Hope versus Reality
Tibor R. Machan
In his column in The New York Times on June 25, 2009, Judge Richard Posner wrote that "The most promising reform would be to give the Federal Reserve, the National Economic Council or the president’s Council of Economic Advisers the ability to collect and analyze financial intelligence and do emergency planning. Regulators failed to prevent the financial collapse not because they lacked adequate powers but because they lacked information, a culture of inquiry and a contingency plan." But then he immediately adds that "There were abundant warnings of impending economic disaster. Had they been investigated rather than ignored, we might not be in the fix that we are in today."
The confidence shown in regulators in the first statement seems to me to be plainly undermined by the historical claim in the second, one that seems to follows from a certain plausible understanding of public choice theory, actually--ignoring rather than investigating warnings would come naturally to those who are, whether consciously or not, embarking upon vested interest dealing, in this instance working for regulations to continue instead of doing what might make them unnecessary in time. Regulators have a good job and it is no surprise that they might work not so much to fix problems they perceive in the market place but to keep working at what keeps them employed and well fed.
In free markets, to the extent that they exist, such vested interest dealings are checked by competition and budgetary constraints (to the extent these are not thwarted by government policies that often produce monopolies). A shoe repairer may be tempted to fix shoes not quite as well as they need to be fixed but just enough that they will last a while but need to be returned for further repair. Indeed, automobile repairers are often suspected of this. What, apart from conscientiousness, keeps such folks on the straight and narrow is competition, the knowledge that if they don't do the work well enough someone else will jump in to do so. One main reason that bureaucracies are generally sluggish and unenthusiastic about serving the public--as distinct from private vendors--is this element of constant competition, combined with the fact that bureaucrats gain their income from taxes which can often be raised with impunity by those who hire them.
What public choice theorists claim is that bureaucrats have a far better opportunity to yield to the temptation of malpractice than are those in the private sector. The theory does not claim that all bureaucrats are cheats and all those in the private sector are professionally responsible. But it identifies an evident tendency and shows it to exist through the study of economic and political history. Common sense supports this, as well, when most people notice that if they go to, say, the Department of Motor Vehicles (one of the more visible government outfits), they mostly get a reluctant, bored, at times even curmudgeonly treatment, whereas in the private sector the routine tends to be eagerness to serve, to generate and keep business.
There is an element about public choice theory that economists do not emphasize often enough, namely, that the objectives of regulators are often very obscure, unclear, even contradictory. For example, governments often embark on historical preservation but at the same time they are supposed to make sure that building and other facilities are properly managed, kept safe, etc. But historical preservation mostly require keeping things in their original form, while the pursuit of safety involves making use of the most up to date technology and science. One can generalize this kind of conflict within government policies all over the place--which is what accounts for vigilant propaganda against smoking while tobacco farmers keep receiving government subsidies.
As far as I can tell, entrusting to government officials anything other than the job the American Founders understood as theirs, namely, securing our basic rights, is seriously misguided. Not only is most government regulation a violation of due process, meaning it acts preemptively by restraining professionals in various fields of endeavor who have not done anyone any wrong. But it is also an ineffective devices, just as Judge Posner points out in his article.