Category Archives: regulation

From the Right-Wing Conspiracy Wing Nuts

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For example, the FDA assures the public that it is committed to transparency, but the documents show that, privately, the agency denies many reporters access—including ones from major outlets such as Fox News—and even deceives them with half-truths to handicap them in their pursuit of a story. At the same time, the FDA cultivates a coterie of journalists whom it keeps in line with threats. And the agency has made it a practice to demand total control over whom reporters can and can’t talk to until after the news has broken, deaf to protests by journalistic associations and media ethicists and in violation of its own written policies.

This comes from that notorious conservative outlet, Scientific American.

A Congressional Regulation Office?

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Philip Wallach and Kevin R. Kosar write,

The office would have two core functions. First, it would perform cost-benefit analyses of agencies’ significant rules, which number around a hundred per year, in order to provide a disinterested check on agencies’ self-interested math. These CRO analyses would coincide with the prospective estimates that agencies themselves perform. This would create a legislative counterweight to the rule-review function of the Office of Information and Regulatory Affairs — which is nested within the OMB and thus the Executive Office of the President, and is therefore unable to provide a credibly neutral review process that goes beyond concerns internal to the executive branch.

The CRO’s assessment of a proposed regulation, like CBO’s bill scores, should be posted online and delivered to the committee of jurisdiction. Doing these things would increase the political salience of agency rulemaking, thereby fostering congressional oversight and encouraging policy entrepreneurs in the legislature to take up the subject. A CRO cost-benefit analysis should also be automatically submitted as public comment to the rule, which would oblige an agency response and possibly a recalibration of the rule.

Second, but perhaps just as promising, would be to have CRO perform periodic retrospective analyses informed by real data rather than forward-looking estimates. Agencies sometimes perform “look-back” assessments, but they are modest in number (certainly compared to the massive corpus of standing regulation) and produce only nominal changes. This is unsurprising, since each agency is passing judgment on its own work. CRO reports would regularly goad Congress to examine how the rules produced by existing laws are performing, such that they could work to revise those statutes that have yielded problematic results.

My thoughts.

1. Take the analogy with the Congressional Budget Office. People love the CBO, but its practical impact has been questionable. Since 1975, the Congressional budget process has become worse, not better. Congress has become more evasive of accountability, not less so.

2. The proposed CRO is a solution if the problem is that Congress lacks information about bad regulatory policy. But is that really the problem? The problem is that, as with the budget, there is not much collective will in Congress to set policy.

I think that we have the state of affairs that we do because politicians like it. That means either that the regulators are getting away with something without the public realizing it or the public is basically complacent about regulators running amok. I am afraid that it is the latter.

Would a CRO make the public less complacent? Well, CBO has not made the public any less complacent about the unfunded liabilities of Social Security and Medicare. Instead, the CBO’s main impact has been to increase policy makers’ hubris about the ability of deficit spending to create jobs.

In a better world, what are called “regulations” would be called “laws,” and every single last one of them would require Congressional votes. In an even better world, politicians in Washington would look at all the things that agencies are attempting to regulate and say, “Gee, we have no business doing that. We are not properly informed. We should only regulate in areas where we have a good set of information on which to base regulation.”

I don’t know how to get to a better world. Look, I love checks and balances in theory. And I don’t mean to discourage creative ideas for addressing what I agree is a serious problem. But I am afraid that I must assign a low probability to a CRO moving us in the right direction.

When Price Regulation is the Solution. . .

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Scott Alexander writes,

Some people have talked about funding research via “prizes” rather than through an investment-and-profit model. Some people say we should fund it publicly through the NIH or something, which we already sort of do to a degree. Still other people say that we should abolish the FDA, cut the costs of drug development by an order of magnitude, and, um, see what happens. I don’t know about any of those things. I just feel like until you’re ready to set these up and have some idea that they work, do the thing that probably is going to result in people having the best access to the most life-saving drugs. Which right now looks like no price control.

Read the whole thing. His point is that, holding other policies equal, price controls would result in less pharmaceutical innovation and considerable harm.

I am going to drop the “other policies equal” assumption to make a point. That is, whenever someone proposes price controls as a solution, I assume that some other government policy is the problem. In the case of pharmaceuticals, the FDA really does impose huge costs, and those are what feed into drug prices.

To use another example, rent control is often a “solution” to the problem of restrictive land-use regulation. The minimum wage is a “solution” to the problem that payroll taxes and labor market regulations create a large wedge between the cost to firms of employing workers and the take-home pay that finds it way into those workers’ pockets. Price controls in medical care are a “solution” to the problem of government policy that subsidizes demand and restricts supply.

Excellent Sentences

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From Alex Tabarrok.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

Hundreds of millions of dollars have been spent on designing and implementing disclosure rules for such products as home mortgages. Has there been a single case of a consumer who read such a disclosure and made a better decision as a result?

Zoning After 100 Years

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Justin Fox writes,

Fischel has a long list of explanations for this intensification of zoning that I won’t go into here, other than to mention the one that drives me the craziest — the dressing-up of self-interested economic arguments in the language of environmentalism and morality.

Pointer from Mark Thoma.

My thoughts:

1. In urban areas, there are important spillover effects from development. Your new building might block my view, create noise or congestion, and so on. In theory, this would be resolved in a Coasian manner–either you compensate me for the harm that you do or I compensate you for not allowing you to build. But in practice the mechanisms for Coasian bargaining do not exist. Hence, these spillovers are dealt with by the political process.

2. Land-use regulation is a major source of political power. If the teachers’ unions ultimately determine who can and cannot be elected in Montgomery County, Maryland, then the ability to fund a campaign comes from developers. The developers are effectively bribing the county council to get their projects approved.

3. I am not sure what the free-market equilibrium looks like for major cities. Perhaps there would be a bit more high-rise apartments built and somewhat less upward pressure on prices and rents. But do not be so sure that the effect would be large.

4. Economists and pundits look at the higher incomes in San Francisco and New York relative to small-town Ohio and see missed opportunities caused by zoning restrictions. I think that these observers under-estimate the differences in lifestyle preferences.

Daniel Yergin on The Great Regulation

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He writes,

Voters under 30 were either very small or not yet born when the Berlin Wall came tumbling down in 1989. They have no memory of communism—what it meant in terms of poverty, thwarted opportunity and political repression. Closer to home, few Americans recall the likes of the now-defunct Civil Aeronautics Board, which not only set the price of an airline ticket but regulated the size of the in-flight sandwiches. What millennials do know is what happened in 2008—and for many it serves as an indictment of the market system.

The people want regulation and they are getting it–good and hard, as Mencken would say. The result?

if you want lifetime employment, go into compliance.

Thanks to a reader for the pointer. I used to say that if you want to start an automobile company in this country you need a handful of engineers–and at least 1000 lawyers. Starting an independent medical practice is getting to that point.

There may be natural forces at work that cause industries to become dominated by a few large players. But there is also the unnatural force of regulation.

The Great Regulation

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Guy Rolnik writes,

Looking at both intangible investments and political activities to explain the 20% rise in Tobin’s q in the U.S. since 1970, a new working paper by James Bessen from Boston University concludes that activity associated with increased Federal regulation is the most important explanatory factor, especially after 2000. In fact, spending on R&D and other intangibles has fallen relative to conventional assets since 2000.

Noting that operating margins for these firms have also risen since 1990 by over 2% in aggregate, Bessen’s study also found that variables associated with regulation and corporate campaign contributions account for about half of this increase.

Pointer from Mark Thoma. The article is a long interview with Bessen, interesting throughout. For example,

In 2011 a new patent law passed, the Leahy-Smith America Invents Act. This patent law was essentially negotiated between a small number of large pharma companies and a small number of large tech companies.

…all of a sudden you have a whole lot of small businesses in every state in the country who are now upset about getting sued for patent infringement over these very ridiculous claims.

Once again, I wonder how much of the trend toward industry consolidation and loss of dynamism in the past twenty years is due to regulation and rent-seeking.

Alex Tabarrok on Policing

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He writes,

in a survey of crime and policing that Jon Klick and I wrote in 2010 we found that a cost-benefit analysis would justify doubling the number of police on the street. We based our calculation not only on our own research from Washington DC but also on the research of many other economists which together provide a remarkably consistent estimate that a 10% increase in policing would reduce crime by 3 to 5%. Using our estimates, as well as those of some more recent papers, the Council of Economic Advisers also estimates big benefits (somewhat larger than ours) from an increase in policing. Moreover, what the CEA makes clear is that a dollar spent on policing is more effective at reducing crime than a dollar spent on imprisoning.

Hard to do Large Clinical Trials

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With this:

Speaking this week at the EmTech conference in Cambridge, Massachusetts, Editas CEO Katrine Bosley said the company hopes to start a clinical trial in 2017 to treat a rare form of blindness using CRISPR, a groundbreaking gene-editing technology.

…The condition Editas is targeting affects only about 600 people in the U.S., says Jean Bennet, director of advanced retinal and ocular therapeutics at the University of Pennsylvania’s medical school.

I don’t think that the FDA is prepared for what is coming.

Steve Teles Defends Technocrats

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He wrote,

greater responsiveness only increases the opportunities for concentrated interests to exert influence over the agencies that are supposed to regulate them. Perhaps ironically, it may be the case that only those regulatory agencies that are able to escape domination by politicians will be able to effectively pursue the goals that those same elected officials wrote into law back when the public was paying attention. Effectiveness, in short, may demand a significant degree of bureaucratic autonomy, rather than democratic control.

…Carpenter’s key insight is that bureaucrats themselves have the power not only to shirk or subvert their principals, but in some cases to guide or even dominate them. The canvas on which he explains how this is possible is the history of one of America’s most powerful agencies, the Food and Drug Administration.

Teles is reviewing a book by David Carpenter, in which the author argues that the FDA’s power stems from its reputation. Because the FDA is highly regarded, it can maintain its independence from Congress.

Teles sees that as a good thing. His model of politics is that there are fleeting demands for regulation, to which Congress responds by establishing an agency. However, once the spotlight is off and the actual regulatory process is underway, the more politically responsive the agency, the more likely it is that the agency will be manipulated by special interests. It is better for the agency to polish its reputation and sustain independent power.

In this model, what is it that limits an agency’s power?

In theory, the loss of reputation leads to a loss of power. When has this happened? The Federal Emergency Management Agency (FEMA) has a terrible reputation, but it has at least as much responsibility as ever. Same with the Transportation Security Administration (TSA). The Environmental Protection Agency (EPA) recently spilled chemicals into the Colorado River, and as far as I can tell it suffered no consequences.

Still, I think that it is fair to say that technocrats focus on their reputations. Bad publicity does attract Congressional attention, and perhaps that makes an agency less aggressive than it otherwise might be.

But reputation-protection, rent-seeking, can be costly. A place like the Fed selects for chairmen who write self-serving memoirs. The question is whether the focus on reputation leads to better behavior or mere image-polishing.

In the private sector, there is the same tension. Reputation can be earned, or it can be manipulated through public relations. But one hopes that the competitive process will eventually expose the manipulators and reward the good performers.