally powerful that the worst tyrants go through the motions. Stalin bothered with show trials. Putin put Pussy Riot on trial, and then they were “legally” convicted of and jailed for the crime of ”hooliganism.” Even Henry the Eighth had trials before chopping heads. Is this not rule of law?

No, of course, but it’s worth reminding ourselves why not as we think about bureaucracies.

“Rule of law” ultimately is a set of restrictions to keep the state from using its awesome power of coercion to force your political support. If you oppose Castro, you go to prison. If you opposed Herbert Hoover, could you still run a business? Sure. If you oppose President Obama, or the future President Hilary Clinton can you do so? If you oppose the polices of one of their regulatory agencies, now powers unto themselves, or speak out against the leaders of those agencies, can you do so? If you support candidates with unpopular positions, can you still get the regulatory approvals you need? It’s not so clear. That is our danger.

“Rule of law” is not just about the existence of written laws, and the superficial mechanics of trials, judges, lawyers, ad sentences. Rule of law lies deep in the details of how those institutions work. Do you have the right to counsel, the right to question witnesses, the right to discovery, the right to appeal, and so forth. Like laws, what matters about regulation, both in its economic efficiency and in its insulation from politics, is not its presence but its character and operation.

Regulators write rules too. They fine you, close down your business, send you to jail, or merely harass you with endless requests, based on apparently written rules. We need criteria to think about whether “rule of law” applies to this regulatory process. Here are some suggestions.
  • Rule vs. Discretion?
  • Simple/precise or vague/complex? 
  • Knowable rules vs. ex-post prosecutions? 
  • Permission or rule book? 
  • Plain text or fixers? 
  • Enforced commonly or arbitrarily? 
  • Right to discovery and challenge decisions. 
  • Right to appeal. 
  • Insulation from political process. 
  • Speed vs. delay. 
  • Consultation, consent of the governed.
One by one:
  • Rule vs. Discretion?
This is really a central distinction. Does the regulation, in operation, function as a clear rule? Or is it simply an excuse for the regulator to impose his or her will on the regulated firm or person? Sometimes discretion is explicit. Sometimes discretion comes in the application of a rule book thousands of pages long with multiple contradictory and vague rules.
  • Simple/precise or vague/complex?
Regulations can be simple and precise — even if silly. “Any structure must be set back six feet from the property line” is simple and precise. Or the regulation can be long, vague and complex. “The firm shall not engage in abusive practices.”

Many regulations go on for hundreds of pages. Long, vague, and complex is a central ingredient which gives the appearance of rules but amounts to discretion.
  • Knowable rules vs. ex-post prosecutions?
Is the rule book knowable ex ante? Or is it, in application, simply a device for ex-post prosecutions. Insider trading rules are, at present, a good example of the latter. The definition of “insider” varies over time, and there is really little hope for a firm to read a coherent rule book to know what is and is not allowed. Much better to stay on good terms with the regulator.
  • Permission or rule book?
In one kind of regulation, there is a rule book. If you follow the rule book, you’re ok. You go ahead and do what you want to do. In much regulation, however, you have to ask for permission from the regulator, and that permission includes a lot of discretion. Environmental review is a good example.
  • Plain text or fixers?
Can a normal person read the plain text of the rule, and understand what action is allowed or not? Or is the rule so complex that specialists are required to understand the rule, and the regulatory agency’s current interpretation of the rule? In particular, are specialists with internal agency contacts necessary, or specialists who used to work at the agency?

As a private pilot, I often bristle at the FAA’s mindless bureaucracy and the plain silliness of much of their regulation. But to their credit, there is a strong culture that the plain text of the rule counts, and each pilot should read the rules and know what they mean. That is a system much harder to misuse. Financial, banking, environmental, health care, and housing regulation stand on the opposite end of the spectrum.
  • Enforced commonly or arbitrarily?
Regulations that are seldom enforced, but then used occasionally to impose enormous penalties are clearly more open to political abuse. If Americans commit three felonies a day in “conspiracy,” internet use, endangered species, wetlands, or employment and immigration regulations (just to start), but one in a hundred thousand is ever prosecuted, just who gets prosecuted is obviously ripe for abuse.
  • Right to discovery, see evidence, and challenge decisions.
Do you have the right to know how a regulatory agency decided your case? Step by step, what assumptions, calculations, or interpretations did it use? Often not, and even in high profile cases.

For example, the Wall Street Journal’s coverage of Met Life’s “systemic” designation reports
The feds ..still refuse to say exactly which [threats] make MetLife a systemic risk or what specific changes the company could make to avoid presenting such a risk.
and continues
…MetLife says that..the government’s decision is based on mere speculation and “undisclosed evidentiary material.”
Since the case is still being decided, the point here is not the correctness or not of these charges. But the charges are a clear example of the kind of regulation that can go wrong

(In fact, the miracle of the MetLife case is that the company had the chutzpah to sue. They are taking a big bet that FSOC doesn’t believe in revenge.)
  • Right to appeal.
And not just to the same agency that makes the decision! In law, the right to appeal is central. In regulation, the right to appeal is often only to appeal to the same agency that made the decision. The Chevron doctrine severely limits your ability to appeal regulatory decisions (and the regulations themselves) to any outside entity. As an example, continuing the above MetLife coverage,
The … stability council “lacks any separation in its legislative, investigative, prosecutorial, and adjudicative functions.” That combined with MetLife’s inability to see the full record on which the decision was based made it “impossible” to get a fair hearing.
As in law, secret evidence, secret decisions, secret testimony; and legislature, prosecutor, judge, jury, and executioner all rolled in to one are classic ingredients for subverting rule of law. And, eventually, for using the machinery of law to silence political opposition.
  • Insulation from political process.
There are many structures in place to try to ensure the “independence” of independent agencies. There is also a tension that we live in a democracy, so independent agencies can’t be too independent if they have great discretionary power.

These important structures try to limit explicit party politics’ use of the regulatory state. They are less successful at limiting the bureaucracy’s use of its regulatory power to prop up its own separate fiefdom. They are also less successful at limiting unwitting political cooperation. When vast majorities of the bureaucracy belong to one political party, when government employee unions funnel unwitting contributions to candidates of that party, and when strong ideological currents link decisions across agencies, explicit cooperation is less necessary.

And, though it was ever thus, the enormous expansion of the size, power, and discretion of the regulatory state makes the insulation structures more important, just as they are falling apart.
  • Speed vs. delay.
The regulatory process can take years, and a canny regulator need not explicitly rule against a political foe. Delay is enough. Lois Lerner herself didn’t deny applications. She just endlessly delayed them. The FDA similarly sits on applications, sometimes for decades.

A central element of a new Magna Carta for regulatory agencies should be a right to speedy decision. If a decision is not rendered in, say, 6 months,  it is approved.
  • Consultation, consent of the governed.
The process by which rules are written needs to be reformed. Congress writes empowering legislation, usually vague and expansive. The agencies undertake their own process for rule writing. They usually invite comment from interested parties, but are typically free to ignore it when they wish. We are as supplicants before the King, asking for his benevolent treatment.

And that was before the current transformation. As exemplified by the EPA’s decision to brand carbon dioxide a pollutant (coverage here), to extend the definition of “navigable waters” to pretty much every puddle, HHS’ many reinterpretations of the ACA, and the Education Department’s “Dear Colleague” letters, even the barely-constrained rule-making process now proceeds beyond its previous mild legal and consultative constraints.

A structure with more formal representation, and more formal rights to draft the rules that govern us, is more in keeping with the parliamentary lessons of the Rule of Law tradition.

2. A Tour

Do we really have reason to be afraid? Let’s take a tour.

These cases are drawn mostly from media coverage, which allows me a quick and current high-level tour. Each case, and many more that are unreported, and a serious investigation to the structure of our massive regulatory state, could easily be drawn out to book length.

My point is not so much a current scandal. My case is that the structure that has emerged is ripe for the Faustian political bargain to emerge, that the trend of using regulation to quash political freedom is in place and will only increase.

As we tour our current regulatory state of affairs, then, think of how well the current regime represents “rule of law,” how well it respects your freedom to speak, your freedom to object, your freedom to oppose the regulator and regulatory regime. Think how insulated it is against the strong temptations of our increasingly polarized, winner-take-all, partisan political system to use regulatory power as a means of enshrining political power.

Banks

Start with finance. Finance is, of course, where the money is.

The Dodd-Frank act is 2,300 pages of legislation, in which “systemic” is never defined, making a “systemic” designation nearly impossible to fight. The act has given rise to tens of thousands of pages of subsidiary regulation, much still to be written. The Volker rule alone — do not fund proprietary trading with insured deposits — runs now to nearly 1,000 pages. To call this Talmudic is to insult the clarity and concision of the Talmud. (Recent critiques here and here.)

The result is immense discretion, both by accident and by design. There is no way one can just read the regulations and know which activities are allowed. Each big bank now has dozens to hundreds of regulators permanently embedded at that bank. The regulators must give their ok on every major decision of the banks.

The “stress tests” are a good case in point. Seeing, I suspect, the futility of much Dodd-Frank regulation, and with the apparent success of the Spring 2009 stress tests in the rear view mirror, such tests have become a cornerstone of the Federal Reserve’s regulatory efforts. But what worked once does not necessarily work again if carved in stone.

In “stress tests,” Federal Reserve staff make up various scenarios, and apply their own computer models and the banks’ computer models to see how the banks fare. However, the Fed does not announce a set scenario ahead of time. They Fed staffers make up new scenarios each time. They understand that if banks know ahead of time what the scenario is and the standards are, then the clever MBAs at the banks will make sure the banks all pass. And billions of dollars hang on the results of this game.

Now, the Fed staffers playing this game, at least those that I have talked to, are honest and a-political. For now. But how long can that last? How long can the Fed resist the temptation to punish banks who have stepped out of line with a stress test designed to exploit their weakness? Is it any wonder that few big banks are speaking out against the whole regime? They understand that being an “enemy” is not the way to win approvals.

And the stress-test staff are getting handsome offers already to come work for the banks, to help the banks to pass the Fed’s stress tests. Ben Bernanke himself is now working for Citadel.

If this sounds like the cozy world of “capture,” however, remember the litany of criminal prosecutions and multibillion-dollar settlements. These are instigated by the Attorney General and Department of Justice, with much closer ties to the Administration, but they revolve around violations of securities regulations. Is it a coincidence that S&P, who embarrassed the Administration by downgrading U.S. debt, faced a $1.4 billion dollar settlement for ratings shenanigans, while Moody’s, which gave the same ratings, did not? Pay up, shut up, and stay out of trouble is the order of the day.

The Wall Street Journal nicely characterized today’s Wall Street, quoting John J. Mack, Morgan Stanley's ex-chairman “Your No.1 client is the government,” which embeds “About 50 full-time government regulators.”

CFPB

Another example: The Consumer Financial Protection Bureau and Department of Justice charged Ally Bank with discrimination in auto lending, and extracted a nearly $100 million settlement. (Coverage here, here, here, here.)  Ally provides money to auto lenders. Lenders negotiate interest rates. Nobody is allowed to collect data on borrowers’ race. So Justice ran statistical analysis on last names and zip codes — Bayesian Improved Surname Geocoding — to decide that minorities are being charge more than they should, essentially encoding ethnic jokes into law.

Why did Ally pay? Sure, they might survive in court. But nobody wants to be branded a racist. And DOJ and CFPB have many more cards up their sleeves. CFPB now can disapprove any retail financial arrangement it deems “abusive,” and put Ally out of business.
Note in this case, there was no charge or evidence of discriminatory practice or intent. The case was purely that DOJ and CFPB didn’t like the statistics of the outcome.

More importantly, was this a knowable regulation, or a bill of attainder? Did CFPB and Justice make available the Bayesian Improved Surname Geocoding program on their website, and tell financial institutions “please download the BISG program, make sure you run loans through it, and that they come out with the right statistics?” Obviously not. This was an unknowable regulation. Ally had no way to make sure it was lending to the right last names.

Ominously, in Wall Street Journal coverage,
Larger settlements may be on the horizon. J.P. Morgan.. warned in a recent filing that it is discussing the issue of possible “statistical disparities” in auto lending with Justice. With more than $50 billion in auto loans on Morgan’s balance sheet at the end of last year, real or imaginary disparities wouldn’t have to be that large to generate a fat settlement.
While the Obamacare (King v. Burwell) and gay marriage decisions soaked up the airtime in the summer of 2015, the Court’s upholding of statistical discrimination and disparate impact stands as the greatest affront to liberty. Without even alleging discriminatory intent, without following any established procedure, the Justice Department can chew numbers as it feels, and based on statistical analysis brand you a racist and drag you to court.

SEC

The SEC’s regulation of insider trading is a fine example of discretion run amok. There is no legal definition of insider trading. Other than corporate insiders (who have legal fiduciary responsibilities not to trade on information) there is little economic rationale for this witch hunt. The game is characterized by big suits with big settlements and novel theories.

And thus, big discretion. The SEC can ruin anyone it wants to. If you’re running a hedge fund and the SEC accuses you of insider trading, it grabs your computers and shuts down your business. Sure, 5 years from now you might win in court, but your customers left and the fund shut down the day they took the computers away. And appeal is only to the SEC itself.

Robosigning

During the financial crisis, many banks didn’t fill out all the forms correctly when foreclosing on houses. The charge was entirely about process — there was no charge that anyone was evicted who was paying his or her mortgages. From the Federal Reserve’s own press releases (here, here; previous post)  we learn that the Fed found them guilty of “unsafe and unsound processes and practices.” The Fed was
acting in conjunction with a comprehensive settlement agreed in principle between the five banking organizations, the state Attorneys General, and the Department of Justice … The Settlement Agreement requires these organizations to provide $25 billion in payments and other designated types of monetary assistance and remediation to residential mortgage borrowers.
The Fed, a supposedly non-political independent agency devoted to bank safety and monetary policy, acted with the Administration, to transfer $25 billion dollars from bank shareholders to mortgage borrowers (not the victims of robosigning, other borrowers) and “nonprofit housing counseling organizations.”

It’s a small example, but a concrete one.

Regulation in general is transitioning from widespread application of rules to sporadic but very large enforcement actions, frequently involving threat of criminal prosecution and ending in large settlements. Documenting this trend, the Wall Street Journal noted the spread of Department of Justice Attorneys to regulatory agencies. For example, the EPA “described a strategy of pursuing larger, more complicated enforcement cases, albeit fewer in number.” Similarly,
Larry Parkinson, another former federal prosecutor who runs FERC’s [Federal Energy Regulatory Commission] investigations, described it as an outgrowth of shifting resources to more serious matters—like market manipulation—and away from more traditional violations. In 2008, for example, a majority of the agency’s penalties were against firms that violated requirements that natural-gas shippers maintain title to the gas. 
“Market Manipulation” is of course a lot more nebulous and discretionary than natural-gas title checks.

The ACA, AKA Obamacare

The ACA is 2,700 pages, and the subsidiary regulation is so convoluted that there is an active debate on the page count of its actual regulations. Justice Scalia invoked the eighth amendment against cruel and unusual punishment as protection against actually reading it.

The Heritage foundation counted 1,327 waivers. Clearly, someone needing a discretionary waiver shouldn’t be a big critic of HHS or the law.

The cartelization of health insurance and health care under the ACA is almost a textbook case of corporatism. The big hospitals doctors, and insurers get a protected small cartel. In return for political support for the ACA, HHS, state exchanges, and so on. And, the ACA itself being an intensely partisan question, that support already leaks into major party politics.

Writing on the consolidation of health insurance into two or three big companies, the Wall Street Journal quotes Aetna CEO Mark Bertolini that the federal regulators “happen to be, for most of us now, our largest customer,” adding
“So there is a relationship you need to figure out there if you’re going to have a sustained positive relationship with your biggest customer. And we can all take our own political point of view of whether it’s right or wrong, but in the end-analysis, they’re paying us a lot of money and they have a right to give us some insight into how they think we should run our business.”
The Journal opined that “such domestication is part of ObamaCare’s goal of political control,” echoing my fear.

United Health wanted to join the California exchange Covered California. Many areas of California have only one or two insurers now, so competition and choice are clearly needed. But participation in the exchange needs prior regulatory approval, and United Health was denied. Why? The LA Times wrote
Peter Lee, executive director of Covered California, said established insurers shouldn't be free to come in right away. Those insurers, he said, should not be allowed to undercut rivals who stepped up at the start and made significant investments to sign up 1.2 million Californians during the first open enrollment.
and quoting Lee further,
We think the health plans that helped make California a national model should not be in essence undercut by plans that sat on the sidelines.
You can’t ask for a clearer example of a regulator, using discretionary power to cartelize his industry, protect incumbent profits, and punish a business for failure to support political objectives. He said nothing about United Health’s ability to serve California customers, or to abide by any regulation.

Again in California, reported by the Wall Street Journal, the Daughters of Charity Health system wanted to sell six insolvent hospitals to Prime, which agreed to take on their debt and and a $300 million pension liabilities. Under state law, Attorney General Kamala Harris must approve nonprofit hospital sales or acquisitions, with only a vague guideline that such transactions must be “in the public interest.” But only four of Prime’s 15 California hospitals are unionized, so the Service Employees International Union was against the merger. Ms. Harris torpedoed the merger, despite a positive report form her own staff.

Was the event a political cave to unions, as represented by the Journal? Perhaps; perhaps not. What matters here is that it certainly could be, as the Attorney General has enormous discretionary power to approve or disapprove hospital mergers. Hospitals are well advised to stay on her good side.

FDA

Henry Miller at Hoover tells the sad tale of the Aquadvantage salmon, submitted for review in 1996 and still under review:
…Consider what they [FDA] have inflicted on a genetically engineered Atlantic salmon, which differs from its wild cohorts only by reaching maturity about 40 percent faster, as the result of the addition to its genome of a growth hormone gene from the Chinook salmon…
It took FDA more than a decade just to decide how they would regulate the AquAdvantage salmon. Characteristically, they decided on the most onerous pathway, regulating the new construct in genetically engineered animals as though it were a veterinary drug, similar to a flea medicine or pain reliever. After several years of deliberation, regulators concluded as early as 2012 that the AquAdvantage Atlantic salmon has no detectable differences and that it “is as safe as food from conventional Atlantic salmon.” …
When the FDA completed its Environmental Assessment in April 2012 and was ready to publish it—the last necessary hurdle before approving the salmon for marketing—the White House mysteriously intervened. The review process vanished from sight until December of that year, when the FDA was finally permitted to publish the EA (the unsurprising verdict: “no significant impact”), which should then have gone out for a brief period of public comment prior to approval.
The reason for the delay in the FDA’s publishing the needed Environmental Assessment was exposed by science writer Jon Entine. He related that the White House interference “came after discussions [in the spring of 2012] between Health and Human Services Secretary Kathleen Sebelius’ office and officials linked to Valerie Jarrett at the Executive Office [of the President], who were debating the political implications of approving the [genetically modified] salmon. Genetically modified plants and animals are controversial among the president’s political base, which was thought critical to his reelection efforts during a low point in the president’s popularity.”
Needless to say, 20 years of delay makes a project pretty unprofitable.

This is a good example, because the FDA regulations prescribe a precise science-based process for evaluating a food. There are time limits for rendering decisions, which the FDA ignores. But strong political forces don’t like GM foods, science be damned.

EPA

A clean environment is important. Pollution is a clear externality. We can also regard it as a Nash equilibrium. Each competitor in an industry is happy to pay the extra money to produce cleanly if all his or her competitors do so.

But the modern EPA violates just about every one of my suggested bullet points for preserving rule of law in the regulatory bureaucracy, and is ripe for political misuse. Discretion vs. rules, the potential for endless delay, the need for ex-ante permission, and a politicized and partisan bureaucracy are just the beginning.

In the Pebble Mine controversy (here and here), EPA issued a preemptive veto of a project before a request for review was submitted, and was found colluding with mining opponents. Note, I’m not opining on whether the mine was a good or bad idea. Merely that the process in view is clearly one that could be misused for political purposes, and that mine owners already must know not to speak ill of the EPA or administration with such sway over the EPA.

The Keystone pipeline stands as the example par excellence of regulatory delay and politicization. Perhaps next to the EPA’s decision to take on carbon as a pollutant.

Already, anyone opposed to a project for other reasons — like, it will block my view — can use environmental review to stop it. Delay is as good as denial in any commercial project.

The small story of Al Armendariz, head of EPA region 6 who proposed “crucifying” some oil companies as an example to the others is instructive. He was caught on tape saying:
The Romans used to conquer little villages in the Mediterranean. They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years.
…we do have some pretty effective enforcement tools. Compliance can get very high, very, very quickly.
According to the story, Armendariz shut down Range Resources, one of the first fracking companies. Range fought back and eventually a Federal Judge found in its favor. But an agency that operates by “crucifying” a few exemplars, explicitly to impose compliance costs,  is ripe to choose just which exemplars will be crucified on political bases.

Internet

The Internet is the central disruptive technology of our time. So far it has been “permissionless” — unlike just about every other activity in the contemporary United States, you do not need prior approval of a regulator to put up a website.

Pressure grew under the reasonable-sounding banner of “net neutrality,” though what was at stake was the right of some businesses to pay extra for faster delivery. “Net neutrality” meant outlawing business class. The FCC, a supposedly independent agency, studied the issue and found no reason to regulate the internet.

One fine day in November 2014, FCC commissioner Tom Wheeler must have found horse head in bed. Well, more specifically a surprise public announcement from President Obama that “blindsided officials at the FCC” per WSJ coverage.

The result is not just “net neutrality” but to apply full telecommunications regulation circa 1935. In particular, this includes Title II rate regulation, in which the FCC has full power to determine what rates are “reasonable.” The FCC announces it will “forbear” to use that power. Along with its right, under the regulation, to impose content restrictions — yes, to tell you what to put on your website — and the “fairness doctrine.” But forebearance is discretionary. So, a company thinking of investing money in fiber-optic lines had better invest in good relations with the FCC and the Administration that apparently drives its decisions.

The “independence” of regulatory agencies is one of the key structures impeding widespread use of regulatory power to induce political support. The WSJ coverage of the politics behind the decision describes well how specific businesses’ access to the White House drove the result. On the commission, the 3-2 vote with 2 republicans issuing withering dissents speaks of the partisan nature of this regulation.

Alas, the internet is all moving to Washington. Uber hired, straight from the Administration, well known tech wizard, David Pflouffe. Given Uber’s troubles with labor law — a California court recently ruling that its contractors are employees — and taxi regulation throughout the U.S., investing in politics is good business for Uber.

Campaign finance

Campaign finance law and regulation is all about restricting freedom of speech and altering who wins elections. So one should not be surprised about its political use to restrict freedom of speech and alter who wins elections.

Still, the recent trend is more troubling than usual.

Lois Lerner, director of the IRS Exempt Organizations Unit, famously derailed applications for nonprofit status from conservative groups, ahead of the 2012 Presidential election. Her main tactic was endless delay. All you need is for the election to pass.

Governor Scott Walker’s troubles are similarly renown. Milwaukee District Attorney John Chisolm filed “John Doe” probes against conservative issue advocacy groups, “blanketed conservatives with subpoenas, raided their homes and put the targets under a gag order” that they could not even reveal the fact of the investigation. It came to light, and is now in the courts, but not until well after the election. Walker won anyway, but might not have.

The Administration has been pushing since 2010 to force nonprofits to disclose all donors, as campaigns must disclose contributors. It sounds innocuous: “Disclosures?” Who can be against that? Shouldn’t “big money” contributing to politics be public information?

Not when the vast power of the regulatory state can come down on whomever it wants to. Tyrannies always start by making lists. Nixon at least had to compile his own enemies list.

Snowden

The Snowden affair taught us some important lessons about our government. The NSA collected phone call “metadata.” Well, it’s just who called who and not the content of phone calls (unless you call abroad), you may say.

But even metadata is revealing. Suppose you called three cancer doctors, alcoholics anonymous, and two divorce lawyers. And you want to run for the senate. That kind of information is political dynamite.

The NSA has the content, not just metadata, of any emails that go abroad. The NSA likely has many Hilary Clinton’s missing emails. And Jeb Bushes’. Unless neither has ever written an email that rises to the embarrassment level of Mitt Romney’s 47% remark, the information to sink either campaign is likely sitting on NSA computers.

That information would never leak out, you say? Snowden proves the opposite. Any piece of information on a government computer is one Snowden, one Lois Lerner, or one Chinese hacker away from a twitter feed.

John Oliver’s hilarious Snowden interview contained an interesting revelation. The internet is an amazing thing. What do Americans do with it? They send around pictures of their private parts. And NSA employees regularly pass the pictures around to great hilarity.

E-Verify

As part of most immigration deals we are likely to see strong enforcement of the right of employees to work via e-verify. Every single human being who wishes to work in the United States must ask for the ex-ante permission the Federal Government.

Leave aside here the obvious question how the same government that runs the Obamacare website, and, as I write, has had all visa applications to the U.S. shut down for two weeks due to hardware failures, will manage this. Let’s focus on the political implications.

This power will naturally expand. First, people without proper immigration documents. But once in place, why only enforce immigration laws? Already there are a long list of laws governing who can work and when and where. People must have the right licenses, the right background checks, union memberships and so on. Are you guilty in the latest SEC which hunt? E-verify can really make sure you never work in finance again, not so much as a bank teller. Or that a conviction for violating the endangered species act keeps you out of the work force.

Every tyranny controls its citizens by controlling their right to work. Do we really want every American who wants employment to have to ask for the ex-ante permission of the Federal Government of Edward Snowden and Lois Lerner?

Transactions

We have lost the right to transact privately in the terror and drug wars. The right to political dissent requires the ability to speak freely and privately; the right to earn a living despite political opposition; and the right to transact in private. All three are vanishing.

You may have reveled in the ending of Stephen King’s Shawshank Redemption, in which the hero takes cash out of banks and heads to Mexico. Under today’s banking laws, that could no longer happen.

As a recent political example, Dennis Hastert was recently indicted for violating the spirit of the $10,000 limit on bank withdrawals, by withdrawing amounts just shy of the limit. Hastert wanted the money, apparently, to pay blackmail to someone with an embarrassing personal secret.

Hastert is retired. But should aspiring politicians really have no privacy in their personal transactions?

Education

As Daniel Henninger put it:
…historians of the new system will cite the Education Department’s Office for Civil Rights’ 2011 “Dear Colleague” letter on sexual harassment as the watershed event.
This letter—not even a formal regulation—forced creation of quasi-judicial systems of sexual-abuse surveillance on every campus in America. The universities complied for fear of lawsuits from enforcers at the Departments of Education and Justice.
The Justice Department’s Special Litigation Section and Housing and Civil Enforcement Section have forced numerous settlements from police departments, school districts, jails and housing agencies. Whatever the merits, the locals know the price of resisting Justice is too high.
National Review’s coverage of Laura Kipinis’ travails is a good example of the political use of this regulation. Professor Kipinis “wrote a column in the Chronicle of Higher Education arguing that college campuses are in a state of ‘sexual paranoia.’” She quickly became the subject of a “Title IX inquisition,” documented in her essay by that name. Though eventually cleared, the point is the use of regulatory power to silence speech.

3. A Magna Carta for the Regulatory State
The power of the regulatory state has increased steadily. And it lacks many of the checks and balances that give us some “rule of law” in the legal system. (A system which has its own troubles.) The clear danger we face is the use of regulation for political control. Each industry gets carved up into a few compliant oligopolies. And the threat of severe penalties, with little of the standard rule-of-law recourse, keeps people and businesses in line and supporting the political organization or party that controls the agencies.

We’re not there yet. The Koch Brothers are not on the EPA “crucifixion” list, an investigation of every plant they own, or probes by the DOJ, NLRB, EEOC, OSHA, and so on and so on. They could be. The Hoover institution retains its tax-exempt status despite writings such as this one. A free media still exists, and I can read all my horror stories in the morning Wall Street Journal, and the free (for now) internet.

But we are getting there. What stops it from happening? A tree ripe for picking will be picked.

The easy answers are too easy. “Get rid of regulations” is true, but simplistic like “get rid of laws.” What we learned in the 800 years since Magna Carta is that the character of law, and the detailed structures of its operation that matter. Law is good, as it protects citizens from arbitrary power.

It is time for a Magna Carta for the regulatory state. Regulations need to be made in a way that obeys my earlier bullet list. People need the rights to challenge regulators — to see the evidence against them, to challenge decisions, to appeal decisions. Yes, this means in court. Everyone hates lawyers, except when they need one.

People need a right to speedy decision. A “habeas corpus” for regulation would work — if any decision has not been rendered in 6 months, it is automatically in your favor.

A return to economic growth depends on reforming the regulatory state. But the deeper and perhaps more important preservation of our political freedom depends on it even more.

69 comments:

  1. "A return to economic growth depends on reforming the regulatory state. But the deeper and perhaps more important preservation of our political freedom depends on it even more."

    What objective evidence would convince you that you're wrong about this?

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    1. Why don't you start by offering some?

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    2. Because I'm curious what would convince John, which is why I'm asking him.

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    3. That's an interesting comment. Well, let's start simple. I would be delighted to read a similar essay documenting that our regulatory state is competent, efficient, and a-political; that people all the time stand up to its decisions, win in court, and suffer no backlash; that political parties and the regulatory bureaucracy are unable to use legal and regulatory strong arms to silence their opponents. I'd be delighted to read point by point alternative interpretations of the events I passed on.

      I'm also interested by the reaction, because in my first evaluation I thought the essay was far too long, far too loaded up with specifics, and that anyone reading the news for the last few years would put together the threads. This reaction suggests that perhaps quite the opposite is true, and the case needs to be made in hit-one-over-the-head detail and greater length.

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    4. In Cochrane's world businessmen are benevolent actors benighted by a corrupt state. In the real world, we get Enron. You think Jeffery Skilling and Andy Fastow were an aberration? Think again.

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    5. I think that the problem with the article is that it's evidence is in the form of anecdotes rather than rigorous behavioral economics studies about the effects of regulation. A lot of the assertions that you present as fact are really just opinions: i.e. the money that banks were fined was a lousy use of regulation because it went to people who were having a hard time paying their mortgages. I'm inclined to agree that there were better ways to regulate: A long stretch in the penitentiary is a more useful form of regulation for those who engage in such a massive fraud, But that's just my opinion. I don't know if it would really discourage bankers from making false statements under oath.

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    6. Just as an addendum: There is a lot of good science that indicates that young men are inclined to engage in risky behavior well in to adulthood. I remember reading a few weeks ago from someone (I don't remember who, but I suspect it was a female) a proposal that all males under the age of 30 should be banned from the field of finance. This seems to me to be a data produced reasonable financial regulation.

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    7. Hi John,

      Thanks for the reply. Perhaps you read more into my question than what was intended.

      Somehow I doubt you'd be persuaded by an essay. Although in fairness, you didn't state that would change your mind. You just said you'd be "delighted" to read such an essay.

      I did not mean to imply that you are wrong nor did I mean to imply that you did not present evidence for your case. I just wanted to know what would convince you, as a scientist, that your conclusions are false.

      In the same spirit that I'd ask any scientists about any of their claims. If I ask an evolutionary biologist what evidence would convince him that evolution is false, I'd expect to get a laundry list of matter of fact examples, such as the pre-Cambrian rabbit fossil.

      Perhaps I'm completely out to lunch, but regarding this claim for example:

      "A return to economic growth depends on reforming the regulatory state."

      I'd expect that there may not be a consensus about that in the field. For example, perhaps some think reform isn't crucial for returning to growth. Perhaps (to address one of your other points) another significant percentage would argue that the state is competent enough not to preclude growth. I don't know ... again, that's why I asked.

      So to answer my question, I wasn't looking for you to produce more evidence to support your conclusion (although that would be great), I simply wanted to know some examples of conceivable evidence that would be sufficient for you to abandon your conclusions.

      In the same spirit that the moderator here asks both debate participants.

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    8. JZ, its not that businesses are benevolent, its that they face competition.

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  2. I can't believe you didn't mention the Residential Speed Limit Board as discussed here in 2012 http://johnhcochrane.blogspot.com/2012/11/demuth-on-obamacare.html

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  3. 10 years ago I publicly criticized our local water authority for concentrating too much on restrictions and not enough on locating new supplies. Within the next year, I was targeted four time and fined for allowing my sprinklers to hit the sidewalk. How anxious do you think I am to speak up again?

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  4. How about the criminalization of robust new housing construction in almost any desirable neighborhood in the entire United States?

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    1. Nick Rowe demonstrates that under the right circumstances open borders immigration is equivalent to forced emigration. In general I support immigration, however in terms of my quality of life being adversely affected by run-away construction, I can see his point.

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    2. The "right" circumstances include totally identical geographic considerations, zero land ownership, a maximum of two groups, and perfectly homogenous preferences among the population. These things are hashed out in the comments (and Nick explicity agrees to several of them)

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  5. Lord save us from 'System' more Law creates trouble of interpretation, misunderstanding etc by factorial..!

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  6. We believe the Alexander Hamilton Institute for the Study of Western Civilization (www.theahi.org) received "special scrutiny" by the IRS.

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  7. Is there any objective evidence that any of the issues raised are actual problems? To touch on one topic: In my own experience real estate developers are done in by leverage not by zoning. This seems like a list of solutions trying to find a problem.

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    1. The developers I talk to are full of stories on just what deals they have to strike with local pols to get approval, particularly via "affordable housing" requirements. We must talk to different developers.

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    2. But I'll bet none of the developers you talk to have abandoned the business. Are there any studies on the topic?
      I'm reminded of the encounter Franklin Roosevelt had with the pretty conservative NYTimes columnist Arthur Krock in 1944. Krock related being depressed seeing how ill FDR looked at the end of his life, as he was wheeled by, suddenly the famous grin returned, the cigarette holder tilted to a jaunty angle, and Roosevelt said: Cheer up Arthur! Things are rarely as bad as you say they are!

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    3. the requirement that developers "[abandon] the business" should not be used to validate John's thesis/argument. he clearly states that participants (in the cited markets) continue to engage but simply make sub optimal accommodations for regulators.

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    4. I doubt there is an upper-class single family detached neighborhood in America where they would allow 60 story luxury condo towers to be built. Property rights and free enterprise die at the city line.
      Oddly enough about the only places one could build a 60 storey luxury condo tower is in Manhattan downtown Los Angeles parts of Chicago Houston and maybe Miami.

      But you could sell out a 60-story condo tower in nearly every luxury neighborhood in America, if you could get the rights to build it.

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    5. On the 60 story point, again, I think this is an assertion of opinion rather than an assertion of fact. I suspect that the lack of 60 story apartment buildings in most of America has more to do with the cost of land rather than any other factor. I did practice a little zoning law in my day. I never encountered a developer who wanted to erect a 60 story apartment building in suburban Connecticut, even on the Fairfield county Gold Coast.
      AS to the leaving the business issue, maybe the lack of interest in leaving the business is an indication that there is no need for regulatory reform. Getting a sub-optimal choice in life? Welcome to the real world!
      The simple facts are that our country is the most desirable place in the whole of human history for starting a business, for developing a technology, for expressing ideas in the public forum. Get used to the idea! Things aren't as bad as you claim they are.

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    6. Ben: Do you really think that there is an enormous demand for 60 story housing in any where but the great financial capitols of our country? Maybe Boston. But OMG. Please.

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  8. "What banker dares to speak out against the Fed, or trader against the SEC?"

    There is no shortage of people willing to criticize the Fed or the SEC and, even if someone is reluctant to put their own name to a criticism, no shortage of channels to express a personal criticism. I very much doubt that there is any criticism of either the Fed or the SEC which does not have a spokesman.

    The biggest problem with the SEC is not abuse of discretionary powers but regulatory capture. The SEC was warned for years about Madoff but only acted when Madoff went to them on his own initiative and confessed.

    If you think that there are suppressed points of view about any of these agencies - invite them to be aired in anonymous comments on this blog.

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    1. Well if there is no shortage of such people willing to criticize the Fed or SEC by name, why don't you give us a few examples?

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  9. What we need is a bill of rights regarding adminsitrative entities. Especially when the entity can pursue noncriminal penalties (criminal law already has the bill of rights).

    1. You have the right to appeal with a person who at the very least is not a member of the specified agency,

    2. You have the right to hire an expert in that field for your defense.

    3. You have the right to maintain your property until all hearings are completed, unless the rule you are accused of breaking will result in imminent injury/harm.

    4. The presumption should always be that a person has no knowledge of the pertinent regulations, unless they can be shown to have training, skills, etc that indicate they should ie mens rea should be a burden of the administrative agency.

    5. Administrative entities have only limited prosecutorial immunity when it can be shown their activities were in good faith.

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    1. Thanks. These are good. I left out the ability of the regulators to seize assets and shut down businesses. And their immunity from lawsuits.

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    2. I would add that you have the right to see/have all evidence, statements, science, calculations, and any other information on which the entity relied to issue its injunction, cease and desist order, show cause, or [whatever form], including ALL exculpatory evidence and information the entity possesses.
      If they can take from you your liberty and/or property, then at the very least you should have all the rights routinely available to you in our Art. III court system.

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  10. John, I agree with your reply to the comment above. Needs "hit-one-over-the-head detail and greater length".

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  11. This comment has been removed by the author.

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  12. My suggested term is "tyranny of the technocrats." It has the benefit of paralleling your earlier phrasing along with highlighting that it isn't just the bureaucrats but also the independent "private" rulemaking bodies such as HOA or formal business associations that build in (and advocate for) different restrictions. The other benefit is that, unlike with the capture/crony-capitalism/influence story, the term does not presuppose that the agent is seeking pecuniary gain through the system. For example, many environmental regulations are disastrous because they are believed to be effective by those agents advocating them. The agents are legitimately trying and believe they are making the world a better place. However, my skepticism is based on the Hayekian knowledge problem where I wonder how one could know that the regulation is an improvement over previous status quo. Stoping the advance of the regulatory state seems to necessitate an institutional acceptance of the validity of the knowledge problem. How you build that into an institutional structure.....

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  13. Mr. Cochrane: I think that your essay is very apt and on point. And I could add anecdotes about my own clashes with with Federal regulators back in the day when I did such things.

    I think your essay is very congruent with the ideas of professor Philip Hamburger of Columbia Law School, whose most recent book is "Is Administrative Law Unlawful?" (2104)
    http://www.amazon.com/Administrative-Law-Unlawful-Philip-Hamburger/dp/022611659X/

    If you wish a short introduction to this work, you can find it at
    http://www.cato.org/multimedia/events/administrative-law-unlawful
    Which has a video of a lecture Professor Hamburger gave on the book. Here is the precis of the talk:

    "When law in America can be made by executive “pen and phone” alone — indeed, by a White House press release — we’re faced starkly with a fundamental constitutional question: Is administrative law unlawful? Answering in the affirmative in this far-reaching, erudite new treatise, Philip Hamburger traces resistance to rule by administrative edict from the Middle Ages to the present. Far from a novel response to modern society and its complexities, executive prerogative has deep roots. It was beaten back by English constitutional ideas in the 17th century and even more decisively by American constitutions in the 18th century, but it reemerged during the Progressive Era and has grown ever since, regardless of the party in power."

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  14. Early in your essay you define socialism as the public ownership of the means of production. This is more precisely the definition of communism which is but one of many forms of socialism. Our system has drifted dangerously close to another form of socialism called fascism, the total regulatory control of economic production. Bastiat posited that socialism is a broad term that includes a spectrum of many different types of systems with the one common thread of improper law that acts as an instrument of theft rather than a shield to protect individual rights.

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  15. I feel that one of macro failings is the focus on monetary and fiscal policy, while leaving out regulation. Not all government spending is created equally and just inserting G into an equation is about the most worthless thing to do, in my opinion. Regulatory Policy should be used in macro just as MP and FP. This could be done by splitting up G into harmful spending (mass incarceration, everything mentioned in this post etc), neutral spending and beneficial spending. But this would lead to massive disagreements on the effectiveness of different kinds of government spending, but I think would move macro forward.

    So perhaps for your label, it should simply be Regulatory Policy (to mirror monetary and fiscal policy) with RP being used for both good and evil.

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  16. I am currently reading Harvey Silverglate's "Three Felonies a Day".
    I would encourage all lovers of liberty and the rule of law to read this book.
    You may not agree with all he says, but still...
    He makes similar points on how many issues (like insider trading, and other stuff, like legal issues in the medical device industry) are not clearly defined in law, and thus gives prosecutors huge, enormous, discretion on if, how, when, how much to prosecute their targets.
    Read the book, and judge for yourself.

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  17. "If you opposed Herbert Hoover, could you still run a business? Sure. If you oppose President Obama, or the future President Hilary Clinton can you do so?"

    Come on John, you're generally very level-headed but that's verging into Rush territory. I don't think Koch Industries or Las Vegas Sands have been crippled by regulatory actions lately.

    As for the robosigning settlements, I'm surprised you dismiss this issue in such a cavalier fashion given your libertarian leanings. I always thought property rights were a major issue for libertarians, and yet here you are dismissing what in many cases amounted to fraudulent seizure of property (in many cases the banks filed for foreclosure without any idea where the actual title was). Also, I find it hard to pity banks that have 1. laundered money for drug cartels (almost all of them) 2. fixed prices on a massive scale (LIBOR rigging) and 3. have broken so many deferred prosecution agreements that it makes probation look like a joke. You seem for some reason to have a blind spot for criminal offenses when they're committed by large companies.

    With the healthcare market, I agree that what we have now is a mess. However, in all of your solutions you never suggested how to address the giant information asymmetry that plagues this market. How do you force price transparency? How do you give consumers a benchmark of quality? How do you have any idea whether or not to pay for the $1,000 test your doctor says you "need'? Are you going to question his judgement?

    Most of your other points are well made and the overall argument is very sound, but I think you take the "regulation bad" too much as gospel and not an idea that must be applied in a nuanced fashion.

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    1. I grant that the essay is too long, but if you work your way to the bottom you will find

      "We’re not there yet. The Koch Brothers are not on the EPA “crucifixion” list, an investigation of every plant they own, or probes by the DOJ, NLRB, EEOC, OSHA, and so on and so on...."

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    2. John, my apologies. I skimmed over the last couple of paragraphs. I still do think though that that sentence I quoted is on the side of hyperbole. As I said, I think you have many solid points in here, and in many cases your are 100% right (FDA, EPA, NLRB, OSHA). I just think you take it too far and paint the whole system with the same brush. I have a hard time agreeing with you in regards to the SEC given the fairly obvious regulatory capture in that agency from 2001-2010 or so.

      I think one major point of disagreement we have is that I think some of the ways we got here did not arise from regulatory power grabs. Take the EPA for instance. There was such a thing as acid rain in the US, and the EPA did solve that problem. There are also Superfund sites all over the country that probably would never have been cleaned up without the EPA. There's an argument to be made that it's since gone too far, but I think you're leaving out that many of these agencies and rules arose as attempts to solve difficult real-world problems.

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    3. But I did not argue for the removal of regulation and to go back to rivers that burn. Merely to add the same common law protections that we have enjoyed for hundreds of years with regard to real law, to reap the benefits and constraint the possibility of political misuse.

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    4. I don't want to derail this conversation, but after my comments on health care I went back and read (maybe re-read, I don't quite remember) your essay on "After the ACA". I found it extremely well thought out and generally very persuasive, and you did address some of the arguments I brought up above. I have slightly less faith in marginal cost borne by consumers massively affecting health care consumption, but I think overall your ideas are excellent and well worth implementing. Just a couple of ideas for thought: what consumer will turn down a potentially life-saving (or prolonging) treatment? Do you think people will honestly say "no, I'm ok with dying to save that money"? And given the large percentage of our health care spending that goes to end-of-life care, I think that lack of elasticity would be meaningful. Second, there is an issue with chronic care as well. If people are insured for life-changing costs, much of chronic care will be covered (most people in the US can't afford dialysis out of pocket). If it's so covered, the effect of marginal out of pocket costs will be muted. Overall, I just think your reforms will be slightly less effective than you predict, not that they won't be effective and worthwhile. If it makes you feel better, I have never been a rabid anti-ACA partisan and generally vote Democrat, but you have made a compelling, convincing case for a change.

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    5. All fine sentiments, however, "more honoured in the breach than the observance".

      Unfortunately, humanity is not that like the perfected and homogenized variety described in neoclassical economic models.

      Henry

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  18. Apparently there are some serious articles in economic journals that, to put it in non economic terms, call out the Fresh water school of economics for using mathematics in order to make false statements. This article seems to be full of opinions unsupported by any real evidence. I'm a lawyer. I'm used to figuring out what claims of fact actually prove. Long before I stumbled upon arguments about scientific proof versus argumentative proof I had some deep suspicions about the field of macroeconomics. This article is simply garbage.

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    1. Wow Tom... big condeming words for a lawyer. " I'm a lawyer. I'm used to figuring out what claims of fact actually prove." Really? Or are you one of those lawyers who obfuscate the truth to let a guilty party go free? You condemn this article and express "deep suspicions about macro"...but what about your own profession, Tom? What about the ambulance chasers and the mass tort lawyers who cash in millions by shaking down corporations, but give the rest of us little coupons with a pat on the back? What about those lawyers that portend and pretend to be "prosecutors" in search of truth, when in fact they are soft stalinists in search of a target so that they (those "prosecutors") can have another "victory" on their resumé? [Read Harvey Silverglate's "Three Felonies a Day".]
      Last, but not least, you condemn the article and macro, but you give no proof whatsoever, none, zero, nada. In other words, you do not practice what you preach.
      So Tom, before you condemn other people's articles and professions, go and clean up your own profession. Because it seems to me that you have plenty to work on in your own profession, before worrying about your neighbor's.

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    2. Mamooth, for sure there are problems in the legal profession, but that does not mean problems in this discipline should be let off the hook. I think Tom has identified the real problem in macro-economics - people come up with convenient or just plain implausible stories to simply justify the use of mathematical models, when they should be getting their explanations of how the real world works by putting together the pieces from documented historical evidence - with or without models. A lot of people, from hard scientists to historians to philosophers to lawyers who see serious breaches of professionalism in the discipline that would not be tolerated in their own field.

      It is right these criticisms are raised.

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    3. Anonymous... where to start...
      "For sure there are problems in the legal profession..." - you call those "problems" only, as if it is a flat tire on a highway? Mass tort lawyer extorting money from corporations, ambulance chasers cashing in gazillions and leaving nothing to the real victims (only a pat on the back), prosecutors and attorney generals on the lose believing they are Stalinist henchmen ("give me a man and I make a case"), and you call all of this only "problems"? How about that all of those things are at the root of the putrefaction of the rule of law in the US? But no, according to you, they are only mild problems...
      Then you say "serious breaches of professionalism" that would not be tolerated in their own professions... don't make me laugh Anonymous. Lawyers protect themselves at all costs - when do you see lawyers supporting a reform of mass tort? When do you see lawyers (the ABA, say) supporting the disbarment, forever, of an overzealous prosecutor? You never see it - Hell will freeze over before such thing would happen.
      And finally you seem to criticize math models in Econ... do you have any idea what you actually are talking about? Do you know *why* such models even evolved? Do you have any clue how modern macro people use data? Go and read a decent graduate macro book first - a good start is David Romer's textbook in grad macro. Go and read it, study it, do the exercises in at the end of each chapter, and then come back with an informed opinion. And by the way, also, for bedtime reading, pick up a copy of Harvey Silverglate's "Three Felonies a Day".

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    4. Mamooth, nobody is justifying what goes on in the legal profession, but there are things in that profession that would not be happen that do go on in economics. There is no need to get personal with this. Would you like someone to go to jail on "evidence" drawn from a representative agent model? Or would you prefer an accurate account of the historical record, model free? Of course you want data - that's different, but you also want to know what that data actually means. Ditto for someone who has to make big decisions on the economy.

      Yes I do know Romer's textbook and unfortunately, and I am very familiar with the end of chapter problems (Hec, I hope this book is still not being used) and I do not think the problem sets are the path to wisdom - which you clearly do. One thing I remember thinking at the time was that as long as you know the maths (which by the way- if this means anything at all- did not particularly impress my maths friends), you do not have to know any economics at all to do solve them. In fact I knew a maths major who had never studied economics in his life who did exactly that.

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    5. Just a note about freezing hell: according to la divina commedia, a sure reference for these topics, the last and most hellish round of hell is a land frozen by the chilly wind produced by Lucifero's gigantic wings. Lucifero himself half buried in the ice.

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    6. ^^ Anon -- you assume that it is possible to determine what the data "means", which I guess is some kind of causality statement, without using a model. That is impossible, and ultimately is why historians cannot agree on anything. I realize you are mathematically illiterate, but that doesn't mean the rest of us don't know how to use mathematical models properly in combination with data. Your narrow view of macroeconomics would be funny if it weren't so sad and widespread.

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  19. We should really update the term "entrepreneur" to “permiteur” at this point.

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  20. Jose Romeu RobazziAugust 5, 2015 at 1:53 PM

    "
    I haven’t yet found a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control.

    Many people call it “socialism.” But socialism means government ownership of the means of production. In our brave new world private businesses exist, but they are tightly controlled.
    "
    Keynes defended this state of affairs in his "General Theory".

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    1. José, how about "soft tyranny"? Or drop the "soft" part (at least, in certain instances...). Sometimes it is just plain and simple tyranny.
      Or... here is another word: despotism. Despots govern arbitrarily and at will, no matter what the majority thinks, and not matter if there are other branches of government.
      There you have it, two possible words, tyranny and despotism.

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    2. Jose Romeu RobazziAugust 5, 2015 at 10:50 PM

      You know, I prefer "socialism". What are regulatory agencies ? The look a lot like Hayek's "expert counsils". Prof. Cochrane is brilliant and this post has a nice ans sophisticated discussion, but in the end, if it is not the capital owners that are making investment decisions, then, we are back in "Road to Serfdom".

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    3. José, I do not disagree with you. But remember, Hayek's "Road to Serfdom" was (or is) basically an argument that we go to despotism or tyranny.
      When a regulator (like the EPA or the SEC or the FCC) or an attorney general as so much discretion, can interpret rules, regulations and laws so broadly that anything goes, when prosecutors are very close to the mindset of "give me a man and I make a case" - then, José, we are living in tyranny. It is tyranny, plain and simple - it is despotism, and not the rule of law as Charles de Montesquieu and others conceived it.

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  21. Great article.

    One minor point I would argue with you about is Chevron. While I believe that case to be terrible, it really isn't implicated much in judicial review of administrative decisions. Instead, Chevron (as modified by later case law) stands for the idea that an administrative agency's determination of an ambiguous law is due judicial deference, provided the interpretation is reasonable and has gone through notice and comment rule-making. Therefore, Chevron applies when an agency makes a legislative decision; it does not control judicial determinations by an agency.

    I think your complaint has more to do with the Overton Park line of case law and the APA itself. That law generally applies the abuse of discretion standard of review to administrative agency's decisions.

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  22. Three thoughts --

    1. I am a lawyer at a company that is regulated by one of the agencies mentioned. The article is consistent with my experiences, though those are certainly just anecdote, not data. But that leads to a problem: if businesses are rightly fearful of bureaucratic terror, how would anyone ever collect meaningful data on the effects of that terror?

    2. Press releases. Enforcement agencies now love to issue press releases about the new enforcement action filed against some business. The business can't really call the agency out on it, because the business (with a duty to its shareholders) is still angling for a settlement. In the meantime, the business suffers injury to its top line as its customers move somewhere else. And what, exactly, is the public benefit from issuing the press release?

    3. For the bill of rights against bureaucratic terror, I think eliminating administrative law judges and putting all of these cases into real courts has to be the top priority. The positive effects are:
    - The judge is independent from the agency that is prosecuting.
    - The court has rules allowing the defendant to challenge the legal sufficiency of aggressive theories and the adequacy of the evidence at an early stage.
    - Court have rules for defendants to get discovery of the evidence against them.
    - Courts give you a jury.
    - Courts give you a predictable route to appeal.
    - Decisions become precedential.

    The usual rejoinder to the idea that the federal courts could handle the administrative law matters is one of two things. The first is that these issues are "so complex and specialized" that federal judges can't really be expected to handle them. Well, I must say that while I disagree with federal judges many times, I've never encountered one that was stupid. To the contrary, federal judges are some of the most terrifyingly intelligent people you will ever meet. If a federal judge can't understand a law, that's a pretty conclusive case that the law is insufficiently clear to pass constitutional standards against undue vagueness.

    The second rejoinder is that litigation in federal court is really expensive. Well, that's already true for the defendant in an administrative proceeding. Generally, the agency has the practical ability to demand almost any information it wants, but the defendant has none. So, it is like one-sided discovery under court rules, but without limits. That is a guarantee of high expense. So the rejoinder here is a feature, not a bug: moving the forum for these cases to federal courts raises the government's cost of bringing them, which should deter some of the more aggressive cases.

    A sometimes rejoinder is that cases take a long time in court. That can be true, but it really isn't that different in administrative proceedings. Frequently, the investigation takes years, and that would simply be the discovery phase in court. Counting from the point where the agency commences an enforcement action would be like counting the duration of a court case from the point that discovery cuts off: it misses two-thirds of the picture. And if the agencies find that court cases take too long, he first thing they could do is end their own dilatory practices -- never ask for an extension of time and tell the defendants that they will only consent to one under unusual circumstances, rather than the normal rule of consenting to them absent unusual circumstances.

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    1. I can't think of anyone the term "regulatory capture" would be more apt for than administrative judges.

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  23. A "Rule of Law" [RoL] in a Limited Access social order has access to that RoL limited to members of the dominant coalitions of that society (NWW).

    In an Open Access social order all members have access to the RoL.

    We are observing limitations on open access to the RoL; and its replacement by Rules of Policy (legislation, regulations, etc., etc.) with the consequent diversion of determinations of relationships other than by Law. Law and Rules of Policy are two very different things.

    But with these efforts to limit access to the RoL, we may be observing the symptoms of shifts that occur when there is a "Circulation of the Elites;" or, in this case, efforts to enlarge and join the dominant coalitions.

    R. Richard Schweitzer
    s24rrs@aol.com



    .

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  24. "Civil feudalism"? "Guilded bureaucracy"? "Civil masters"?

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  25. One of the best things I have read in a long time that clearly sums up where we are in America, and what we are close to losing. People just haven't realized it yet.

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  26. "Show me the man and I will show you the crime," said Beria, Stalin's KGB chief. That's exactly what the regulatory state has become for just the reasons you write.
    But please be careful not to let this sound like an attack "the rule of law" itself, which you almost seem to slip into at a few points. You've made the case for why the rule of law is sacred and how it has been undermined. Keep that clear.

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    1. Mark, read Harvey Silverglate's "Three Felonies a Day". It describes with many examples what you said in your first sentence.

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  27. An example of regulatory threat being used to intimidate large corporations is provided here:
    http://www.bizjournals.com/sanfrancisco/blog/2012/06/wells-fargo-dick-kovacevich-occupy-tarp.html

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  28. Do you think we will vote our way out of this? Historically, has it ever happened?

    Thank you for your insightful article.

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  29. I've had an idea for a while that what we need is an amendment that takes power away from the bureaucracy and forces Congress to do its job.

    1. No regulation written by the Executive branch shall have the force of law unless it be also passed by Congress as a normal law.
    2. No regulation or law passed by Congress shall have the force of law after 7 years from its date of passage unless it be passed again by the Congress after 7 years.
    3. No bill or regulation may be passed by Congress that is longer than the Constitution of the United States.
    4. We really meant the 10th Amendment.

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  30. George Mason law professor Michael S. Greve has been writing on the same topic at the Library of Law and Liberty. In The Rise of Adversarial Corporatism, he too struggles to coin an appropriate name for our new regime. But Greve's most unique insight is the development of “government-by-prosecution,” whereby the public's insatiable desire for a villian is satisfied at the same time as rents are extracted by both official [government regulatory] and non-official actors such as trial lawyers, the academy and public interest groups. This is no longer a New Deal-styled “partnership” between business, labor and government.

    Walter Russell Mead has also written extensively on the socio-political origins of what he calls the Blue Social Model.

    The emergence of our modern administrative regulatory state can be most directly traced to a series of Supreme Court decisions that relaxed (repealed?) constitutional prohibitions on federal government power. In other cultures, the end point has been the emergence of a modern caudillo, an executive strong-man who attempts to slow the economy's free fall while managing the distribution of the [ever decreasing] spoils in a neo-feudalistic manner. Regardless of how our future plays out, one thing is certain: democracy is no longer “the worst form of government, except for all others.”

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  31. Flawlessly argued. The only problem I see is: How do we get there? Magna Carta was imposed on the king by the nobles through force of arms, and I don't see anything equivalent possible today.

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  32. Your first two paragraphs are, with respect, wrong I think. I hear bankers rail against the Fed. There is little cowering against government retaliation on the Wall Street Journal editorial page (the second paragraph).

    But I disagree more with the first paragraph. Concentration of power comes from technology and scale. If not for the government, American Airlines could ruin your life by refusing to sell you a ticket if you diss them on yelp. I think the critique by Marx still makes sense today: people worry about losing freedoms when the centralization of economic power that unregulated capitalism leads to has already taken away most of our freedoms.

    Modern economists and historians (some of them anyway) say FDR saved capitalism by regulating it.

    -- Jonathan Goodman

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  33. Just coming here from another blog, this post comes recommended.

    Not there yet, but getting closer?

    In April, Stephen Moore spoke at my local university (University of Colorado at Boulder). During Q & A, he asked what the biggest obstacle to doing business was today

    He rejected my answer "over-regulation" and said "unqualified workers." Reason? Marcellus oil patch firms tell him so.

    Later, thinking it through, I thought: Moore's reflecting US Chamber of Commerce thinking, and not considering the enormous job frustrations of underemployed populace six years into the "recovery." The application pool is poisoned by this intense frustration (Cf the ongoing Trump phenomenon for confirmation.)

    Another data point: last spring, this summer, there are STILL more businesses closing that forming. Leading new the business formation list? Denmark, Finland - and those well-known business powers, Italy, Hungary! (/sarc off) The USA is well down the list.

    A great deal is wrong with the Obama-era economy. The failure of median incomes to rise for the longest in memory, the young with one-in-three still living with their parent, and home ownership and job-holding rates back to the 1970s. and there is no change in sight.

    Bush did end the recession quickly (, officiallyJune 2009). It's Obamunism following on with the record setting regulatory state circa 2003-4 (also Bush) that's killing the job creating small business people.

    Last Winter, I recall the CATO Institute Estimate of the cost of regulation - $15,000 per family.
    Cut that burden in half, and health insurance is affordable, along with a rise in real income.

    Only a radical reversal of the overweening and intrusive regulatory state can save the American Dream. Meanwhile, my closest friends have all planned exiting the US for opportunities abroad - voting with their feet.

    America is in steep decline - economically, politically (post-constitutional - Mark Levin - 'elective Kingship' - F H Buckley), and culturally. The latter? Ten years ago, American Exceptionalism was believed by the young at a healthy 70%. Today the figure is around 50%, and the young re-elected and re-elected a Marxist president who doesn't.

    Numerous polls for years are pessimistic about the future.

    Oddly enough, a reversal of overregulation and economic re-birth is the easiest and most likely to occur. All the rest? Much, much harder.

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  34. Regulations (arbitrary rules) drive out rule of law (moral principles). Studies show bureaucrats unable to account for their own spending and cannot accurately describe the details of the regulations they are enforcing. When questioned about the details they get them wrong more often than they get them right. They impede every activity and are a cause of corruption (being "connected" gets favorable rulings) and create a cynical society. I would rather the bureaucrats just collect their 1.5 times private compensation welfare and do nothing, the economy and society would be better off.

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