Thursday, July 1, 2010

Testing Regulation to Destruction

My weekly oped discusses the endgame of Keynesianism, a bad idea when it was introduced with Wordworthian bliss 75 years ago, and a bad idea as it gets tossed onto the ash heap of history along with the Obama administration.

As I wrote, there was never going to be an easy exit from Keynesian economics:

We won’t bury Keynesian economics until after Keynesian economics buries the liberals.

The way things are going, Keynesian economics is going to bury liberals something frightful.

But then there's another bad idea that liberals cherish, and that's in trouble too. The regulatory state.

For liberals, the free market is inherently flawed. It doesn't meet basic human needs in health care, education, care for the poor, and care of the environment. Government must do this. It must create programs to correct the mistakes of the market, and it must minutely supervise the operations of corporations and businesses to correct corporate greed. The result is a vast regulatory and administrative structure directing resources and behavior by political means rather than market means.

After a dispiriting 30 years of Reagan-Bush when regulation was stalled and even rolled back, liberals have enacted a veritable spring flood of regulatory legislation. ObamaCare places the whole of health care under minute administrative regulation. The proposed cap-and-trade places the whole energy sector under minute regulation. The Dodd-Frank financial regulation bill proposes an intensified administrative regulation of the financial industry. And then there's all the stuff under the radar.

Meanwhile we are seeing the administrative state in action in the Gulf oil spill. We can see that in the past the regulators for the offshore oil business has been too lax. It was clearly a case of regulatory capture. But now that we have a disaster on our hands, the regulators are tightening up. No barges can go out until they have fire extinguishers. Giant Dutch oil skimmers can't operate because they don't quite meet the standard for oily water discharge.

Notice the difference between the regulatory approach and Wal-Mart at Hurricane Katrina. CEO Lee Scott told his workers that in the emergency they would be making decisions way above their pay grade. Just do the right thing, he said.

Conservatives have a faith system when it comes to the regulatory state. Our faith comes from the scholarship of Friedrich Hayek the Nobel economist. Beginning with The Road to Serfdom and continuing through The Constitution of Liberty and The Fatal Conceit he argued that the bureaucratic, administrative state was bound to fail because it did not, could not, know enough to direct the economy.

Our free economy, he argued, was the result of human action but not of human design. A complex system like the global economy evolves out of the millions of actions and decisions of market participants.

What was needed, he argued, was general rules and responsibilities, expressed in the legal code. What the regulatory state always ended up producing was detailed procedures and administrative discretion.

We have seen, in the Gulf oil crisis, how the regulatory state fails. The regulatory process results in the regulated industry conforming to the regulation rather than conforming to prudent business or technical practices. It is the same as the complaint we hear about education under national standards and testing. Teachers teach to the test, not to the needs of the children.

The whole point of law is to deal with things when they go wrong. When you damage someone or something then you must pay to make them whole. Of course, that is impossible, so the law attempts to provide compensation in lieu of making the damaged party whole.

But government regulation assumes that if you can create bureaucratic procedures and permits then you can make everything right before the fact. Of course, there is a place for standards and permits. But ultimately, you have to rely on the judgement of the parties involved.

Our liberal friends are making a huge bet on their regulatory state as they capitalize on their liberal hour. According to conservative political and economic ideas, it will fail, and it will fail big. Only then can we start to repair the damage with a common-sense conservatism that trusts but verifies.

If only we didn't have to have a meltdown first. But then we were never going to get out of the liberal regulatory state on the cheap.

We won’t bury the regulatory state until after the regulatory state buries the liberals.

And that's no error.

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