Tag Archives: regulation

Regulatory Capture

Those of us who teach classes in public administration routinely include lessons on what is called “regulatory capture.” That’s jargon for the “coziness” that often develops between regulators and those whom they regulate.

The more technical and “exclusive” the area being regulated, the easier it is for employees of the government agency charged with oversight, and the representatives of enterprises they are overseeing to become comfortable with each other, and to develop a trusting relationship.

The concern, of course, is that it gets too trusting, and that the oversight intended to protect the public becomes too lax.

Regulatory capture is generally not intentional–familiarity leads to comfort, and things slip between the cracks. But of course, there are also situations in which lax enforcement is, shall we say, more calculated. The question being asked in the wake of two Boeing aircraft crashes, and reports that the FAA allowed Boeing to “self-certify” the safety of its aircraft, is: which kind are we dealing with?

According to the Washington Post, Boeing and the government have long had a “special relationship.”

As a top economic adviser to President Bill Clinton, Dorothy Robyn was charged with advancing America’s aerospace industry.

Part of the job was not choosing sides between companies. But there was one exception: Boeing.

“It was the one company for which I could be an out-and-out advocate,” Robyn said Thursday. In competitions between American companies, the administration as a rule remained neutral. But Boeing’s commercial airplane division employed tens of thousands of Americans and its prime competition, Airbus, was in Europe.

“In the engines business, you can’t choose between GE and Pratt & Whitney. With Boeing, that’s it. They’re ours. It is the only sector where we have a de facto national champion and you can be an out-and-out advocate for it.”

That “special relationship” has existed for decades. Boeing makes the planes that fly as Air Force One. A former Boeing executive, Patrick M. Shanahan, was tapped by Trump to be acting defense secretary after the resignation of Jim Mattis, despite the fact that he had no prior government experience. Boeing’s business is so dependent on federal government policies that the company spent $15.1 million last year on approximately 100 Washington lobbyists.

Boeing booked a record $101.1 billion in 2018 revenue, up 13 percent from the year before, and analysts say about a quarter of that was from government contracts. In 2017, Boeing received an estimated $23.3 billion in taxpayer-funded contract awards, not including classified military funding. And its joint ventures with Lockheed Martin and Bell Helicopter Textron received $2.2 billion and $2.5 billion, respectively, in federal contract funding in 2017….

Daniel Auble, a senior researcher at the Center for Responsive Politics, called Boeing “an excellent illustration” of the “the undue influence of money in our political system.”

In the wake of the two crashes, Congress has demanded answers about FAA oversight of Boeing, including why the FAA didn’t ground the company’s planes until regulators in Europe, China, Australia and elsewhere had done so.

Some FAA personnel have complained that the agency has given Boeing too much responsibility for its own safety checks.  Concerns about a lack of rigorous oversight–especially as reports have emerged about Boeing’s “rush” to beat a rival and deliver these aircraft–is only the most recent evidence that warnings about the company’s “cozy” relationship with the government are not misplaced.

The close relationship between the Pentagon and Boeing is part of a long-standing revolving-door culture in which senior defense officials move back and forth between jobs in government and with defense contractors.

In 2004, Darleen Druyun, a high-ranking Air Force procurement official, was sentenced to prison after she admitted that she approved a purchase of 100 refueling airplanes from Boeing at an inflated price of about $20 billion to enhance her job prospects with the company. She also leaked proprietary pricing information from a competitor and helped Boeing secure a separate $4 billion as a thank you for hiring her daughter and future son-in-law.

According to Bloomberg (link unavailable)

In one previously unreported case involving a separate aircraft program, a Boeing engineer sued three years ago, claiming he was fired for flagging safety problems that might have slowed development. Boeing has denied the claims.

If the investigations now underway find evidence that regulatory oversight was lax–whether due to an excess of trust or something worse–it will be yet another item on the growing list of reasons other countries no longer feel they can trust us.

As airlines cancel several billion dollars of orders for Boeing airplanes, and the company’s stock tanks, the livelihoods of Boeing’s 153,027 employees are at risk. The economic consequences for the whole country could be very ugly.

America is about to get a lesson that our anti-government Republicans won’t like: effective regulation and oversight are essential to economic stability and growth, and only government can provide it.

 

Get The Lead Out

Doug Masson recently shared a news article and a righteous rant.

The shared article was a report on lead contamination in northwest Indiana. It seems we Hoosiers have the nation’s largest source of such contamination–not a distinction to celebrate.

The nation’s largest source of industrial lead pollution is 20 miles down the Lake Michigan shore from Chicago in Indiana, churning more than twice as much of the brain-damaging metal into the air each year as all other factories in the region combined.

The company responsible is ArcerlorMittal (a company I’d never heard of); its Burns Harbor plant is the (ir)responsible emitter. According to the report, the plant has topped the list since 2013.

The continuing coverage of Flint, Michigan’s unsafe water generally includes a recitation of the effects of lead poisoning, and they aren’t pretty. They also aren’t reversible; if a child ingests lead through the water, as in Flint, or from flaking of old paint in run-down houses, or from areas of contaminated ground (we have a number in Indianapolis’ poorer precincts), the damage to that child’s intellectual functioning is life-long.

The referenced “rant” is how Masson describes his frustration–which I share–with conservatives’ constant attack on regulation. Pollution is the poster child for why regulatory activity is an essential function of government. As Doug points out, absent regulation, it will always be cheaper to pollute the air that others breathe or the water that others drink than to dispose of the waste from your manufacturing process in a manner that doesn’t harm others.

Meanwhile, pollution means that the market is getting incomplete information about the cost of (in this case) the steel being produced. They offload some of the costs of their production onto the people suffering brain damage from the lead pollution. Those people are, in effect, subsidizing the cost of production. Because the cost of the pollution is not reflected in the price of the steel, the market gets the signal that this form of production is more efficient than it really is. Polluters are rewarded and, consequently, environmentally sound production processes are put at a competitive disadvantage because they don’t force nearby residents to subsidize the process by breathing in the tainted air.

Economists call pollutants generated by manufacturing “externalities,” and note that failing to account for them in the cost of goods being produced distorts the market and–as Doug notes–puts manufacturers who are properly disposing of their pollutants at a pricing disadvantage.

Are some regulations onerous and unnecessarily broad? Sure. Are others inadequate? Absolutely. Regulatory activity by its very nature must be calibrated–ideally, rules governing commercial enterprises should be only as restrictive as necessary to the achievement of the desired result.

When we discuss government regulatory activity in my classes, I always emphasize the inadequacy of the usual political and ideological “either/or” formulations–as I tell my students, the need for and adequacy of any particular regulation will always be what lawyers like to call “fact-sensitive.” Issuing a wholesale assault on “regulation” writ large makes no more sense than advocating the elimination of “laws” because some laws are over-broad or unnecessary.

One of the most frustrating elements of our current impoverished and dishonest political discourse is the over-simplification of issues that are complex and/or nuanced. Too much of our public debate is conducted via bumper-sticker slogans and easy, inaccurate generalizations. When it comes to protecting the environment, those formulations are not only inaccurate, they are dangerously misleading.

Most Americans want the air they breathe to be clean, the water they drink to be safe, the playground soil to be free of harmful contaminants. It would be wonderful if we could rely upon the ethics of manufacturers to ensure the safety of our environment, but we can’t. We have no choice but to rely upon the government to promulgate and enforce rules against despoiling our air and water.

Of all the many obscenities being perpetrated by the Trump administration, watching the EPA play “footsie” with favored corporate polluters while refusing to discharge its most basic responsibility–to safeguard the environment– may be the worst.

 

 

The Costs of Regulating–and Not Regulating

A few days ago, I wrote about the REINS Act, a Congressional effort to block administrative regulatory activity. A commenter asked for a discussion of what we know about the costs of regulation, so I did a bit of research.

What I discovered reinforced my belief that the answer to most questions is: “it depends,” and/or “it’s more complicated than that.”

It turns out that there is not a lot of research calculating the costs of regulatory activity, and what does exist comes to very inconsistent results. Scholars argue about how such costs should be measured, and how best to conduct accurate analyses.

Despite these uncertainties, it is standard procedure to subject proposed rules to a cost/benefit analysis before they are promulgated. Since those analyses are being conducted prior to the implementation of proposed regulations, they are based upon estimates of both the costs and the benefits, and no matter how good-faith those estimates, they are essentially guesswork.

Anti-regulation politicians who throw around huge numbers that “demonstrate” how burdensome regulations are rarely admit that there is very little agreement on those numbers, nor do they address the benefit side of the equation, so a concrete example, assessing the actual costs of regulations that have been in effect for a long enough period of time to permit more accurate assessment, is instructive.

Vanderbilt University recently studied the compliance costs the university incurred, and came up with a big number. 

So let’s see which of those nasty, costly regulations we could dispense with.

The great majority of the university’s compliance costs were connected to research. There are a number of stringent rules governing academic research: some require respecting the privacy of human subjects, others ensure that volunteers in medical studies have information they need in order to make informed decisions about their participation. Still others ensure that the research will not pose unnecessary risks to individuals or communities.

Which of those “costly” rules should we dispense with?

Universities also bear the costs of obtaining accreditation. Accrediting agencies require lots of information in order to ascertain whether a given institution of higher education is providing…what’s that called?…education. Without accreditation, students would have to make expensive decisions about attendance without knowing whether the “product” had been adequately vetted, and whether a degree from that institution would be valued or discounted by potential employers.  (Actually, I’d favor a far more rigorous examination, since some “accredited” schools hardly seem to merit that credential. But that is a post for another day.)

Universities must also comply with regulations that are generally applicable. They must, for example, abide by rules governing immigration. Would the Congressional critics of regulatory costs prefer that University personnel turn a blind eye to the immigration status of their students? What about Human Resources regulations requiring compliance with civil rights laws?

Whole industries must comply with costly regulations governing food and drugs. Even if we could measure those costs with reasonable accuracy, how should we count the benefits? How do we determine–let alone value– the number of lives saved? How do we calculate, let alone value, reductions in illnesses from impure drugs or spoiled foods?

It seems likely that the REINS Act is aimed at environmental regulations. How do we value the benefits of clean air and water?

None of this is to say that all regulatory activity is wonderful or necessary. The “take away” is that both purported costs and anticipated benefits should be viewed with healthy skepticism, and all regulations should be evaluated individually and on their own merits.

Bottom line: it is perfectly justifiable to argue that the benefits of a specific regulation are not worth the costs involved in complying with that particular regulation. But ideological arguments against an activity called “regulation” are–excuse the expression–bullshit.

 

Flavors of Freedom

There is a book review in the latest issue of the Washington Monthly of “No Freedom Without Regulation: The Hidden Lesson of the Subprime Crisis.”  It was written by a Professor Singer of Harvard Law School, and in it, he considers a type of freedom that gets short shrift from the various special interests who are constantly insisting that any and all government regulation constrains our liberties.

I found this passage illuminating:

When the state sets minimum standards of safety and transparency for the manufacture and sale of consumer products, it affords me the freedom to buy a toaster oven without first hiring a lawyer to read the fine print and an electrician to look over the specs to make sure it won’t catch on fire. Other restrictions protect us from negative externalities. Building codes may limit my neighbor’s ability to contract for the construction of a house with cheap material and bad wiring, but it protects my house from the fire likely to erupt in his.

As I have noted in previous posts, I’m grateful for the Food and Drug Administration that relieves me of the need to test that chicken I bought at Kroger for e coli. (Before the recent news from Flint, Michigan, I used to be more grateful for the EPA’s monitoring of water quality–now, I’d like to see those regulations stiffened up a bit…)

The ongoing debate about government regulatory activity displays all the deficiencies of American policy arguments generally: it oversimplifies, assumes an “either/or” answer, and focuses on the wrong questions.

Can regulation be too stifling? Can a “nanny-state” approach impose unnecessary costs on businesses and consumers? Sure.

Can the lack of appropriate regulation endanger innocent people, and impose additional costs on those same businesses and consumers? You betcha!

The questions we should be addressing are the “how” questions: is this particular regulation necessary? Is it “narrowly tailored” to accomplish its goal? Does it make sense from a cost-benefit standpoint?

We’ll still disagree, still argue about the extent and substance of regulatory activity. But at least we’d be arguing about the right things.

Bought and Paid For

A Federal District Court judge in Washington recently upheld new Obama administration rules that deny federal aid to career training programs that charge outrageous amounts, saddle students with crushing debt, and give them useless degrees in return.

As the New York Times editorialized

The ruling strongly reaffirms the government’s authority to regulate these often-corrupt programs — and comes at a time when federal and state investigations are uncovering fraud and misconduct by for-profit schools all over the country. Regrettably, however, Republicans in both houses are moving bills that would block the Obama administration from enforcing the rules.

As the editorial notes, the new rules were inspired by data showing that students in for-profit schools account for only about 12 percent of college enrollment, but nearly half of student loan defaults.

We the taxpayers have been footing the bill for these predatory practices.

Research has consistently shown that graduates of for-profit institutions are more likely than graduates of other institutions to have debt of more than $40,000 by the time they leave school, and far less likely to find the employment promised by those marketing these programs.  What is particularly odious about these “schools” is that they deliberately target veterans, minorities and the poor.

Republican attempts to block the new rules are not sitting well with organizations that work on behalf of consumers, veterans and the poor. This spring, a coalition of these groups sent a letter reminding Congress that 37 state attorneys general are jointly investigating allegations of fraud in for-profit schools. Various investigations have already uncovered deceptive tactics; dismal graduation rates; false or inflated job placement rates; and dubious sales and admissions policies that target veterans and students of color.

It’s hard to argue with the Times‘ conclusion.

At issue here is an industry that routinely exploits the country’s most vulnerable citizens and fleeces the federal student aid program at the same time. The administration’s effort to bring it under control deserves support, not legislative sabotage.