Elizabeth_WarrenThe folks over at RegBlog are running a series of essays on “Rooting Out Regulatory Capture,” a problem that I’ve spent a fair amount of time discussing here and elsewhere in the past. (See, most notably, my compendium on, “Regulatory Capture: What the Experts Have Found.”) The first major contribution in the RegBlog series is from Sen. Elizabeth Warren (D-MA) and it is entitled, “Corporate Capture of the Rulemaking Process.”

Sen. Warren makes many interesting points about the dangers of regulatory capture, but the heart of her argument about how to deal with the problem can basically be summarized as ‘Let’s Build a Better Breed of Bureaucrat and Give Them More Money.’  In her own words, she says we should “limit opportunities for ‘cultural’ capture'” of government officials and also “give agencies the money that they need to do their jobs.”

It may sound good in theory, but I’m always a bit perplexed by that argument because the implicit claims here are that:

(a) the regulatory officials of the past were somehow less noble-minded and more open to corruption than some hypothetical better breed of bureaucrat that is out there waiting to be found and put into office; and

(b) that the regulatory agencies of the past were somehow starved for resources and lacked “the money that they need to do their jobs.”

Neither of these assumptions is true and yet those arguments seem to animate most of the reform proposals set forth by progressive politicians and scholars for how to deal with the problem of capture. Continue reading →

FAA sealRegular readers know that I can get a little feisty when it comes to the topic of “regulatory capture,” which occurs when special interests co-opt policymakers or political bodies (regulatory agencies, in particular) to further their own ends. As I noted in my big compendium, “Regulatory Capture: What the Experts Have Found“:

While capture theory cannot explain all regulatory policies or developments, it does provide an explanation for the actions of political actors with dismaying regularity.  Because regulatory capture theory conflicts mightily with romanticized notions of “independent” regulatory agencies or “scientific” bureaucracy, it often evokes a visceral reaction and a fair bit of denialism.

Indeed, the more I highlight the problem of regulatory capture and offer concrete examples of it in practice, the more push-back I get from true believers in the idea of “independent” agencies. Even if I can get them to admit that history offers countless examples of capture in action, and that a huge number of scholars of all persuasions have documented this problem, they will continue to persist that, WE CAN DO BETTER! and that it is just a matter of having THE RIGHT PEOPLE! who will TRY HARDER!

Well, maybe. But I am a realist and a believer in historical evidence. And the evidence shows, again and again, that when Congress (a) delegates broad, ambiguous authority to regulatory agencies, (b) exercises very limited oversight over that agency, and then, worse yet, (c) allows that agency’s budget to grow without any meaningful constraint, then the situation is ripe for abuse. Specifically, where unchecked power exists, interests will look to exploit it for their own ends.

In any event, all I can do is to continue to document the problem of regulatory capture in action and try to bring it to the attention of pundits and policymakers in the hope that we can start the push for real agency oversight and reform. Today’s case in point comes from a field I have been covering here a lot over the past year: commercial drone innovation. Continue reading →

This week, my colleague Jerry Brito asked me to guest lecture to his George Mason University law school class on regulatory process. He asked me to talk about one of my favorite topics: the sad, sordid history of regulatory capture. Regular readers will recall the compendium I posted here a few months ago [and that I continue to update] of selected passages from books and papers penned by various economists and political scientists who have studied this issue.

Again, it doesn’t make for pretty reading, but the lesson that history teaches is vital: No matter how noble the “public interest” goals of regulatory advocates or their specific proposals, the only thing that really counts is what regulation means in practice.  Regrettably, all too often, regulation is “captured” by various interests and used to their advantage, or at least to the disadvantage of potential competitors, new entrants, and innovation.

While I was gathering some materials for the case study portion of my lecture — which incorporates the history of telecommunications monopolization, broadcast industry regulatory shenanigans, and transportation / airlines fiascos — I figured I had to post a passage from one of my favorite books on regulation of all-time: Thomas K. McCraw’s brilliant Pulitzer Prize-winning 1984 book, Prophets of Regulation. In his chapter on the late great Alfred Kahn, the father of airline deregulation, McCraw recounts the history of the Civil Aeronautics Board (CAB) from its creation in the 1940s up until the time of Kahn’s ascendency to CAB chairman in the Carter Administration (and then the CAB’s eventual deregulation and abolition). Here’s the key passage from that history: Continue reading →

I absolutely loved this quote about the dangers of regulatory capture from Holman Jenkins in today’s Wall Street Journal in a story (“Let’s Restart the Green Revolution“) about how misguided agricultural / environmental policies are hurting consumers:

When some hear the word “regulation,” they imagine government rushing to the defense of consumers. In the real world, government serves up regulation to those who ask for it, which usually means organized interests seeking to block a competitive threat. This insight, by the way, originated with the left, with historians who went back and reconstructed how railroads in the U.S. concocted federal regulation to protect themselves from price competition. We should also notice that an astonishingly large part of the world has experienced an astonishing degree of stagnation for an astonishingly long time for exactly such reasons.

I’ve just added it to my growing compendium of notable quotations about regulatory capture.  It’s essential that we not ignore how — despite the very best of intentions —  regulation often has unintended and profoundly anti-consumer / anti-innovation consequences.

Washington Post cartoonist Tom Toles is certainly no fan of free markets, but his contribution to today’s paper offers us this humorous take on the dangers of regulatory capture, a subject we’ve spent much time documenting here on the TLF.

[Note: This post is updated regularly as I discover relevant old or new material.]

“Regulatory capture” occurs when special interests co-opt policymakers or political bodies — regulatory agencies, in particular — to further their own ends.  Capture theory is closely related to the “rent-seeking” and “political failure” theories developed by the public choice school of economics.  Another term for regulatory capture is “client politics,” which according to James Q. Wilson, “occurs when most or all of the benefits of a program go to some single, reasonably small interest (and industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).”  (James Q. Wilson, Bureaucracy, 1989, at 76).

While capture theory cannot explain all regulatory policies or developments, it does provide an explanation for the actions of political actors with dismaying regularity.  Because regulatory capture theory conflicts mightily with romanticized notions of “independent” regulatory agencies or “scientific” bureaucracy, it often evokes a visceral reaction and a fair bit of denialism.  (See, for example, the reaction of New Republic’s Jonathan Chait to Will Wilkinson’s recent Economist column about the prevalence of corporatism in our modern political system.)  Yet, countless studies have shown that regulatory capture has been at work in various arenas: transportation and telecommunications; energy and environmental policy; farming and financial services; and many others.

I thought it might be useful to build a compendium of quotes from various economists and political scientists who have studied the regulatory process throughout history and identified regulatory capture or client politics as a major problem.  I would greatly appreciate having others suggest additional quotes and studies to add to this list since I plan to update it frequently and eventually work all of this into a future paper or book. [Note: I have updated this compendium over a dozen times since the original post, so please check back for updates.]

The following list is chronological and begins, surprisingly, with the thoughts of progressive hero Woodrow Wilson…

Continue reading →

After posting the first three installments of my ongoing look at Tim Wu’s important new book, The Master Switch: The Rise and Fall of Information Empires, [see parts 1, 2, & 3], I’ve heard back from some readers as well as Prof. Wu himself that I may be going a bit hard on him, or that I am under-appreciating some of his valid critiques.  In particular, Wu and others have claimed I’ve ignored or downplayed his admission that the problem of regulatory capture is a prime culprit of “the cycle” he addresses in his book.  So, let me address that point here today.

I have acknowledged that Prof. Wu’s book includes some occasional references to the problem of regulatory capture or bureaucratic bungling throughout the history of communications and media policy.  In a comment to my previous post, Wu itemizes a couple of those instances, most of which I’d already cited before. But here’s probably the best passage from the book on this point:

Again and again in the histories I have recounted, the state has shown itself an inferior arbiter of what is good for the information industries. The federal government’s role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace…. Government’s tendency to protect large market players amounts to an illegitimate complicity … [particularly its] sense of obligation to protect big industries irrespective of their having become uncompetitive. (p. 308)

I agree.  And, as I also noted in my previous essay, I very much appreciated this footnote in chapter 3 of Wu’s book: “The technical term for such a system is ‘corporatism’: in its extreme manifestation it is called ‘fascism.”  Wu is absolutely right.  I applaud him for labeling this system what it really is.

But here’s what’s so damn peculiar about Wu and his book when it comes to the problem of regulatory capture and bureaucratic mismanagement: as soon as he raises it, he immediately walks away from itThere’s seemingly never any serious lesson drawn from it. Continue reading →

A diverse group of technology companies including broadband, video and wireless providers as well as Google, Microsoft and hardware giants like Intel and Cisco today launched the  Broadband Internet Technical Advisory Group (BITAG or TAG) to provide exactly the kind of self-regulatory forum for dealing with concerns about network management practices that we at PFF have long called for—most recently in Adam Thierer and Mike Wendy’s recent paper, “The Constructive Alternative to Net Neutrality Regulation and Title II Reclassification Wars.” But rather than applauding BITAG, the regulatory radicals at Free Press insisted that:

this or any other voluntary effort is not a substitute for the government setting basic rules of the road for the Internet.

Swansong of an Industry?

There must be a separate FCC rulemaking process, which can take the recommendations of this or any other voluntary advisory group into account, but rubber-stamping those recommendations would ignore the agency’s mandate to create public policy in the public interest. Allowing industry to set its own rules is like allowing BP to regulate its drilling. The Comcast BitTorrent case shows that without government oversight, Internet Service Providers will engage in what are already deemed by engineers to be bad practices

Free Press certainly wouldn’t have the influence they do if they weren’t so good at picking metaphors. But what does the oil spill really teach us about regulation? The Wall Street Journal notes the growing outrage on the political Left against president Obama from those who are “furious and frustrated that the President hasn’t demanded the heads of BP executives on pikes.” But the Journal points out the central irony of the situation:

The [so-called] liberals’ fury at the President is almost as astounding as their outrage over the discovery that oil companies and their regulators might have grown too cozy. In economic literature, this behavior is known as “regulatory capture,” and the current political irony is that this is a long-time conservative critique of the regulatory state….

In the better economic textbooks, regulatory capture is described as a “government failure,” as opposed to a market failure. It refers to the fact that individuals or companies with the highest interest or stake in a policy outcome will be able to focus their energies on politicians and bureaucracies to get the outcome they prefer.

Continue reading →

One of my favorite recurring themes here on TLF is the definitional dispute/clarification. We point out where a term has been used in many different ways and explain the positives and negatives of the various behaviors described by that term. I just did this with privacy.

Of course, it is somewhat pointless to argue about the “true” meaning of a term, but that’s not exactly what’s involved here. Yes, we libertarians can lament when terms that used to describe things we believe in, like “liberal,” “freedom,” “rights,” “choice,” etc., get appropriated by others and terms that used to describe things we don’t believe in, like “coercion,” get ascribed to us. There may be some battles we can win, some terms we can hold onto, but these disputes often end up with two ships passing in the night.

But I’m talking about something a little different. Lots of terms that have, or get, normative connotations – that sound like they describe something good (think “democracy”) or bad (think “terrorism”) – get way overbroadened. Speakers use such terms to describe nearly anything (as long as it’s vaguely related to the original meaning) to which the speaker wants to ascribe the good/bad connotation. We here on TLF catalog those various ways such terms have been used – break the term down – and describe which ways are really good and really bad. As I said, I just did this with privacy. If this were a more lawy, as opposed to techy, blog I’d do it with “activism,” one of my pet peeve words. (Maybe I’ll do it anyway; after all, I posted on the best and worst Supreme Court decisions even though they weren’t especially tech-focused.)

But today, it’s “regulatory capture.” We have discussed it a bit recently, including just tonight. Tim Lee did some great posts on it back in the day. It’s definitely a recurring theme here. We seem to have something fairly specific in mind when we use the term. As Tim put it, it is when “established businesses argue in favor of regulations that they perceive as hurting their competitors (often smaller competitors) more than themselves.” Indeed, I argued with a commenter on one of Wayne’s posts that this definition that makes the most sense given the meanings of the words:

Regulatory capture is when businesses capture regulatory actions and use them as tools, backed by the force of government, for imposing burdens on their competitors. Businesses banding together to oppose government intrusion is not “capture.” Fighting an enemy is not the same as capturing him and using him to do your bidding…

Call Tim’s and my definition the “appropriation” definition. Continue reading →

Herman on Regulatory Capture

by on January 31, 2007

OK, last post on the Herman paper. I’m especially pleased that he took the time to respond to my “regulatory capture” argument, because to my knowledge, he’s the first person to respond to the substance of my argument (Most of the criticism focused on my appearance and my nefarious plot to impersonate the inventor of the web):

Timothy B. Lee insists that BSPs will have more sway than any other group in hearings before the FCC and will therefore “turn the regulatory process to their advantage.” He draws from a vivid historical example of the Interstate Commerce Commission (“ICC”), founded in 1887. “After President Grover Cleveland appointed Thomas M. Cooley, a railroad ally, as its first chairman, the commission quickly fell under the control of the railroads, gradually transforming the American transportation industry into a cartel.” Yet this historic analogy, and its applicability to the network neutrality problem, is highly problematic. Even the ICC, the most cliché example of regulatory capture, was not necessarily a bad policy decision when compared with the alternative of allowing market abuses to continue unabated. One study concludes “that the legislation did not provide railroads with a cartel manager but was instead a compromise among many contending interests.” In contrast with Lee’s very simplistic story of capture by a single interest group, “a multiple-interest-group perspective is frequently necessary to understand the inception of regulation.”

Herman doesn’t go into any details, so it’s hard to know which “market abuses” he’s referring to specifically, but this doesn’t square with my reading on the issue. I looked at four books on the subject that ranged across the political spectrum, and what I found striking was that even the ICC’s defenders were remarkably lukewarm about it. The most pro-regulatory historians contended that the railroad industry needed to be regulated, but that the ICC was essentially toothless for the first 15 years of its existence. At the other extreme is Gabriel Kolko, whose 1965 book Railroads and Regulation, 1877-1916 argues that the pre-ICC railroad industry was fiercely competitive, and that the ICC operated from the beginning as a way to prop up the cartelistic “pools” that had repeatedly collapsed before the ICC’s enactment. Probably the most balanced analyst, Theodore E Keeler, wrote in a Brookings Institute monograph that that in its early years, the ICC “had about it the quality of a government cartel.”

Continue reading →