If America’s regulatory miasma is not due to a covert war against capitalism waged within government agencies, then what is the real cause?
3
Let us return to our inventor friend, Henry, and his turbo-charged automatic vacuum cleaner. (You remember: Just leave the vacuum on a shelf for five minutes and—presto!—the room is spanking clean.) Imagine, as before, that the product proves enormously popular. But this time imagine that it suffers from a small flaw: It emits a roar something like a jet engine at full throttle, but louder. Every time the machine is switched on, the noise loosens tooth fillings and induces deep neurosis in dogs within a radius of two hundred yards. This flaw does not deter consumers from using the vacuum; following operating instructions, they simply set the timer, sedate the dog, and go off to the movies while the machine cuts loose. Soon in neighborhoods all over America the vacuum’s roar issues from empty houses, causing flocks of passing birds to fall stunned from the sky and neighbors at table to drop plates and fling drinks into the air. Henry would like to make a quieter version of the product, but so far has had no luck; adding an adequate muffler would triple the cost of the vacuum.
Now suppose that several years before all this Congress had instructed the Environmental Protection Agency to take steps to “ensure no household appliance emits excessive noise.” That was all the legislation said. Congress decided to leave it to the EPA to devise and enforce regulations concerning neighborhood noise pollution. Since then, the agency has issued only one broad rule: “No consumer product shall generate noise in excess of 110 decibels.” That’s it—nothing more specific than this, no reporting requirements, no interpretations, no elaborations. The EPA publishes the rule and considers the problem settled.
Henry has hired a Washington lawyer named Seymour, who informs him of the EPA’s regulation. Worried about the threat to his company, Henry asks Seymour if he can think of some legal way to continue selling the turbo-charged vacuum cleaner. Seymour is a smart lawyer who specializes in federal regulations. “Not to worry,” Seymour assures Henry. “I can think of two hundred ways to dodge this regulation.” Henry rests easier.
Two months later, the EPA inquires about the vacuum. It seems they have been getting complaints about its noise. Seymour meets with the EPA’s attorney. “The regulation doesn’t apply to the turbo-charged automatic vacuum,” says Seymour, matter-of-factly. “It says no consumer product should emit a sound in excess of 110 decibels, but this isn’t a consumer product. It’s designed for industrial applications, although consumers happen to use it. And it’s not even a product, but a service, since under our unique payment plan it is leased rather than purchased outright.” The EPA attorneys silently take off their hats to Seymour and go back to their law books and word processors.
Two months after that, the EPA announces a more detailed set of rulings, which define “consumer product” as “any product or service sold or leased to industrial or consumer users.” They then return to Seymour’s office. “Still doesn’t apply,” says Seymour calmly. “The regulation prohibits sounds in excess of 110 decibels. But our automatic vacuum records only 95 decibels when we’ve tested it outside in the middle of a field during a hailstorm. Here’s the proof.” He hands the EPA attorneys computerized results of the experiment. They take off their hats again, solemnly shake his hand, and drag back to the office.
Two months later, the EPA announces precise specifications for how such products are to be tested to determine decibel levels—the kind of sound chamber in which testing is to occur, the type of testing equipment, scientific definitions for “decibel,” and detailed requirements for when the testing must be done and under whose auspices. The agency also announces that hereafter all manufacturers of a new product “designed for or adaptable to household use” must file a report with the agency indicating its decibel level according to the prescribed test. All over America, developers of new cat beds, corn poppers, and sock matchers fume as they pay for the premarketing decibel tests Washington demands.
Over the next several years Seymour meets with the EPA attorneys innumerable times. Each time, he claims that the burgeoning regulations, rules, and interpretations still do not apply. Each time thereafter, they become more detailed. Seymour also disputes their applicability before administrative law judges and he appeals their rulings to the federal courts. He argues, as the occasion warrants and the spirit moves him, that the EPA has exceeded its mandate from Congress, or that the agency has acted arbitrarily in singling out the turbo-charged automatic vacuum, or that the company’s constitutional rights have been violated. The administrative judges and appellate courts issue opinions that further elaborate upon the EPA’s regulations and interpretations, and its authority to regulate in this area. Meanwhile, the original statute has been amended by Congress to avoid the loopholes and ambiguities that Seymour (and others like him) have discovered. The new law is far more detailed and complex, spelling out in excruciating specificity what is required.
Five years later, Henry meets with Seymour. “I’m afraid,” says Seymour, “we’ve reached the end of the line.” Seymour points to a bookshelf sagging under the weight of statutes, EPA regulations, rulings, advisory opinions, interpretations, court opinions, and appellate decisions, all concerning noise pollution. “But at least I got you more than five years of delay.” Henry is downcast nonetheless. “Does this mean we have to stop selling the turbo-charged automatic vacuum, or else install the muffler?” he asks. “Either that,” Seymour warns, “or you’ll have to pay the fine every year you violate the regulation.” “How much?” Henry asks, trembling. “A full twenty-five hundred American dollars,” Seymour says as he grins and takes off his hat to himself. Henry jubilantly goes back to his company, where he asks his secretary to organize a bake sale to cover the fine.
This example exaggerates, but not much, the typical fate of a regulatory effort. It describes a familiar dynamic between American business and government. American corporations are not reluctant to test the limits of the law. They pay lawyers handsome sums to discover loopholes, technicalities, and elegant circumventions. In many instances the investment is worth it to the corporation. It buys the firm at least temporary relief from a regulation, enabling the company to profitably continue doing what it was doing before. Nor do American lawyers recoil from the challenge. They relish it. They cultivate reputations for their elegant pirouettes around statutes. The art of Washington practice is to stake out an area of government regulation and then become expert at outwitting those who administer it. Talented people have been known to spend entire careers circumventing a single, arcane area of regulation for the benefit of a few corporations.
This ploy may be rational from the standpoint of the lawyer and his client, but it is often irrational for American business as a whole. Each such maneuver generates a countermaneuver from within the regulatory bureaucracy and Congress; every feint and dodge, a more complicated prophylactic for the next encounter. The result, over time, is a profusion of legislative and regulatory detail that confounds American business. The underlying dynamic is analogous to the commercial gridlock examined earlier, and the crippling dilemma of irresponsibility in social programs, which was also explored. American business finds itself strangled by the red tape that government uses to seal the loopholes through which American business repeatedly tries to sneak.
The profession of discovering and exploiting loopholes is both intellectually and financially rewarding. It is also eminently respectable. Some of the nation’s most erudite and honorable people do it. Those who play the game on the other side—the lawyers and middle-level bureaucrats within regulatory agencies and pertinent congressional committees—are simply trying to realize a simple and often sensible congressional mandate. Honor and financial reward will come to them later on, moreover, if they have gained a reputation for expertise and adroitness. The best law firms and largest corporations will hire them out of government, paying them many times their government salaries,
to outwit their successors.
Washington lawyers who advise American business have a certain stake in the profusion of regulatory detail. When an area of regulation, like noise pollution, is compounded by such maneuver and countermaneuver into volumes of detailed statutory language, rules, interpretations, and opinions, it becomes accessible only to those, like Seymour and his tenacious opponents inside the agency, who have spent long hours refining it. The very complexity of the area generates new business and further elaboration. Soon every major corporation whose activities touch upon the area of law must have tactical advice about it. Seymour and his younger partners (who had once enforced EPA regulations on noise pollution) are sought out. Their practice mushrooms.
Unlike the story of the “new class,” there are no plotting villains to this tale, which makes it far less satisfying. Seymour and other lawyers like him have no intention of confounding American capitalism. Seymour does his job as he understands it, and is good at what he does. Henry and other chief executives are no revolutionaries either. Henry also is trying to do his job, protecting his company’s interests. Indeed, Henry has a responsibility to his shareholders to do whatever he can, within the limits of the law, to maximize the firm’s profits. If he did not hire good lawyers to maneuver around statutes and regulations that were open to such circumnavigation, Henry might be found liable for breach of fiduciary duty to his shareholders, or he might be taken over by someone with fewer scruples about exploiting every possible route to higher profits. Every actor in this sad and silly tale is simply carrying out the responsibilities assigned him within a set of rules that we all have accepted.
The story, exasperatingly, suggests no obvious plan of action. For any fundamental improvement to occur would require a broader definition of responsibility by which businesses would not simply yield to the letter of the law but endorse its spirit, or else openly challenge the goals underlying the laws. And the story promises no happy ending, because such a change in attitude and practice will be difficult to achieve. Business executives like Henry, lawyers like Seymour, shareholders and regulatory officials alike, act on the expectation that American business will try to outmaneuver government. As thrust meets parry, the miasma of regulation thickens.
CHAPTER 19
THE MYTHOLOGY OF THE MARKET
1
American political rhetoric often frames the decision in the dramatic terms of myth: Either we leave the market free, or the government controls it. The starkness of the choice thus posed infuses issue after issue with mythic overtones, and excites debates over where we dare and where we must abandon other social concerns in favor of the vigor of the market, or abandon free enterprise to pursue a higher public good. The debates have generally failed to help the public understand the options and the stakes of each issue.
Two truths underlie the grand debate; each side tends to emphasize one to the exclusion of the other. First, government efforts to dictate economic outcomes are inherently inefficient; they stifle innovation and concentrate decision making within imperfectly accountable bureaucracies. Second, unfettered profit seeking inherently neglects both the broader costs and the potential benefits that do not figure in individual tallies of profit and loss. This is true to the extent the rules that define the market fail to induce profit seekers to take such effects into account. Posing the debate in mythic terms, as a moral choice between the security combined with stagnation of bureaucratic control and the vitality combined with rapacity of capitalist enterprise, obscures the more prosaic but central choice, the real choice, of how we make the rules.
The idea of a free market somehow separate from law is a fantasy. The market was not created by God on any of the first six days (at least, not directly), nor is it apparently maintained by divine will. It is a human artifact, the shifting sum of a set of judgments about individual rights and responsibilities. What is mine? What is yours? What is ours? How do we define and deal with actions that threaten these borders—theft, force, fraud, extortion, or carelessness? What should we trade, and what should we not? (Drugs? Sex? Votes? Babies?) How should we enforce these decisions, and what penalties should apply to transgressions? As a culture accumulates answers to these questions, it creates its version of the market.
These answers are not found in logic or analysis alone. Different cultures, at different times, have answered them in different ways. The answers depend on the values a society professes, the weight it places on solidarity, prosperity, tradition, piety, and so on. In modern societies, government is the principle agency by which the culture deliberates, defines, and enforces the norms that structure the market. Judges and legislators, as well as government executives and administrators, endlessly alter and adapt the rules of the games—usually tacitly, often unintentionally, always under the watchful eye and sometimes under the guiding hand of interests with clear stakes in the outcomes of particular decisions.
To the extent that rhetoric frames the issue as one grand choice—between government and market—it befogs our view of the series of smaller choices about the wisest and fairest of an endless set of alternative ways to structure the rules of ownership and exchange. The myth of Rot at the Top, which indicts in turn profit seekers and policy makers, blinds us to the real source of so many economic inefficiencies and outrages—bad choices about rules, flawed procedures for making such choices. Complicated codes of laws and regulations lack the emotional charge of mythic struggle, but they are where the action is.
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Economic activities often have consequences for people not immediately party to them. Some of the consequences are unwelcome: private ponds flood neighboring fields, locomotives ignite prairie fires. Some are socially useful: a beekeeper’s swarm pollinates his neighbor’s orchards; knowledge gained in developing a new product proves relevant to a range of other endeavors.1 As the world shrinks and the pace of economic change quickens, many of these side effects loom larger. Industrial pollution, unsafe products, community abandonment, and sudden unemployment all take a toll. Simultaneously, new knowledge, skills, and experience are ever more central determinants of a culture’s prosperity. How to deal with these social effects? The mythic contest between the free market and government intervention forces us either to ignore them, or to rely on countless government directives to pull corporations, and on subsidies to push them, onto paths other than the pursuit of profit. Each of these alternatives invites abuse and inefficiency, as we have observed, which tend to launch the pendulum of righteous fulmination in the opposite direction.
There is a third alternative, however. It is to reorganize the market to bring these broader effects into consideration as private agents decide on transactions. This is not a Utopian proposal. It suggests merely that the government concern itself with designing the right market rules, rather than trying to dictate the right market results. Consider how the most recent swing in the pendulum has obscured government’s role for dealing with the unwanted side effects of corporate action in just this way.
“Deregulation,” a term that had a heyday in the late 1970s and 1980s, was broadly seen as a manifestation of a decisive swing toward the free market, away from government intervention. In fact, deregulation represented only a shift in the nature of government action, from commanding specific outcomes to creating and maintaining new markets. By 1980, for example, the airline industry was deregulated in the sense that the Civil Aeronautics Board no longer passed judgment on air fares or routes. Carriers could compete on prices and services, to the delight of passengers. This reform did not eliminate the government’s involvement in the air travel business, but rather shifted government responsibilities. Government was now charged with organizing a new market, whose development called for all sorts of decisions: Under what conditions should mergers and acquisitions among airlines be barred because they might stifle competition? How should airport landing slots be apportioned among competing airlines? On what terms should airlines gain access to their competitors’ computerized res
ervation systems? What kinds of standard, comparative information should airlines provide prospective passengers about their flights and services? How should the airlines handle overbooking, or the sudden cancellation of flights? Beyond these issues lay new concerns about safety. With so many more flights, more passengers, and more airlines competing far more furiously against one another, there was a greater risk of accident. The government now had to expand its safety inspections—and also restructure industry incentives to guarantee the proper degree of care. This prompted some liberal interventionists to talk about “reregulating” the airlines. But that option was irrelevant to the issue at hand. In continuing to view the choice as between government intervention and the free market, the more subtle questions of market design were often obscured.
The control of air pollution offered another example. Since the passage of the Clean Air Act in 1970, the federal government had issued mounds of regulations determining the maximum concentrations of air pollution throughout the nation and how much airborne toxin could be emitted by each of tens of thousands of industrial facilities. Enormous amounts of data had to be accumulated and analyzed, and even then it was possible only to issue uniform and inflexible rules for whole industries and regions. The uniform rules took no account of individual needs or deviations and were altered only slowly or more often not at all as circumstances changed. They were almost impossible to enforce.2
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