Yesterday I heard politicians talking sagely about how the gulf oil disaster shows we need stronger drilling regulations. I’ve recently heard similar musings about how the financial crisis shows we need stronger financial regulations. Makes sense, right? But stop for a moment and ask: Aren’t there lots of areas where we haven’t seen a big disaster in a long time? (E.g., when was the last big hairdressing disaster?) How strong would regulations have to be before you’d say that a prolonged period of no big disaster suggests we need
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A simple one is that plane travel is probably too safe. The safety measure probably cost in efficiency resulting in greater persistence risks and lower quality of life for all of us.
On the other hand, a portion of the population gets very anxious about plane disasters unless a certain level of safety is maintained.
A lot of regulation seems to me to work that way. Once we move beyond social contract to maximize persistence odds to some other thing, it all becomes an arbitrary game filled with rent-seeking hecklers or random traders anyways, from my perspective.
Can we agree that regulation "ratchets" up in a time of crisis because the political will is there? And deregulation can and does happen when special interests are able to lobby without the public noticing, i.e., when there hasn't been a crisis in a while.
Politics aside, of course a crisis doesn't always point to the need for better regulation. But given the influence of the energy industry and the problems with the Mineral Management Service, along with questions about the blowout preventer, it seems to me that the scrutiny this crisis has brought may be beneficial.
The author doesn't seem to give any weight to the idea that existing regulations may be preventing a disaster, and therefore, lack of a disaster wouldn't necessarily suggest a reason to lower regulations.
I would expect regulation to grow like other designs grow, including biological designs, primarily by accretion. I expect this is a feature and not a bug. And indeed, evolution does "delete" parts of its designs with some regularity, and when it deletes something useful, it self-corrects. Regulation seems to do the same.
But overall the complexity grows, with the human, esp. the brain being pretty amazingly complex, just as current federal regulation is pretty amazingly complex.
I would suggest that a belief that the default is that we are better off without regulation is a bias to overcome. Overall, our productivity tracks the amount of regulation we have over broad periods of time. Even at a given time, the most productive states are the most regulated. There is no great outpouring of wealth creation in unregulated Africa right now. The prima facie case is regulation is generally just another kind of infrastructure, some designed better than others, but generally something that once put in place enables, overall, significant gains in efficiency.
I don't think Glass-Steagall had much to do with the mortgage-backed security problem. Many of these "speculative instruments" had AAA ratings and were considered safe investments. Also, investing in mortgage-backed securities is not synonymous with carrying out investment backing. Finally, most of the key players in the credit crisis were either non-banks (AIG, Fannie, Freddie) or investment banks that were not affected by Glass-Steagall (Bear Stearns, Lehman) and in fact were bailed out by non-investment banks (not possible if Glass-Steagall had not been repealed).
Robin, you asked:
How strong would regulations have to be before you’d say that a prolonged period of no big disaster suggests we need weaker regulations? When did you last hear someone using this reason to suggest we weaken a particular regulation?
Someone else mentioned the repeal of Glass-Steagall, but didn't go into detail. He was referring to the Banking Act of 1933, a Depression-era banking-regulation law which (among many other things) separated commercial and investment banking. That particular aspect of Glass-Steagall was repealed in 1999, and commercial banks promptly plunged deep into investment banking. The financial panic of two years ago, and the ongoing credit crunch, happened in large part because the investment arms of several enormous banks got too deep into speculative instruments like mortgage-backed securities. When the real-estate bubble burst, those banks were faced with gargantuan losses that threatened their whole operations, including conventional banking operations like checking accounts, mortgages, loans, and credit cards.
If Glass-Steagall was still in effect, the speculative frenzy in mortgage-backed securities might never have happened. Even if it had, it would have remained restricted to the investment-banking field, and not directly affected commercial banking. It would have still been a financial disaster, but it probably wouldn't have rocked the entire global financial system the way it did and is continuing to do.
We should have periodic regulatory reviews. I agree with one of the above posters who states that it's not as simple as strong/weak, but of currently useful/not useful. It could go several different ways:
Existing regulation gets strongerExisting regulation gets weakerNew regulation addedExisting regulation removed and different one put in its placeExisting regulation removed and not replaced
This would be determined using a variety of methods.
Bottom line: we could weaken, remove, change, or add regulations, and should do so on a regular basis. It shouldn't be framed as "strong/weak" but as "right balance and mix."
The Federal Register isn't a particularly brilliant proxy for levels of regulation, since, IIRC, it's mostly internal government documents, and it also records changes to rules, so deregulation (i.e. a change to the current laws to remove regulation) would add to its length.
"I have to take the next best option, asking the government to help shift his risk preference." -Adam H.
Nice write-up, but have you considered that asking the government to do this may not be effective or may improve the chances of a negative outcome by shifting accountability from the rig operator to the government?
"I or my family can be ‘made whole’ through tort law, but does that really shift the risk-preferences of the rig operator sufficiently?"
Nothing is foolproof enough to avoid tragedies. I'm not convinced government regulation reduces the incidence of tragedies. It's very possible it increases it.
Tort law is not the only thing influencing the rig operator's risk-preferences. I'd consider that the rig operator's risk profile is even more conservative than the beach house owner (as evidenced by buying a beach house in hurricane country). But, even with that, as the bumper sticker from the the 80s warned us, S*** Happens.
I swear to God, how can you have followers of Milton Friedman and Gary Becker who use their arguments but are completely unaware of any practical effect those arguments have had on the world? Does Jesse Jackson have a blog somewhere where he asks if anyone knows of any successful movements to improve civil rights for black people?
And another point: the lack of disaster, per se, will never be a good argument for weakening regulations, only for not strengthening them.
I haven't blown a head gasket in my car, but that doesn't mean I'm going to stop getting oil changes.
I think your general argument doesn't work for a couple of reasons. The first is that there have been very real and very recent arguments for deregulation. This seems to have been sufficiently addressed in the comments, so I won't further belabor the point.
The second is your "big hairdressing disaster" analogy is broken. There's greater pressure to regulate activities that have a large potential negative effect on the public in general. I'm finding it quite difficult to imagine what exactly would constitute a big hairdressing disaster. The lack of a big hairdressing disaster is evidence of... nothing at all.
If you're going to make an argument from the lack of catastrophes in a a lot of industries, you first need to restrict your consideration to industries which are capable of having one.
All, anyone care to list current regulations they think we should weaken mainly because of a lack of recent disasters?
Matt and others, I didn't claim regulations never changed, nor even that lack of disaster is never offered as a reason.
Mark, I didn't say there aren't other dimensions to regulation besides strong/weak.
blink, yes if old regulations aren't interpreted as applying to new industries the ratchet rate may fall behind the innovation of new industries rate.
Kakun, see stephen; yes of course there are periods of deregulation, but those are usually not argued for on the basis of a lack of recent disasters.
Frank, what is the evidence that regulations tend to decay?
E.g., when was the last big hairdressing disaster?
When was Lady GaGa last seen in public?
In the post soviet block you could argue that privatization of state companies is making less of people's activity regulated. So you can observe other trends in the world. Well, but the reasons are more complex than just the fact that property doesn't cause disasters. Another case with social order of Iraq when Saddam was alive. The US troops came and deregulated their system of rules. ;) Well, they drafted new laws soon afterwards, but still.