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To regulate or not to regulate, that is the question...

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Joined: 07 Mar 1999
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Location: Berkeley, California

PostPosted: Thu Mar 05, 2015 2:50 pm    Post subject: To regulate or not to regulate, that is the question... Reply with quote

The action by the FCC triggered a lot of libertarian claims that the market would take care of things and we didn't need regulation. None of this had any rigor; it displayed neither a grasp of economic theory nor an understanding of the successes and failures of regulation. Displaying even greater ignorance, or spleen, the archbishop claimed that I want to regulate everything. So let's review the economic and governance theories and results at hand.

Long ago most societies recognized that in the case of certain economic assets, the market fails to capture some of the costs. The classic example of this is "The Tragedy of the Commons", written by Garrett Hardin and published in 1968. The idea goes back much further, and this succinct explanation can be found:

[this} scenario {was} first sketched in a little-known pamphlet (6) in 1833 by a mathematical amateur named William Forster Lloyd (1794-1852). We may well call it "the tragedy of the commons," using the word "tragedy" as the philosopher Whitehead used it (7): "The essence of dramatic tragedy is not unhappiness. It resides in the solemnity of the remorseless working of things." He then goes on to say, "This inevitableness of destiny can only be illustrated in terms of human life by incidents which in fact involve unhappiness. For it is only by them that the futility of escape can be made evident in the drama."

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.

As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility to me of adding one more animal to my herd?" This utility has one negative and one positive component.

The economic system fails to capture the diminished quality and productivity of a commonly owned resource, such as a meadow, or the quality of water in a river or the ground. We have seen this, and a great deal of rigorous economic analyses, when we first started to deal with environmental problems in the 1960's. Those uncaptured costs are usually described as externalities.

I have seen excellent analyses that proposed economic systems that captured the external costs, generally through taxes, and showed how such systems were more efficient than regulatory systems. Those analyses go back to approaches to deal with water quality problems on the Rhine, where the regulations of any one nation were not sufficient to resolve water quality problems for their nation, or for downstream nations. For a long period, the use of economic strategies rather than regulatory schemes was the province of conservative thinking in the United States--and it was an approach that I agree with. The classic example was the cap and trade system applied to interstate constituents contributing to acid rain, whose political author was George H. Bush

Modern conservatives have abandoned the rigorous economic thinking about environmental and public safety problems that could be addressed by economic structures, and have instead launched wholesale attacks on regulation without proposing alternatives. What we hear and read are incessant and reflexive attacks on regulation, and half-baked argument that the market forces will solve the problem.

The most significant failure of these modern attacks are their failure to reflect the inherent imperfections of the economic system, or the successes and failures of regulation.

Neo-conservatives take a theological approach that the economic system will self-regulate without government intervention. The classic argument here is Bard's repeated ad nauseum, that letting the banks fail would have resulted in a correction. These arguments assume, rather than demonstrate, a complete fluidity in markets--an illusion if not a fantasy. People are constrained in, for example, their willingness to pick up stakes, sell their house, and move to another location where jobs are more plentiful. Persistence in thinking that the market is fluid simply ignores human behavior--something common inside the echo chamber of conservative talking points.

There are certainly regulatory structures that should be dismantled or reformed. Many of them were developed to protect workers, the classic featherbedding aspects of the railroad labor system that ultimately helped weaken the economic viability of the railroads. Deregulation has had a few dramatic successes in ridding the economic system of these regulatory brambles, perhaps most notably in the deregulation of the trucking and airline industries. Unambiguously, those efforts reduced the cost and increased the efficiency of both industries. But the news on the other side has been ignored by the neo-cons. The deregulation of the financial sector and the energy sector, both under legislation penned by Phil Gramm of Texas, led to disastrous economic results.

Most of the screaming by the Republicans over the last six years has been complaints about three sources of regulations: 1) the regulations to implement the Affordable Care Act; 2) the regulations to implement the rather weak reregulation of the Dodds Frank Act, and 3) EPA regulations to regulate CO2, required in response to a Supreme Court decision during the Bush administration.

Thoughtful analysis proposes alternatives; most of what we hear is simply repeating of talking points without analysis. The latter is what I expect from the right when I post this. Tee hee.
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