The Republicans are not wasting any time in their ongoing campaign to make sure nothing stands in the way of Wall Street’s rapacious quest for more profits.
The latest example is a bill that is going largely under the radar was tabled last week, HR 185. It has yet another Orwellian name, “Regulatory Accountability Act of 2015.” It’s basically a requirement that regulators do the research of anti-regulation lobbyists on the public dime. I’m not making that up. From the summary of the bill at the Library of Congress:
The bill requires agencies to publish advance notice of proposed rulemaking in the Federal Register for major rules and for high-impact rules (rules having an annual cost on the economy of $100 million or $1 billion or more, respectively) and for negative-impact on jobs and wages rules and those that involve a novel legal or policy issue arising out of statutory mandates. The notice must include a written statement identifying the nature and significance of the problem the agency may address with a rule, the legal authority under which the rule may be proposed, the nature of and potential reasons to adopt a novel legal or policy position, and a solicitation for written data, views, or arguments from interested persons.
Additionally, the bill: (1) sets forth criteria for issuing major guidance (agency guidance that is likely to lead to an annual cost on the economy of $100 million or more, a major increase in cost or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or ability to compete) or guidance that involves a novel legal or policy issue arising out of statutory mandates; and (2) expands the scope of judicial review of agency rulemaking by allowing immediate review of rulemaking not in compliance with notice requirements and establishing a substantial evidence standard for affirming agency rulemaking decisions.
This is far more sweeping than it appears. The language “those that involve a novel legal or policy issue arising out of statutory mandates” covers almost all of what regulators do in the course of new rulemaking. And notice how in (2) in the second paragraph how it increases the ability of Federal judges, when the Federal bench is increasingly populated with jurists skilled at making strained readings to defend big business interests, to force agencies to go through these hoops and uses these studies and reports as the basis for not implementing new regulations.
The effect will be to delay the implementation of new rules, divert resources to preparing these analyses, which cuts into budgets that would otherwise be devoted to oversight and enforcement, and most perverse of all, forcing agencies to gin up talking points against regulation. It’s hardly a surprise that rules often result in lower revenues or profits to the regulated. That’s a feature, not a bug. Regulation is a response to market defects, that parties to a transaction either unfairly impose costs on one party through information asymmetries or outright deceptive practices, or parties to a transaction impose costs on innocent third parties. Regulation is meant to limit anti-social behavior, either by proscribing it, or by imposing costs on it so that the costs to the parties to a transaction reflect the damage that it does to bystanders.*
To use the banking example, we have bank regulations because the cost of periodic crises on the community at large is too high to let financial firms carry on without having some curbs on their behavior, particularly given their well-established propensity to run off cliffs all together. HR 185 seeks to create a new fiction: that the only costs that matter when imposing new regulations are those borne by the potential or actual perps, and not society as a whole.
Better Markets weighed in on this noxious bill. From their letter:
HR 185 is nothing more than a disguised pro-Wall Street deregulation bill. It is as if people – in just a few short years – forgot the crisis of 2008, which was the worst financial crash since 1929 and caused the worst economy since the Great Depression of the 1930s. H.R. 185 also ignores the fact that the crash, which is going to cost the U.S. more than $12.8 trillion plus untold human suffering by tens of millions of Americans who lost their jobs, savings, homes, retirements, and so much more, was largely caused by lack of regulation and de-regulation, not by too much regulation or bad regulation.
A key example of a dangerous provision in H.R. 185 is the requirement that would force financial protection agencies to undertake an exhaustive and quantitative so-called “cost-benefit analysis” for every major rulemaking. Don’t be misled by the labeling. As has been repeatedly shown over the years, such so-called “cost benefit analysis” is little more than “industry cost only analysis” that prioritizes Wall Street’s interests over the public interest. As Better Markets detailed in an extensive report, the type of “industry cost only analysis” required by H.R. 185 would effectively kill financial reform, take down key rules that protect Main Street from Wall Street, and possibly lead to another devastating financial crash.
In effect, H.R. 185 would hand a lethal club to Wall Street, the very industry that crashed the financial system – and cost tens of millions of Americans their jobs, savings, homes, retirements, and economic security. Armed with this bill, Wall Street can beat back rules by arguing that the costs imposed on them to prevent them from crashing the financial system again should be more important than the benefit to the public of preventing such a crash. This shamelessly turns the world upside down, effectively re-victimizing the American people who have suffered and continue to suffer from the last crisis.
* In the case of externalities, there’s a robust literature on the topic, which Andrew Haldane summarized in a seminal 2010 paper, The $100 Billion Question. Key section:
The taxation versus prohibition question crops up repeatedly in public choice economics. For centuries it has been central to the international trade debate on the use of quotas versus subsidies. During this century, it has become central to the debate on appropriate policies to curtail carbon emissions. In making these choices, economists have often drawn on Martin Weitzman’s classic public goods framework from the early 1970s.
Under this framework, the optimal amount of pollution control is found by equating the marginal social benefits of pollution-control and the marginal private costs of this control. With no uncertainty about either costs or benefits, a policymaker would be indifferent between taxation and restrictions when striking this cost/benefit balance.
In the real world, there is considerable uncertainty about both costs and benefits. Weitzman’s framework tells us how to choose between pollution-control instruments in this setting. If the marginal social benefits foregone of the wrong choice are large, relative to the private costs incurred, then quantitative restrictions are optimal. Why? Because fixing quantities to achieve pollution control, while letting prices vary, does not have large private costs. When the marginal social benefit curve is steeper than the marginal private cost curve, restrictions dominate.
The results flip when the marginal cost/benefit trade-offs are reversed. If the private costs of the wrong choice are high, relative to the social benefits foregone, fixing these costs through taxation is likely to deliver the better welfare outcome. When the marginal social benefit curve is flatter than the marginal private cost curve, taxation dominates. So the choice of taxation versus prohibition in controlling pollution is ultimately an empirical issue.
And Haldane was also clear that the more aggressive remedy, prohibition, was the right response to practices that lead to financial crises, based on the broader costs, such as unemployment, business failures, reduced government services, particularly at the state and municipal level:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.