Regulations Run Amok Trying to Keep Muckers From Running Amok

Regulations are a reaction to past bad actions that try to anticipate future bad actions (Good Luck!)

The concept of regulating maleficence is as old as Moses. It started when God personally handed Moses the Ten Commandments. (There is suspicion that God actually gave Moses 20 commandments, but lobbyists and special interest groups persuaded Moses to drop 10 of them.) Since God witnessed all manner of debauchery, depravity, wickedness and even dreaded sloth being committed by and upon his people, He/She decided that a few simple rules – along with the threat of eternal damnation in Hell – would regulate the activities of humans and make life on earth a perpetual Garden of Eden. And that worked just fine, didn’t it?

And that raises another question just as rhetorical: If even God can’t come up with regulations that achieve their desired objectives, what chance do mere mortals have of doing so? Without pausing to plead for divine intervention, humans are forever trying (and trying and trying). And it all adds up. A research survey by the University of Michigan (funded, of course, by a federal grant), determined that there are now enough regulations on the books for every one of some seven billion people living on the earth to have 734.6 regulations of their very own.

Some Good News and Some Bad News . . .

This leads to the most logical question of all: If regulations don’t work, why even try? Unfortunately, the answer is that without them, life on this blue marble would be chaotic and deplorable. One need only look to the debacle in the savings and loan industry during the 1980s and ‘90s to see what happens without them. Despite decades of steady, safe and stable growth, the savings and loan industry chafed under the strict regulation of its activity. They claimed regulation inhibited the growth of the housing market. In 1979 Congress bought this argument and deregulated the S&L industry. No sooner had the savings and loan industry been given the “freedom” to act the way they wanted to act when they began to act, very badly. In legal parlance, they began “shirking their fiduciary duties,” “racketeering” and engaging in “rampant and imprudent” real estate lending.

By the mid-1980s the savings and loan industry was in such disarray that the government bailed them out at a taxpayer cost of nearly $1 trillion (think about that as you fill out this year’s 1040). A similar example of a well-intended effort to reduce regulations that can turn bad is the 2001 deregulation of the power and utility industry. Envisioned as a way to bring competition, efficiency and lower prices to the power industry, the deregulation actually opened the door for companies like Enron to be formed. We all know what followed!

Should We Give Up?

The truth of the matter is that regulations are needed and they do work; they just don’t work to the level of perfection intended, because the world is not perfect. This frustrates those who seek a mandated perfect world and irritates those who believe an unfettered free-market is a perfect world.

By the very nature of their intent to constrain activity, regulations are a prime target for those who believe the essence of freedom is unrestrained activity. Many see regulations as a sinister conspiracy on the part of government to limit freedom. On the other side of the issue are those who see regulations as a magical way to assure and safeguard freedom of activity for all. As a result of this schizophrenic attitude, government regulations have become an easier whipping boy – for both the left and the right – than an alcoholic at a MADD convention.

Even the most zealous Libertarians – those who believe the Tea Party is left-wing – agree that some modicum of regulation is needed for society and business to function. The problem is that what may be a simple, acceptable idea and objective, becomes a complicated and burdensome collection of convoluted rules that do more harm than the harm sought to be rectified. That happens because in order to stop what has already happened from happening again, regulations tend to be static, complex, rigid rules that instead of preventing abuses, actually create loopholes for unscrupulous activity that the creative can use with impunity.

The classic example of how this concept can fail is the ill-fated Maginot Line. This line of tank obstacles, concrete fortifications and other defenses was built by France along its borders with Germany and Italy after World War I. The Germans, of course, had attacked France from the east during this war to end all wars. To prevent the Germans from attacking from the east again, the French built this massive defensive line.

It worked. But of course, the crafty Germans came up with a new way to do bad things and simply flanked the Maginot Line by going through the Ardennes forest and the low countries and defeated France in just a few days. All of this while the French army was busy defending the Maginot line. The meaning of this debacle is clear: Regulations become burdensome and fail because they often fall prey to the same static strategy of attempting to prevent the recurrence of previous transgressions. And they’re easily outflanked by crafty lawyers, greedy business people, and unethical politicians.

The Dodd-Frank Fiasco

A contemporary example of regulations run amok to prevent people from running amok is the Dodd-Frank law passed in 2010. The objective of the law is simple and well-meaning: Preclude a repeat of the financial meltdown and crisis of 2008 that virtually brought the country to its knees. To accomplish this objective, Dodd-Frank requires increased disclosure and transparency from banks and investment firms; prohibits banks from taking excessive risks (whatever that is) and seeks to eliminate the concept of “too big to fail.”

The problem of course is in the implementation, not the objective. As The Economist reported (Feb. 14, 2012), “Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. (By the way, Glass-Steagall, which was repealed in 1999, is an example of successful regulation that prevented the types of bank failures that led to the Great Depression.) Dodd-Frank is an example of regulation that is sorely needed, but in its attempt to anticipate and prohibit any and all potentially abusive activity, it becomes tortuous and incomprehensible and unless changed, will be about as effective as the Maginot Line.

And the Moral of the Story …

There is no magical solution when it comes to dealing with regulations. The nature of regulation creates conflict. However, there is a more reasonable approach to regulation that would moderate some of the dynamic tension created by those who view any regulation as too much and those who believe the answer to any malfeasance is more regulation.

The objective of regulation should not be to legislate morality, or anticipate the bad things people can think to do, or decide what is best for people; that simply does not work. The purpose of regulation should be to create a transparent, level playing field for all. Regulations should not decide what can or cannot be done, but they can be designed so that everyone knows what everyone is doing. This approach offers the freedom to do what one wants to do, while giving others the freedom to decide what they believe is best for them.

A simple example of this “level playing-field” concept is a recent regulation requiring airline advertising to quote the “total cost” as opposed to the “base cost” of tickets. The airlines still have the freedom to tack on all the fees they want, but they must be fully and openly disclosed so the consumer can make an informed comparison and buying decision. Of course the airlines reacted as if this rule was a horrendous burden that would put them out of business.

Unfortunately, the simple philosophy of regulations designed to create a level playing field is not likely to catch on. Why? Because there will always be constituencies that want more regulation, just as there will always been those who favor less. And politicians are smart enough to know that the safe re-election position is to appeal to “the base.” And to change the existing philosophy of regulations would deprive bureaucratic regulators of the power to decide what is best for all of us. It is unfortunate, but until a fresh approach to the objective of regulation is adopted, no matter how voluminous or detailed regulations may be, those muckers who want to run amok will be able to do so and we will be left to clean up the muck.


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