Posted by James Surowiecki’s latest New Yorker piece tackles the problem of weakened federal agencies failing to get tough on companies that need it. He notes that leading up to the BP Deepwater Horizon Disaster, Minerals Management Service officials “had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating.” And he gives other examples:
Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.
When considering weakened regulatory agencies, I tend to think first that elected officials have deliberately weakened them – usually at the urging of the regulated industries. (See this John Judis piece for a summary of how the Bush administration hobbled regulatory agencies, and blog posts from Rena Steinzor and James Goodwin about how Obama’s Office of Information and Regulatory Affairs is stalling coal-ash regulation.) Surowiecki, though, suggests that there are also some subtler forces at work:
The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized, seen as little more than the tool of Washington busybodies. This view was exacerbated by the way regulation works in the U.S. Too many regulators, for instance, are political appointees, instead of civil servants. This erodes the kind of institutional identity that helps create esprit de corps, and often leads to politics trumping policy. Congress, meanwhile, often takes a famine-or-feast attitude toward funding, allocating less money when times are good and reinflating regulatory budgets after the inevitable disaster occurs. (In 2006 and 2007, for instance, Congress effectively cut the S.E.C.’s budget, even as the housing bubble was bursting.) This makes it hard for agencies to do consistent work. It also contributes to the sense that regulation is something it’s O.K. to skimp on.
Given that we still spend tens of billions of dollars on regulation every year, it may seem odd that attitudes can matter this much. But the history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do.
… The social psychologist Tom Tyler has shown that acceptance of a law’s legitimacy is the key factor in getting people to obey it. So reforming the system isn’t about writing a host of new rules; it’s about elevating the status of regulation and regulators.
The problem with good regulators is that they make it easy to forget about them. When we get clean water from our taps, take pills without having unexpected nasty side effects, or ride in a vehicle that experiences no dangerous malfunctions, nothing reminds us to thank the agencies who free us from worrying about the safety of our water, drugs, and vehicles.
Surowiecki ends by pointing out that regulation is good for the regulated industries, too:
The pharmaceutical industry, for instance, would be much smaller if people were seriously worried that they might be poisoned every time they took a new drug. And though executives chafe at financial regulation, the protection it provides makes investors far more likely to hand them money to play with. If we want our regulators to do better, we have to embrace a simple idea: regulation isn’t an obstacle to thriving free markets; it’s a vital part of them.
I agree, but I wonder whether it’s really something companies think about when they sign onto anti-regulatory endeavors. I suspect that most corporations, like most individuals, dramatically underestimate the chances of a disaster happening – until one happens, and then the realizations about the cause don’t last long enough to make the changes needed to prevent future catastrophes.
The best way I can see to increase respect for regulators is for people to stop the knee-jerk bureaucrat bashing and start talking about the easy-to-miss but important work regulators do. Given that even members of Congress are so often eager to distance themselves from Washington bureaucrats, I have a hard time believing this will happen.
June 12, 2010
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