Obama’s State of Regulation

Barack Obama sounded a number of themes in his 2012 State of the Union Address this week, all underpinned by the proposition that socioeconomic ills can be solved by interventionist government in general and his administration in particular.

Indiana governor Mitch Daniels, giving the Republican rebuttal, effectively replied to the main claims. He pointed to the failure of  the President’s “grand experiment in trickle-down government.” Programs spend borrowed money in attempts to boost the middle class. “In fact, it works the other way: a government as big and bossy as this one is maintained on the backs of the middle class,” Mr. Daniels said.

Mr. Obama’s points about regulation drew less attention.  Acknowledging that “some rules are outdated, unnecessary, or too costly,” the President said he approved fewer regulations than his Republican predecessor did in his first three years and ordered every federal agency to eliminate rules that don’t make sense.

Truth, regulatory expansion in the age of Obama has been massive in healthcare and finance, with hugely expensive new requirements imposed on large numbers of individuals and businesses. But in broad terms he is right that regulatory expansion went on unabated under the second George Bush, indeed as it has under many US presidents since the 1930s.

From that perspective, the sprawling healthcare and Dodd-Frank financial regulation laws are additional links in the chain of government controls that bind American society ever tighter in almost every area. Certainly the trend is not new.

The issue Mr. Obama did not address is that much regulation is not just outdated, unnecessary, or too costly; it simply does not work. Case in point is the Financial Crimes Unit he proposes to create. Consider the mission of this new bureaucracy, in Mr. Obama’s words: “to crack down on large-scale fraud and protect people’s investments.” As if there were no law and officialdom that does this until now.

Fraud has always been subject to criminal law. The Justice Department, the FBI, state and local police forces are responsible for apprehending perpetrators and handing them over to the courts for punishment. Besides criminal prosecution, since the early 20^th century the US developed an elaborate body of law and regulation meant to prevent financial fraud. There came to be numerous civil bureaucracies to enforce the rules and investigate violations. These range from the Securities and Exchange Commission to the specialized overseer of Fannie Mae and Freddie Mac, the government-backed mortgage finance giants.

Close regulatory oversight did not prevent accounting shenanigans at Fannie and Freddie, let alone stop them from playing the role of enabler to the housing bubble, subsequently  in effect becoming insolvent. They remain dependent on Congressional handouts of taxpayer money.

Then there are the astounding failures of the Securities and Exchange Commission to intervene when alerted by whistleblowers to the giant Ponzi schemes of Bernard Madoff and Allen Stanford.

Mr. Obama wants to establish a new bureaucracy because the existing ones failed to do what they were supposed to do. Were the existing agencies private entities, they would have gone out of business and been replaced by better functioning firms (if warranted by market conditions). But since they’re part of the government, they don’t disappear. At most they change their names and get re-organized, as happened to the Fannie supervisor.

New ones are set up to compensate for the dysfunction of the old ones—a pattern public choice economics pioneer Gordon Tullock described in his book, The Politics of Bureaucracy.  Adding an extra bureau is the stock response to regulatory failure. Hence Mr. Obama’s proposed Financial Crimes Unit.

But this is futile. Tullock pointed out that after a few years new bureaucracies become like old bureaucracies in that they mainly look after themselves while pretending to carry out their supposed tasks. Nothing is achieved, while taxpayers and consumers pay for offices, salaries and other expenses. When failures show up, yet another bureaucracy is created.

Tullock called the resulting system of pullulating government organizations the emerging bureaucratic order. That was in 1965. It is no longer emerging, it is already here and Mr. Obama is adding to it.

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