Curbing the Regulatory State: The Search for a Second-Best

On the volokhconspiracy, my colleague Todd Zywicki has a little piece on auto safety before and after NHTSA’s creation in 1970. It has a graph suggesting (though, Todd notes with excess caution, not showing) that NHTSA has made little if any difference. I use graphs of this sort when I teach State Farm (1983), the famous “airbags case” in which the Supreme Court took a “hard look” at NHTSA’s regulation—alas, without the slightest comprehension of what it was doing. I even happen to know the rate of decline in fatalities per passenger vehicle miles: 3.5% per year in the decades preceding NHTSA; 3.5% thereafter.

There is a rich literature on the subject, beginning with a 1975 study by Sam Peltzman. People, Peltzman argued, don’t behave like crash dummies: regulate, and they change their behavior (e.g. by driving more recklessly); and the response is big enough to wipe out the expected safety gains. That finding has held up pretty well, and you get a “Peltzman effect” and very similar results regardless of what you look at—drug safety and “effectiveness,” workplace safety, child labor, even the environment. This is a depressing performance, especially considering the cost of regulation. Alas, it’ll continue.

“Don’t regulate,” say the libertarians. “Regulate (or “nudge”) only when it’s cost effective, and stop regulating when it’s not” say the technocrats. However, none of these responses is remotely likely.

In a prosperous society, Peltzman argued in a wonderful 2004 essay entitled “Regulation and the Natural Progress of Opulence,” things will usually get better. More money buys better roads, bigger cars, better information, better technology. However, scandals or crises will still produce new agencies and programs because the fact that things are already improving is lost on the public. Post-intervention, the natural progress of opulence masks the fact that the program isn’t doing a darn thing. It looks like it’s working; and even if you can find a counterfactual to prove that does no good (and probably some harm), an entrenched program isn’t going to crumble over that.

What to do? Maybe we should think less in terms of efficiency and (vaguely) measurable costs and benefits, and more in terms of political economy.

The public will demand regulation and government approval stickers on this, that, and the other product. That demand is more or less a constant; it doesn’t vary with agency performance, which no one can assess. Meanwhile, the agencies can’t  improve our lives in any tangible way; they can only make us feel better. If that’s right, and if we insist on being reassured by a benign governmental presence, maybe the way to maximize welfare is to satisfy the demand, while minimizing the agencies’ output. A few ideas:

Maximize opportunity benefits. Periodically, there are stories about bureaucrats’ Las Vegas junkets, conferences that accomplish nothing, opulent offices, etc. Those aren’t “scandals”: people who carouse, conference, and move desks can’t regulate or enforce. “Waste” produces opportunity benefits, which we should seek to maximize.

Create capture. It cannot possibly be the purpose of NHTSA, Justice White wrote in State Farm, to adopt only safety measures that the industry would implement in any event. I don’t know about “purpose,” but a general policy of “regulate only when the industry is ahead of you” would surely be NYHTSA’s highest and best use—and that of OSHA, FAA, CPSC, CPFB, … Agencies that can’t drive “their” industries to distraction are often said to be “captured”: let them be.

Helicopter funding. Per an earlier post, what to do with the gobs of money collected by agencies in the course of enforcement and regulation has become an increasingly urgent problem. Leave the funds with the agencies, and you create a bunch of regulatory autarkies. Mandate remittance of the funds to Congress, and legislators look to regulation as a profit-making enterprise. And the regulatory infractions usually have no victims, so the money can’t go there, either. The only rational solution may be to drop the money, physically, from helicopters. That would be a good reason not to collect it in the first place, which is the point.

Randomize enforcement. Even under a regulatory system that is optimal in the sense just suggested, bad things will happen. The unwanted response is exemplified by the financial crisis: tons of new regulation (Dodd-Frank), virtually no punishment of the people who supposedly did this to us. The desired response is to show that the system is working, as evidenced by the number of people who lose their jobs and go to jail. The objection that it’s often hard to finger the culprits and to prove the case misses the point, which is Nietzsche’s: there must be punishment, but why does it have to hit the guilty? Post-crisis enforcement is already nearly random—except that firms and individuals attempt to minimize the risk by investing in politicians. We should wring those rents out of the system by completely randomizing enforcement: the culprits in the offending industry will be chosen by lottery, in sufficient numbers to satisfy public demand. The risk will be priced into CEOs’ compensation, or into D&O insurance. It probably already is.

I’m kidding, of course, but not entirely. If the regulatory state is (a) here to stay and (b) a luxury product we can’t really afford, we should think seriously about second-best institutional solutions that promise to minimize the harm.