• Does Regulation Always Tighten?

    Here’s Robin Hanson’s regulation ratchet theory (via Bryan Caplan):

    Look, in any area where we let humans do things, every once in a while there will be a big screwup; that is the sort of creatures humans are. And if you won’t decrease regulation without a screwup but will increase it with a screwup, then you have a regulation ratchet: it only moves one way. So if you don’t think a long period without a big disaster calls for weaker regulations, but you do think a particular big disaster calls for stronger regulation, well then you might as well just strengthen regulations lots more right now, even without a disaster. Because that is where your regulation ratchet is heading.

    That’s true as a matter of logic. But it’s false as a matter of reality. Isn’t our experience, at least in certain areas, that regulations tend to weaken (or effectively weaken) as special interests go to work on them? There is something to regulatory capture, isn’t there? How ’bout in the area of finance? Which way did regulations tend over the last several decades?

    Plus, this isn’t just a matter of law, but of enforcement and oversight. Can’t we think of an administration or two or three that let the muscles of regulation go a little slack relative to others?

    The other relevant dynamic is that the world does not stand still. Technology changes. If regulations are static they cease to be apply, hence they weaken.

    In practice, the ratchet goes both ways.

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    • The text of a basic regulation usually stays constant until politicians change it. Do we have data on if non-disaster changes tend to make regulation weaker or stronger? I’d expect the actual implementation of the text to get stronger as government agencies seek to expand their power and budget, but it would be nice to see data there too.

      • @Robin Hanson – I’d be delighted to see data. I’m the wrong guy to produce or find it.

        Why would we not expect politicians to trade the weakening of regulation for campaign contributions and high-paid consultant positions? (And by “weakening” I don’t just mean in the absolute sense, but relative to technological change.) Why would corporations pay politicians and their campaigns if not for such gain.

        The pendulum doesn’t seem to only swing one way. Deregulation does occur. Whole administrations are about this very thing.

    • Why assume that whomever is pressuring for regulatory changes is a corporation, or that they want weaker regulation? For example, stronger regulation can often help incumbents keep out entrants.

    • I’m not saying regulation only ever increases. I’m saying this particular factor, the existence or not of a disaster, is a ratchet factor – this factor only pushes one way. Other factors may push other ways.

      • @Robin Hanson – Ah. Yes. It is hard not to agree with that. If a force only pushes up then that is an upwards force always. Until your last comment, I didn’t see anywhere that you acknowledged other forces on regulation existed, which was my point. It would seem we agree then. That we weren’t was entirely a misunderstanding. I’m surprised it lasted that long.

    • Hard? Did not the absence of a banking disaster lead to the elimination of banking regulations? The loosening of regulations? There was more than just capture involved. Leverage limits were loosened. The kinds of securities allowable as collateral for repos was broadened. Why not? We had not had a true banking crisis since 1929.

      The absence of disaster, from my POV, after many years in the military and in medicine, leads to not enforcing existing regulations, then if one eludes disaster long enough, the writing of weaker regulations. Then the elimination of the regs. This is often rational. In medicine, at least my specialty, some techniques are much safer now. They do not need as much much monitoring so we changed the regs, eliminating some.

      Steve