Regulating Government

Wall Street is apparently profiting from helping local governments use an accounting trick to underfund pensions:

Pension bonds … current boom is … being driven … by a new accounting quirk that has largely escaped public notice while morphing into a major marketing tool for Wall Street banks. The quirk stems from a rule change that was meant to force governments to more clearly disclose the health of their pension funds. … If a pension plan is so poorly funded that it is projected to run out of cash, the new rules require it to make less optimistic projections about future returns. That increases the reported pension shortfall. But if governments infuse a big slug of borrowed money into the fund, they can resume using optimistic projections, and the shortfall shrinks. …

A review by ProPublica and The Post of the 20 largest pension bonds issued since 1996 found that in three-fourths of the deals, governments did not make their full required contribution in the years after the bonds were sold. … Because of the underfunding, most of the pension funds now are worse off than before the bonds were issued. (more)

I find it plausible that these pension bonds are often bad ideas, and that some general regulation might be useful to prevent their misapplication. But today I’m less interested in the particular issue of pensions, and more in the general issue of when democratic governments can be trusted to act in the interest of their voters.

Consider also the examples of public employee unions, and of eminent domain. In all these cases we don’t trust democratic governments to make the best choices for their citizens, and so we may empower some other democratic government to regulate or constrain those distrusted governments. For example, it seems we don’t trust governments to choose good wages for their employees, since we empower unions to negotiate with them.

It is not just that some citizens aren’t allowed to vote, or that governments representing different regions may have conflicts, or that the same government at different times can have conflicting time-inconsistent preferences. It seems to also be about a limited ability of citizens to pay attention to government activities. But how is it exactly that citizens can pay enough attention to the regulating government to help it choose a good regulation role, but can’t pay enough attention to the regulated government, tempting that government to make bad decisions? How is this supposed to work, even in theory?

This seems an important issue, and I’m interested in reading more about it. I expect there is a literature out there on this, but I don’t recall ever coming across it. Anyone have some good cites?

This topic is of course related to the possibility that governments may often be over-regulated.

GD Star Rating
Tagged as: ,
Trackback URL:
  • Valentin Eni


    Paragraphs: 9
    Sentences: 24

    Words: 469
    Characters: 2421
    5 of 24 sentences are hard to read.

    6 of 24 sentences are very hard to read.

    4 adverbs. Aim for 3 or fewer.

    1 words or phrases can be simpler.

    6 uses of passive voice
    Passive voice puts the subject of a sentence at the end: ‘The ball was hit by Sam.’ Instead, make it active: ‘Sam hit the ball.’. Aim for5 or fewer.

    • Did you include the quote?

      • Valentin Eni

        I shouldn’t have to include the quote of course 🙁

  • Lord

    It is usually known as closing the barn door after the horse has bolted, or fighting the last war. It is not like there is an alternative, regulation or not problems will arise, so one must view this as an active process and look towards solving the next problem even as the last solution develops new ones. It is nothing about public employee wages, but of the political patronage system which unions disrupt.

  • chaosmosis

    P=/=NP. It is often easier to verify a solution’s correctness than to actually solve a problem. Micromanaging policy is harder than just intervening whenever the government does something obviously selfish or stupid. A sufficiently sneaky politician can exploit limitations of the public’s perceptiveness, but the sneakiness of politicians is not infinite, so this is still a good idea.

  • jhertzli

    The assumption may be that the regulating government operates in far mode whereas the regulated government operates in near mode. I don’t know if that assumption is justified or if far mode is preferable.


    “But how is it exactly that citizens can pay enough attention to the regulating government to help it choose a good regulation role, but can’t pay enough attention to the regulated government, tempting that government to make bad decisions? How is this supposed to work, even in theory?”

    Assuming the regulating government is higher up the chain, there are less instances of regulating governments than of regulated governments: a typical country has one central government, some local governments and a large number of municipalities. In the American case it’s easier to keep tabs on on the single central (federal) government than on 50 state governments, at least when it comes to things like pension fund regulations. Regulated governments also have more incentives to screw around: they can’t run deficits as easily, rely on higher government for some of their funding and they’re closer to the immediate beneficiaries of things like pension fund accounting tricks (although that principle is somewhat undercut by countries that do not base their central government on the national popular vote).

    • This is a reasonable concept, but what I want to see is a literature that explores such concepts, working out more detailed formal models and more systematically seeing what actual patterns of governance they can account for.

  • Isn’t this just another manifestation of the problem of rational ignorance? It’s rational for people to be ignorant about things that are out of their hands. Christians shrug and say “It’s in God’s hands now”. Liberals shrug and say “It’s in Gov’s hands now”.

    If you want to increase scrutiny, then you simply allow taxpayers to choose where their taxes go. People won’t want to throw their money away… which will incentivize them to do their homework.

    “And the rich do not tend to throw their money away easily; those who do, do not stay rich very long.”

    That’s what you wrote! Not sure why you’re not the biggest fan of tax choice!

    • IMASBA

      The whole idea behind representatieve democracy is that voters mostly cannot do their homework in a very detailed manner. I fancy myself quite a politics and history buff and I have a background in physics so I can grasp all the math and environmental issues but I still know I do not have complete oversight of everything my government does and all the issues involved, and I still have a dayjob that takes up time and attention. Most people don’t have my background, didn’t spend years reading up and have kids and more stressful jobs.

      Besides, however detailed a voter would order his taxes spent there’s always a more detailed level below it where things can still be screwed up.

      In reality even Switzerland is mostly run by civil servants. Politicians steer the civil servants in a general direction and voters choose that general direction.

      • Your impersonal shoppers (congress) would still be there. If you don’t have time/energy to shop in the public sector… nobody would force you to do so. Just like nobody forces you to shop at Home Depot. Just like nobody forces you to shop in China. Or Africa. Or Las Vegas. Or at Bed Bath and Beyond.

        Maybe your wife forces you to shop at Bed Bath and Beyond? Yes? Will she also force you to shop in the public sector? Yes? What can I say… every rule has an exception.

        So, in a tax choice system, what percentage of the population will choose to have congress spend their taxes for them? In other words, do you know what the demand is for impersonal shoppers?

        It might help to read the short tax choice FAQ.

  • But how is it exactly that citizens can pay enough attention to the regulating government to help it choose a good regulation role, but can’t pay enough attention to the regulated government, tempting that government to make bad decisions? How is this supposed to work, even in theory?

    That strikes me as an odd take on regulating government. (Odd just because it attributes an irrational purpose where rational purposes are readily available.) I would characterize the essence of the control tactic as designing institutions that are impelled by their own structural interests to counter the worst problems of the regulated component.

  • UPS Systems

    There’s nothing that we can do, we will never fully understand the workings of the country.

  • Pingback: “Regulating Government”, from Overcoming Bias | Hypergeometric()