Cato's David Boaz

Cato’s David Boaz writes Occupy Pennsylvania Avenue in The Cato Policy Report for Jan/ Feb 2012

Excerpt:

The libertarian argument for keeping more of society in the private sector is not that there’s no self-interest or corruption in business; it is that the market system has more competition, more checks and balances, and more incentives to satisfy customers. You can make money in the private sector by cutting costs; government agencies that cut costs find their appropriations reduced. Businesses must constantly search for better ways to deliver goods and services lest customers move to their competitors. Government agencies are usually monopolies that forbid competition. With no owners seeking a profit on their investment, no financial reward for doing a good job, no penalty for wasting money, government employees have little incentive to deliver goods and services efficiently.

As Adam Smith suggested with his “invisible hand” metaphor, the competitive market system channels self-interest in a socially beneficial way — into the search for ways to attract customers — while the non-market system actually encourages pure self-interest. And one aspect of that is lobbying. Big government means big lobbying. When you lay out a picnic, you get ants. And today’s federal budget is the biggest picnic in history.

Lobbyists love spending bills. They also love a complicated tax system with myriad rates and exemptions. And they especially love complex regulations, which generate demand for consultants who can navigate the regulatory agencies. Just look at some of the lobbying stories from 2011: “Desperate to Stop AT&T [in Washington, not in the hearts and minds of consumers], Sprint Doubles Lobbying Spend.” “Google, facing an antitrust probe by federal authorities, boosted its lobbying expenditures.” “Goldman Sachs flexes its lobbying muscle.”

As Craig Holman of Public Citizen, an organization founded by Ralph Nader, told Marketplace Radio after a report on rising lobbying expenditures during the financial crisis, “the amount spent on lobbying … is related entirely to how much the federal government intervenes in the private economy.”

HKO

Lobbying is a by-product of regulation, yet the same people who decry lobbying the most are often the biggest pushers of new regulations.  Political self interest is often more corrupting than economic self interest because they substitute the force of government rule for the force of market discipline.  When wealth is sought from government connections rather than market service the economy becomes stagnant

There are two particular targets of American progressive political ideology: special interests and the curse of bigness, primarily in business. But the preferred solution of the progressives, central planning and regulation, only serve to make these matters worse.

The proliferation of lobbyists and their influence is a common campaign theme. Both parties appear to disdain them. At their best lobbyists serve to bring the pragmatic realities of constituents to bear on pending laws that will affect them.  This should help to fashion regulations and legislation that will actually work as intended without destroying the host industry or interest that is expected to produce the results.

At its worst lobbyists are just special interests that work to fashion legislation for their constituent self interest  at the expense of competitors and consumers.  When we hear of a large company or industry representative pushing for its own regulation, our skepticism should cause us to wonder if the ultimate goal is not to write the rules for protection from competitors.

Lobbyists are a byproduct of modern regulation.  The more we regulate, the more lobbyists are needed to protect the businesses affected and the more the political process becomes distorted by their influence.  The better answer to lobbyists and special interests is to reduce regulation and stop offering them the cover of preferential treatment. Regulations that intend and claim to level the playing field too often serve to tilt it to the special interest with the better political influence.

Big business is also often cursed by the progressive movement, but again their response is to encourage more bigness rather than less.  The intense and uncertain regulation, especially of the last two years, has created an enormous burden on business that is much more easily absorbed by the larger concerns who have the sophisticated infrastructure to comply with new burdensome rules.  Smaller enterprises who eventually get overwhelmed by the new and growing administrative burdens are more likely to sell out to larger concerns or just shut down, leaving the larger competitors with a bigger market share.

Progressives are defined not by the problems the seek to solve and the values they claim to cherish, but by their methods.  Their methods seek more regulations and more central planning.  This approach only makes the problems worse and only serves their own special interest to gain ever greater political power.

Are lobbyists that bad?

If the government was about to make sheet-rock illegal because of bad or misguided information and you were in the sheet-rock or home-building business, wouldn’t you seek to persuade the lawmakers than their efforts were wrong? Wouldn’t you seek to give them better information or explain how that law will dramatically increase the costs of homes?

Every business or service sold has unique characteristics that few in Congress understand; they depend on lobbyists to fill in the blanks.  And Congress is not always driven by the highest of motives. They are frequently duped by industries that appear to be fighting to protect the public, but really are just trying to use the law to make life harder for their competitors.

Do we want a health care bill with no inputs from doctors, pharmaceutical companies, or health insurance administrators?  Do we want a trade bill with no input from the producers and consumers who will be harmed? Do we want an energy bill with no input from those who actually produce and distribute …. energy?

Obama and most others have criticized the input of lobbyists and the influence they have yielded. Yet the biggest recipient of campaign funds from the controversial insurance giant AIG, the PAC assembled by  Countrywide Financial, and from Fannie Mae was Barak Obama.  If he was so opposed to lobbyists’ influence why didn’t he reject their campaign contributions?

While critical of the influence of lobbyists, the president’s dramatic growth of government will only increase the activity and influence of lobbyists.  Lobbyists are caused by excess government regulation; a growth in regulation is guaranteed to cause an increase in lobbying activity.

In spite of the rhetoric to the contrary you can expect to see more lobbyists under this president, not less.

One of the most intriguing concepts of economics is the concept of “moral hazard.”  It is a corollary to a more obvious principle that everything has a cost. An understanding of it is critical for those whose world view is a never-ending series of crisis that demand a government solution.

Insurance, for example, encourages the risk it is designed to protect us from.  Seat belts may make us more reckless drivers.  I may be more inclined to eat the high fat burger with cheese if I think I am protected by Lipitor.  Free health care may make us less healthy and more obese.

But nowhere is the cost of moral hazard more significant and more obvious than in our financial system.

We insure bank depositors to bring stability to our financial system, but such insurance means that the depositors are freed from the responsibility of even caring about the bank’s stability.  It also increases the bank’s proclivity for risk taking. They get to pocket profits and get bailed out of losses. We privatize the profits and socialize the risk.

FDIC protection started out at $10,000, and soon went to $40,000. Jimmy Carter raised it to $100,000 and some partially faulted this move with creating the savings and loan fiasco about ten years later.  In the midst of our recent crisis the limit was raised to $250,000 to avoid another bank run.  Given our historical correlation of increasing FDIC protection limits with worsening crisis, I wonder if in our effort to avert the current crisis whether we have simply sown the seeds of the next one.

Those who fault the absence of regulation for our current crisis should look further at the moral hazard created by the very protections embodied in our current regulations.

Regulations written in response to our last crisis do not seem to protect us from the next one.  Rules written as a result of the dot.com bubble did not protect us from the ensuing housing bubble.  In fact our regulators and our government was more of a willing participant via Fannie Mae and Freddie Mac.

In the absence of FDIC insurance perhaps the consumer and society would be better served by an “independent” rating such as the AM Best rating service is for life insurance companies or an equivalent of Moody’s or S&P for small banks.  I do stress the independence which had been seriously compromised in the past.

There will never be enough regulators to counter the number of people who seek loopholes, ply lobbyists, create new products or who otherwise seek to game the system.

Even if we were able to staff enough bureaucracies to squeeze excess risk and abuse out of our financial system, it would likely restrict growth so severely that we may long for the days of a few bubbles and the ensuing market correction.

Facing record deficits this administration needs economics growth desperately. The union card check bill, the budget deficit, the uncertainty of cap and trade, higher taxes on the wealthy and private businesses, and the cost of the health care proposals severely threaten business growth.

But the biggest hindrance may be both an increase in moral hazard that increases the likelihood of the next bubble, and overly restrictive regulations that retard the growth we need to recover from the last one.