As we continue to wallow in recession thanks to irresponsibility from the Federal Reserve and Wall Street, it’s not uncommon to hear arguments that if we simply had more regulations.
This article from the New York Times offers a great micro example of one of the problems with that argument (note: I said “one of” — I’m not claiming that this alone trumps all arguments for regulation ever): cosmetology licenses.
Jestina Clayton grew up in a village in Sierra Leone where every girl learns traditional African hair-braiding. Then, when she was 22, she moved to Centerville, Utah, a place where no one learns traditional African hair-braiding. So Clayton was pleasantly surprised to find a niche in the market among a small group of Utah parents who had adopted African children but didn’t know how to style their hair.
Clayton moved to the United States as an 18-year-old and headed out to Centerville to be near her in-laws. After graduating from college, she considered getting an office job but decided instead to start her own hair-braiding operation and began advertising on a local Web site. “It’s not like it was bringing me millions,” she says, “but it was covering groceries.” At least until a stranger who saw the ad e-mailed her a demand to delete it. “It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license,” the e-mail read. “Please delete your ad, or you will be reported.”
A cosmetology license required nearly two years of school and $16,000 in tuition. But Clayton hoped for an exemption. After all, many Utah cosmetology schools taught little or nothing about African-style hair-braiding, and other states allowed people to practice it after passing a hygiene test and paying a small fee. Clayton made her case (via PowerPoint) to the exhaustively named governing body of Utah hair-braiding, the Barber, Cosmetology/Barber, Esthetics, Electrology and Nail Technology Licensing Board. The board, made up largely of licensed barbers and cosmetologists, shot her down.
This isn’t just a random Utah law. There are more than 1,000 licensed professions in the United States, partly a result of more than a century of legal work. As the country industrialized, state governments wanted to protect their citizens and create standards not just for lawyers and doctors but also for basic services. It didn’t take long for professional groups to find that they also stood to benefit from the regulations. Over the years, more and more started to lobby for licensing rules, often grandfathering in existing professionals while putting up high barriers to new competitors. In fact, businesses contorting regulation to their own benefit is so common that economists have a special name for it: regulatory capture. “Everyone assumes that private interests fight like crazy not to be regulated,” says Charles Wheelan, who teaches public policy at the University of Chicago. “But often, for businesses, regulation is your friend.” […]
This is the pattern that creates regulatory capture — the people with the biggest stake in any regulation are usually the ones who are being regulated. When there’s a public hearing on, say, implementing new rules for trading derivatives, most of the people who show up are the people who trade derivatives. And these people, who generally know the most about trading derivatives, can use their expertise to try to create rules that benefit themselves.
If you read the full article, you’ll see that this is exactly what happens in the cosmetology situation. It’s also what happens in many other industries as big businesses and professional organizations with lobbying budgets use the regulatory process to their own advantage. Industry experts work with lawmakers to create rules which their smaller competitors will never be able to follow, but which their own companies are already following or else can adjust to follow with ease.
Some businesses, of which Goldman Sachs is probably the most notorious example, go a step beyond lobbying to simply staffing the agencies which will be tasked with regulating them with their own employees. Thus the last Treasury Secretary and the current Treasury Secretary’s chief of staff are both Goldman Sachs employees — though it’s not just Goldman Sachs which engages in this practice:
[T]op government regulators have made it a habit to use their positions as a springboard to the highly profitable financial sector.
It has just been confirmed that Bill Daley, an executive at JP Morgan and member of the Chicago political powerhouse, is to become Obama’s new chief of staff while Joe Biden’s current chief of staff, Ron Klain, has announced he will step down at the end of January to join the major investment firm Case Holdings. Even Gene Sperling, who has just been announced as a replacement for Larry Summers as the head of the National Economic Council, is reported to have earned about $900,000 from Goldman Sachs in 2008 as well as $158,000 from various financial institutions for speeches he gave. So continues what Robert Wenzel brilliantly describes as the “incestual relationship” between Wall Street and Washington, DC.
With such a revolving door, it should come as no surprise that as the new Frank-Dodd financial-regulation bill begins to take effect, many of the institutions blamed for causing “The Great Recession” have begun to take advantage of loopholes within the bill. So while Washington politicians, Democrat and Republican alike, continue the facade of bashing Wall Street and trying to regulate its excesses, they in turn remain ever ready to support it behind the scenes. All the while the big banks cash in by utilizing various lobbyist firms.
Given this information, it shouldn’t be surprising that we see all kinds of special funding rolling down the pipes from the Treasury, even after years of foolish (as wellas fraudulent) activities which should have been punished in the marketplace, if not the courts.
Wall Street, other big corporations, and the government are indeed in bed together — and that’s not a good thing. Adding more regulations (as opposed to stopping corporate welfare which rewards bad behavior and doubling down on prosecution of fraud and other criminal activity) will only give the biggest, most corrupt players in each industry more opportunities to write, bend, and administrate the rules in their own favor.