Regulators Gone Wild

How do we explain a government regulatory agency gone wild, turning viciously on its subject and seeking to destroy or impair it, regardless of the harm done to the general public?

Some tough-minded economists some years ago developed a realistic description of political behavior called "public choice theory."  Under this view, everyone in the political process -- voters, politicians, bureaucrats, lobbyists, and the special interest groups who hire those lobbyists -- are motivated primarily by self-interest.

However, the theory continues, the degree of interest varies, and so the amount of knowledge about the process varies.  For example, if a $300-million bridge to nowhere is proposed as an earmarked provision to a defense spending bill, the average taxpayer stands to lose only a few dollars, while the building contractor stands to gain millions of dollars.  So the contractor will follow closely the progress of the pork-barrel spending as it works its way through Congress, while the taxpayer will not.  Economists say of the taxpayers that they are "rationally ignorant" -- since they stand to lose only a few dollars, it is more rational for them to focus on their daily lives, where they have more to lose.

Politicians, who are not spending their own resources, are motivated not to spend said resources for the general good, but instead to spend them to maximize their own preferences (re-election, typically) -- and so they will push the pork to get the campaign cash from the special interests while relying on the rational ignorance of the voters.

This theory in turn explains another concept: the notion of regulatory capture.  In regulatory capture, as commonly defined, the biggest players (companies) in an industry manage to put people favorable to their views in control of whatever regulatory agency is supposed to monitor that industry.

Regulatory capture is repellant because it violates an important feature of any political system: impartiality.  We take the purpose of any regulatory agency to be that of a neutral umpire looking out to make sure that the players in the industry under its oversight stay within reasonable bounds.  We expect the agency to act impartially for the public good, which entails minimizing negative externalities while allowing industry to make the profits necessary to stay in business and produce positive externalities (like wealth, jobs, tax revenue, and so on).

That is, a regulatory body run by fair and impartial agents will, we think, ensure that the industry produces desirable goods and services while keeping the public safe from harm.  But a body run by agents beholden to the industry will more likely let the industry get away with producing more public harms while producing fewer social goods.  It would be as if all the referees in a football game were ex-coaches from one of the teams.  The players on the other team and the spectators of the game would be incensed at this violation of impartiality, and rightly so.

But what is not often noted is the phenomenon which, for lack of a better name, I will term "reverse regulatory capture."  I mean by this cases where the agency that regulates an industry is taken over by special interests in an adversarial relationship with that industry.  Specifically, reverse regulatory capture occurs whenever a regulatory body is run by people allied with either unions in that industry or groups (such as environmentalist activist funds) that oppose the very existence of that industry in the first place.

Is it not obvious that reverse regulatory capture is as morally repugnant as regular regulatory capture, and for the same reason?  It violates the impartiality we expect of our institutions to the same degree.

So, for example, imagine a governor of Nevada appointing as chief of the Nevada Gaming Commission the past head of the National Coalition against Legalized Gambling, or a past head of the Culinary Workers Union.  In both cases, the citizens would have as much right to suspect biased, agenda-driven rulings as if the agencies were headed by past casino owners.

We have in the Obama administration a surfeit of illustration of reverse regulatory capture.  Obama has placed virtually every regulatory agency in his power in the hands of the devout adversaries of industry.  These adversaries of industry -- unions and environmentalist activist organizations -- just happen to be his most lavish financial supporters.

A fine example of this is the subject of a recent federal court ruling.  The National Labor Relations Board (NLRB) was established in 1934 as the federal agency in charge of investigating and adjudicating labor disputes in private industry (and the Post Office).  The major adjudicating body in the NLRB is a governing board whose members are nominated by the president and confirmed by the Senate.

Early on in his reign (April 2009, to be precise), Obama signaled his intention to reverse-capture the NLRB by nominating to the governing board one Craig Becker, the leftist associate general counsel of the Service Employees International Union (SEIU).  The SEIU was a huge donor to Obama's 2008 campaign, and its then-head Andy Stern was a major FOO (friend of Obama),  and frequent White House visitor.  Becker was so obviously extreme that even the Democrat-controlled Senate wouldn't confirm him.  No matter -- Obama put him in on a recess appointment.

Becker behaved as Obama intended him to.  He pushed to reverse the decades-long decline in private industry unionization by every mechanism he could think of, constitutional or not.  In one of his more egregious rulings, he shoved through a new rule allowing the aptly named "quickie" or "ambush" union elections, where unions could secretly gather workers' signatures and then push companies to have elections within two weeks.  This tactic is designed to deprive companies of any chance to research the issues being covered and prepare a defense.  This is no merely abstract debate: unions win 87% of quickie elections, versus just 58% for those held after five to six weeks.

Here's where it gets cute.  Becker and the other leftist Obama appointee voted for the plan, but the lone Republican, Brian Hayes, opposed it and refused to vote, depriving the board of a quorum.  In response, Becker claimed that since he and his fellow union hack knew that Hayes was opposed, it was pretty much a real quorum -- what you might call a "virtual quorum" -- so in reality, the rule passed 2-1!

But a federal judge has just ruled otherwise, so the rule has been rendered void.  However, there is no doubt that Obama's more recently recess-appointed NLRB myrmidons will try to ram it through again.

My suggestion for President Romney (assuming we are lucky enough to have him prevail in the fall election) is that he replace across the board the agents of reverse regulatory capture put in by the hyper-partisan, neo-socialist Obama administration.  But he should aim at true impartiality (coming as close as possible) by replacing them with economists, engineers, and scientists form the academic world and elsewhere who demonstrably have no ties to the industries they will help regulate, but also no ties to adversary organizations hostile to those industries.

This country is war-weary in many ways.  One of these wars is the endless regulatory war against industry.  It is time to declare a truce, by putting impartiality first in regulation.

Philosopher Gary Jason is a senior editor of Liberty and the author of the new book Dangerous Thoughts (available through Amazon).