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Government as Referee: Who Regulates the Regulators?

A recent opinion-page editorial by a Ray Hankamer Jr. in the Houston Chronicle, Government as Referee for Society, espoused big government to promote basic protection in a modern society. 

Such is the romantic view of government; the Good Government and We the People view of democracy where the body politic is all of us (not us versus them). But the real world is different from this all-to-common textbook view.

Romantic Government

Hankamer begins:

“Leave the market alone and it will self-regulate just fine.” “Stop taxing the people and let them spend their own money instead of letting the government take it and waste it on ‘meddlesome bureaucrats and business-stifling regulators.’” This is the viewpoint of the tea party and many Republicans. But wait a minute: How would such a philosophy really work if implemented?

He then invokes the sports metaphor to conclude that we need federal regulators in an alphabet soup of agencies to do the necessary and sometimes dirty work to achieve fairness:

They are the public’s referees and umpires, such as the Securities and Exchange Commission, the Environmental Protection Agency and the Fish and Game Commission. They are there to enforce the rules for the good of all the people.

But when they are reined in, the public suffers. Remember Enron, WorldCom, Bernie Madoff, Stanford Financial, Lehman Brothers and all the other examples of the market being left alone to self-regulate?

One caveat, Hankhamer adds: “Overzealous referees and umpires can stifle an athletic contest, and overzealous regulators can do the same for an economy. But the suggestion that we can play the game with no supervision is preposterous.”

In response to Hankamer’s use of the tragedy of the commons as a pervasive reason for government intervention, I opined in a letter published by the Houston Chronicle:

Regarding “Government as a referee for society” (Page B8, Oct. 2), we can all applaud Ray Hankamer‘s advocacy of a society based on the rules of law.

Although he allows that overzealous regulators can stifle an economy, he attacks the straw man position that “we can play the game with no supervision.”

However, he seems surprisingly uninformed that most of his “tragedy of the commons” and market failure examples have been solved by property rights (fences), private accreditation organizations and the law of torts. He should also realize that the self-regulating features of the market, which he unfairly demeans, and not government regulators are what brought the downfall of Enron, Lehman Brothers and other malefactors. Investors were far more prescient than SEC bureaucrats.

His closing platitudes call for a more balanced (in his opinion) media coverage of political events. Being a referee (sergeant-at-arms) in the Texas Legislature has evidently inspired him to want to make more rules for the rest of us.

Rob Bradley (of MasterResource) also published a rebuttal in the letters section of the Chronicle, reprinted below:

Ray Hankamer Jr.’s essay misleadingly presents a case for activist government. We do need the rule of law to police against fraud and force against person and property. But government intervention in the name of the “general good” often has unintended consequences, and government for the people is often government for the special interests against the people.

Our democracy-in-deficit is about government going far beyond what is intellectually defensible. And as far as the examples Hankamer uses (Enron, Madoff, Stanford, etc.), where were the thousands of regulators enabled by tens of thousands of pages of regulation? Might there have been unanticipated consequences where simple rules against fraud could have been more effective?

Conclusion

There is not only market failure but also government failure. Government should not intervene if its own shortcomings approximate or exceed the market imperfection.

Such is the bottom line of real-world political economy.

6 comments

1 Steve C. { 10.14.11 at 9:08 am }

When stimulus fails, the solution is more stimulus.

When regulators fail, the solution is more regulation.

Isn’t that one definition of insanity?

2 Jon Boone { 10.14.11 at 11:53 am }

In many ways, the issue featured here is central to the prospects of enlightened polity. Broadly, one of the chief roles of government, particularly government embedded in a highly commercial culture, is to serve as a dispassionate arbiter for settling arguments about veridical claims in the marketplace. But government today has so many stakes in the outcome of so much enterprise that no one in their right mind considers government dispassionate. In too many cases, we have the best government money has bought–arrogantly disposing of our resources in profligate, highly unproductive fashion to benefit a handful at everyone else’s expense. And with no sense of shame or expectation of reckoning. Rigging markets with drek on behalf of the idea of free marketry has taken firm hold throughout the land.

This is, in my view, what joins the basic concerns of the Tea Party with those occupying Wall Street. For those who think any of the Republican candidates for president offer surcease, or even consolation, just consider the Republican Shout-Out for Wind, one of the dumbest modern energy ideas imaginable:

http://green.blogs.nytimes.com/2011/08/18/a-republican-shout-out-for-wind-energy

http://aboutmittromney.com/energy.htm

http://www.frumforum.com/perrys-wind-energy-mandate

The claim is that it’s all about diversifying the nation’s energy portfolio, using government tax policy to shove it down the public’s throat. But, as I’ve often said here, it’s much more about how ignorance and greed forage freely at the public trough, enabled by the cronyest corporatism.

Unless we hold political candidates accountable for their pandering pomposity, the public trough will continue to swell with the swill of government-imposed theft.

3 Ray { 10.15.11 at 1:02 pm }

The regulators always end up in bed with the regulated. When Freddy Laker wanted to bring his cut rate arline to the US the FAA wouldn’t let him becaus it could harm the US arlines.

4 John Howley { 10.15.11 at 7:29 pm }

“Simple rules.” I like that. How about we start with this simple rule: “Government shall not fund, directly or indirectly, private business.” No bailouts. No loan guarantees. No direct or indirect subsidies whether in cash, kind, or via tax exemptions. Every business plays on a level playing field, and let the best ones win.

5 Noblesse Oblige { 10.15.11 at 7:59 pm }

Hankamer is another example why you need to keep your eye on the pea in the liberal shell game. He sets up a straw man of anarchy/no government, but no one is proposing that. We want smaller, less intrusive government that does not reward its supporters who pay to play. We want to get rid of the ineptness; the ideologues; the corruption of crony capitalism; and the drive to make us all servants by entitlement. Government can indeed work, but it must work in partnership with the private sector, not at war with it. It must reign in the EPA whose imperatives have a life of their own, destroy whole industries, and are sand in the gears of everything we do — and are virtually unaccountable.

This is just for starters.

6 Michael Cunningham { 06.27.12 at 8:28 pm }

Here’s something I wrote on the issue some years ago. Now I would also stress the fact that many/most in government are not driven by public interest considerations, and that their policy time horizons have shortened (except in the absurd case of 2100 temperature projections).

Market failure and government failure

Markets are very efficient devices for providing and processing information, for organising production and distribution of goods and services so as to allocate resources to their highest valued use and thus maximise community income. Their superiority to central planning is well attested.

There may, however, be cases where markets do not produce the most efficient outcome, where there is “market failure.” This tends to arise in particular circumstances, for example when there is a natural monopoly, where externalities are not taken into account, where there is information asymmetry or in the case of public goods.

The identification of market failure alone is not, however, sufficient reason for government intervention. There can be no presumption that governments outperform markets: indeed, “government failure” is more common. The World Bank advised that “the countless cases of unsuccessful intervention suggest the need for caution. To justify intervention it is not enough to know that the market is failing; it is also necessary to be confident that the government can do better” (World Development Report, 1991). A Bureau of Industry Economics paper assessing the 15 major interventionist policies of the Commonwealth Government from 1970-85 found no positive outcomes: 13 had negative returns, while for two the net outcome was unclear.

Should the cost to the community of market failure be significant, government should first see whether it is possible to improve the workings of the market. If not, it must assess its capacity to produce a better outcome, and the costs and benefits of any intervention. Given that a number of studies have found administrative costs of around 15-50 per cent in government industry support programs, the prospect of a net benefit from intervention must be considered doubtful. Overall, there is extensive evidence that government interventions return far less than their opportunity cost.

Imperfect government: “The skills of government in addressing market failure are often exaggerated. Government intervention must overcome three formidable difficulties: the tendency of regulated firms to “capture” their regulators, weak incentives for efficiency within the public sector, and missing information (where markets lack it, governments are likely to lack it as well). … The record of intervention is poor … history suggests that the burden of proof should lie with those who would extend the government’s role.” The Economist, 17/2/96.

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