EconoMonitor

The Obama Administration’s Regulatory Capture

As an economist, I know one simple truth: every legislative and regulatory decision has implications for jobs and output. Hence, policies like mandating mortgage modifications and forgoing access to energy resources in the Outer Continental Shelf and the Gulf of Mexico have inextricable economic consequences.

During the Gulf Moratorium, the courts acknowledged such views. In response to the Administration’s policy, a federal judge in New Orleans blocked enforcement of the moratorium, writing that “[t]he blanket moratorium, with no parameters, seems to assume that because one rig failed, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger,” which was not – in the court’s opinion – sufficient justification for taking economic value from private sector jobs and firms.

But the situation is worse than you might think. In the field of economics, such value-destroying economic takings are not as rare as one might think. Previous research gives a worrying indication of what can be expected from the regulatory responses to events like Fukashima, Deepwater Horizon, and the mortgage crisis. The results show that regulatory decisions are influenced by many factors beyond the dispassionate evaluation of the economic costs and benefits.

For instance, a recent study by Mian, Sufi, and Trebbi (2010) found that congressional representatives whose constituents had higher rates of mortgage defaults were more likely to be in favor of the Foreclosure Prevention Act, despite economic evidence that foreclosure prevention has unavoidable economic costs, including depressed home prices, decreased construction activity, and higher unemployment, even while it is clear that the vast majority of foreclosures involve borrowers who have not made a single payment in months and, often, no longer even reside in the home.

Before that, research by Moran and Weingast (1982) showed that politicians influenced the activities of the Federal Trade Commission, skewing the work of a supposedly independent regulatory agency.

Grabowski and Vernon (1978) showed that the nascent Consumer Products Safety Commission (CPSC) tended to focus on products where risks were well understood, ostensibly to better justify their creation to lay outsiders. Moreover, only five of the CPSC’s top 21 priority products for regulation had measurable economic benefits that exceeded proposed regulatory costs.

What we can observe from a large body of research on the political economy of regulation, therefore, is that both elected officials and regulatory agencies are influenced by political factors, which may lead to suboptimal solutions to complicated problems such as energy policy and the mortgage crisis.

In recent years, regulatory agencies have continued to impose costly policies upon the economy without congressional approval. For instance, while the EPA ruling that carbon should be treated as a pollutant was ultimately supported by the Supreme Court, many in Congress still maintain that the agency overstepped its bounds in such a dramatic – and potentially costly – reinterpretation of its rules.

The carbon ruling, however, is somewhat less problematic than the EPA’s December 2009 back-door regulation of phthalates (used to soften plastics). Although the EPA did not have sound scientific evidence upon which to ban phthalates, the agency imposed the “precautionary principle” to “temporarily” halt their production. 

The Bureau of Ocean Energy Management, Regulation, and Enforcement’s recent Gulf of Mexico drilling policy seems to have been based on similar policy reasoning. While specific companies, a specific type of platform design, and BP, itself, have been blamed for the Deepwater Horizon blowout, BOEMRA continued to severely restrict not only deep water but also shallow water drilling in the Gulf of Mexico, despite ongoing economic damage to the Gulf region. Then, blatantly disregarding the Spill Commission’s findings and even the dissenting report of the Chair of that Commission, BOEMRA’s first deep water drilling permit went to BP.

In looking at the political economy of new regulatory arrangements, therefore, we must look with skepticism and concern upon both the political motivations of the regulatory officials charged with enforcing the rules, and the economic power that will be concentrated in those regulatory officials as a result of their influence over the implementation costs and economic redistribution. Without restraint, a potentially toxic mix of politics and power may damage both the industry and the environment.

When new agencies like BOEMRA and CFPB are created, they have a strong incentive to prove their worth to their creators and flex their muscle with regard to their related industries. As such, new agencies regularly undergo dramatic power shifts before settling into anything that could be considered a stable role in the U.S. regulatory framework. Recently proposed legislation can help that evolution by setting clear accountability standards for new regulatory agencies like BOEMRA and CFPB so that they are captured neither by corporations nor politicians.

Balancing regulatory accountability and economic growth as envisioned in proposed legislation can therefore be a useful lens that sharpens our focus on regulatory rent-seeking and helps build regulatory framework that can balance the safe use of energy resources and social goals of housing policy with jobs and economic growth.

2 Responses to “The Obama Administration’s Regulatory Capture”

Deus-DJApril 6th, 2011 at 11:10 pm

Hmmm, congresspersons who want to keep people in their homes is an example of regulatory capture? Preventing foreclosures depresses home prices? What kind of goddamn world do you live in?

GuestApril 7th, 2011 at 10:02 am

You have a very odd definition of rent seeking, IMO. Congressmen that implement the preferences of their constituents is not suboptimal. Even if it would benefit aggregate growth and the aggregate market to force homeowners into default, there are still winners and losers. Congressmen should stick up for their constituents if the losses are concentrated in their districts.

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