Transcript Harris Faculty Lecture 2014 FINAL 040914

• Evolving Theory
• Recognition
• Effects
• Why OIRA?
(Kudzu)
Research Questions
• What is happening to the entry and exit of firms?
• What is the effect on systematic risk of regulated firms?
Industries?
• What is the effect on economic growth and distribution of
factor payments?
• What about the resilience and response of the economy
to shocks? Policy shocks and otherwise.
• What is the theoretical explanation of endogenous
versus exogenous regulation? How is the theory applied
to White House efforts to manage the regulatory
process?
Evolving Theories of Regulation
Exogenous
Endogenous
Part One
The Federal Regulatory Continuum
THEN
No Intervention
Independent Commissions
Public Utility/Antitrust
Continuous Entanglement
NOW
Government Owned
Evolving Literature
From
Stories without Theory & Theory without Stories and Data
To
Theory with Stories and Data.
From
Rich Normative Arguments
To
Refutable Positive Statements.
George Stigler’s work on the theory of regulation is
one of those rare contributions—rare for the rest of us,
though not for him—which force a fundamental
change in the way important problems are analyzed…
What Stigler accomplished in his Theory of Economic
Regulation was to crystallize a revisionism in the
economic analysis of regulation that he had helped
launch in his and Claire Friedland’s work on economic
regulation.
Sam Peltzman. 1976. Toward a More General Theory
of Regulation. Journal of Law and Economics 19 (2):
211-40, at 211.
Why is Rent Seeking so Costly to Growth?
American Economic Review, 2003 (May): 409-414.
Kevin M. Murphy
Andrei Schleifer
Robert W. Vichny
The Extent of the Market and the Supply
of Regulation
Casey Mulligan
Andrei Schleifer
Quarterly Journal of Economics, 2005 4(120): 14451473
Marta Modemska-Miklub and Richard Wagner.
2011. Entangled Political Economy and the Two
Faces of Entrepreneurship, J. Pub Fin & Pub Ch.
28: 99-214,.
Recognition??
Part Two
1966. Johnson. [I]n the case of pollution,… those who contaminate the
environment are not charged in accordance with the damage they do... Public
policies must be designed to reduce the discharge of wastes in ways and amounts
that more nearly reflect the full cost of environmental contamination (119-120).
1978. Carter. In a mixed economy, like that of the United States, government
regulations of the marketplace sometimes play a vital role in meeting social goals,
curbing abuses or mitigating the hardships that would flow from the unconstrained
flow of economic forces (206).
1981. Carter As government involvement in the economy has grown, so have the
overtly political aspects of economic decisions. Representative government is
quite responsive to claims from individuals, groups, or regions that proposed
policies will benefit them or do them harm… Many of the recent arguments over
deregulation, for example, have tended to focus less on the benefits of
deregulated markets than on the economic losses of the persons or industries that
have been protected in the past by Federal economic regulation (89).
1989. Reagan. [M]any firms attempt to use the regulatory process to
enhance their competitive position. Barriers to entering an industry may
increase with the introduction of new regulations, not only increasing profits
for regulated firms, but also yielding a less efficient industry structure…Over
the past 20 years some economists and political scientists (especially those
of the “public choice” school) have attempted to understand what motivates
different approaches to regulation. A key insight from this research is that
much regulation can be explained by an interest in redistributing wealth from
the general public or taxpayers to special interest groups… For example,
the legislation requiring scrubbers on power plants appears to have been
motivated as much by the self interest of environmentalists and high-sulfur
coal miners as by a desire to promote cleaner air (191-192)
2012. Obama. [R]egulations are intended to improve the quality of life by
correcting market failures that lead to unsafe living or working
environments. Effective regulations put into place rules that correct for
significant market failures and thus achieve greater social benefits. “Smart
regulations” are those that maximize the net benefits of a regulatory action
to society. Benefit-cost analysis attempts to quantify and assign dollar
values to the various effects of a regulation, which can be used to
determine how it can reach its goal in the most efficient manner (233).
To evaluate market outcomes, we introduce into
our analysis a new, hypothetical character called
the benevolent social planner. The benevolent
social planner is an all-knowing, all-powerful, wellintentioned dictator., The planner wants to
maximize the economic well-being of everyone in
society.
Gregory N. Mankiw. 2012. Principles of
Economics. Mason, OH: Southwestern Cengage
Learning, 145.
The best cases for viewing the growth of
knowledge as a succession of reigning
paradigms…have come from the so-called
“natural” or “exact” sciences, particularly physics,
whereas for the social sciences the fit has not been
so good. Unlike some literally earth-shaking
discoveries in the natural sciences…, new
paradigms in social thought seldom have totally
vanquished previous ones.
Mary O. Furmer. From “State Interference” to the “Return of the Market,”
Edward J. Balleisen and David A. Moss, eds. Government and Markets:
Toward a New Theory of Regulation. New York: Cambridge University
Press, 2010, 95.
Google Scholar Citations to Pigou, Economics of Welfare
1920 - 2020*
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1920-29
1930-39
1940-49
Counted on March 5, 2014.
1950-59
1960-69
1970-79
1980-89
1990-99
2000-09
2010-20*
Does acceptance of scientific
findings have something to do
with rent protection and rent
seeking?
Capernicus
Free Trade
Minimum Wage
Galileo
Industry Differentials & Structural Change
What about the Effects?
Part Three
Patrick McLaughlin
Shall. Must. May not. Prohibited. Required.
MFG
EDU
ENT
Industry Regulation Index
1.45
1.4
1.35
1.3
1.25
1.2
1.15
1.1
1.05
1
0.95
1997
1998
1999
2000
Oil & Gas
2001
Rail
2002
2003
Paper
2004
2005
Chemical
2006
2007
2008
Industry Mean
2009
2010
Public Utilities (some form of regulated price & rate of return):
Healthcare & Social Services (17,720,090)
Banking, Credit Intermediation (2,460,400)
Insurance (1,157,490)
Government Enterprises (partial ownership or private/public
partnerships)
Auto Manufacturing (169,000)
Education (9,500,000)
Real Estate & Residential Construction (614,930)
Rail (224,530)
Government Regulatory Satellites (deep agent-client relationship)
Telecommunications (860,060)
Energy (309,230)
Pharmaceuticals (267,750)
Total Employment Affected: 41.0 million or 31% of total U.S. nonfarm
employment.
Employment data source: Bureau of Labor Statistics, May 2012 National Industrial Specific
Occupation Employment & Wages Estimate.
Enterprise Exits, Fewer than 20 & More than 500 Employees,
1989 - 2010 Title
<20
700000
600000
500000
400000
300000
200000
100000
0
<20 Employees
<20
700000
Enterprise Exits, Fewer than 20 & More than 500 Employees,
1989 - 2010 Title
600000
>500
600
500
500000
400
400000
300
300000
200
200000
100
100000
0
-
<20 Employees
>500 Employees
Source: Office of Advocacy, U.S. Small Business Administration, from data provided by the U.S. Bureau of the Census, Statistics of U.S. Business.
Why OIRA?
Refereeing the Regulators
Stationary Bandits with
Promises to Keep
Part Four
Our evolving theory draws on Mancur Olson’s notion of
roving and stationary bandits, which he developed in Power
and Prosperity (1999) With endogenous and entangled
regulation, the president must pay closer attention to the
relative cost of major rules and the rate at which they are
imposed on the economy, while at the same time making
certain that he is delivering on regulatory promises. The
opportunity cost of one rent-generating regulation is another
rent-generating regulation. We assume that political
competition pushes the president to behave as a stationary
bandit, but that the regulatory establishment, due to agency
costs, has a coordination problem. President unwittingly may
move into roving bandit territory.
Bruce Bueno de Mesquita and Alastair Smith
The Dictator’s Handbook, 2011
Politicians seek to gain and hold power
through redistribution. Regulation is among
items that can be used to redistribute wealth.
Within the polity there are interchangeables,
influentials, and essentials. Theirs is a theory
of winning coalitions made up of essentials.
Each party is necessary, but not sufficient. It
takes all to provide a critical element in the
selectorate that keeps the political deals in
place.
The Hybrid Good
Dima Shamoun
Environmental regulations offer the most
productive way for stationary bandits to
satisfy the essentials. Such goods are
hybrids. They have a public component—
environmental quality—and a private
component—restrictions on output and
other differential effects.
The Propensity to Truck,
Barter & Impede
Exchange. Economics
Dissertation, George
Mason University, 2014.
Stationary Bandits with
Promises to Keep
Evidence:
1. Presidents accelerate production of “good”
rules and reverse production of “bad”
ones…while maintaining OIRA reviews.
2. Presidents vary review time to minimize
announcement effect of costly regulations at
strategic times.
3. Presidents favor hybrid (EPA) rules in the
review process, relative to other major rules.
Vero de Rugy
Antony Davis
Susan Dudley
de Rugy V, Davies A. 2009. Midnight Regulations and the
Cinderella Effect. Journal of Socioeconomics
38: 886–890.
Dudley, S.E. 2009. Regulatory Activity in the Bush
Administration at the Stroke of Midnight. Engage
10: 27–29.
Major Rules Published by Presidential Year
January 1 through February 1 of the Year Following
1981 - 2012
Jerry Ellig, Patrick McGlaughlin, and John Morrall III. 2013. Continuity,
change, and priorities: The quality and use of regulatory analysis
across US administrations, Regulation & Governance 7: 153–173
Develop an expert-based quality index for regulatory agency analysis
provided to OIRA.
Focus on OIRA review of major regulations.
Statistically examine variation across George W. Bush and Barack
Obama I administrations.
Find a 50% increase in the flow of major rules during lame-duck period,
significant deterioration of quality of analysis during lame-duck period.
Not much difference between administrations.
Reflects deep pressure to deliver promised regulations.
Source: Cassidy West. Center for Regulatory Studies.
George Washington University.
Endogenous regulation?
We should call it national capitalism.
N.S.B. Gras, Capitalism—Concepts & History, 1939.
No, it should be called political
capitalism.
Gabriel Kolko, The Triumph of Conservatism, 1963.
We have crony capitalism.
David Stockman, Moyers & Company,
March 7, 2012.