Paul Romer on Institutional Reform
By Arnold Kling
The talk is here. He says things to offend many people, libertarians in particular. For example, he talks about problems that we would call public-choice issues, with for-profit education and health care. That is, he argues that when government is footing a lot of the bill, for-profit firms have a stronger incentive to lobby aggressively, which will lead to bad results.
He speaks as if the original sin here is having a for-profit sector in health care and education. That strikes me as wrong. What strikes me as the original sin is having the government foot the bill.
He also thinks that a solution to public choice problems is to replace legislative processes with independent agencies. So, on the one hand, he uses the financial sector as a poster child for a sector that extracted rents from the political process. But on the other hand, he views the Fed as an outstanding example of an independent agency.
In the Q&A, Romer argues for principles-based regulation rather than legalistic regulation. Legalistic regulation in finance sets up regulators to fail. I would argue that this is because banks are able to use innovation and “cognitive capture” of regulators to stay within the letter of the rules while violating their spirit. I am not sure that he is saying this, however. Instead, this may be part of his case for for giving regulators more autonomy, with Congress stating principles and letting regulators work out details.
Overall, I hear this talk as catering to people who believe in the metaphor of government as an adult supervisor in a nursery school. Which is ironic, given that his charter cities project, to which he alludes only briefly during the talk, is best understood relative to the metaphor of government as a monopoly offering lousy service.