Through this whole Larry Summers exchange I hear a lot of people treating regulation the way those researchers at the Mercatus Center tend to treat it - as if it is some amorphous blob that you have more of or less of (they will literally count pages of regulatory code and use that as a measure of "regulation"). Liberals think more "regulation" is good and conservatives/libertarians think more "regulation" is bad.
I don't know the regulatory world nor do I know finance and banking well enough to have a strong opinion, and as a result I don't think I ever put out a particularly strong opinion on it. But when people say things like "most of the left blames Summers for his role in weakening regulation and protecting our inefficient and wasteful financial system from proper reform" I honestly wonder if you know any better than I do, because when I read things like this I have no clue what the hell you have in mind.
Why don't people ever speak in specifics when they talk about regulation? I can believe there are people out there who genuinely think all kinds of regulation are bad, but is there really anyone out there who thinks all kinds of regulation are good? What are some specifics here?
Thursday, August 1, 2013
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Maybe you've heard of something called a "proxy." If you have a better suggestion for degree of regulation that can actually be operationalized, please suggest it.
ReplyDeleteProxy is fine to get at a coherent concept that we can't measure well.
DeleteThe thing is, I don't see how "regulation" is a coherent concept.
Ah, just like how price inflation isn't a coherent concept. It's just an amorphous blob of prices.
DeleteI'd give more content and less snark, but you already know what I would say and you're just being difficult.
DeleteMeh, I don't see how I'm being difficult.
DeleteIt's like trying to measure the amount of beauty in the world by adding up how many paintings, prints of paintings, and jpegs of paintings exist. If you tell me you're trying to measure the supply of art in the world I'd buy it. But I'm not buying that you are adding up anything that coherently proxies "beauty".
And at least beauty is a distinct quality that we could think about quantifying. "Regulation" is just a description of a type of action. It's not even a quality much less a quantity.
So you have two countries. One instructs all coal power plants that they must install scrubbers of grade X. They check once a year, but might check more than that if someone complains.
DeleteThe other specifies by means of a complicated formula how many units of each pollutant coal power plants are allowed to emit. For each grade of coal different handling procedures are mandated, and each must stay separated in transport and storage. Both the trucks they coal arrives in and the storage units are subject to bi-weekly checks. The plant is required to change out its scrubbers once every year, subject to an appeals process due to hardship for small coal power producers. In conjunction with other USHA rules (since you don't like "regulation"), there are several specific rules for handling coal between the storage units - which must be greater than 100 gallons but less than 500, by the way - and the actual processing to ensure that other contamination does not take place. There are 1500 more pages of these rules the coal power plants must follow or they will be hit with fines. I'd go on, but I'm making this up and sorta bullshitting since I know little about coal power.
Which of these two countries is more regulated?
y u no answer obvious question oh right
DeleteThe second one obviously. So?
DeleteRegulation is a catch all for worldviews/ideologies. I'm as libertarian as they come, but I would be mistaken to say that all regulation is bad. That is a claim that is impossible to prove. Even in libertarian thought, a regulation could happen upon great success. Our strongest claim should be that it often does not, and, more often than not, creates opportunities for rent-seeking. Plus, libertarians are keenly aware of the knowledge problem. What that means is that even we don't know if a regulation will work or not. We cannot predict the unforeseen consequences of unleashing a policy in a multivariate world. Therefore, it would be hypocritical of us to claim all regulations are bad. The only question is whether we should try or not. We tend to say no. Let the multivariate world sort it out. The other side tends to think we should experiment and see.
ReplyDeleteI'm not so sure its fair to pick on someone for using shorthand in the comments section of a blog post. I don't see why someone is required to list the specific legislation Summers was involved in every time they point out that he played a large role in the Clinton administrations push for financial deregulation.
ReplyDeleteThe glaring example of this was his role as part of the triumvirate that shouted down Brooksley Born when she advocated reasonable regulation of derivatives by the CFTC. He is notorious on the "left" for that.
It's not that I mean to pick on anyone. It's just that I imagine a lot of the deregulation Summers pushed was very, very good to do so when people complain about "deregulation" I'm honestly not sure how to react to that.
DeleteI had not heard of Brooksley Born until recently. I heard a lot more discussion of all the other stuff I listed.
I dunno, I think you are putting too fine a point on it and it is not unreasonable to throw the "good baby" deregulation out with the "caused the financial crisis" bathwater.
DeleteMost leftists hold that the country would have been better off if depression era regulation had not been tampered with, so that the entire Clinton era deregulation of the financial system can be thought of as one lump move toward "deregulation".
"reasonable regulation of derivatives by the CFTC"
DeleteI admire her recognition that a problem existed, but the whole idea of "reasonable regulation" of a market worth 4+ times the size of our annual GDP is pretty comical. IMHO, the way to "regulate" these products is to not allow them to be used by any institution that uses the government as a backstop.
I've read (Gilder's recent book) that regulations actually required fincancial institutions to purchase derivatives as a backstop to losses. I haven't been able to track down that regulation, yet. If he is correct, that would be a good example of a very bad regulation. Overall, I think there is a tendency for financial institutions to think they have every risk covered even when the credibility of that coverage is quite low.
"Liberals think more "regulation" is good and conservatives/libertarians think more "regulation" is bad."
ReplyDeleteAlthough I don't consider myself either a libertarian or a conservative...I have to say something about this.
Wouldn't a right-leaning American citizen's view on regulatory policy also depend on the generation that he or she was born in?
Allow me to explain, please. Unless my knowledge of U.S. history is horribly wrong...IIRC, much of the generation of Republicans that came into power after the Great Depression and Second World War essentially made peace with the idea of government intervention in the economy and the New Deal. One could make the argument that Dwight D. Eisenhower, Richard Nixon, and Gerald Ford, all fit this bill. Eisenhower largely kept the reforms of the New Deal intact, and the cabinets of Nixon and Ford did enact policies that clearly indicated they didn't have a knee-jerk, across-the-board opposition to regulation or government intervention. (I believe the EPA was created under Nixon's time as President.)
One could say otherwise about the generation of Republicans that rose to power through the Reagan Revolution. Reagan was much more inclined to deregulation than any of his three Republican predecessors as President. As for the generation of Republicans that consider themselves libertarians, from what I can tell, they have a general opposition to regulation per se.
I agree that such attitudes vary across generations with Republicans. But while we are being general here, I would say that there is a knee-jerk reaction for more regulation among Democrats of recent generations. Also, one could argue that Republicans were more in favor of regulations when the regulatory environment was considerably more lax. That's still being too general. I think Daniel's point is that "the devil is in the details.
DeleteWhen everyone was up in arms about Dodd Frank, I asked those in favor to name their favorite aspect. When they failed to do that I asked them to name even ONE thing they like about it. Those opposed I asked to name the worst aspect and then even ONE THING that particularly bothered them. Very few people even knew anything about the law they either loved or hated.
Although I am inclined to the left (but not as much as I once was, at a younger and more naïve age), I do agree with you that the average, left-leaning layperson has a knee-jerk tendency to advocate for more regulation without going into the specific details and proper understanding of how regulation is supposed to work. I agree with you and Daniel Kuehn that the devil is in the details, but the reason I made that comment about American right-wingers is because I'm not sure that would apply to an older generation of the U.S. Republican Party.
DeleteI was very left-minded at a younger age, as well. On regulation, I'm proably more to the right. I think there's some truth to your point. I would say that older generation Republicans liked to hear anti-regulation talk, but were fine with status quo as long as their party was in power. Same thing for running budget deficits.
Delete"they will literally count pages of regulatory code and use that as a measure of "regulation""
ReplyDeleteI agree with you that this is not a good measure of "regulation". However, I think it is a good measure of "complexity". Complexity is important. 1) Complexity is a major cost according to Deming, and most efficiency experts since him. 2) Complex regulations are a much bigger hindrance to small firms than large ones. 3) Complexity is typically less efficacious. Loopholes can be thought of like security of code. More surface area creates more opportunity for circumvention.
Johnny Cochrane has an interesting approach to regulating too big to fail. He basis his approach on stopping "runs" by requiring equity financing of loans based on illiquid assets. Here is one passage "Institutions that want to invest in risky or illiquid assets, like loans or mortgage-backed securities, have to fund those investments with equity and long-term debt. Then they can invest as they please, as their problems cannot start a crisis. " The entire blog post is here: http://johnhcochrane.blogspot.com/2013/06/stopping-bank-crises-before-they-start.html
"Why don't people ever speak in specifics when they talk about regulation?"
ReplyDeleteBecause in politics specifics are boring (and commit people to boot).
Plus, you know, the CFR and the federal bureaucracy are gigantic. The sorts of difficulties associated with wrapping your hands such discourages specificity.
re: "Plus, you know, the CFR and the federal bureaucracy are gigantic. The sorts of difficulties associated with wrapping your hands such discourages specificity."
DeleteOne would think this would lead people to refrain from having bold opinions about the entire CFR or the entire federal bureaucracy!!
No, one would expect the exact opposite. Bold opinions are generally much common in arenas when knowledge is difficult to access or it is scarce.
DeleteBut it shouldn't be. I'm not sure you got what I meant by "one would think...".
DeleteIOW - I know it's not this way, but it ought to lead people this direction.