The Obama administration’s regulatory capture

[hypocritexposer]

The Obama administration's regulatory capture
by JOSEPH MASON

Wednesday, April 6th, 2011, 4:18 pm

As an economist, I know one simple truth: every legislative and regulatory decision has implications for jobs and output. Hence, policies like mandating mortgage modifications and forgoing access to energy resources in the Outer Continental Shelf and the Gulf of Mexico have inextricable economic consequences.

During the Gulf Moratorium, the courts acknowledged such views. In response to the Administration's policy, a federal judge in New Orleans blocked enforcement of the moratorium, writing that "[t]he blanket moratorium, with no parameters, seems to assume that because one rig failed, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger," which was not –- in the court's opinion -– sufficient justification for taking economic value from private sector jobs and firms.

But the situation is worse than you might think. In the field of economics, such value-destroying economic takings are not as rare as one might think. Previous research gives a worrying indication of what can be expected from the regulatory responses to events like Fukashima, Deepwater Horizon, and the mortgage crisis. The results show that regulatory decisions are influenced by many factors beyond the dispassionate evaluation of the economic costs and benefits.

For instance, a recent study by Mian, Sufi, and Trebbi (2010) found that congressional representatives whose constituents had higher rates of mortgage defaults were more likely to be in favor of the Foreclosure Prevention Act, despite economic evidence that foreclosure prevention has unavoidable economic costs, including depressed home prices, decreased construction activity, and higher unemployment, even while it is clear that the vast majority of foreclosures involve borrowers who have made a single payment in months and, often, no longer even reside in the home.

Before that, research by Moran and Weingast (1982) showed that politicians influenced the activities of the Federal Trade Commission, skewing the work of a supposedly independent regulatory agency.

Grabowski and Vernon (1978) showed that the nascent Consumer Products Safety Commission (CPSC) tended to focus on products where risks were well understood, ostensibly to better justify their creation to lay outsiders. Moreover, only five of the CPSC's top 21 priority products for regulation had measurable economic benefits that exceeded proposed regulatory costs.

What we can observe from a large body of research on the political economy of regulation, therefore, is that both elected officials and regulatory agencies are influenced by political factors, which may lead to suboptimal solutions to complicated problems such as energy policy and the mortgage crisis.

In recent years, regulatory agencies have continued to impose costly policies upon the economy without congressional approval. For instance, while the EPA ruling that carbon should treated as a pollutant was ultimately supported by the Supreme Court, many in Congress still maintain that the agency overstepped its bounds in such a dramatic – and potentially costly – reinterpretation of its rules.

The carbon ruling, however, is somewhat less problematic than the EPA's December 2009 back-door regulation of phthalates (used to soften plastics). Although the EPA did not have sound scientific evidence upon which to ban phthalates, the agency imposed the "precautionary principle" to "temporarily" halt their production.

The Bureau of Ocean Energy Management, Regulation, and Enforcement's recent Gulf of Mexico drilling policy seems to have been based on similar policy reasoning. While specific companies, a specific type of platform design, and BP, itself, have been blamed for the Deepwater Horizon blowout, BOEMRA continued to severely restrict not only deep water but also shallow water drilling in the Gulf of Mexico, despite ongoing economic damage to the Gulf region. Then, blatantly disregarding the Spill Commission's findings and even the dissenting report of the Chair of that Commission, BOEMRA's first deep water drilling permit went to BP.

In looking at the political economy of new regulatory arrangements, therefore, we must look with skepticism and concern upon both the political motivations of the regulatory officials charged with enforcing the rules, and the economic power that will be concentrated in those regulatory officials as a result of their influence over the implementation costs and economic redistribution. Without restraint, a potentially toxic mix of politics and power may damage both the industry and the environment.

When new agencies like BOEMRA and CFPB are created, they have a strong incentive to prove their worth to their creators and flex their muscle with regard to their related industries. As such, new agencies regularly undergo dramatic power shifts before settling into anything that could be considered a stable role in the U.S. regulatory framework. Recently proposed legislation can help that evolution by setting clear accountability standards for new regulatory agencies like BOEMRA and the Consumer Financial Protection Bureau so that they are captured neither by corporations or politicians.

Balancing regulatory accountability and economic growth as envisioned in proposed legislation can therefore be a useful lens that sharpens our focus on regulatory rent-seeking and helps build regulatory framework that can balance the safe use of energy resources and social goals of housing policy with jobs and economic growth.


Joseph Mason is a Professor of Finance, Louisiana State University. he is also a guest speaker at HousingWire's upcoming REthink Symposium.

Mason has testified before the Senate Judiciary Committee, the Senate Committee on Banking, Housing, and Urban Affairs, the House of Representatives Financial Services Committee, the European Parliament, and the Federal Reserve Board.

http://www.housingwire.com/2011/04/06/the-obama-administration%E2%80%99s-regulatory-capture

 

[Tex]

The Obama administration's regulatory capture
by JOSEPH MASON

Wednesday, April 6th, 2011, 4:18 pm

As an economist, I know one simple truth: every legislative and regulatory decision has implications for jobs and output. Hence, policies like mandating mortgage modifications and forgoing access to energy resources in the Outer Continental Shelf and the Gulf of Mexico have inextricable economic consequences.

During the Gulf Moratorium, the courts acknowledged such views. In response to the Administration's policy, a federal judge in New Orleans blocked enforcement of the moratorium, writing that "[t]he blanket moratorium, with no parameters, seems to assume that because one rig failed, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger," which was not –- in the court's opinion -– sufficient justification for taking economic value from private sector jobs and firms.

But the situation is worse than you might think. In the field of economics, such value-destroying economic takings are not as rare as one might think. Previous research gives a worrying indication of what can be expected from the regulatory responses to events like Fukashima, Deepwater Horizon, and the mortgage crisis. The results show that regulatory decisions are influenced by many factors beyond the dispassionate evaluation of the economic costs and benefits.

For instance, a recent study by Mian, Sufi, and Trebbi (2010) found that congressional representatives whose constituents had higher rates of mortgage defaults were more likely to be in favor of the Foreclosure Prevention Act, despite economic evidence that foreclosure prevention has unavoidable economic costs, including depressed home prices, decreased construction activity, and higher unemployment, even while it is clear that the vast majority of foreclosures involve borrowers who have made a single payment in months and, often, no longer even reside in the home.

Before that, research by Moran and Weingast (1982) showed that politicians influenced the activities of the Federal Trade Commission, skewing the work of a supposedly independent regulatory agency.

Grabowski and Vernon (1978) showed that the nascent Consumer Products Safety Commission (CPSC) tended to focus on products where risks were well understood, ostensibly to better justify their creation to lay outsiders. Moreover, only five of the CPSC's top 21 priority products for regulation had measurable economic benefits that exceeded proposed regulatory costs.

What we can observe from a large body of research on the political economy of regulation, therefore, is that both elected officials and regulatory agencies are influenced by political factors, which may lead to suboptimal solutions to complicated problems such as energy policy and the mortgage crisis.

In recent years, regulatory agencies have continued to impose costly policies upon the economy without congressional approval. For instance, while the EPA ruling that carbon should treated as a pollutant was ultimately supported by the Supreme Court, many in Congress still maintain that the agency overstepped its bounds in such a dramatic – and potentially costly – reinterpretation of its rules.

The carbon ruling, however, is somewhat less problematic than the EPA's December 2009 back-door regulation of phthalates (used to soften plastics). Although the EPA did not have sound scientific evidence upon which to ban phthalates, the agency imposed the "precautionary principle" to "temporarily" halt their production.

The Bureau of Ocean Energy Management, Regulation, and Enforcement's recent Gulf of Mexico drilling policy seems to have been based on similar policy reasoning. While specific companies, a specific type of platform design, and BP, itself, have been blamed for the Deepwater Horizon blowout, BOEMRA continued to severely restrict not only deep water but also shallow water drilling in the Gulf of Mexico, despite ongoing economic damage to the Gulf region. Then, blatantly disregarding the Spill Commission's findings and even the dissenting report of the Chair of that Commission, BOEMRA's first deep water drilling permit went to BP.

In looking at the political economy of new regulatory arrangements, therefore, we must look with skepticism and concern upon both the political motivations of the regulatory officials charged with enforcing the rules, and the economic power that will be concentrated in those regulatory officials as a result of their influence over the implementation costs and economic redistribution. Without restraint, a potentially toxic mix of politics and power may damage both the industry and the environment.

When new agencies like BOEMRA and CFPB are created, they have a strong incentive to prove their worth to their creators and flex their muscle with regard to their related industries. As such, new agencies regularly undergo dramatic power shifts before settling into anything that could be considered a stable role in the U.S. regulatory framework. Recently proposed legislation can help that evolution by setting clear accountability standards for new regulatory agencies like BOEMRA and the Consumer Financial Protection Bureau so that they are captured neither by corporations or politicians.

Balancing regulatory accountability and economic growth as envisioned in proposed legislation can therefore be a useful lens that sharpens our focus on regulatory rent-seeking and helps build regulatory framework that can balance the safe use of energy resources and social goals of housing policy with jobs and economic growth.


Joseph Mason is a Professor of Finance, Louisiana State University. he is also a guest speaker at HousingWire's upcoming REthink Symposium.

Mason has testified before the Senate Judiciary Committee, the Senate Committee on Banking, Housing, and Urban Affairs, the House of Representatives Financial Services Committee, the European Parliament, and the Federal Reserve Board.

http://www.housingwire.com/2011/04/06/the-obama-administration%E2%80%99s-regulatory-capture

I am totally familiar with their storyline, hypo. For many people if they hear it a few places they actually think it is real.

I am totally familiar with the economic arguments of "rent seeking" which for others means not getting screwed and for the public to be protected. You can't put a price on the health damages that untested products can cause. The test should be one of the corporations using the materials proving the safety, not the other way around. Immeasurable harm can be done if that is not done first.

My neighbor was given some drug that was later pulled from the market. It has crippled him and now it is all about lawyers and lawsuits (he isn't in one). No one will ever consider the economic damage done to him, his family, or his own health. Economists might be good for some things but making these kind of policy decisions based on unknown economic theorizing is about like telling your neighbor that licking an electrical outlet might do more harm than good.

This guy's testimony to the committees mentioned is nothing more than cover for many of these politicians to continue the screwing they are are allowing and protecting those who are bribing them.

Same with the meat packer report on GIPSA laws and the congressional testimony in the sub committees. It is all rigged for the simple minded.

Many of us have a choice on whether we are simple minded or not. Obviously some do not.

Fancy words like "rent seeking" shouldn't fool anyone. Who was rent seeking in the plastics example or the caution in the oil industry after the BP disaster?

The largest rent seeking on the face of the earth in all its known history is done in Washington D.C. and mostly between the politicians and K Street.

I reserve the legitimate argument that regulatory agencies are sometimes abused by rent seeking politicians which leads to regulatory capture and of course a competitive advantage in the election. The public's seemingly simple mindedness was quoted by Keynes:

"The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second.
Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity. Our argument does not affect the first of these considerations. But it may considerably modify our attitude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital. Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.
The existing confusion of the public mind on the matter is well illustrated by the very common belief that the death duties are responsible for a reduction in the capital wealth of the country. Assuming that the State applies the proceeds of these duties to its ordinary outgoings so that taxes on incomes and consumption are correspondingly reduced or avoided, it is, of course, true that a fiscal policy of heavy death duties has the effect of increasing the community's propensity to consume. But inasmuch as an increase in the habitual propensity to consume will in general (i.e. except in conditions of full employment) serve to increase at the same time the inducement to invest, the inference commonly drawn is the exact opposite of the truth.
Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed. I am not saying that there are no other reasons, unaffected by our theory, capable of justifying some measure of inequality in some circumstances. But it does dispose of the most important of the reasons why hitherto we have thought it prudent to move carefully. This particularly affects our attitude towards death duties: for there are certain justifications for inequality of incomes which do not apply equally to inequality of inheritances.
For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today…"
-J.M. Keynes

Tex

 

[hypocritexposer]

This guy's testimony to the committees mentioned is nothing more than cover for many of these politicians to continue the screwing they are are allowing and protecting those who are bribing them.

why is it, you cannot understand that Congress can not possibly know what is going on with these behemoth regulatory agencies.

You will not see the changes you want with regulations alone, there needs to be structural change.

Look at the banking industry. "Finance reform" is a good one.

No structural changes, like separating commercial banking from investment, just a few more regulations that look good on the surface, but will be amended and massaged by the industry with the influence they hold over the regulatory agencies.

Regulatory Capture, plain and simple.

why is it you have a problem admitting that Regulatory Capture includes bribing the regulatory agencies?

Regulatory capture can happen when it involves the politicians that control the agencies or the agencies acting independently of Congress.

But you seem to want to place all the blame and responsibility on the politicians.

 

[Tex]

This guy's testimony to the committees mentioned is nothing more than cover for many of these politicians to continue the screwing they are are allowing and protecting those who are bribing them.

why is it, you cannot understand that Congress can not possibly know what is going on with these behemoth regulatory agencies.

You will not see the changes you want with regulations alone, there needs to be structural change.

Look at the banking industry. "Finance reform" is a good one.

No structural changes, like separating commercial banking from investment, just a few more regulations that look good on the surface, but will be amended and massaged by the industry with the influence they hold over the regulatory agencies.

Regulatory Capture, plain and simple.

why is it you have a problem admitting that Regulatory Capture includes bribing the regulatory agencies?

Regulatory capture can happen when it involves the politicians that control the agencies or the agencies acting independently of Congress.

But you seem to want to place all the blame and responsibility on the politicians.

You are totally right that regulatory capture is all about corruption. It is about like a student sleeping with a teacher to get a better grade. There are no societal winners although the teacher and student may count it as a win.

All of the regulatory agencies are run by political appointees. The less corrupt the party making the appointments, the less regulatory capture.

Why don't you get that the regulatory agencies are headed by political appointees?

Regulatory capture is not usually done by bribing the regulatory agency, although the picking off of top bureaucrats by the businesses they regulate commonly called the "revolving door" certainly is, but by the politicians who have the power over the political appointees.

I will give you an example of a coverup in our industry and talked about here on this site.

When GIPSA was investigated during the Bush administration, the investigation came out saying that there was no illegal activity by JoAnn Waterfield, just gross mismanagement. The question of legality was not investigated by the OIG and they are given specific questions to investigate when they investigate which are usually the result of some political compromise. The GAO is the same way. They can not just do an investigation on whatever questions they think needs to be answered, but on the cleverly crafted parameters that they are asked to investigate. That leaves open the industry possibly giving bribes with the line that the so and so investigation did not uncover illegal behavior.

The investigation was never done on that question so of course it didn't find any illegal activity.

This is quite simply a cover up job for an agency that has been captured by the industries they regulate BY THE POLITICIANS WHO HAVE OVERSIGHT.

These regulatory agencies should not be scapegoated as the problem. It is as Keynes correctly identified, a problem with voters not being smart enough to hold politicians accountable for what they are doing.

Tex

 

[hypocritexposer]

Why don't you get that the regulatory agencies are headed by political appointees?

Most of the "policy makers" work for the agencies, they are not elected, they are appointed by ideologues like obama.

http://ranchers.net/forum/viewtopic.php?p=533940#533940

 

[Tex]

Why don't you get that the regulatory agencies are headed by political appointees?

Most of the "policy makers" work for the agencies, they are not elected, they are appointed by ideologues like obama.

http://ranchers.net/forum/viewtopic.php?p=533940#533940

So now you are beginning to understand, grasshopper. The competence or lack thereof of the regulatory agencies is directly related to the competency of the political appointees that the executive branch makes. The president himself does not know all of these political appointees, he has to rely on the party to help him pick competent people. They do or they do not.

In the case of the Bush administration, Bush did pick Sec. Johanns and Johanns did pick or have influence with the GIPSA administrator after JoAnn Waterfield. Sec. of Agriculture Johanns did help sweep under the rug what was happening at GIPSA and their new appointees were place setters that did nothing and knew very little about the real issues other than trying to quiet them down so they would go away.

The OIG investigation of GIPSA did not even go as far to investigate the individual claims that GIPSA was having problems with and playing interference for by asking the people who had the claims. The FSIS took two of the economists who had been educated on what was happening in the industry and reassigned them. This, by the way, was a criticism of a former GAO report on GIPSA.

If you want to look at a perfect case of regulatory capture, you need look no further than GIPSA under the Bush administration and the packer backers like Senator Saxby Chambliss and Secretary Johanns who helped guide the coverup.

This is where regulatory capture is influenced most--- from the politicians on the take by the industry.

You can blame the regulatory agency but the people running it are the real problem. They are using their power to pander to those they are supposed to regulate for nothing less than what amounts to bribes.

Again, Keynes's last paragraph on politicians is vindicated.

Tex

 

[hypocritexposer]

I "got it" days ago. It is you that is now agreeing that it is Regulatory Capture, as I mentioned days ago.