The Rule of Law in the Regulatory State
By David Henderson
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.
This is from an excellent piece by my Hoover colleague John Cochrane. The piece is titled “The Rule of Law in the Regulatory State.” He gets at something that I posted about here a few months ago: a gap in the theory of public choice. I didn’t do it that well, focusing on the politicians and their interests and ideologies. He does it way better. He points out, with many examples, that the bureaucracy is its own lobby and that if you forget that, you will miss a lot.
This will definitely be a reading on my Executive MBA economics course this fall.
I highly recommend the whole thing.
In a section titled “A label,” he writes:
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 [sic] 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
I have my contender for a label. It starts with “F” and ends in “ism.”