Thursday, September 18, 2008

Types of Regulations

In the midst of this breakdown of several financial companies, there is a debate going on about the merits of regulation.

Democrats are claiming that the current problem is caused by the Republican philosophy of deregulation, allowing the participants in the financial markets to do whatever they please, where what they pleased. What they pleased was the cause of this crisis. And, in the midst of this crisis, they are not the ones who are suffering for their mistakes. Certainly, if they had benefitted, they would have been able to pocket all the profits. But, in the wake of losses, those losses go to us. We get to bail them out.

Think of all of the regular people who have lost a family business who could not appeal to the government for a bailout, or leave with a $50 million “golden parachute” after mismanaging the company to such a degree.

However, there is a case to be made against a culture of regulation. Whenever regulations get written, you can count on there being a group of people who will follow that bill in minute detail, hire lobbyists, make phone calls, and manipulate public opinion so as to manipulate that regulation. If there is some twist of wording in a regulation that will put millions of dollars in somebody’s pocket, or prevent the loss of a million of dollars out of somebody’s pocket, that person will have reason to invest hundreds of thousands and millions of dollars to manipulate that legislation.

However, you and I are not going to gain or lose millions of dollars as a result of some twist of wording. So, while those with a great deal to gain or lose will hire lawyers, lobbyists, and public relations firms to get their desires written into that legislation, most of us will not even know that the legislation is being debated. As a result, the legislation will serve the purpose of putting millions of dollars into the pockets of the very rich, or prevent them from losing millions of dollars.

In fact, as we watch this situation in the financial industry unfold, what do we see? The people in charge – the people with the money, are making millions of dollars. The current state of regulation is one that protects the wealth of the very rich, and with all of this financial turmoil we do not hear of the very rich being put at risk. This is the effect of regulation, and the reason why many Republicans are opposed to the practice (in theory).

On the issue of regulation, I want to get past the idea that all regulation is bad.

Every criminal law is, in a sense, a regulation. For example, the hit-man industry is heavily regulated; virtually regulated out of existence. We could, of course, have an unregulated hit-man industry – one that is regulated by the market. In this system, anybody who has an objection to the fact that a company employs hit-men by simply boycotting their products or . . . well, by supporting businesses that do not use hit-men and boycotting businesses that do. Giving people the liberty to express their opinions through the market means that we do not need any government regulation of the hit-man industry.

Of course, capitalism does not allow for a hit-man industry. Capitalism imposes certain limits on what one person may do to another. Free trade includes, in part, a prohibition on such things as murder, theft, fraud, and the like.

These are regulations

These "rights to life, liberty, and property" are regulations – a set of rules determining who can do what to whom under what circumstances.

So, the question is not whether to have regulations or not. The question is over what set of regulation works best.

This defeats the line we tend to hear from the Republican camp that all regulation must be prohibited because any set of regulations will become corrupted by special-interests. We are going to have a set of regulations. If sets of regulations are bound to be corrupted by special interest, then corruption by special interest is unavoidable. It is not a reason to select one option and reject another. The option to be rejected does not exist. It is, instead, a background condition that we have to live with and find some way to avoid.

We can perhaps make some progress by distinguishing between two types of regulations.

Regulation to Enforce Rights

One type of regulation is the prohibition on doing harm to others. In just the same way that one is prohibited from hiring a hit man to kill a competitor's leading salesman as a way of improving the bottom line, businesses are prohibited from poisoning others to improve the bottom line. However, this includes prohibitions on poisoning the air that others breathe or poisoning their drinking water.

There are regulations that prohibit a person from simply destroying somebody else's property because one wants something that will allow them prohibitions on simply destroying somebody’s property because one can make a profit by doing so. Similarly, we have reason to impose regulations on those industries that contribute to global warming or ozone depletion or other outcomes that have the effect of destroying somebody else's property. It is not a legitimate defense to say that these regulations cut into their profits, because the regulation against bull-dozing somebody’s house at will also might cut into profits.

There are regulations that prohibit fraud or other acts of deception. It would be considered fraud to sell somebody a car that does not run under any circumstances in which the recipient had reason to expect that it would run. It also counts as fraud to sell somebody a mortgage under conditions that the recipient does not understand – where the recipient reasonably expects one outcome while the mortgage contract says something entirely different.

And it is not enough to say that, as a protection against fraud, it is sufficient to put the terms and conditions in the fine print of some disclaimer that the recipient signs. Most of you who are reading this blog have installed software. You have gotten to the page with all of the legaleze describing the terms of use or some other set of concerns. You have signed that you have read and understood (or at least accepted) those terms and conditions without having any idea what they said.

The call for deregulation is all too often a call to remove these types of restrictions. It is a call to allow a business to kill others by poisoning the air and water. It is a call to allow a business to destroy the property of others through the effects (e.g., global warming) of its practices. It is a call to allow businesses to engage in all sorts of fraud to get money from people by selling them things with fine print that no mortal could possibly understand, and with the knowledge that it is not cost-effective (in the face of ignorance) to go over such agreements in detail.

Many of the bad mortgages sold to people in the last several years would count as fraud. People did not understand what they were getting into and the banks knew it. But the banks did not care that their customers had false beliefs about the product they were selling, as long as the bank got the customer’s money.

Regulation that Violates Rights

These forms of regulation – prohibitions on killing others, destroying their property, or defrauding them – are to be contrasted with regulations whose purpose is to redistribute wealth. These are the regulations where a business says, "Tax every household in the country by one dollar. This will be too little for them to pay any attention to. That will generate $125 million in revenue. Keep $25 million for the government, give us $100 million, and we will make sure that there is something in your campaign bank account the next time you run for office." Those campaign contributions are, in effect, kick-backs for the hundred million dollars in benefits the company gets from the new regulation.

These types of regulations, we have many and good reasons to want to stop.

These are the types of regulations that we have good reason to reject to – and good reason to vote for politicians who will eliminate them.

It does not change the fact that there are good regulations – regulations against killing others (even by poisoning the air they breathe and the water they drink), regulations against destroying their property (through the corrosive or destructive effects of one's actions), and regulations against fraud (or business practices that are so deceptive they count as fraud).

Nor does it change the fact that if somebody has found a way to make millions of dollars by acts that kill others, destroy their property, or that require fraud, that they have a tremendous incentive to convince the legislators to allow them to perform those activities.

1 comment:

anton said...


While US America can, and does, impose regulations on its corporations, nothing in US law restricts its corporations from dumping products which are not legal in US America on other parts of the world which have not yet created regulations to stop this practice.

In effect, profit trumps morality!

For example, US tobacco exports products which do not conform to US regulations, to third world countries. Advertising may be universal and contain a consistent message. Often, the products are far from the same even though the "packaging" is.

When it did manufacture electrical appliances, US America exported products which did not conform (products which did not pass quality control) to US standards to other countries?

Hazardous products which called for "immediate recall" to protect US citizens, were not recalled from foreign countries. In fact, there are instances where "notices" of defect were kept as quiet as possible so US corporations could dump their remaining inventory on other countries.

US corporate pressure, with the help of the US Government, puts tremendous pressure on other countries not to implement regulations that would hurt US business. When countries depend on selling their products to the US, their products are subject to close scrutiny. But, at the same time, they must also contend with the US desire to export products or services which it couldn't sell in the US because they don't meet US standards.

US America is also infamous in some of its offshore activity where it has foreign corporations supply "acceptable" products to the US and employ the strategy of dumping products which don't meet the US standard on other countries. This practice was popular during the 1980s when personal computers were manufactured in India, Korea, and Taiwan. The "rejects" were sold in other countries. It was a successful practice since the foreign citizens were seduced by the big name advertising from the US and they believed they would be purchasing identical products that were being enjoyed by US customers.

US citizens were "protected" when the US banned beef when Mad Cow Disease was discovered in other countries. When Mad Cow Disease was discovered in the US, it was quickly "covered up". In fact,the US will not admit that it has ever been discovered in the US. Doctors have been "pressured" into avoiding any reference to Mad Cow Disease on death certificates. How many US citizens are aware that several of their number from the Philidelphia area died from Mad Cow Disease?

Also, regulations have been imposed on US corporations not to deal with certain countries. Those regulations did not stop those same US corporations from using their "foreign" branches from selling their products to the banned country. US corporations profited. US citizens were fooled into thinking that they were not "trading" with the enemy.

I agree with a need to regulate. In a previous comment I mentioned the need for my neighbor to "control his pooch". I also remind my neighbor that I don't like his practice of disposing of his "rabid, flea infested pooch" on my property and endangering me and my children.

We could appeal to US Christian churches to "openly" excommunicate and/or ban those executives, and their families, who work for corporations who employ these immoral practices. I would imagine that while church attendance wouldn't show any appreciable reduction, the profit picture of those churches would be seriously affected!