How To Regulate

CBA Methodology

CBA: Methodology for policy assessment A call for policies that maximize net benefits Welfarist decision-making tool, focusing on the actual consequences of policies Difficult to measure/price human values Human life and health, biological diversity and environmental purity. Value of a statistical life (VSL)-- quantification challenge Social discount rate--measures willingness to forgo welfare now or in the near future in exchange for more time-distant benefits Example: Limits of CBA, accommodation requirement of the ADA imposed measurable infrastructure costs, yet the benefits of inclusion are difficult, if not impossible, to measure. No special weight to social values Ignores distributional effect of policy Takes all preferences at face value Should be seen not as a decision rule, but a decision tool with distinctive capacities and limitations Context for applying CBA: 14 normative principles-- tracks with framework for identifying market failure Policy makers should intervene only when it will correct a significant market failure Market competition and provision are public policy's strong default conditions A program should maximize net benefits and also be cost-effective See normative issues above Bottom line-- whatever a program's purposes are and whatever level of benefits it actually produces, these purposes and this level should be attained at the lowest possible cost CBAs should be conducted for different levels of benefit Highest levels of benefit tend to be much more costly Tunnel vision blinds A program should be target-efficient Resources should be allocated where they can do the most good A policy may be cost-ineffective because it uses the wrong tool See Ch. 3-- policy instruments Example: EPA has been wrongly using command and control instead of market incentives-based regulation and other alternatives Special efforts must be made to identify "invisible victims" and consider their interests in the analysis Those systematically neglected by policy makers whose programs adversely affect their interests Cost is large only when aggregated-- so won't politically organize to protest Tendency is to ignore unless special effort is made Example: Those won't get a job opportunity because of a new regulation, higher minimum wage, or litigation-adverse employer chills job creation. Food prices rise due to biofuel requirements increasing the demand for corn. Low-income people who don't receive adequate care under Medicaid. CBA should be used retrospectively analyze the effectiveness of existing policies, not just proposed ones The need for government accountability before and after the fact Example: NASA's Mars Rover turned out to be faster, cheaper and better than projected. Some cost overruns are more avoidable than others Example: Unpredictable weather affecting what government must pay in agricultural subsidies Can't rely on marketplace of ideas to flush out bad policy ideas quickly enough to avoid serious damage Especially if consumers are unmotivated to discriminate, are biased themselves, or are unable to determine the truth of the manner Post-hoc accounts are not enough -- Tetlock, experts are poor at predicting future events Ending a failed policy is kind of a policy success Example: Airline Deregulation Act of 1978, repealed regulatory cartel that was egregiously inefficient, replacing it with a competitive system (see Ch. 11). Don't ask, don't tell repeal. Medicare Catastrophic Coverage ACt of 2988. Policy-making demands appropriate organizational analysis Design considerations (see Ch. 7 on policy implementation and Ch. 10 on bureaucracy). Policy assessment requires appropriate time frame Opponents may be undermining its success Example: Republican opposition to Obamacare Program must have been in effect for a sufficient length of time to demonstrate its desirable and undesirable effects Example: 2009 bailout of GM, desirable in principle v. its possible and eventual effect-- it's going to take awhile to make determinations on profitability. AIG bailout seen as successful. See also Head Start in Ch. 6. Safe Streets and Crime Control Act of 1968-- effects long after repeal. Should allow for possibility policy that makes sense at time A, doesn't at time B Example: Inflation and bracket creem make alternative minimum tax less desirable than in 1982 Policy assessment requires competent and objective assessors No political or ideological ax to grind Who will guard the guards The well-designed randomized controlled experiment is the gold standard for assessment See Ch. 11 and 12 Policy assessments must take most of the existing social and institutional contexts as given Example: Consider transit had the US invested in better rail systems rather than building a national highway system Avoid the Nirvana fallacy Viewing the policy choice as if it were one between an ideal program and the existing, flawed one Don't idealize the new version-- it too is vulnerable to the same structural factors

Civil Bureaucracy

Civil Service Bureaucracy Reshape the civil service as many of the existing members reach retirement age Tons of suggestions on pg. 406, including improve performance measurement and statistics, flatten the bureaucracy, etc. Make sure federal employees understand contract administration as more private contractors are used

Regulatory Approaches to Information Asymmetries

How do We Regulate? (1) Non-Regulatory Government Response (least restrictive) Do Nothing - Voluntary Disclosure will Occur Voluntary Disclosure - sellers knowing there's an information asymmetry and an adverse selection problem have the information to provide information to buyers so buyers trust them Examples Brand offerings to get reputation for good value (e.g. Apple) Inspection periods or free trials Money back guarantee → shows consumer it will be good Professionals get educational degrees to signal skills/talent to employers Common thread: informationally advantaged party has INCENTIVE to signal on their own (2) Do Something to Encourage Voluntary Disclosure Remove Regulatory Barriers The problem with regulatory barriers: they may disincentivize disclosure b/c of the legal risk for doing so TL Example of existing regulatory barrier that thwarts voluntary disclosure and should be removed: the FDA's non-GM foods draft guidance Non-GM foods are attractive to consumers However, FDA issued complicated guidance to stop including "non-GM" on labels, b/c consumers don't know what it means Result: (1) companies that had non-GM foods and would have advertised that did not, for fear of legal risk; this created a negative inference that they do have GM; and (2) harder on smaller companies than big companies Government Protects IP Rights so Private Standards can occur Example: private certified organizations validate Kosher food products Pros: allows heterogeneous communities to establish standards that work for them; diff families have diff requirements for what they think "Kosher" is so they can align with the organization of their choice Government role: give the companies IP rights (e.g. trademarks) Government Provides Voluntary Standards Example: government provides the term "organic" and defines it; absent the governmental definition, the term would be meaningless - anybody could use it (3) Governmental Regulatory Responses (most restrictive) Licensure/Quality Standards Rationale for licensing: if consumers expect decent quality, they won't reduce their willingness-to-pay & higher-quality service remains on market Palliative remedy: mitigates symptom of adverse selection (lack of high-quality offerings), but doesn't address underlying disease (info asymms b/w seller/buyer) CONS (TL hates this approach overall) Knowledge Problem → b/c you are restricting, knowledge problem is severe - how is government official to know which person in Nashville to certify as a shampoo technician?; and if you are wrong, you destroy wealth (e.g. I would have gone to the other shampoo technician, but now I can't) Public Choice Concerns → highly favors incumbents, who lobby for bars to entry to block out others Mandatory Disclosure Addresses disease: Not palliative like licensure; actually addresses underlying disease (info asymms b/w seller/buyer) Under a mandatory disclosure approach, government officials seek to prevent adverse selection by requiring informationally advantaged parties to share specified info with their counterparts Rationale for mandatory disclosure: if you bring informationally disadvantaged parties up to speed, they won't reduce willingness to pay to the level of average value → so high quality offerings remain in the market Two Types Direct: government makes company disclose directly to consumer (e.g. nutrition labels) Centralized: government makes company disclose to government, so consumer can search for info if they want it Pros: cheaper than direct disclosure, and usually will suffice if there are consumers who search for info on their own TL Examples Securities laws requiring companies to provide potential investors with otherwise hidden info USDA requirements to disclose ingredients of processed foods Pros/Cons of Mandatory Disclosure Pros: less of a knowledge problem since you don't have to restrict low quality officers, just ask for disclosure → TL Overall View: disclosure is fairly cheap, so overdoing it shouldn't make too much cost Cons: public choice problem → interest groups will lobby for standards to "shame" companies for practices they don't like, like buying black diamonds, thus imposing costs widely Critique: people may not read the labels anyways/ignore them Response: it's normative; we want sellers and buyers to be on an even playing field Compelled Disclosure

Incentives & Moral Hazard

Incentives What are policymakers' incentives? Two theories: (1) public choice; (2) self-interested actors PS conclusions: the self-interested model is better to make predictions about how governmental actors will behave b/c the public choice model is difficult to quantify and empirically study. Though public choice is sometimes apparent retroactively Example of public choice The Airline Deregulation Act (a success) was accomplished both by (1) self-interested actors, (2) but also those who really just thought it was good for the public Individuals are also self-interested - how does this + policymakers' self-interestedness affect public policy? Ordinary citizens have little or no rational incentive to participate actively in political activity CBA analysis: voters are irrational to vote → little incentive to do all the leg work, go to polls, to have little effect Implication: actors with large incentives more likely to fight for political change → CBA makes sense for them, they have a stake But see: many Americans vote, and many join environmental/civil rights groups etc. → could also be seen as rational b/c they find it self-fulfilling Political actors design policy-making institutions and processes to advance their self-interest Incentives of Congressmen: Political actors are career politicians; they take political actions to align with their voters and groups their voters support to get re-elected Incentives of agency officials: Agency officials try to increase political and budgetary support, professional status, and job security Political effectiveness depends of a group depends on its ability to manage incentives to overcome obstacles to collective action Interest groups must overcome collective action problems with incentives Problem: "free rider effect" Solution to free rider effect: tailor incentives by providing members with valuable benefits that can be withheld from non-members This creates unity and ability to act collectively at low cost Officials have powerful incentives to provide voters and interest groups with short-term benefits and hide the long-term costs Politicians urged to "do something" in crises, e.g. 2008, 9/11 Incentive: bestow benefits on constituents quickly, exaggerating the benefits and hiding the costs Cost-hiding techniques include: Ignoring them and hoping nobody notices Delegate tough, costly decision to agencies Unfunded mandates to shift costs to local government Political dynamics of a public-policy depend on how it distributes its benefits and costs among voters and groups Interest group politics: both costs and benefits born by a small group Majoritarian politics: benefits and costs widely dispersed Client politics: relatively small group benefits while costs are widespread Much political activity consists of narrow-interest logrolling at the expense of taxpayers Under the three above theories, client politics is the worst Groups with small, narrow, intense and well-organized groups gain majority political support for policies that will disproportionately benefit them at the public's cost Logrolling isn't always bad though EXAMPLE: food stamps came from a bargain struck by urban politicians and rural politicians whose clients wanted to sell food Non-market failures also occur, which are systematic, incentives-based tendency of government policies Internalities: private goals that apply within nonmarket organizations to guide, regulate, and evaluate the performance of agencies and their personnel EXAMPLE: True cost of a program is often not reflected in the budget b/c government keeping costs off-budget, b/c of government incentive to hide costs. However, this undermines CBA analyses. For example, Fannie Mae, Freddie Mac, Farmer Mac, the Federal Home Loan Banks, and Farm Credit institutions impose private costs for private compliance that are not reflected on balance sheet. Derived externalities: unanticipated side effects, often in an area remote from that in which the public policy was intended to operate Maldistribution of influence and power: (compare to inequality of income and wealth that private markets generate) Zero credit policymaking Zero credit policy: government activity that has no capturable political returns but wide-ranging social benefits → c.f. the private sector, where it pays to invest in big improvements Implication: not much gets done, because little return on investment EXAMPLE: Obama 2009 Stimulus Legislation → Obama needed Republicans, and they actually supported measures in the bill. However, they refused to publicly support him, because they knew he would reap the credit if it succeeded. This is an example of the immobilizing effects of zero credit policy-making Tunnel vision: propensity of administrative units, particularly those with a single mission, to narrow their cognitive focus so as to promote that mission and that mission only E.g. congressional committees will by guided by a single mission, which leads them to exclude concerns other than their agency's mandate Moral hazard is another major source of incentives-based programmatic failure Occurs when: Info asymms about risk so that risk-bearers cannot readily predict, monitor or control the risk-taker's choices → cannot manage risk; OR Program creates incentives for actor to behave in self-interested manner that undermines the program Increasing moral hazard can be part of sound-policy EXAMPLE: in 1970, Congress put 50 dollar cap on consumers' liability for unauthorized credit card use → though this makes us have moral hazard (less careful than if we were at risk to big losses), it is effective b/c (1) shifts risk of unauthorized use from credit card users to lenders, who can better handle it; and (2) reassures buyers about internet shopping, which increases net CBA Most moral hazard is bad, though EXAMPLE: Fannie Mae and Freddie Mac engineered home mortgages that created vast moral hazards → they inflated the housing market by pressing lenders to make subprime loans. This left lenders with incentive to walk away from underwater mortgages and have the government pay the cost with the bailout. We have not learned from the experience; currently the Federal Housing Admin is replicating moral hazard, lowering the traditional 20 percent down-payment requirement, and subsidizing people to own rather than rent. EXAMPLE: Dodd-Frank reform Act did not do much to solve moral hazard problem - it broadened Wall Street's safety net, and thus citizens' exposure, in two ways. First, it classified some of the largest financial institutions "too big to fail," which actually gives them credit advantages and makes them more profitable; (2) Dodd-Frank creates a system in which the government keeps interest rates so low for so long that it invites excessive borrowing, speculation, asset bubbles and future inflation EXAMPLE: The Pension Benefit Guaranty Corporation guarantees employers' unfunded defined-benefit pension debts under certain conditions. Thistempts firms, especially those in bankruptcy, to shift their obligation to PBGC, causing a $26 billion deficit in 2011 EXAMPLE: Nat'l Flood Insurance Program encourages homeowners and businesses to locate and build in the floodplain and beaches initially and then to return and rebuild once the floodwaters recede - a form of moral hazard. *Unexpected consequences* then, flood insurers, alert to the moral hazard, fled the scene, leaving the government to provide flood insurance EXAMPLE: ACA creates moral hazard b/c penalty for not buying insurance for young healthy people is so low, they can put it off and then by insurance when they are ill, and their right to buy later despite preexisting conditions Moral hazard that encourages excessive risk taking: EXAMPLE: federal drought insurance programs are replete with moral hazard. The programs are especially costly b/c they guarantee farmers, regardless of their wealth, a portion of their projected income rather than simply paying them for the damaged crop, so farmers buy more coverage than otherwise. Thus, the subsidies, which cost taxpayers $6 billion per year, have made many farmers more money from insurance during drought season than they otherwise would have made. This also encourages development in arid areas. Moral hazard that encourages the government to make bad bets EXAMPLE: the student loan program confers entitlements rather than screening for ability to succeed at school and repay the loans, with the predictable result of rising default rates Moral hazard is common in government actions targeted to help the poor EXAMPLE: unemployment insurance discourages workers from seeking or taking new jobs until the benefits run out EXAMPLE: government health insurance programs insure emphysema (largely caused by smoking) and drinking related diseases EXAMPLE: poor can usually only receive benefits by remaining poor; this discourages people from working EXAMPLE: poor people in Appalachia do not try to exit poverty, but rather try to maximize benefits. E.g. people don't join the military (a route out of poverty) to maintain benefits. People pull their kids out of school so they are more likely to qualify for mental disability benefits. It is possible to provide aid to the poor with no moral hazard, though: EXAMPLE: the Earned Income tax credit provides wage supplements to low-income workers. Those without jobs are not eligible. EXAMPLE: benefits for the elderly, the widowed and the disabled do not cause moral hazard because no rational person would risk losing a spouse, e.g., to obtain the benefit EXAMPLE: the New Deal was largely successful in minimizing moral hazard by targeting individuals whose misfortunes were no fault of their own Moral hazard as the government seeks to maximize its dollars at little or no cost to itself EXAMPLE: states have powerful incentives to expand food stamp eligibility as much as possible since the government pays 100 percent of the costs. States are thus largely responsible for the expansion of the program. EXAMPLE: local government encourages homebuilding in fire-prone areas, knowing that taxpayers will bear the cost of fire-fighting. EXAMPLE: federal disability insurance. States typically pay for laid off workers temporary welfare and unemployment. But if they can get them on the federal disability insurance, the federal government pays 100% of the costs indefinitely. Because of this, and the good benefits, SSDI (the program) has higher claim rates and lower return-to-work rates than other programs Remedies for moral hazard Potential risk-bearers should improve info about the risk so that they can manage it better Risk-bearers can also make risk-takers bear some of the costs through contracts or public policy Problem: government doesn't have incentive to fix moral hazards b/c, in the end, taxpayers will pay in the case of default

Define Property Rights and Facilitate Markets

No government intervention - just common law and contracts between parties? Sometimes this can produce the optimal outcome. Bargaining can be a good option in theory and CAN produce optimal outcome in theory, but still costs involved The magnitude of transactions determines whether parties are likely to strike Coasean bargains. All depends on cost benefit Coase's fundamental insight: when there is a conflict over a legal right, the cost to the party who is denied that right isn't really "external" to the party to whom the right is allocated "The real problem isn't externalities, but transaction costs" and reducing these may be the optimal regulatory solution Regulation comes into play when the transaction costs are so high that Coasean bargains are unlikely Strategic behavior is a transaction cost and thwarts Cosean bargains in situations involving a lot of people, so this theorem is of little relevance to regulation THREE RESPONSES TO THIS: Bargains requiring significant coordination among multiple parties do occur with some regularity. Meade was wrong about the bees and pollination. He assumed it would produce an externality problem and it didn't. Neighborhood assemblages provided an example of coordinated transactions. Regulation is not limited to situations in which transaction costs would be so high as to preclude Cosean bargains Ex: Smoking bans. Regulation around this but implicit Cosean bargaining tends to eliminate such externalities No need for regulation to correct an externality here (but there are regulation! ???) Conditions right for CB: well defined in common law, transferable, transaction costs are low. Owner is motivated and equipped to strike the optimal outcome without a need for regulation to correct an externality Another example: workplace safety regulation. Good reason to believe bargaining among the parties will minimize external costs in this context Employers bargain over and pay for risk Even in contexts in which transaction costs are so significant that pure Coasean bargains are unlikely, policymakers may harness Coasean insights to achieve efficiencies Under a permit trading scheme, different from command/control or Pigouvian tax/subsidy, government sets a limit on something, distributes permits that allow a total up to the limit, and allows trading of those permits. End up achieving the optimal level at desired cost. Cf. cap and trade-- permit trading, selling off property right Permit trading exhibits aspects of all 3 approaches: Determine aggregate amount of something allowed Can choose to cut amount emitted or pay Essence though is Coasean: government defines the rights and then facilitates exchanges in a way that results in the cheapest cost avoider and minimized social cost Downsides to permit trading: Same knowledge problem and command and control Risk of trading scheme increasing the social loss Can't concentrate the trading into a small area with things like emissions Still better than command and control

Symptoms of Behavioral Irrationality

People are predictably irrational -- scholars have moved on from the rational choice model of human behavior and adopted a "behavioral model" This chapter concerns not the welfare-reducing defect in a market failure/system itself, but rather the collection of deficiencies that inhere in individual players Symptoms: People have a lot of regret stemming from two immutable facts about our world: change is constant and resources are scarce Chapter focuses on a different type of regret: from individual choices that government can control, the "why didn't I" Collection of systematic frailties that most people appear to exhibit -- three categories Imperfect Optimization: people make systematic mistakes in choosing among alternative courses of action, make choices that don't wring the greatest possible value from their resources Bounded rationality: limits on memory restrict our capacity to gather and process info Heuristics: rely on instinctive, system-one thinking rather than slower, logical system-two Availability heuristic: the more available past instances of the event are in one's recollection, the more probable one will deem the event to be Salience bias: big, dramatic events command notice Anchoring and adjustment: usually at play when people determine how much they are willing to pay for something Representative heuristic: heavily rely on the degree to which x resembles a prototypical member of category Biases: we are more likely to take risks if we (irrationally) believe we're particularly unlikely to experience a bad outcome Bounded Self-Control Volitional constraints = limits on our will power, stem from our hyperbolic discounting We implicitly discount the value of future opportunities, those who really value present over future compensation have high discount rates -- meaning future option must be a lot better than the present one Discount rates are not constant: people discount future rewards at a greater rate when the delay occurs sooner in time Will hold off getting $100 in 30 days if $110 in 31 days Non-Standard Preferences Endowment effect: ascribe value to things according to whether we own it or not (think: mug in classroom example) Loss aversion: we tend to evaluate outcomes not in isolation but relative to an initial reference point IF a person has to give something up, hurt worse than she is pleased if she initially gains the same thing Status-quo biases: attaching extra value to initial set of entitlements and losses weigh heavier than gains, people will tend to keep things the same Framing effects: whether things are framed as a gain or loss impacts decision making Due to these things, we routinely fail to maximize our welfare -- what should the government do about it?

Pigouvian Taxes & Subsidies

Pigou: the government should tax activities that create negative externalities and subsidize those that create positive externalities, ensuring that the actors at issue bear the full cost or receive the full benefit of their conduct so that they act optimally. Tax: difference between the individual and total marginal cost of production Pigouvian Taxes: alcohol, cigarettes, gas guzzlers, bank tax in wake of 2008 financial crisis Subsidy: difference between individual and total marginal benefit of effort Pigouvian Subsidies: $7500 credit to early purchasers of electric vehicles that were good for the environment Three premises underlie Pigouvian approaches Both asume externalities involve a clear victimizer who imposes a cost on an innocent victim Reason that forcing that victimizer to do something encourages her to alter than behavior Assume government must do the forcing Coase questioned these assumptions. More two sided. Harms are reciprocal: each party is both a victim and a victimizer. When property rights are clearly defined and enforceable, parties are free to exchange them and can get the result without government intervention <-- Coase Theorem. Advantages of Pigouvian Taxes & Subsidies Over Command Control: PTS doesn't threaten to lock in particular technologies and discourage cheaper or more effective ones Knowledge problem is less severe because Pigouvian approach requires less info (just different in costs to set the tax or subsidy equal to that difference) Less welfare loss from manipulation by special interests because it gives regulatees a choice (eliminate spillovers OR pay a per-unit penalty) --> less loss from competition reduction and lower level of wasteful lobbying activity Cheaper and quicker externality reduction than CC Example: comparing a CC strategy with CAFÉ standards to regulate automobile emissions with a Pigouvian gasoline tax. MIT study concluded that a Pigouvian standard could achieve the target level of fuel consumption at as little as 1/14th the cost of the CAFÉ standards approach. Café standards are more expensive for them to work faster, but the tax provides a strong incentive for consumers to buy fuel efficient vehicles, adopt biofuels if cost-effective, and sharply curtail travel in both new and used vehicles. Benefits of PTS: May permit government to raise revenue it needs w/ less adverse impact on economic growth (may need to be replaced though by more distortive tax) 4. Challenges with PTS: 1. Can be harder to implement politically; US doesn't trust this method May generate adverse distributional effects (could affect lower income people more) May entail higher administrative costs than CC Still have knowledge problem and public choice concern/special interest manipulation (just less so than CC) Warning to those who would ignore government's own limitations and compare unregulated states of affairs to an unrealistic and idealized regulatory alternative (Nirvana Fallacy). Also discussed institutional constraints that could prevent regulators from achieving the ideal outcome imagined by economists

Knowledge Problem & Inflexibility

Policy Implications Sound policies require good information the government cannot always access good information, it often must be mined from "resistant materials" at a great cost - ex: mandatory disclosure to consumers Much policymaking is based on pivotal information that only insiders possess (informational asymmetry) It's often unclear how markets will react to a given policy proposal (unclear info) Information is seldom self-evident, self defining, or self-authenticating Info often requires interpretation → leads to competing interpretations of the same information (this is why additional information seldom resolves political disputes and often inflames them) Policymakers are often more informed than the voters who sent them to Washington Informational gaps about social problems leads policy makers to direct efforts at symptoms, not root causes (so underlying problem persists) Data systems that government demands of the private sector often misfire ** (Medicare's bad record keeping program discussed in chapter 7) - Note PS spends a lot of time on this point and has several examples (ACA, Immigration status, Gun Control background checks) Examples Southern Border After spending huge amounts of money at southern border (surveillance, additional patrols, border fence) we don't know which of these conditions caused recent decline in illegal entries to make rational budgeting decisions So we keep pouring huge sums of money into border protection when it might not be doing anything to solve the problem (could be policies in Mexico, demographic changes, etc.) Information Disclosure to Consumers Designed to help consumers make rational choices in a market, but government cannot provide this info itself - needs private companies to do this work (discussed more in Chapter 8) Bill Clinton's Budget proposals Experts carefully researched Wall Street trends but was still caught off guard when the proposals angered many of his supporters - market movements are hard to predict (still don't know exact reasons for financial crisis of 07-08) Crime Billions of dollars spent on criminological research but we still do not know what really causes crime - just spend tons of money trying to stop it Gun Control / Immigration Poorly run data systems make it nearly impossible to conduct perfect background checks / keep track of immigration status Hayek: The Constitution of Liberty Won Nobel prize on book that officials' efforts to centralize all of this dispersed information and then "massage it into coherent policy" was doomed to failure PS applies Hayek's theories to the US policy-making system Headstart / other social programs Public interest groups command valuable resources that can influence agency policy makers Headstart (immensely popular and well-connected program) has flourished despite fact that many studies have shown it is not all that beneficial There are many information failures in the chain keeping Headstart and other ineffective social programs alive - ignorant federal judges, which influences/limits the information flow to policy makers

Voting Rights Act of 1965

SUCCESS: Express purpose (to equalize access to the ballot box) was achieved almost immediately. Exceeded expectations & had sweeping structural effects on American politics. Also dramatic increase in minority office holders at all levels COSTS: Led to minority vote dilution --> decades of federal court challenges to state and local laws that designed electoral maps --> ended up (unintentionally) causing racial and partisan gerrymandering Domino Effect: Ensuring that districts were drawn in ways that would encourage election of minority candidates and having districting maps that maximized the number of minorities elected to the legislature ended up encouraging racial gerrymandering, which led to partisan gerrymandering Ended up heightening rather than dispelling significance of race in the minds and actions of officials and ordinary citizens --> led to narrow partisan opportunism and manipulation concealed by legislators under the banners of VRA compliance and racial justice (NOTE: example of bootleggers and Baptists theory) Another issue: rigid and anachronistic application of parts of the law that are not applicable in the same way, parts of the model are "unsuited to meet today's challenges" TAKEAWAYS: Two questions about the VRA's striking success: What conditions accounted for it? Moral imperative in the wake of the Civil Rights Movement The nature of the right being protected Voting is a simple, physical, unambiguous act--in contrast to something like being disabled or seeking work for welfare eligibility Became self-enforcing over time It regulates government institutions, NOT private markets, and since state & local governments are constitutionally subordinate to Congress in this area, they are subject to direct control. Market actors, in contrast, have numerous ways to circumvent government policies (see ch. 7) How common or replicable are they in today's policy world? Unfortunately not very common--no other law combines the VRA's moral, implementational, and policy advantages

Pros and Cons of Market Regulation Approaches

See chart

Homestead Act of 1862

The Homestead Act of 1862: BACKGROUND: Congress was given the responsibility of owning, managing and disposing of public lands High stakes because fed government wanted proceeds from public land sales to help pay burgeoning national debt & growing infrastructure among other things Solution: "basic and fateful decision" to transfer land to private hands for private development rather than retaining for public ownership, EVEN THOUGH this undercut their own sales Issue: too much land and pricing issues --> much land remained unsold and/or undeveloped --> squatters, exploitation by trespassers, etc. B/c of these issues, Congress adopted new policies to accelerate privatization of public lands like sliding scale pricing, but still underdevelopment, corruption, and fraud HOMESTEAD ACT: Rationale: safety valve for poor farmers and impoverished workers, antipathy to land speculators/monopolists, insignificance of federal land revenues, opposition to slavery. These ideas were incorporated into the Homestead Act, which Lincoln enacted in 1862 Positive Outcome: Ended the policy of using public lands as a source of fed government revenue Created and encouraged tons of owner-operated farms Failures: corrupt land officials, law's safeguards against corruption and abuse relatively weak, and efforts to promote homesteading were constrained by other policy goals TAKEAWAYS: we can't take much away from this example about policy effectiveness because no program-specific data or policy assessments available, AND numerous factors besides the act caused the outcome. Two points illuminate contemporary policymaking challenges: Act's implementation was seriously flawed, and some of these flaws continue to apply to today's policymaking (skewed official incentives, poorly informed predictions, legal ambiguity, market dynamics, ease of evasion, and weak enforcement) Act's purpose was highly attractive: giving resources (land) to a sympathetic target group (homesteaders) for a socially desirable purpose (cultivating empty land) on an administratively objective basis (first come, first served) with no opportunity costs (the land had no better use) **No contemporary policies can have these same success-promoting features**

Ways Markets Frustrate Regulations

5. Markets Frustrate Market-Perfecting Policies Government depends on markets to produce the wealth that government taxes Any policy that seriously threatens to reduce economic growth and thus tax revenues will likely fail Reasons Markets Frustrate Policies Speed Diversity Informational demands on regulators Price and substitution effects Trans-jurisdictional effects Political influence Enforcement obstacles Rational expectations Lack of good substitutes for market ordering Speed Markets change quickly and constantly Policy-makers must aim at a moving target with weapons akin to "blunderbusses" Ability of large investors to move capital quickly means that policies whose success depends on attracting asset-specific investments are harder and more costly to implement, as the opportunity costs for investments (sacrifice of asset mobility) rise Example: Macroeconomic policy Federal Reserve has a mixed record on controlling inflation and unemployment Fiscal Policy Effects of fiscal policy take 12-18 months, and by that time the rational expectations and anticipatory adjustments of market actors have neutralized the new policy, or economic conditions have changed in other ways that render the policy change inapt or undesirable when it takes effect Diversity Markets are diverse but government policies usually involve wholesale, centralized techniques that this vast, uncoordinated, volatile, differentiated array of market actors tends to confound Antitrust and anti-discrimination laws may be an exception Informational Demands on Regulators Government cannot regulate effectively without access to timely, accurate, inexpensive information about market actors, dynamics, and strategies Government has systemic difficulties in managing information flows generated by private market actors at any reasonable cost Examples: Social Security Sending pension checks to seniors is effective Government only needs names, ages, addresses, and number of quarters that they were obtained All information readily accessible from public records Disability Benefits program Need much more detailed information Vague legal standards Must rely on decisions of other institutions (i.e. hospitals) EMRs Bush and Obama administrations failed to generate accurate clinical information by subsidizing providers to adopt electronic medical records New systems were clunky and time-consuming, reduced the number of patients seen in one California county by 50% Inadequate safeguards against fraud and abuse Price and Substitution Effects Examples Peltzman Effect: people adjust their behavior to a regulation in ways that counteract the intended effect If government builds more roads to alleviate traffic congestion, the lower congestion costs will attract more drivers to the roads If price of gas is lowered, the lower price will discourage producers from bringing new supply, thus increasing demand and pushing the price back up Requiring more energy-efficient air conditioners may increase power consumption as consumers respond to lower electricity costs Requiring child-resistant drug packaging may reduce safety by making them harder and slower for adults to open If you must be homeless to receive free housing, more people will claim that they are homeless If shelters are more attractive, more people will tend to stay there longer When NHTSA mandated safety features for cars, drivers took more risks and the accident rate rose Substitution Effect: raising a good's cost (or banning it outright) will induce its producers to find cheaper (or legally permitted) substitutes EPA raised gas mileage standards, automakers made cars lighter and this caused more fatal car accidents Banning DDT led to the use of more harmful chemicals and an increased rate of malaria Some OSHA regulations have resulted in employers substituting a banned chemical for an even more harmful chemical 2009 stimulus law sought to create jobs, but its provisions raised the cost of hiring workers (easier access to food stamps, lengthened unemployment benefits, minimum wage increases) More Examples Dodd-Frank Act increased compliance costs for banks, and this led to less access to credit for low-income consumers When products are banned, consumers may turn to more costly and less satisfactory ones, including more dangerous ones Laws that raise consumers' costs in order to improve their health also produce offsetting health risks by reducing their wealth Trans-jurisdictional Effects Federal government cannot regulate foreign markets, and when it can regulate foreign entities it does not because it does not want to produce negative consequences for domestic producers and consumers Banking regulators having trouble subjecting foreign banks to Dodd-Frank because they fear evasive tactics that could harm American consumers and banks Possibility that domestic firms will move their operations abroad limits regulators Sarbanes-Oxley made listing shares on the US stock market so costly that firms increasingly looked abroad for capital or remained private US share of IPOs fell from 67% in 2002 when the law passed, to 16% in 2011 Concern that foreign firms will use US law to compete against domestic firms Jumpstart Our Business Startups Act of 2002 Designed to create job growth in the US by reducing costs to small firms of raising capital and going public by reducing SEC disclosure requirements Foreign firms now using the law to compete more aggressively with US firms Political influence of market actors Particularly true where a single government agency intensively regulates a market or related markets, such as the SEC, the FDA, the NHTSA, and the Nuclear Regulatory Commission Mutual dependencies of regulator and regulated for information, personnel, political support, and sometimes even revenues (FDA), are great Mutuality of influences and interests cause program performance to deviate from policy goals Examples: Aerospace companies have influence over government procurement Veterans groups shape the activity of the Veterans Administration DOJ attentive to ABA views Industry influence is diffuse in health and safety, the environment, and civil rights OSHA, the EPA, and the EEOC Interests among the industries and within an agency may conflict, as regulatory units primarily concerned with one industrial sector (as in OSHA) or with one risk medium (as in the EPA's solid waste program) compete for congressional attention, budget, legal authority, publicity, and political support Influence of public interest organizations is often considerable Interest Group Influence Lobbying of Congress Much lobbying is intended to shore up support with incumbents and members already inclined to support the group's activity Interests groups and lobbyists seek to launch educational and publicity campaigns, install sympathetic individuals in office, recruit officials when they leave office, and perform favors for officials Concentrated power of corporate interests is extensive and pernicious More powerful government draws more private money; expanded public authority makes groups more vulnerable to policies that can seriously harm them, which raises the stakes in averting those harms through whatever sources of influence they can muster Most contributions are below legal ceiling and given to legislators who already agree with the interest group Citizens United decision had little impact Public and private corporate giving is very low and has not risen substantially Individuals, not special interests, are the main source of campaign contributions, and there is little relationship between money and votes once one controls for other vote-relevant factors Obstacles to policy enforcement Economic crimes are under-deterred Prosecutorial confusion confounds enforcement, making optimal levels of deterrence or sanctions unlikely Jurisdictional overlaps produce multiple prosecutions for the same course of conduct by different agencies I.e. could be eight federal agencies investigating one bank Reasons for weak and limited enforcement Optimal level of enforcement for most crimes and regulatory enforcement is well below 100% Enforcement sequence is costly to the government Enforcement budgets are limited (Congress does not want regulations enforced against their friends) Criminally prosecuting corporations punishes innocent employees and others by forcing the company out of business White-collar defendants are often represented by highly skilled attorneys Officials are mindful of the need to cultivate and sustain the regulated industry (usually not militant opponents) Sometimes firms can in effect select their own regulators Banks may choose federal or state charters and decide whether to operate as a savings institution or a commercial bank Congressional appropriations for enforcement tend to be woefully inadequate SEC is underfunded and Congress and the Courts have limited class actions (which could have supplemented SEC enforcement) Enactment and administrative implementation of regulatory statutes is always shaped by a process in which industry lobbying plays an important role Lobbyists help a bill pass and in exchange expect the final version to reflect their clients' interests Specific regulations that agencies promulgate to implement such statutes tend to be highly technical and intricate Complex architecture may make regulations easier to evade Example: CFPB rules to protect consumers made it easier for attorneys to defend their clients against violations Complex, protracted negotiations between the government and the targeted entities that may both precede and follow a decision to go forward with the case Prospect of a failed prosecution may be more frightening and lead to settlements in which corporations never admit fault Sheer force of incompetence SEC failed to investigate Bernie Madoff despite warnings going back to 1992 Botched effort by the Fed to review implementation of federally mandated payments by banks and other financial institutions to homeowners subjected to illegal and abusive mortgage foreclosures Regulators had designed a flawed review of the troubled loans Politicians sometimes seek to restrain enforcement against putative violators who are their constituents, allies, or favored interests

Solutions to Agency Costs

Following 4 proposed remedies fall into one of these two categories: Address Externalities: limiting degree to which ownership and control are separated Address Informational Asymmetries: make it easier for principals to detect / respond to agent infidelity, thus incentivizing agents to behave in the first place Pure Private Ordering Addressing Externality - reuniting ownership and control by giving principals more control or agents more ownership Agents More Ownership Pros: Agents (managers) could be compensated with stock to give them more ownership or "skin in the game" and better align their interests with those of shareholders Compensating employees with stock is the most common private (aka not regulatory) solution to address externality issue Cons: Paying employees in stock is a huge economic risk for them (if company goes bankrupt they lose everything) so employees will likely demand additional compensation if being paid in stock Raises amount Principals must pay for managerial talent without a clear reduction in agency costs Agents will always be tempted to make selfish decisions, even if they have more ownership Principals More Control Pros: Principals (shareholders) can gain more control by getting to vote on particular management decisions But this solution is less common Cons: Problem of rational ignorance = shareholders realize their vote means very little so they do not educate themselves on the ins and outs of the business By having ignorant shareholders vote on managerial decisions, the company likely won't get value-maximizing results Addressing Informational Asymmetry - appropriate principal responses to agent infidelity 2 Barriers to Principal's ability to respond to agent infidelity: Principal is at an informational disadvantage and agent knows that, bc of this, they likely won't get caught by the principal Punishment is limited to prospective sanctions (firing, dock pay) which have little effect if agent plans to / wouldn't mind leaving current employment Solutions to Informational Asymmetry attempt to overcome these 2 barriers preventing principals from responding to agent infidelity Internal audits / other internal controls to overcome barrier 1 These programs limited by costs (monitoring principals is an element of agency costs) but as long as cost of monitoring is less than cost of bad agency behavior that is ultimately preventing, the monitoring is a positive solution Contracts / employment agreements to overcome barrier 2 Contracts cannot include an exhaustive list preventing all possible negative agent behavior, always loopholes Fiduciary Duties and Shareholder Suits Fiduciary Duties - professional standards are better than employee contracts (rules) bc they can be enforced case-by-case, after people have negatively acted 3 Questions in implementing standards: Who should set forth the standards - private parties or government? (States' incorporation standards) "Internal Affairs Doctrine" = relations between parties to the corporate contract are governed by the law of the state of incorporation State laws include fiduciary duties that set standards for how managers of a corporation must act in using their shareholders' resources EX: Delaware Dominance in incorporation market What should standards consist of? (Duties of loyalty and care) Usually include fiduciary duties of loyalty (agents can't use principal resources selfishly) and care (requires agents-managers to make reasonable decisions on behalf of principals-shareholders) BUT: Business Judgment Rule Courts will typically abstain from second guessing the substance of a business judgment as long as the agent complied with the duty of loyalty and the procedural aspect of the duty of care This incentivizes managers to take the sort of business risks that are necessary to maximize shareholder return (and protects them if those risks fail) How should standards be enforced? (Derivative Suits) Derivative Suits to enforce standards (note that derivative suits themselves will have agency costs of lawyers fees, etc.) Litigation brought on behalf of principals (shareholders) against agents (managers) for failing to do their job However, this is a flawed solution to an already complicated problem Issue of sham suits, collusive settlements, strike suits, and remedies that ultimately don't provide any value to the shareholders but come at their expense Mandatory Structural Rules Recent Change Historically state corporate law has relied on market pressures to incentivize companies to have appropriate structure (ex: board of directors voted on by shareholders, etc.) In response to corporate scandals of early 2000s, reformers pushed for (and many regulatory bodies adopted) mandatory rules (not just standards) concerning corporate structure (not just managerial behavior) Command and Control Solution Imposing corporate structure rules to constrain agency costs is like command-and-control and thus subject to command and control pros and cons Pros = clarity and responsiveness Clarity lowers decision costs Rules are structured to take immediate effect and thus respond more quickly to the problem Cons = knowledge problem, public choice concerns, lack of competition Knowledge problem Makes it hard for regulators / business planners to come up with a set of rules that would work to structure ALL companies - different companies need different things from their directors Result = resource misallocation resulting from regulator error EX: Sarbanes-Oxley Act required all public companies to do financial reporting in the wake of the Enron scandal - burden was crippling on small companies Public Choice Concerns Legislatures and administrative agencies in charge of setting corporate structural rules are swayed by public interest groups Open to special interest manipulation by companies, interest groups, etc. Lack of competition Relative to state corporate law (standards set by incorporation in a particular state), federal structural rules are less subject to market discipline and more likely to reduce enterprise value Bc companies can't shop for a more favorable set of rules - no market feedback Downsides It can be easy for large corporations to comply with these structural rules but almost crippling for small companies The more players you have in an industry, the harder it is for companies to set competitive pricing - but excluding smaller companies can make a market failure even worse Market Mechanisms Some agency cost-reducing institutions require no government action, but policymakers have erected barriers that reduce these mechanisms' effectiveness Involve voluntary exchanges, which tries to reduce agency costs by addressing the externality, information asymmetry, or both The Market for Corporate Control - addresses externality To purchase the right to control corporations they believe are currently mismanaged, then unlock more of business value, then sell the business for a profit Key Qs to ask: Who is in this market? Every corporation whose stock is publicly traded What determines price? Key is predictions about profits How do you know if company being mismanaged? Stock price drops relative to where it has been in the past or where one would expect it to be given the company's assets, compared to other similar companies Makes this market for corporate control a highly effective means of constraining agency costs bc.. Managers know that disloyalty will reduce company's expected profits, stock prices, which will render the company a good takeover target WIll lose job, reputations tarnished TO avoid that outcome, managers will work hard and avoid disloyal acts that hurt the company's business Market for corporate control internalizes the externality resulting from the sep of ownership and control in a corporation Legal hurdles Williams Act - if want to make a tender offer first have to disclose identity to public, plans for target firm, and sources of financing, giving managers an early warning and making it easier to resist takeover attempt Unocal v. Mesa Petroleum case - managers could thwart takeovers Moran v. Household International - approved of a "poison" pill - device put in place by corporate managers that will cause all kinds of problems for a hostile bidder that acquires more than a certain percentage of the company's stock Result: does maximize firm value Answer: Public choice There are "winners" to being impeded: corporate managers, employees who won't lose jobs. Plus these people can easily group together for a voice vs. shareholders who may not even know each other and thus harder to organize. Easier for employees and managers to secure a legislative fix. Insider Trading (stock trading on the basis of material, non public information) Once those closest to the company start selling, buyers quickly reduce amount willing to pay, sellers lower their price demands. End result is that market price will fall This price effect reduces agency costs Allows michief to be discovered and brought to an end Reminds corporate managers that they're likely to get caught if they act disloyally and encourages faithful management It remedies the information asymmetry that prevents shareholder principals from taking corrective action against their manager agents and tempts those agents to act disloyally in the first place Ex. Dirks v. Sec Large decline in the company's stock price ( as a result of insider trading) led to the exposure of the massive accounting fraud All insider trading should be illegal? This is the long taken position Supreme Court: only illegal when it amounts to a lie, otherwise it would prevent stock analysts from profiting on their own efforts to unearth info about publicly traded companies Why do agencies and SC condemn it so much if it can improve agency costs? It's unfair for an insider to have an advantage over her uninformed trading partner If allowed, there are perverse incentives for mismanagement Can purposefully create bad news for the company and then trade on that news before it is publicly disclosed and incorporated into the stock price Delay disclosures Disclose legitimate secrets Texas Gulf Sulphur case: hoping to acquire at good prices, TGS's president instructed insiders to keep quiet about the discovery. Instead a number of TGS officials purchased company stock and increased stock price. Easily inferred that the company was expecting something and could have thwarted TGS's opportunity to exploit its advantage. It's a mixed bag: it can reduce corporate agency costs, but it can encourage mismanagement or delay disclosures and may usurp the corporation's information property rights Middle ground: Let companies decide for themselves: to maximize the price of stock, they would select, and implement whatever trading policy is likely to create the most value for the company. Such a laissez faire approach would avoid the knowledge problem inherent in any one size fits all regulation More restrictive middle ground: to permit corporations to authorize disclosed insider trading -> allowing some or all of their insiders to engage in informed trading on the condition that the insiders disclose their trades to the market Remedy the fallback of the laissez faire approach: Insider trading may not affect price if trades occur in private Remedy fallback of contractarian Pure contract approach does nothing to reduce insider trading potential downsides: mismanagement, disclosure delays, and infringement of the corporation's informational property rights Advantage of disclosure policy" Ensure other investors learn about the bets that those closest to the business are making with their own money - enhance insider trading beneficial price effects Make it easier to police corporate mismanagement, delayed disclosure Activist Investment Funds Address both externality and information asymmetry Private equity - collective investment schemes in which wealthy investors pool money to buy large percentages of the stock of underperforming companies, revamp management, and sell companies for a profit Hedge funds - invest in a wide range of assets with aim to produce highest available returns as quickly as possible Both active in managing companies in which they are invested in PE - buy blocks of stock for the express purpose of revamping management HF - even with their small stacks still exercise control Ways to do this Secure representation on board of directors Can shame management into doing certain things, relying on their enhanced finance/management abilities Legal impediments Williams Act - requires anyone launching offer to disclose a good deal of info. Can reduce the amount of stock the investor will purchase at an attractive price, which will limit the activist's potential upside from expending resources to identify and correct instances of mismanagement Registering with the SEC it mandates managers to describe the methods of analysis and investment strategies you use in formulating investment advice or managing assets More they have to share investment strategies less likely to develop strategies in the first place

Oakland Project Failure

Oakland Project - an easy to implement project that failed - shows why programs fail Goal: create infrastructure and jobs to inner-city minority residents Simple because few participants, uncomplicated arrangements and clear benefits (cheap money, jobs, and political credit) Difficulties Getting Started: City government was fragmented into agencies that weren't controlled by city hall Lack ok politically oriented interest groups made it hard for leaders to mobilize information or support for policies Economic Development Administration's (federal agency) young policy experts disregarded bureaucratic channels Mission conflicts between the business interests (who wanted commercial development) and city officials (who doubted the commercial plan would provide long-term jobs to those in need) Little time to consider which plans worked best Port Project Difficulties: (most adept at preparing its application) Port claimed it couldn't start without advanced financing that EDA couldn't give Navy complained project would create navigational hazards Army Corp of engineers said plan would interfere with its operations Port requested changes (bigger restaurant) and was told to submit a new app. Aircraft Project Difficulties: Delays Cost overrun of 50% in 2 years Failures: No final plan after 5 years New small business loans program failed to create hobs Success: West Oakland Health Center created 160 minority jobs Why it failed: Participants have different, often inconsistent perspectives and opinions - can agree on substantial goals but nothing more Multiple decision points (including veto points) slows things down Delay can deform, defeat, or raise the cost of a program Powerful weapon! Ex: Volcker Ruler (part of Dodd-Frank Act) was adopted 2 years after the deadline for enactment Industry opposition and disputes Complexity of law made it hard to draw lines among what bank activity was regulated Uncertainty and lack of clarification in its implementation Flawed theory behind program - not knowing which factors/conditions cause what consequences Hard to find this out because of irrationality, sewed incentives, lack of reliable info, policy rigidity, lack of credibility with other participants, mismanagement To implement a solution, need to know how markets work, how they fail, and how effectively the government can manipulate them.

Rivalrous v. Non-Rivalrous

Rivalry: One person's consumption diminishes the consumption opportunities of others --> the idea that "more for me means less for you." Example: Most consumer products Non-rivalrousness: One person's consumption of the amenity DOES NOT diminish the consumption opportunities of others.

Consumer Protection

• Enforcement • Notice and comment rule-making • Agency has to publish a proposal in the federal register, then solicit and receive comments for about 60 days, then they issue a rule • You can be prosecuted or have enforcement action brought against you for violating a federal rule • FTC has hybrid rule-making authority which requires a trial-like procedure • For certain areas of law, the FTC has been delegated notice and comment rule-making, which is the quicker way to engage in rule-making • FTC can issue notice and comment rules over telephone solicitations • Penalty is $16k per violation, which when you multiply it by the number of people scammed can become a very large number • Public education • 6(b)s --> investigate lines of business • Proliferation of debt service companies • Don't have to prove all of the elements of the FTC act, just have to prove that the rule was violated • Rule adds context to the underlying FTC act and gives the court the yardstick to measure the defendant's conduct • Under the FTC act, violations of rules can provide initial civil penalties • Market failure ○ When mobile apps started to proliferate and become popular, FTC did forensic analysis on a lot of mobile apps aimed at children ○ Tracking kids 12 and under without parental permission is illegal ○ Apps were pulling down location, transmission data, sometimes contact information ○ Designed plainly for kids 12 and under ○ Problem is that the industry is incredibly decentralized ○ Many of the app creators were probably in violation of the children's privacy protection act ○ But FTC didn't really know what the app creators were doing with the data ○ Question is would prosecuting these people send a big enough signal to the industry? ○ Decided to spend a year educating the industry § One privacy lawyer was in charge of going out and finding these people and teaching them about the law ○ The education campaign essentially did nothing ○ Apple claimed it would screen the apps but its methods weren't particularly effective ○ Google said they had no responsibility whatsoever for the apps ○ Ended up doing carpet bombing of the apps with enforcement actions ○ Highly decentralized industry § Education and enforcement both didn't work § Couldn't get a sufficient handle on the problem to find a solution § The way this problem was solved was by a centralization (more trade associations, app developers becoming more centralized) of the major producers and the marketplace matured § For years, an important statute was under-enforced § Tools that a regulatory agency has don't really adequately address the market failures with respect to children's apps Hyman Summary • Both of the regulations fit comfortably into informational asymmetry dynamic • COPLA involves vulnerable population - complicates any analysis of regulation • Emphasis on limits of regulators - statutory limits, funding or bandwidth limits • Limits can cause mismatch problems with the regulatory toolkit that you have vs. the problem that you're trying to deal with • Broad and diffuse and can't identify choke points - either carpet bomb or change the rules and hope the market will change • Nature of the market structure, conduct, and toolkit available were all determinants of success/failure • Politics of the FTC • Inherited a series of cases - important reality - more or less a relay race run across administrations • Part of the challenge for regulators is setting up the circumstances so that their successors can be successful, and that's a problem when you don't internalize the benefits • When you announce a big case and not around when it crashes and burns, you get to blame your successor • Who gets penalties and good and bad incentives that can result • FTC - money goes to treasury • State AGs - money goes to their budgets - incentives • Discriminatory enforcement • Information problems ○ Existence of forensic lab that allowed FTC to figure out that apps were doing this ○ Knowledge problem • How they changed the incentives through rule making ○ Debt collection - drove fraudsters out of the market by changing the rules • Dynamic in the context of tax form completion ○ Non-profit businesses that help poor people fill out taxes ○ Refund-anticipation loans - huge benefit for people who want money now and not as concerned about effective interest rate

Securities Regulation

• Why and when do we regulate? ○ Argument to regulate capital markets is market failure ○ Financial crises ○ Securities are different from other types of products - they are not inherently valuable ○ Informational asymmetries ○ Oversupply bad goods and undersupply good goods • Russia discount ○ Inherent risk of the market ○ Risk of government intervention (could just seize the company) • Bitcoin ○ Fraud depresses prices across the border • Ex ante review of accuracy of disclosures, quality of issuer ○ Licensing scheme - if you want to be a broker-dealer or IA, you have to get a license • When states regulate, they offer merit review ○ Check to see if they have a good track record, quality of the issuer itself • Federal level ○ Force disclosure ○ Ex-poste liability ○ Provide issuers with the right incentives to disclose accurate information • Disclosure supports markets • Flip the presumption • Every offering of a security has to be registered • Private placement is an exemption and the issuer then has to prove that every investor satisfies the requirements • Number of IPOs is not a good proxy for vibrancy of capital markets • JOBS Act ○ Grow businesses, create jobs, spur economic activity by giving incentives to small businesses to invest by reducing the costs of compliance ○ Goal was to expand private markets by allowing private companies to advertise more broadly and to seek investments from the small retail investors that otherwise can't invest in private companies • Capital markets do not increase growth or employment directly • Will the new laws reduce the cost of compliance to the point that it will lead to more investment and as a result economic growth or will these new rules increase the risk in capital markets and that is going to reduce growth? ○ Have to weigh cost of raising capital against the cost of capital itself ○ Lower costs of capital are relatively easy to observe ○ Create Emerging Growth Companies § 2 years vs. 3 years § Going through an audit for that third year might be excessively costly § Could be that 2 years paints a much rosier picture § Issuer can submit registration statement confidentially to the SEC § Being able to see that a company tried to defraud a federal agency is valuable information § Being able to see dirty laundry in public can be important ○ Private stock tends to trade at a discount (around 20%) because it is much more difficult to find qualified investors § Can be a problem for companies trying to raise capital ○ Withholds relevant information as well as how much of an editing process was involved in getting the registration statement ready for public disclosure ○ If there is greater risk, investors might pay less for your stock • Accredited investor crowdfunding ○ Investors who are not well connected may not get the capital they need because they don't know enough accredited investors ○ Allow entrepreneurs to generally solicit private placements, as long as they only sell to accredited investors ○ 10% of households qualify for this status, of that group only 10% actually invest in private placements ○ 8.1% of all private placements use general solicitation ○ New private placement 255b, old private placement 5.8trillion § So new rule (general solicitation) - about 4% ○ The reason the general solicitations haven't proved to be popular is signaling § Being able to do a private placement indicates high quality because VC firms have already invested in you ○ 506© (new pp) - most are smaller with a few high outliers ○ 506(b) (old pp) - most are larger and more evenly distributed • Retail Crowdfunding and Regulation A ○ Exemption from registering for an IPO ○ Going to be good for only small projects that don't require much funding - million dollar cap ○ Limits the number of possible ideas that can be funded through crowdfunding ○ Types of companies § 3 employees - median § No assets § Pre-revenue □ Yet to earn a dollar § $4700 of cash on hands § $10,000 in debt ○ First six months - raised $113m ○ Limit on how much individuals can invest in securities § Based on income and net worth § Caps for individuals who are lower income § Retail investors don't have the sophistication to evaluate the quality of these securities • Regulation A ○ Crowdfunding on a larger scale ○ Allows an issuer to sell to retail investors up to $50m if they provide a limited disclosure ○ Force them to do some compliance • Why is it that these regulations worked? ○ The reason the 90% don't invest is not so much that they don't have the opportunity, its that they don't have any money in the first place ○ Top 10% of Americans hold almost 90% of all stocks and mutual funds ○ Start-ups are typically seeking not just capital but also advice § Venture firms will specialize and seek out those types of start-ups and steer them in the right direction while they invest § Entrepreneurs want money+ § Retail investors are perceived as pests - not wanted by entrepreneurs ○ Have been no exits from crowdfunding § What we know isn't promising ○ Crowdfunding § Contract provisions - If the value increases by a factor of 2 or 3, the founder has the right to buy the investors out at a set price so that the founder can sell to a VC firm at a much higher price ○ Even if the cap is raised, these are still not going to fare very well ○ Crowdfunding fills a niche but for the Oculus Rifts of the world, it will not be a good way for retail investors to generate large returns • Title V - Staying Private Longer ○ Under former rules, once a company had 500 shareholders it had to be subject to SEC oversight, formal disclosure, audits, etc. § Companies felt like they were forced to go public § Silicon Valley said they were forced to choose between hiring (with stock options) and seeking investment from new shareholders ○ JOBS Act allowed companies to go up to 2,000 shareholders (and that number does not include employee shareholders) § This means that no one is going to be forced to go public § A lot of unicorns - private companies valued at $1b or more § 326 global unicorns § Unicorns are under-cutting the goal of the JOBS Act ○ Pre-Title V § Very few firms were actually at risk of being forced to go public § Most companies go public at about 50 shareholders • Legislation by Anecdote ○ JOBS Act was a reactive statute to little anecdotes § In response to Facebook and Twitter ○ General solicitation § Goldman Sachs ○ Limited Disclosure § Groupon ○ Predicated on false ideas • Bigger issue with capital markets regulation - even if you did make an effort to learn more about what a possible provision might do, the range of possible outcomes is huge ○ Don't have good experimentation techniques ○ Secondary effects are much more substantial • A lot of policy isn't subject to cost-benefit analysis • Companies staying private longer is driven more by abundance of private capital than the costs of going public • One of the biggest costs of going public is paying your underwriter • Bubbles in various parts of the economy misdirects capital • Hyman Summary ○ Informational asymmetry ○ Agency costs § Control ○ Regulatory regime both pre-JOBS and post-JOBS § Regulatory segmentation § Different rules for different slices of the market § JOBS Act is a response to the perception that we were over-regulating in certain areas ○ How little we actually know about the securities markets and what is driving market failure ○ Fundamental nature of the knowledge problem more broadly § Affects everyone § Affects Congress especially □ Only information they get is from people who are upset ○ Administrability turns out to be an important attribute § A simple rule, even if flawed and imperfect, will often out-perform a very good but very complicated rule ○ Fundamental trade-offs that cut across all regulatory regimes § Rough and ready assessments and solutions § Thresholds come about because people come up with a wag (wild ass guess) about what the assumption is and wrote it into law ○ Global market for capital and investment § Perception was that IPOs were not occurring in the United States - instead companies were choosing other markets § Influenced by public choice issues? ○ The more burden you put on the SEC to police, the more you have to think about funding and workload § Easy to pass JOBS, hard to increase the budget to allow for effective enforcement ○ Theranos as case study of where things go wrong in a private company § Public disclosure might have prevented it from getting as big as it did § Very smart and sophisticated people were defrauded § Cautionary tale of what can happen when regulations don't effectively address soruces of market failure

Irrationality

Irrationality Single best way to avoid irrationality is to counter it with "systematic and well-publicized" cost-benefit analyses (CBAs) Congress should endorse CBAs and extend them to independent regulatory agencies Congress should not rely on omnibus funding bills that allow a lot of different policies to slip through without scrutiny Costs and benefits should be clear to all parties, and the parties that benefit should also have to bear the costs Low-income consumers should get vouchers to participate in such a system

Regulatory Approaches to Public Goods

Approaches: Non-regulatory approach: General tax revenues Given the definition Lambert uses for regulation, implementation of taxes cannot be a regulation because it involves no threat-backed order from the government except for the government saying, "pay your taxes!" Regulatory approaches (most often used for commons goods - the policy options for commons goods tend to mirror those for negative externalities since that it what commons goods create): Command-and-control Government officials first decide what level of aggregate consumption maximizes welfare, and then restrict each individual's consumption to ensure that such an aggregate level is achieved. Examples: Government might grant each fisherman the right to catch only a set quantity of some fish species within a certain period of time. The government might dictate who may drive when if they are dealing with congested roads (this occurred in Beijing during the 2008 Olympic Games). Pro: Often cheap to administer Example: China's rules during the 2008 Olympic Games for who could drive on every other day was based on whether one's license plate was an even or odd number. Cons: Heavy informational requirement Requires extensive fact-finding to determine who should be allowed to do what. Knowledge Problem/ Public Choice Concerns: Significant allocative inefficiency is likely to result For some consumers, command-and-control will permit too little of the regulated; for others, too much. The government doesn't know what is best for the public interest. Special interest manipulation: It relies on competitors' self-serving statements. Invites wasteful and unfair political manipulation. Example: FCC regulations determining who can broadcast when and at what frequencies. Adverse unintended consequences: Inflexible mandates drive regulatees to take actions they wouldn't otherwise take. High error costs Pigouvian taxes Uses taxes to collect the difference between the consumer's marginal cost and the total marginal cost of consumption. In other words, the tax should reflect the amount of cost spillover from a unit of consumption. IMPORTANT: Technology developments may reduce the administrative and informational burdens of Pigouvian schemes, increasing their attractiveness. Example: Automatic tolling (tolls set the welfare maximizing price - the optimal price to keep the flow of traffic moving at the given speed limit - every five minutes and locks in the price when a driver enters the toll until he/she exits the toll) Pros: Lower (though still significant) informational requirement than command-and-control. Less (though still some) potential for special interest manipulation Less error-prone than command-and-control. Fewer public choice concerns (special interest manipulation) than command-and-control. Doesn't involve personal decisions Less focused on particular individuals or entities Cons: Entails greater administrative costs than command-and-control. Regulators must determine the optimal final outcome and design a tax schedule to achieve it. Someone must asses/collect the taxes. Quite difficult to implement The divergence between individual and total marginal cost tends to grow as consumption increases. Defining and enforcing property rights (Coase Theorem) The idea that if a commons good (rivalrous and non-excludable) became a private good (rivalrous and excludable) through property rights, then welfare-reducing shortages through overconsumption would not occur. Coase believed that as long as property rights were well defined, enforceable, and transferable, and bargaining costs were sufficiently low, private negotiations would lead to a valuable right being allocated to its highest and best end. The government would not have to determine who gets to consume the amenity nor what the aggregate amount of consumption is. The private owner of the amenity would have an incentive to maximize his/her value or transfer the value to whoever values it most. Example: Auction system Helps ensure that the amenity initially goes to the entity that will extract the most social value from it. Helps the government raise revenue in a way that is different than implementing taxes. The only government action consists of defining and initially allocating the property interests Pros: Less welfare loss stemming from the knowledge problem and public choice concerns than command-and-control and pigouvian approaches. May be the best way to ensure efficient exploitation of the specific amenity. Few public choice concerns (only the initial allocation of property interests may be subject to special interest manipulation) Cons: Defining and allocation property rights at the outset can be complicated and if complicated, also costly (this depends on the nature of the good) Example: Defining and allocating property rights to freeway space would be so costly and impracticable. May lead to inefficient outcomes if transaction costs (1) are so significant that reallocation bargains are unlikely to occur and (2) cannot be reduced to a point at which such bargains are likely. Policymaker Considerations for the Different Types of Approaches: Each of the approaches impose costs. A wise and benevolent regulator recognizes the downsides (costs) of each approach, including hybrids, and settles on the one likely to maximize social welfare by minimizing error and decision costs. Occasional reassessments of approaches will be needed as technological development alter the relative costs of different regulatory approaches. The wise and benevolent regulator remains attuned to the possibility of privately ordered solutions (solutions created by and between individual parties for how to police an activity), to commons problems and never invokes governmental power unless doing so would unambiguously improve social welfare. Individuals and groups often concoct creative and successful means of managing commons goods and such means sometimes run afoul of rules designed to address other, perhaps less significant, problems. The wise regulator will consider relaxing regulatory barriers to cooperative private ordering if doing so will generate greater benefit than harm.

Remedies for Behavioral Irrationality

Available remedies Paternalism: commands (wear seatbelts) and bans (drugs) - has three major issues: Significant knowledge problem -- no way of knowing how much pleasure people derive from banned activities Public choice concerns -- private interests line up to ensure whatever course of action gets mandated is one that benefits them Tends to reduce self-protection -- may lead people to work less hard to overcome cognitive limits Libertarian: government does nothing about our cognitive and volitional limitations Choice between the two requires balancing the welfare losses that result from leaving people alone against the administrative costs of paternalist approach + knowledge loss Only take paternalistic approach when: planners confident they know what is better for people; power being exercised is of little benefit to special interests/unlikely to invite manipulation; there is little concern of squelching regulates' learning Libertarian Paternalism -- a kind of choice architecture, for example opt-out harnesses the status quo bias to nudge employees in the direction that is good for them; some options: Private nudges -- voluntarily encouraging particular decision by its contracting partners (opt outs) Government engages is messaging guided by behavioral insights (anti-smoking campaigns) Government requires private parties to disclose salient facts in simple, standardized formats Government imposes default provisions in private contracts Government imposes default provisions in private contracts and erects hurdles to opting out of them Government imposes default provisions in private contracts and dictates the substantive terms of permissible opt-out arrangements Government bans or commands certain behavior or imposes mandatory contract terms Out of the seven options, coercion comes in between #2 and #3 The rest are not libertarian because they must do something or be punished When private entities choose their own policies tailored to their specific context, mistakes are less far-reaching and are subject to market discipline Public choice and knowledge concerns not an issue for categories #1 and #2 To ensure that government schemes actually leave the intended targets better off, officials must: Identify people's true preferences Determine the extent of each cognitive or volitional defect A nudge too strong or weak in light of the bias is aims to correct may end up hurting people by preventing them from doing what they "really want to do Assess the next effect of conflicting quirks Predict how the prescribed policies will affect targets' self-protections Account for heterogeneity in all of these matters Before implementing a coercive libertarian paternalist initiative, policymakers should carefully consider whether the downsides of intervention (regulator mistake, special interest manipulation, and a reduction in self-protective efforts) will outweigh the upside of helping people avoid mistakes

Cartel Behavior

Cartel Behavior A small number of producers can form a cartel to create a monopolistic curve situation/price structure but the effectiveness of the cartel is contingent upon cartel members monitoring compliance amongst members on the agreed upon price structure Chicago School argues that cartels are inherently unstable because the incentive is for members to cheat; however, government coercion designating limited producers can make cartels much more durable More than six - tend to break down Less than six - possible if they can develop complex methods of compliance/monitoring

Fishing Example - Public Goods

Fishing Example: Issue: Blue marlin and mackerel scooping Negative externality of overfishing because weak excludability from public lakes. Rivalrous → If I don't take the fish, you will. Why should I hold back? → grab as many as possible because if I don't grab now, the fish might not be there later. No one has interest in taking optimal amount to preserve the fish population in the lake because fishers get the total benefit (the enjoyment of fishing and potentially catching a fish) while the costs are spread among all fishers (the reduction of the fish population). How to solve: Command control -- time/place, license, manner, outputs Licensing helps a little-- additional revenue Boat size--reducing intensity doesn't necessary decrease volume Limit amount of fish Can map indirectly Some easier to monitor than others Information problem-- how do we know how many to not let them take? Lives and safety-- output restrictions don't help Pigouvian taxes Subsidize those under Tax those over Property rights/facilities Right to get fish Private facility? Absence of-- Cycle of violence when legal system doesn't formally recognize Leave it alone Kids fishing -- don't have strong concern of overconsumption See "tragedy of the commons" Victories are temporary Getting it wrong has consequences.

Examples of Agency Costs

From Book Conan O'Brien (ridiculously $$ sketches when leaving Tonight Show - didn't care about cost but producers / NBC execs did) Andy Fastow (CEO of Enron, built company into house of cards and hid it all from shareholders) From Class Lawyer billables (client cares more about billing cost than lawyer does) Bernie Madoff (Ponzi Scheme)

Implementation

Implementation Recommends "decree implementation analysis," where policymakers use public hearings and other techniques to analyze possible real-world effects of the policy Hire more inspectors, auditors, and research personnel throughout agencies! Whistle-blowers privy to illegal conduct can be a valuable resource Ensure that agencies are sufficiently staffed to maintain contractual relationships with private contractors

Patents/Intellectual Property

Short selling and instituting patent challenges Insider trading? Still costly even though its less than litigation Inventions - public good Patent is a response to public goods problem -- became a club good Patents transformed public goods to club goods - response to a market failure Drawbacks to patents was people misusing it - response to that was PTAB PTAB amendment to patent system People abuse PTAB system Kyle Bass problem

Competition for Administrative Talent

2. Competition for Administrative Talent Quality of Personnel Matters Functions of private/public employees may not be the same Compare the Air Force to Delta Federal employees enjoy more job security, fewer hours, and fringe benefits Public school teachers make more money than what the market would provide based on their human capital Private firms can outcompete the public sector

Processes to allocate regulatory tasks to agencies

Direct assignment by statute Accident/Fortuity: agency with regulatory capabilities designed to serve one purpose may get drawn into other policy areas that were not part of Congress' original expectations Deliberate expansion into an unoccupied policy domain (ex: tech → new regulatory issues that some regulators take control of) Divestiture/Dissolution by statute: involves the transfer of discrete functions from one agency to another body (either when not necessary anymore, failure of agency, etc.)

Commons Goods

Commons goods: Weak excludability and strong rivalrousness Think: Commons goods typically involve commonly owned property. Overconsumption Consumers overdo their use of an amenity because they get all of the benefit of continued consumption while bearing only a portion of the cost, which is externalized (shared among all consumers of the amenity). Production of commons goods entails negative externalities (spillover of costs, costs that are not borne by their creators) as a result of its weak excludability - this is because owners of the amenity cannot prevent others from enjoying it. Examples: Public Lakes and its fish Reachable from numerous points, the public lakes and the fish it contain are broadly accessible by members of the general public (weak excludability). However, each visitor's consumption of the lake amenity, reduced consumption opportunities for other visitors. Each additional power boat reduced the open area other boats could occupy and each time one visitor caught a fish, the potential for another visitor to do so was reduced (strong rivalrousness). Public parks Non-Toll Roads Public Freeways Insufficient road space to drive at a reasonable rate of speed.

Criteria that affect agency design, location and performance

Policy Coherence (commonalities between agency functions) Branding and credibility Capacity and credibility (don't overburden agencies) Resilience: Is the existing assignment of functions adaptable and sustainable (tech changes can cause regulatory boundaries to shift; then multiple agencies argue about who has jurisdiction over a particular issue → need a sustainable assignment of functions that anticipates these changes and establishes principles that re-allocate tasks efficiently) Cohesion: over times, different units become autonomous and see each other as rivals; simply combining units does not work either Collateral Effects on the Regulatory Ecosystem: creating a new agency/giving new powers to an existing agency disrupts the regulatory ecosystem Political Implications: impacts decisions about where to place authority; this can determine who will resolve particular issues and what the outcome will be

Reintroducing Markets

7. Reintroducing Markets Situation where regulators see regulatory scheme as creating higher costs and no benefits (sometimes even outright detriments) versus deregulating and allowing competitive market forces to resolve the costs and detriment issues Classic example is airline, trucking, and natural gas price deregulation Also cites banking deregulation in 1980s leading to 2008 financial crisis and others However Schuck sees Dodd-Frank as ineffective response

Incredibility

Incredibility: Problem - applied to Lambert Framework?: Many programs can succeed only if the federal government induces private / other governmental actors to do things that they will not do if they doubt gov. will honor its own commitments temporal problem - government will always do what it needs at the moment to fill its obligation to voters (voters needs change over time → policy changes → lack of credibility) Government cannot credibly make the necessary commitments for 2 related reasons: Any rational person will doubt that it will fulfill them, because One knows that government/policy will change direction if future conditions demand it (abrupt changes in policy are common) Primary Ignorance = decision makers do not even recognize that they are ignorant of risks and thus invite program failure without even knowing it Paradox: To function effectively, people must believe that a program is credible - BUT to get effective policy, government / agencies must respond to conditions in ways that impair credibility The credibility problem affects government programs much more than private actors (companies) private actors may have incentives to respond to market changes, but no obligation to do so (as gov. Does to voters) Government doesn't have ways to bind itself to a particular course of action over time like a private company can Examples: 2009 National Academy of Sciences report cited "lack of sustained policies" as one of the top three barriers to promoting renewable energy ACA Some states have resisted ACA's full-cost federal subsidy for expanding Medicaid, fearing that in 3 years when subside decreases, they will be stuck with higher costs Shows how policy changes can violate the Constitution Also incredibly unpredictable as its fate rested in the hands of 1 or 2 swing judges in the Supreme Court - creates massive amounts of uncertainty that will not be settled for years to come Alternative Fuel for Cars Bush proposed $1.2bil program for hydrogen powered cars, 5 years later Obama cut 80% of the funding for this program and repurposed it to electric cars (left scientists and engineers working on hydrogen tech stranded) Statutory Trust Fund : potential solution Institution Congress is seeking to use to increase government credibility Flags certain taxes for fund's use and can only spend revenues for specified fund purposes Congress has used this system in over 150 programs (Social Security, Medicare, highway and airport construction, etc.) Success of this program depends on reciprocity (extent to which fund is benefiting the taxpayers paying for it) and reliance (how much promises are being fulfilled) BUT even the most reliable ones (Social Security and Medicare) are undermined by policy makers' tendency (grounded in their electoral incentives) to overpromise benefits and undertax toward paying for them

Pure Public Goods

"Pure" public goods: Weak excludability and weak rivalrousness Production of a public good entails positive externalities (spillovers of benefits, benefits which their creators cannot fully capture) as a result of its weak excludability - this is because producers of the amenity cannot prevent non-payers from enjoying it. Problems associated with "pure" public goods: Free rider problems Knowledge problem Public-choice concerns Examples: Fireworks The producer couldn't prevent people in the surrounding area from watching the show (weak excludability), and one viewer's watching of the show didn't diminish anyone else's opportunity to enjoy it (weak rivalrousness). Flood control systems/levees Non-contributors could enjoy the benefits of the levees - diminished risk of flooding (weak excludability), and one person's enjoyment wouldn't cause another to be excluded (weak rivalrousness). Ad-Free Radio Broadcasts Non-contributors could enjoy the benefits of the radio - listening to music/news (weak excludability), and one person's enjoyment wouldn't cause another to be excluded (weak rivalrousness). National defense Fire protection Public art

What Makes Good Policy

1. Redistributive policies in which benefits were distributed very broadly and essentially for free Entailed opportunity costs very low and viewed as fulfilling a moral obligation and making a sound investment for the future 2.Relatively simple centralized administration and few implementation obstacles Ex. Social Security: a data management and check-writing operation 3.Administratively more challenging Involve some role for the states and because of concerns about fraud and moral hazard Programs continue to run despite these issues because of morally compelling human need 4.Engaged the actor's self-interest, did not need to create new values or transform deeply rooted behaviors Beneficiaries and administrators pushed against an open door Dominant culture already endorsed and praised the programs implementing actions Government only had to establish entitlement or incentives; let beneficiaries self-interest do the rest

Competition for Performance and Reputation

3. & 4. Competition for Performance and Reputation Markets provide the same service more cost-effectively Market providers make government providers more efficient Force government to compete in cost and other service variables Provide greater effectiveness that government can incorporate into its own programs Example: mere presence of private prisons reduced cost increases in public ones Examples: Mail Delivery (chapter six) Medicare Advantage Encourages seniors to enroll in private health insurance plans Emphasizes capitation payments (fixed monthly payment to hospital/doctor per patient) rather than fee-for-service reimbursement Serves more than 25 percent of Medicare beneficiaries Prescription Drugs Private sector competition has driven down costs in the Medicare prescription drug program Competition to Create Regulation Regulation can reduce incentives for firms to innovate/improve their services Financial institution misconduct is a result of expanded regulatory interventions that falsely assure the public that firms are honest, reliable, and competent, thus reducing the institutions' incentives to invest in building their reputations When the FDIC insures a bank, it signals to consumers that the bank is safe, so the bank does not need to invest further in safety

Public Agency Design

5 basic questions when forming a new public agency What will the agency's substantive mandate be? Where will the agency reside within the existing framework of government entities? How broad will the agency's jurisdiction be (entire economy? Select sectors?) How may the agency execute its duties How should the agency be governed

Midwifing Infant Markets

8. Midwifing Infant Markets Seeking to subsidize and otherwise support market actors who would otherwise not be able to achieve necessary profits to develop a technology or product which would be beneficial due to profits from that development being realized too far in the future Example is patents and also commercial space exploration (p 272) which Schuck says are being stifled by red tape and lack of reform

Earned Income Tax Credit

9. Earned Income Tax Credit of 1975 (EITC) Reason for popularity: encourages work amount of tax credit rises for each dollar of wage earnings up to the statutory limit Critiques EITC still fails to adequately meet the needs of families b/c the labor market where low-income people work is characterized by low pay, job instability, and harsh job conditions EITC claims made in error b/c of: fraud, gov. errors, honest taxpayer errors Lump Sum payment once a year doesn't help beneficiaries as monthly wage supplement would Benefit for non custodial working men is low

Airline Deregulation Act of 1978

Airline Deregulation Act of 1978 Congress regulated Civil Aeronautics Board to control commercial aviation Fares, entry, exit, and terms of service After deregulation: o Consumer welfare increased by 28 billion a year o rates have fallen more on long routes o frequent flyer programs and computer reservation systems have flourished o nonstop service to many cities added Criticisms: airport delays and congestion have increased volatility in fairs has continue traffic control technology has not kept pace

Symptoms of Agency Cost Problem

Allocative Inefficiency Agent fails to extract greatest possible value from principal's resources Productive resources moved away from use in which they would produce the most value towards some use that maximizes controlling agent's own welfare EX: Conan O'Brien and Andy Fastow Both used resources in a way that benefitted them personally, but social welfare would have been better overall had they put resources to their actual highest and best ends Principal Monitoring Costs and Agent Bonding Costs Principals know agents tend to use their resources selfishly This results in principals spending money to monitor agents and agents spending money to prove how loyal they are to their principals = Agency Costs EX: Principal Monitoring Companies have internal controls to prevent fraud - pay accountants and lawyers to review management's job performance (audit) EX: Agent Bonding Agents procure costly certifications or licenses or agree to limit their future profit-making (non-competes = opportunity cost) to prove to the company that they will not steal from them and then seek employment elsewhere TAKEAWAY: Agency Costs = principal monitoring costs + agent bonding costs + the residual allocative inefficiency that occurs when agents still act unfaithfully

Lessons for Policymakers - Agency Costs

As long as people engage agents there will be agency costs Private ordering goes a long way Policymaker's first objective should be to avoid thwarting privately ordered solutions Biggest problem with state law solutions to agency costs in the corporate context lies not in the fiduciary duties but in the primary means of enforcing them: shareholder lawsuits Relationship between plaintiff's lawyer and the shareholder is itself an agency cost → so should revise rules on reimbursement for legal fees and expenses so as to discourage collusive settlement agreements between corporate managers and plaintiff's lawyers Bad idea to have a nationwide rule -> one size fits all rule will invite special interests to seek benefits and removes jurisdictional competition for corporate charters (usually disciplines bad policymaking) Lambert's recommendations Repeal Williams Act Liberalize insider trading prohibitions to allow firms to opt in to disclosure based regulatory regime Resist the temptation to saddle PE and HF with disclosure requirements

Social Security

BACKGROUND/BASICS: Has been popular and effective since inception in 1935 and is the most popular fed program (minus the disability insurance part--more troubled) Social security pays cash benefits to those who have reached retirement age OR suffered death of a spouse. Provides essential financial safety net, and has largely eliminated poverty among the elderly. WHY IT WAS SUCCESSFUL: Administrative costs & error rate = very low (payments calculated under a long-standing statutory formula → agency doesn't need to exercise much discretion, case-by-case adjudication, or law enforcement) Automatically deducted payroll taxes and a substantial transfer of wealth from current workers to retirees Transfers weren't onerous in the past because of workforce, wage, and productivity growth & healthy dependency ratio --> political support has been strong, especially among present/future beneficiaries who vote at higher rates than the young workers who pay into the system WHY IT MAY BE LESS SUCCESSFUL IN THE FUTURE: In recent years, young Americans (unlike their parents) no longer have confidence that the program will be there for them at the same benefit levels when they reach retirement age → the economic and demographic conditions that have sustained the program and its popularity no longer exist This means the program will be likely to fail in the future unless politicians can agree on the steps needed to shore up its financing

Food Stamps

BACKGROUND: Fed government's most important income supplement for most low-income Americans SUCCESS: Well targeted program: 92% of expenditures for the program go to eligible households, with the rest going to defray the federal share of administrative costs Benefits are quickly distributed, and also include a substantial work incentive COSTS: Costs have exploded, now 15% of Americans are on the program, which means the targeting has grown more diffuse Even after unemployment dropped, the program continued to expand Increases in poverty explain only half of SNAP's growth TAKEAWAYS: Reasons for the failures/costs listed above: Eased federal standards, more aggressive enrollment campaigns and laxer enforcement standards by states, states bear none of the costs (this is an institutional form of moral hazard), and individual moral hazard due to expanding job opportunities along with easier eligibility policies

Interstate Highway System

BACKGROUND: Massive scale (over 46,000 miles) and very costly to construct ($129 billion) SUCCESS: Benefits have outweighed costs by a factor of 6:1. Made travel easier, safer, faster, and saved lives. Helped economic growth. COSTS: Took away from pretty scenery, small roadside towns/businesses disappeared, urban sprawl, displaced low income residents, contributes to socioeconomic segregation Needs $92 billion annually to maintain the highways, but given huge increase in number of people on the road from 1960s, we also need modernization and expansion, yet the Highway Trust Fund is approaching insolvency Possible the system lead to underinvestment in alternative forms of transport, especially rail, whose efficiency may be greater for some services Funding construction through gasoline taxes (example of majoritarian politics) has created large, diffuse groups of beneficiaries (drivers) who internalized the costs of constructing and maintaining the system As cars have grown more fuel efficient, drivers no longer internalize full cost of supporting highways, so other revenues will be needed--unclear whether these can be less costly TAKEAWAYS: Despite these numerous costs, the program will continue to be successful because: Immense fixed investment already in the system Increasing population and drivership Political support for physical infrastructure and spending

GI Bill

BACKGROUND: What it does: for returning veterans without a dishonorable discharge who served at least 90 days, extends numerous social benefits: low interest guaranteed loans for homes, farms, or businesses; financial assistance to pursue more education or training; and weekly unemployment benefits for up to a year. Benefits widely used and the federal program widely praised WHAT WE CAN LEARN ABOUT PROGRAM SUCCESS: A caution (Scholar Suzanne Mettler): programs are lauded for their success even when we don't know why exactly they were successful and data is lacking. E.g., the GI Bill: we know little about the scope of the Bill's coverage, the depth of the economic impact, what determines program usage, accessibility, impact on civil and political life after the program's usage, etc. Criticism: "affirmative action program for white males," "ratifies the discriminatory and inegalitarian status quo" Counter to this criticism: it was a product of its time and still paved the way for future success/progress in these areas TAKEAWAYS: GI Bill's success is a product of: Its unanimous support in Congress The feelings of indebtedness Americans felt toward vets of "the greatest generation" Popular conviction that WWII was the "good war" Its focus on enhancing human capital The program's substructure is an example of Wilson's majoritarian politics (chapter 5): large, broad, diffuse groups of both beneficiaries (vets) and cost-bearers (taxpayers), which is a recipe for political support and sustainability.

Bootleggers & Baptists

Bootleggers and Baptists Yandle realized they aren't trying to minimize societal costs and failing Regulators' interest: minimizing their own costs, which are: Cost of making a mistake (favors simple rules applied across the board, b/c requires fewer decisions in which mistakes can be made) Cost of enforcement (favors simple rules with uniform behavior b/c easier to monitor and have false ring of fairness) Political costs (must remember industries and workers in the context) Industry and Labor's interest: Protection from competition, technological change and losses that threaten profits/jobs Bootleggers: e.g. people who support Sunday closing laws Baptists: support same laws and lobby vigorously for them Both parties gain and the regulators win too since law is easy to administer Implication: challenges of regulatory reform are institutional → so reform is difficult

Changes in Supply of Regulation

Bureaucratic incentives (e.g. lifetime earnings improvement for filing lawsuit, whether independent commissions, what voting rules, whether competition from other agencies) affects supply of regulation Assuming demand held constant, congressional oversight affects supple (e.g. FTC less likely to take actions against firms headquartered in Congressman's' districts who sit on FTC Congressional committees, reduction of comm'rs changes it, shift in the party mix of agency oversight committees, whether Rep/Dem chose FTC chairman)

Changes in Demand for Regulation

Changes in the Demand for Regulation How would you upset the equilibrium (hard fought for by existing actors)? Technological change (tech protected/induced by regulation can become obsolete, so regulated business hamstrung by regulations supposedly protecting them) E.g. shift away from landlines increased supply of opportunities for competition and decreased demand for monopoly privilege for AT&T E.g. prediction that b/c Post Office now obsolete technology → demand for regulatory change which treats post office like natural monopoly and bars others from delivering first class mail E.g. prediction that b/c of technical change in renewable energies → demand for regulatory incentives to use natural gas Demographic change (w/migration and population growth, pattern of distribution supported by regulation may become overly costly) E.g. trucking and surface transportation - population changes made old routes less desirable E.g. airline regulation - rising energy prices and populations shifts, shifted demand for regulation Significant changes in factor costs (regulated firms seek regulations based on current prices for labor/materials/capital → if those change, can alter benefits of regulation) E.g. trucking and surface transportation - unexpected change in energy costs magnified costs associated with circuitous routes New info (show taxpayers that regulations not benefitting them more than they're costing them)

Competition for Participants

Competition for Participants Crowding out Effect: people who previously purchased products in the market at some cost or would do so in the future now opt to obtain them from the government program where they are cheaper or even free. This means that government is not expanding access as much as it appears to be doing; many of the "new" participants have simply shifted from private providers to the government provider. Crowding In: government programs draw consumers in to the program, producing more demand (as well as greater staffer need and budgetary costs) than were anticipated. Negative Consequences of Crowding Out and In: Taxpayers have to pay for participants who otherwise would have purchased the product in the private market at their own expense Taxpayer opposition to government spending may increase Crowding in may degrade the quality of the product or service for the participants Scarce taxpayer dollars (which could have been spent on other public programs) will be wasted Examples: Home Loans by Fannie Mae and Freddie Mac Mortgage-backed securities with a low-cost government guarantee replacing private activity in the same market Studies show that eliminating government role would lead to the market simply replacing the government and making sounder underwriting decisions Social Security Retirement Benefits Crowd out private savings for retirement during the working years Reduces private savings' net positive effect on seniors' living standards But this depends on natural tendencies (for some people social security leads them to save more, for some it leads them to save less) Medicaid Crowds out private insurance for long-term care expenditures, which is one of the largest uninsured financial risks facing the elderly Reliance on public insurance alone leaves most individuals exposed to substantial out-of-pocket expenditure Expansion of Medicaid for Children and Pregnant Women For a given level of public expenditure on a coverage expansion, enrollment by those who would otherwise have private coverage reduces the potential number of uninsured people who can be covered Affordable Care Act Will cause many small businesses that now provide private health insurance to their employees to drop the coverage, knowing that the employees will be covered under the ACA Government provision for the poor Crowds out private charitable donations and volunteering This substitution may/may not be desirable depending on your view of the role of government Charities use diverse approaches to serve diverse populations Public programs can ensure equal treatment, formal process, and legal entitlement

Cultural Shift

Cultural shift - UNLIKELY Schuck calls back to the American cultural traits described in chapter four. He acknowledges that cultural change is an incredibly slow process, and even if it were possible on a faster scale, it raises two questions: 1) How public policy can bring it about, and 2) How certain we can be that such a change would be good on balance Four cultural features seem theoretically open to policy-driven change: Decentralization Protection of individual rights Acceptance of social and economic inequality Suspicion of technical expertise and official discretion Ultimately, he decides policy-driven cultural shift is too risky because of unforeseen consequences

Defining Bad Policies

Defining "bad policies": Normative judgement Mix of design and performance failure Example: Flawed policy creating unforeseen consequences, San Francisco's ban on plastic grocery bags on environmental grounds has led to an increase in bacteria-caused illness from reusable bags. Poorly enforced Inefficient or unjust status quo Hamper innovation Private sector can do it well or better and at a lower cost --- private ordering

Defining Regulatory Success

Defining success: Criteria for assessing policy effectiveness, 3 normative features Efficiency: Margins of benefits over costs and cost-effectiveness Most emphasized by Schuck-- all reasonable people should agree inefficient policy should be improved or abandoned Assessed by CBA (see below) Equity: Fairness/distribution Assessed by target efficiency Manageability: Ease of implementation See Ch. 6, 8 +minimizing error and decision costs (Lambert)

Do we want to regulate information asymmetries?

Do We Want to Regulate? Some info asymms are fine (e.g. the Pollock painting example from class) Risks of regulating them: It doesn't fix the problem It makes the problem worse Creates other/new problems (ex: substituting sugar in low-fat food) Public choice - capture of the licensing apparatus (ex: dental boards in the Carolinas, hair braiding) Disparate impact - it's expensive to get a license, different licenses in every state, etc. Adaptive response is invariable - e.g. McDonald's made all these low fat products and disclosed nutrition info, but people didn't want anyways ASK: Does the seller already have incentive to disclose? Sellers of high quality products do (e.g. Apple) If yes → allow voluntary disclosure Otherwise proceed through regulatory options from least-restrictive to most-restrictive if necessary (licensing is probably almost always a no go)

Examples of Information Asymmetries

Examples from Class and Lambert The market for lemons. Steadily ratcheting down the market for used cars, because there's no way to know which cars are good and which are bad. (from TL and class) Fuller explanation from the book: Suppose you have 100 cars, valued between $100 and $10,000 dollars. Every seller knows how much their car is truly worth, but the buyers have no way of knowing. Assuming the buyer has no way of knowing how good the car is, it wouldn't be rational to pay more than $5,000 (the average price) for the car. This will prompt all of the sellers whose cars are worth more than $5,000 to leave the market, pushing the average price down to $2,500. The process continues, unraveling the market. Octane ratings on the gas pump. You don't need to know what they mean to make judgments about it, b/c your car company tells you which grade of fuel to use Closing disclosure for loans from the bank. Came up with the APR to compare different loans - banks are required to disclose this Nursing Home Ratings. Uses star ratings which are helpful b/c we know what is better/worse (as opposed to random numbers)

Externalities - Lessons for Policymakers

In deciding whether and how to exercise government power to address an externality, ask the following Qs: Does the activity at issue involve significant net spillover in costs or benefits? If they are equal, they will self-correct (and no regulation needed) Is the externality a result of an increase or decrease in price? If pecuniary --> ignore To what extent are Cosean bargains occurring? If occurring, let them be. Regulation will only harm. If too big a problem for these bargains, then regulation can come in. Can you encourage Coasean bargains? May be best to remove barriers to transaction costs instead of regulating. Would command and control, Pigouvian, or hybrid scheme create a net social benefit? Which would create the greatest benefit? Assess the degree to which the implementation difficulties and side effects discussed above will afflict each potential regulatory solution: Technological lock in concern? How much info is required? Potential for entry barriers or competitive disadvantages? GOAL is to minimize adverse outcomes and the sum of decision and error costs from externality regulation

Incentives

Incentives Avoid moral hazard! Advocates for repealing or substantially changing some programs (i.e. Fannie Mae, Freddie Mac) and requiring others to disclose their moral hazard (i.e. student loan programs) Programs subject to significant moral hazard should implement some kind of cost-sharing to ensure that people using the program have skin in the game, with amounts scaled to what the beneficiaries can afford Strongly advocates for reforming the system of mortgage guarantees dominated by Fannie Mae and Freddie Mac "At a minimum, we should drop the pretense that these agencies are private entities" -- should be included in the federal budget Recommends Jaffee & Quigley's privatization approach discussed in chapter 5 Strengthen management by objective/performance management -- require each program to specify and quantify their goals in advance, and hold them to those goals Instead of funding providers that give a service to consumers, Congress should focus on using vouchers to allow consumers to make their own choices Increases providers' incentives to act effectively and responsively Allow consumers to make their own tradeoffs Believes this should be the default method for federally-provided noncash benefits Federal policy makers should heighten and exploit competition between states and localities to benefit from that market competition Rewarding effectiveness and punishing failure as people "vote with their feet" and move to high-performing localities, increasing their tax base Congressional/executive order requiring agencies to issue a report showing whether a proposed new program could be "provided as well or better and at the same or lower cost" by privatizing it Congress should systematically reconsider whether and to what extent activities should be subjected to competitive bidding, deregulated, or privatized. Pigouvian taxes are briefly mentioned as a way to reduce harmful activities as opposed to relying on centralized regulation.

Information

Information Policy makers should look to state-level experiments to see what's working Congress should consider creating a federal experimental agency to design and run research experiments before implementing policies Experiment with social impact bonds (SIBs), where private companies can earn money back on an investment into a social program if the social program meets certain goals. No initial cost to taxpayers, and the private company has a strong incentive to rigorously test the effects of the social program (because they can make money on the bond if the program performs well!) Use "big data" to analyze the impact of different policies Ex: Scientists use data-mining techniques to gather information about drug side effects faster than the FDA. Strengthen intellectual property law to incentivize innovation and information-sharing Federal government should make better use of private sources of credible information for consumers Some mostly focus on risks under state law regulations (e.g. kosher foods, fire hazards) but others work in connection with the federal government (bond rating agencies for securities, Joint Committee on Accreditation of Health Organizations for Medicare) Can be misleading: ex. NCAA, LEED certification possibly stifling competition Ensure that low-income populations have the same access to information as those who are closer to the institutions Congress should implement the CBO's recommendation for all federal loan programs Ex: the Federal Credit Reform Act of 1990 calculates government loans in a misleading way

Why do we have irrationality?

Irrationality In Government - more likely to be irrational than markets b/c collective choices are often less rational than individual choices in competitive markets Individual rationality can produce collective irrationality E.g: "voting paradox" - voters don't always vote in their best interests EXAMPLE: government shutdown during Clinton presidency - Gingrich felt like he was acting rationally, but it accomplished nothing for society Sunstein "group polarization theory": when groups deliberate, their views become more extreme than pre-deliberation views Individuals themselves make irrational choices American voters are ignorant → negatively affects elections Predictive irrationality from Kahneman and Tversky study: Same as in TL: people have availability effect (exaggerating phenomena we remember), loss aversion (prefer avoiding losses to making gains), planning fallacy (we underestimate how long things take), optimism bias (we assume we are less at risk of negative outcomes than others), etc. Sunstein People often make "predictably incoherent judgments" Policymakers should deploy "soft paternalism" Cultural Cognition People assess objective evidence that is inconsistent with their preexisting cultural or ideological commitments This bias affects public views on policy - both liberals and conservatives are guilty of rejecting studies they don't like Contrast markets: Markets are driven by self-interested decisions Pareto-superior condition: Transactions do not occur unless they make one party better off and none worse off, absent market failures/coercion/fraud This can never occur in government → decisions inevitably make some people worse off Some irrationality, but it is punished: e.g. bubbles/panics/herd mentality, but markets punish irrationality whereas government magnifies it Bottom Line Collective and individual irrationality in government produce failed public policies Way to solve it: Policymaker can be wiser than avg voter: Even if voters are irrationally opposed to a policy, they often share the end goal with the regulator E.g. even if voters oppose NAFTA, they want a strong economy IF policymaker can enact the unpopular policy and make the good outcome come around quick enough, then policymakers can be more rational that the media voters → however, this is a big IF because it normally takes a really long time to get the desired result Sunstein: soft paternalism Deploy nudges in the form of disclosures, warnings and defaults to nudge the public toward more rational decisions on pensions, fuel economy, etc. Critique: the approach assumes that policymakers are rational

Lack of Credibility

Lack of Credibility Private actors are nervous about working with the government because things change so frequently with the political climate Unfortunately, there's no good solution to this problem. The federal government should try to reduce the risks of doing business for private actors and other levels of government Michael Abramowicz and Ian Ayres have considered some possibilities in their book, but Schuck does not go in to them here

Problem with Lower Level Compliance

Lower-level compliance (securing bureaucratic compliance) It is especially difficult for agencies to cultivate a sense of purpose, status, or solidarity that could induce them to carry out the agency's mission. Management's ability to accomplish this depends on whether the agency is a (1) production, (2) procedural, (3) craft, or (4) coping organization. Production: Managers can observe both the work and its results and thus evaluate workers on the basis of their effectiveness. Example: IRS and Social Security Procedural: Processes can be observed but outcomes cannot, so higher-level officials must manage on the basis of process rather than outcome. Example: Inspectors in the Occupational Safety and Health Administration and in the military. Craft: Managers can evaluate reward operators on the basis of the results they achieve even if the former do not know how the latter are achieving them. Examples: The Forest Service, Army Corps of Engineers, and Justice Department. Coping: Neither outputs nor results are observable. There managers and operators will be in constant conflict; the former will focus their efforts on the latter's most easily measured activities, and effective management is almost impossible. Examples: Academic and police agencies.

Market Failures & Remedies - Public and Quasi-Public Goods

Market failures associated with public and quasi-public goods: Disease: Producers and consumers don't experience all the benefits and costs of their production and consumption (externalities) These externalities exist when the amenities are non-excludable ("pure" public goods and commons goods). See the underproduction example below: If levees were built, it is possible (and probably likely) that a homeowner who didn't contribute monetarily to the construction of the levees would be protected from floods. This incentivizes homeowners to not contribute and let neighbors shoulder the burden of paying. With too many free-riders, there won't be enough homeowners to pay for the levees. Therefore, one can see how flood control/levees' non-excludability induces a positive externality (contributors can't capture all the benefits, as others are benefitting without contributing). Externalities resulting from an inability to exclude are to blame for the welfare-reducing shortages that accompany public and some quasi-public goods. Symptom: Welfare-reducing shortages Welfare-reducing shortages occur when (1) consumers would be willing to pay more for a good than its cost of production, yet the good remains unproduced; or (2) people consume goods, making them unavailable to others, despite the fact that the value the consumers derive is less than the value that would have been created if the goods had been left for others. Examples of welfare-reducing shortages = underproduction and overconsumption. Underproduction example: Flood control and levees If the benefit each unprotected homeowner in a flood zone would get from levee protection, it is likely that the sum would exceed the cost of building levees. Yet, in the example Lambert gave, no levees were built once one got outside of town. Therefore, potential value was squandered from the underproduction of levees. Overconsumption example: Fishing in public lake The lake in Lambert's example used to be full of bass. Now, it has been so overfished that there are few fish left. Remedies: Focus primarily on the two categories of non-excludable goods: "pure" public goods and quasi-public commons goods. While some government intervention may be the optimal response for both types of goods, the interventions most appropriate for pure public goods are not typically regulatory interventions. Commons goods may warrant the same sort of regulatory responses as negative externalities generally. REMEMBER: Non-excludability is the enemy!

Summary of Market Interaction with Regulations

Markets frustrate government enforcement efforts in their initial design, implementation, senior staffing, and broad prosecutorial discretion A program cannot be effective unless two conditions are met Almost all market actors voluntarily comply with its requirements The relatively few violators are either brought into compliance quickly or punished sufficiently to deter future violations Fraud, waste, and abuse continues despite efforts to combat it Rational expectations of market actors can lead to market actors taking steps to reduce the ultimate burden (or increase the benefit) that impending legislation will have on them Within days of the school shooting in Newtown, gun sellers reported a surge of purchases anticipating tighter regulations in the future These adjustments can seriously reduce the effectiveness of the impending policy change, sometimes even rendering it counterproductive Lack of good substitutes for market ordering Social norms are not realistic alternatives to markets, which leaves law as the principal regulator of markets Yet law's limitations frequently render it ineffective under the best of circumstances

Policy Process

Policy Process Schuck toys with the idea of fully revamping Congressional policy processes, but decides that route is a political nonstarter and could have too many unforeseen consequences. Instead, he focuses on more immediate remedies that Congress may actually consider. The Government Accountability Office (GAO) should be given more resources and publicity Congressional procedures should more effectively encourage collegiality and therefore compromise He acknowledges that many proposals (changing the Congressional schedule, campaign finance reform, etc.) have questionable efficacy and political viability He has proposed a legislative checklist to try to catch potential litigation in advance (this checklist does not appear to be in this chapter?) Congress should have to comply with the same rules they're promulgating Increase transparency throughout the domestic policy-making process

Recruiting Markets for Regulatory Purposes

Recruiting Markets for Regulatory Purposes Can take a variety of forms: Taxes Subsidies Disclosure requirements Tort liability Tradable permit schemes (e.g. Cap & Trade) Primarily discusses application to environmental protection with the common policy preference being cap and trade "With cap and trade, the regulatory agency specifies an acceptable overall level of pollution (the cap) and then distributes initial pollution permits to existing or potential polluters - preferably by auction - which the permit holders can trade with others, remaining under the cap. The permits' price will vary according to supply and demand. Those able to control their pollution at a lower cost than the prevailing permit price will do so and sell their permits to those polluters whose control costs are higher than the permit price, which will induce firms to develop lower-cost ways to reduce their pollution." (p 273) Schuck cites as perceived superior to traditional command-and-control schemes to achieve pollution control but argues that in practice political factors, perceptions of "cap & trade" as a license to pollute, requirement for difficult to obtain information and need for strong enforcement which may not be feasible (particularly across international borders) undermine effectiveness of implementation of cap and trade systems

Problems with Selection and Tenure

Selection: The main issue with selection is the process by which presidential appointees to executive branch agencies are vetted. Agency effectiveness is also undermined by leadership vacuums caused by protracted vacancies at the top. Tenure: Political appointees cannot guide their career subordinates effectively if they are too transient, to lead effectively, they must remain on the job long enough not only to learn about the substance of programs and how to operate in the DC networks but also to use what has been learned. There is an overall median tenure of 2.5 years for presidential appointees from 1989-2009. Cabinet-level officials had a median tenure of 3.3 years. Examples: Department of Homeland Security: Over 40% of its senior leadership positions were either vacant or had an "acting" placeholder when the president finally nominated a new secretary in October 2013. The underenforcement of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) is partly due to the absence of a Senate-confirmed director for 6 years. In more than 5 years since the Federal Home Finance Agency was created to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the Senate has failed to confirm a director despite the pivotal role that these agencies had in the housing and banking crises.

Club Goods

Strong excludability and weak rivalrousness Think: You have to pay a cover to get into a club, and if you don't, the bouncer can exclude you. Examples: Satellite Radio Programming By scrambling its signal for all but its subscribers, the satellite radio provider is able to exclude non-payers from enjoying what it has produced (strong excludability). However, one's enjoyment of listening to the satellite radio has no effect (does not impede) another's enjoyment of the satellite radio (weak rivalrousness). Membership/Subscription Base Information goods/IP Laws

Structural Reforms of a Constitutional Nature

Structural reforms of a constitutional nature - UNLIKELY As with policy-driven cultural shifts, unforeseen consequences are a huge risk here Schuck points to a few constitutional shifts that could address policy problems: Changing representation in the Senate and Electoral College: Both prioritize regional interests over national ones -- changing this model to focus more on national concerns may shift policy in a more liberal direction, but he believes the gains in securing more political accountability and equality are worth the political effects Giving the president line-item veto power: Schuck believes this could lessen the effect of special interests on legislation by removing pork barrel projects and allowing the President to pursue the national interest Reducing partisan and racial gerrymandering: Schuck argues that gerrymandering produces legislators that are less responsive to the needs of the median voters in their district, who are mostly concerned with challenges at the primary stage that tend to be dominated by a small number of voters at the ideological extremes, and whose seats are otherwise pretty safe. Campaign finance regulation: He finds this one particularly hopeless.

Subsidizing Markets

Subsidizing Markets aSeek to alter market by subsidizing markets in hopes of influencing market participants to make certain decisions in ways supportive of desired policy outcome Forms of subsidies Direct cash or near-cash subventions (food stamps, social security) Loan or other guarantees to reduce cost of capital (student loans, VA mortgages) or reduce risk (Pension Benefit Guaranty Corporation) Exemptions or deductions from otherwise applicable taxes ("tax expenditures") Regulatory exemptions (small business carveouts) Public investments in private companies (2008 bailouts of AIG or GM/Chrysler) Provision of free or below-cost benefits (VA hospitals for veteran healthcare) Special competitive advantages (lower borrowing costs for big US banks seen as inherently insured by US Federal Government) Others Systemic inefficiencies of subsidies Target inefficient (recipients of benefits of subsidies are not always the ones policy makers intended or who would most benefit from program; e.g. high income people moving into gentrifying neighborhood benefiting from loan discount program targeted at supporting low income home buyers to revitalize same neighborhood) "recipients would have engaged in the desired conduct anyway [here moving into gentrifying neighborhood] (without the subsidy), the do not need the subsidy, or both." (both present in above example) Other example is subsidizing (through tax expenditure) IRA savings and high cost-high benefit healthcare plans even though high income users of both would use them anyways Predictably bad bets because they create moral hazard Housing Loans (p 259) Continued issuance of subprime loans backed and sold by Federal Housing Administration Concentrates loans in areas likely to generate very high foreclosure rates Low income housing (p 260) Example of failure is government built, funded, managed low-income housing (supply side solution) Schuck prefers market solution of vouchers However, "Section 8 has its own problems, chiefly in its implementation - for example many landlords refuse to accept Section 8 tenants, the vouchers are not worth enough in low-vacancy, high-rent communities, and the program's habitability conditions often go unenforced - but its target efficiency makes it a better policy instrument for meeting low-income housing needs than supply-side subsidies." Student financial aid (pp 260-66) Schuck sees as "...poorly targeted. Relatively few of the subsidies go to low-income families; instead, they tend to transfer resources 'from the less well off to the more well off.'" (p 261) Moral hazard: the student loan program "...is an engine for moral hazard. ...the borrowers have few assets and the government demands no collateral, has no underwriting requirements, and asks little or nothing about students' ability to repay or about what sort of education they intend to pursue." (p 262) Perverse incentives: Contributions to tuition increases (liberal loan standards increases demand for higher education since more people can pay for it with easier loans and supply-demand forces then drives up cost to increase supply to meet demand signal) Encourage institutions to substitute federal money for their own financial assistance, thus reducing federal aid's effect Encourage many marginal students to overinvest in higher education by forgoing cheaper, arguably more effective vocational/professional training that may be better for them on balance but that are undervalued if they underestimate their future risk of default on student loans "...disproportionately benefits those who need it least, and harms the many students who are encouraged to borrow sums that they cannot repay because they drop out of school, end up in jobs that pay too little, or default for other reasons." (p 265) Green energy (pp 266-69) "Unless one views clean energy as a moral imperative that trumps all other considerations, it is far from being cost-effective relative to conventional sources..." (p 267) Solyndra example - "..received $535 million in federal loan guarantees for low-cost solar cell production before closing its doors, partly due to unexpected Chinese competition." (p 267) Ethanol Shows influence of political forces in undermining and making worse policies (which Schuck sees as) already bad policies Lower demand for gasoline due to improved efficiency cars required higher amounts of ethanol due to policy's formula which led to higher demand for corn and other foodstuff agricultural products diverting food to make fuel, increasing food prices especially when combined with drought Schuck argues ethanol mandate raised gas costs which disproportionately affect low income populations which spend larger portion of their budgets on fuel Also argues that ethanol is not cleaner, particularly considering fuel expended on growing and processing corn into ethanol

Supplementing Markets

Supplementing Markets: Highways: reducing congestion Inefficiency: Expanding capacity of roads is a poor way to solve the problem: for every $1 spent, consumer sees $.11 of benefit Gas tax is insensitive to congestion and pavement damage factors, which leads policy makers to opt for thinner, faster-deteriorating, higher cost (in the long run) pavement Better strategy: Replace gas tax with marginal cost congestion tolls and pavement-wear tax Pave road with optimal thickness pavement Rail Transit Except for BART, every urban rail transit system had high operating and capital cost that was heavily subsidized and underused by tax payers Amtrak loses money because it is required to exist in most states, even though it operates at a loss in most of them Subsidies not justified because the train is not a public good with localized benefits in the wealthy NE Train hasn't gotten faster in 40 years and $50 billion Acela (high speed) can get people from Washington to NY in 2:45 at its fasted - 15 mins. Slower than the train in 1969 could Management of Public Land Inefficient: developers can get land for $763k and sell it the next day for $4.6M (NYTimes article) US Postal Service Problems: excessive wages and benefits to workers, skewed pricing system Labor Markets Goal: subsidize information/training to improve worker efficiency Evaluation: of 47 programs, only 5 were evaluated Results: of the 5, not all were successful, and success differed across demographics

Command & Control

Traditional means of regulating negative externalities (in environmental context) is for government to impose limits on each producer's spillovers and punish those who exceed their limit. Each producer is subject to emission limitations expressed in a permit based on best available technology. Command & Control: expert government agency (EPA or counterpart) commands a max activity level from each regulatee and controls its operations to ensure attainment of the goal. 2 salutary effects: Reduces magnitude of the externality (diff b/t indiv and total marginal costs) Often induces the regulatee to reduce the level of spillover-causing activity so as to comply w/ permit Drawbacks: Knowledge Problem: Assumes regulators know and process tons of info Imposing a one-size-fits-all standard squanders resources (smoke stacks-- east v. west coal) Implementation difficulty: Regulation involves centralized economic planning, but "planners" can't know or understand the full picture, but regulators are supposed to make refined judgments on the basis of info about relative costs and benefits, but don't always have this info Side effects: Technology can actually delay innovation, or if only a level of performance is prescribed, they may have an incentive to develop cheaper technology to meet that level, even if more expensive ones could reduce pollution even more CC usually involves detailed orders directing regulatees to do things a certain way, which can be useful to businesses seeking to gain advantages over their rivals. And regulators pursuing the public interest do not shed their self-interested nature when they step into the public square (they often benefit from lobbying in favor of questionable rules) Can result in lack of fighting bad, non-protectionist regulations So protectionist rules that impede nascent competition are common under CC regimes Interest-group manipulation/public choice predicts Firms obtaining a regulatory advantage when CC squelches competition may deprive consumers of benefits and reduce overall social welfare (OSW) When firms spend money lobbying for protectionist rules instead of investing in product development or lowering prices, wealth that could have been created is squandered. --> generates waste Raw protectionism is unseemly, so legislators and regulators who don't want to be seen nakedly favoring one group over another seek out some politically attractive or palatable "face" to make an altruistic case for the rule at issue.

Welfare Reform Act of 1996

Welfare Reform Act of 1996: TANF: reduced dependency on cash assistance by ending automatic entitlement to benefits pressure on states to adopt aggressive policies to restrict or eliminate cash benefits to poor parents who were capable of working but did not now work imposed financial penalties on states that failed to implement families could receive federally financed benefits for no more than 5 years Benefits: welfare rolls experienced a large and sustained decline employment rate of low-income single mothers reached highest level ever child poverty rate saw first decline every index of child wellbeing except obesity improved Criticisms laws incentives have not lifted all mothers and their children out of poverty Many who have benefited are stuck in low-wage jobs, and other do not work full time

Problem of Information Asymmetries

Why Are They a Problem? What are the consequences of informational asymmetries? "Bad" deals -- moral hazard Moral hazard = "a temptation to engage in inefficient, but obscurable, conduct for which another must pay." E.g. car that looked like a peach turns out to be a lemon → it was a bad deal BIGGER PROBLEM: No deals -- adverse selection Adverse selection = "occurs when something causes 'bad' market participants -- those offering below-average value to their trading partners -- to be overrepresented in a pool of buyers and sellers."

Privacy

• FTC • Web tracking 101 ○ Lightbeam - every time you visit a website, your computer is tracked not only by that website but by third partites as well ○ Lightbeam tells you who these companies are and visually shows you how many companies are watching you ○ Third parties contract with publishers to let them know when people click on their pages ○ Benefits § More relevant ads § Selling data - creating wealth that wouldn't otherwise exist § Deterring anti-social behavior § Without this we wouldn't have free websites □ Compared to a world where we banned behavioral advertising, what would happen to the internet? • COPPA Rule of 2012 ○ Require people who collect data to notify the parents of children that their children are being tracked ○ Notice and choice - few restrictions on what people can do to use/share your data, but if its privacy implicating then you need to tell them what you're going to do ○ If you collect information from a child under 13 you need special parental consent • "Do Not Track" ○ Influence a standard-setting body ○ Regulation by raised eyebrow - don't have power to tell them to do anything • Internet standards • Compare the two efforts • Technologists and economists Hyman Summary • Entire subject is an informational asymmetry problem • Logic of notice and consent regime is that it solves at some level the informational asymmetry problem • Not the only posisble solution • Susceptible of analysis as a values question - thinking about regulating it as a values question doesn't fit into Lambert but real phenomenon • Protection of vulnerable individuals - don't let people contract until age of majority, etc. • Extent to which people think about the values question as either a real problem or not a problem has generational overlays • Kids are ok with being tracked, grow up to be voters • Don't understand technology - consent? • Surveillance technology • The way in which norms in law interact with one another • Regulation by raised eyebrow is an attempt to create norms • Do not call ○ 2003 ○ Series of litigation ○ Agency threw everything at it ○ Huge success • Technologically do not track is a very different kind of problem • Agencies prefer to do easy things that will be successful • Regulatory design issue ○ Law as pass a law and people stop doing it But you can also prohibit it outright, substantively regulate terms, standard setting org, forced disclosure, do nothing

Fringe Finance

Fringe Finance Regulatory response to information asymmetry that ended up being a failure APR - lenders know more than people who need loans Deception/fraud Externality Lenders didn't internalize the problem of people defaulting People end up being dependent on the state Maybe Lambert's framework does not solve all problems Sometimes industry wants to be regulated for respectability Small loans called salary loans - borrow against future salary Usury laws - limited how much you could charge to 6-7% in a year Stopped the small-loan lending but then those people had no access to credit Did it underground Did it through the mail - mailing small loans from Maine to New York Made it so that making a small loan was no longer profitable State laws so easier to circumvent Bad targeting of a regulation becaues it targetd the entire market - didn't make sense to have usury laws for small lenders but did make sense for large loans But social good for large loans but poorly targeted to small loan lending market Example of how regulations can initially be effective and then become ineffective As people moving to cities - market is changing Became a failure because it wasn't updated Russell Sage Foundation Motivate private industry to deal with this problem Try publicizing this issue, distributing films to philanthropic organization Bootleggers and baptists - set up American Association of Small Loan Brokers Bootleggers - small loan lenders who wanted to operate legally Baptists - Russell Sage Foundation Populists thought they were legitimizing what should not be available period Closed consumer lending organization during WWII USLL Required lenders to be licensed by the state and submit to examination by administrative agency Allowed licensed lenders lend $300 or less and charge up to 3.5% per month on declining loan balance Requiring lender to give borrower statement of loan amount, rate and maturity Banned or limited some debt collection practices Credit card debt and home equity loans - rules didn't get updated Law successful by drafters' goals - goal was to legitimize the enterprise Price regulation? Truth in Lending Act Jurisdictional chaos - each lender has own form of disclosure Numerous organizations trying to achieve the same goal but all operating on own terms Information asymmetry problem? People couldn't compare loans But after this act, people weren't shopping around for different terms on loans Giving people more information didn't address the root problem Giving a lot of borrowers a defense to a debt collection suit - easiest way to defend themselves is to say there was a violation of the truth in lending act Created a way for people to get around paying their debt

Externality

An externality occurs when some of the cost or benefit of an activity is experienced by someone external to the activity. Positive (benefit spillover): makes society poorer Producer produces less than is optimal since he doesn't receive all the benefit Negative (cost spillovers): creates waste Producer produces more than is optimal since he doesn't bear the entire cost. Symptom 1 (obvious): unfairness to the bearer of the externalized cost or creator of the externalized benefit Disease: spilled over cost or benefits Symptom 2 (less apparent): society is poorer than it otherwise would be because decision makers are able to offload some costs or unable to capture all benefits, causing suboptimal market output to occur: Assumption that decision makers bear the full costs and benefits of their choices (and thus produce optimal amounts of goods/services) is not always the case Remedies, Implementation Difficulties and Side Effects: Example of externality: environmental pollution. Focus primarily on negative externalities Note: common law has provided significant protection against negative externalities, but there are limitations to this.

Lessons for Policymakers - Markets

Lambert's "Lessons for Policymaker" First step after determining the market failure is a market power/monopoly, policy makers must decide whether to rely on antitrust, residual regulator, or to impose some form of direct regulation Residual regulator is the regulatory entity burdened directly with regulation of said market For example: DOJ may see Amazon as a market failure problem, but rather than address directly would defer to FTC to address since FTC has more direct oversight role of market actors Ex ante responses Price regulation Franchise bidding (preferred by Lambert) Public provision Ex post responses Antitrust (applicable in most situations, except natural monopolies) A more flexible response because there is less of a knowledge problem and public choice/agency capture than direct regulation or public provision When liability is narrow contributes to minimizing error and decision costs Natural monopolies Some form of direct regulation is appropriate but Lambert prefers franchise bidding over price regulation or public provision When there are not enough producers competing for franchise bid then price regulation is appropriate Price cap is preferred price regulation (versus rate of return regulation) because preserves regulatees incentive to achieve productive efficiencies In rate of return regulation, companies have a cap on profits they can derive no matter how innovative or efficient they are, so this decreases incentive to innovate/increase efficiency in price cap, if can reduce costs well below costs, the most innovative companies can keep those profits between cost of production and price cap which incentivizes innovation and efficiency gains Public ownership is rarely appropriate because it has highest knowledge problem and greatest risk of agency capure Franchise bidding again mitigates the knowledge problem because when private entities are bidding for right to gain monopoly rights that incorporates the competitive market value of the monopoly rights Reduces regulators discretionary authority to reduce risk of agency capture and other public choice concerns When not enough producers for competitive

Perfecting Markets

Perfecting Markets Antitrust Policy: Antitrust actions are likely to lag behind market developments and be less effective than markets in stimulating competition Cases where the court broke up competition failed to increase competition and reduce consumer prices Challenges to mergers have rarely benefited the public, and sometimes harmed it Benefits to consumers are negligible compared to enforcement costs In the case of AT&T, more regulation from the FCC would have been better than breaking company up Economic Regulation: regulating prices/entry/exit/conditions of service in industry on the theory that not regulating produces ruinous competition/monopolies/consumer exploitation through high fixed and low variable costs Agricultural Support Programs are inefficient and regressive: Methods: Direct payments, price supports, loans, subsidized insurance, environmental protection subsidies, acreage restrictions Problems: often make farmers wealthier than non-farmers, large net welfare losses, disproportionate benefit to biggest farms, excess consumption of scarce resources like water, members of Congress are direct recipients of subsidies Solutions: Freedom to Farm Act shifted farming toward the free market but was short lived; commodity prices fell and Congress resumed payments to farmers even after costly conservation requirements expired/were not renewed Cost: Gains to industry fall short of losses to consumers Immigration Policy: Goals: family unification, labor market expansion, economic growth, innovation, protection of human rights, diplomacy, diversity Method: border enforcement and interior enforcement Failures: borders/interior enforcement is very costly and very ineffective; no policy to address mixed-status families; workers who are eager to come here end up in other countries with more flexible and responsible immigration policies Safety Regulation: (Difficulties) Implementation Delays: create huge losses of life and property (firefighting) Offsetting Behavior: Standards of the National Highway Traffic Administration are offset by riskier driving induced by airbags and antilock brakes Child-resistant caps on medication failed to reduce poisoning rates because parents assumed the caps reduced the risk of poisoning and were less careful about putting the cap on OSHA (Occupational Safety and Health Administration) policies are not great at reducing accident rates Lower rates reflect workplace mechanization, independant market incentives to reduce accidents (worker compensation, morality), weak enforcement, and inspectors' tendency to focus on easily identified and corrected hazards Regulation of Externalities: Environmental Regulations Difficulties: General lack of ex post/after the fact analysis and abundance of ex post/ before predictions means that outcome analysis tend to underestimate cost, overestimate benefit (since it is based on predictions, not what actually happened) Hard to identify what factor caused what outcome Pollution rate declined at same rate regardless of whether federal or state government was in charge of regulation, indicating that a third party was responsible Some programs retard polluters from promoting cleaner methods by imposing tougher standards on new "clean" technology than on existing tech

Inflexibility

Problem - how to apply to Lambert Framework- Incentives? Government is not equipped with skills to quickly adapt policies once a program has been put in place, it's incredibly difficult to change Public policy driven by public expectations - often created and reinforced by politicians and interest groups, even when they are not socially desirable Politicians are caught up in a constant campaign Makes them less likely to be bold and change the status quo Opposite problem of "lurch" policy right before a big election when politicians want to make a splash - policy is either in a lull or lurch at all times (never in an ideally efficient place) Policy Inheritance Policy innovation is severely limited by the policies adopted earlier, which leave current policy makers limited freedom of action Costs for old programs have increased while the original policy rationale has eroded (policies from WWII still in place largely unchanged) Potential Solution: outside forces and technology enable policies to change more rapidly (invention of airbags, better processing systems that enable agents to detect crime more quickly) BUT the social changes that increase government effectiveness are vastly outweighed by those that impair it (Delaney Clause) Examples: Head Start - see previous section Reluctance to remove a costly program that has very little benefit Poverty Index Refusal to update the misleading poverty index after half a century Gas Taxes Huge policy incentives to raise gas taxes but would be "political suicide" to do so - so they have not been raised since 1993 - makes some issues "politically untouchable" Judges v. Politicians Unelected judges with lifetime tenure more flexible than politicians on topics like gay marriage, etc. - changes can often come from judges before they come from legislature Budget Control Act of 2011 "Kicked the can" of tough policy decisions to the lame duck Congress after the 2012 elections to avert public fury that would come from a government shutdown Government rather put off tough decisions than actually make them US Postal Service Still heavily funded despite numerous inefficiencies - reluctance to change No Child Left Behind Act In desperate need of overhaul yet has not been touched for more than 5 years bc of reluctance to change Social Security - discussed in depth in chapter 11 Farm Subsidy policies Terrible policy in modern times but originated in Dust Bowl and New Deal and politicians are reluctant to scrap them Tax code's definition of "Family" Not built for modern times with children born out of wedlock, differently structured families, etc. Delaney Clause - 1958 Prohibited sale of processed foods with additive or pesticide (regardless of concentration) that causes cancer in animals or humans Analysts by 1970s could detect microscopic traces of chemical residues, rendering clause unworkable and dangerous to limiting food supply Congress finally repealed it in 1996 long after it had been abandoned

Redirecting Markets

6. Redirecting Markets "Policy makers sometimes want to channel existing market activity into areas that they believe have been neglected." (p 269) Community Reinvestment Act of 1977 (CRA) Sought to ameliorate redlining by requiring banks to make certain loans to low income areas consistent with "safe and sound banking practices" Schuck cites (and seemingly prefers) studies which argue that effort to make loans in these areas (given "safe and sound" allowance of policy) would occur anyway given banking as a competitive market

Immigration and Nationality Act of 1965

8. Immigration and Nationality Act of 1965 Repealed system of racially and ethnically biased national origins quotas in place since 1921 Allocated overall visa quota according to preference system of 7 categories based on family ties, labor skills, and Cold War refugee claims Eliminated discrimination on the basis of race or national origins in granting permanent admission to the United States Substituted per country limit of 20,000 admissions for every country outside the Western Hemisphere Transformation the Act made to Society (almost all beneficial) Americans support legal immigration because of the social gains that is has produced economic expansion and competitiveness population growth cultural diversity and enrichment invigoration of religious communities promotion of tolerance solidarity that Is civic rather than primordial Negative Effects of the Law: · large scale illegal immigration What Caused Success of the Policy: federal distribution of a resource that is essentially free to the government: visas mission deeply consonant with American ideology: melting pot and national renewal through self-reliant immigrants strong evidence that legal immigration of highly skilled workers increases innovation, entrepreneurship, and economic growth

Designing a Regulatory Agency

Designing A Regulatory Agency Organizational issues in government ("jurisdictional chaos") are pervasive Examples: before 9/11, 40+ federal agencies to fight terrorism; HUD had 23 economic opportunity programs; 90 childhood programs between 11 agencies 15 federal agencies share responsibility for food safety Division of responsibility over particular areas can cause problems when separate agencies share jurisdiction/must coordinate efforts; especially when these agencies have conflicting assessments of the nature/seriousness of certain problems; or they agree on the nature of the problem but not the solution High cost associated with redundancy But there are some benefits of redundancy: encourages "deciding agency" to take account of factors it would otherwise ignore; helps coordinate resolution of complex regulatory problems; resisting capture, especially when dealing with political pressure; allows President to select from a wide variety of agencies

Excludability v. Non-Excludability

Excludability: Can keep people from consuming through fine or restricted access. Doing most of the work when issue is bad Gives rise to Lambert's observation that to the extent you can move things between boxes, you may have regulatory solutions available When there is weak excludability, negative externalities become an issue. Things where regulation may be appropriate bc likely to be underprovided Non-excludability: Non-excludable means that it is impossible, or at least impracticable, for the producer of the amenity to prevent non-payers from enjoying it. Leads to underproduction or over-consumption. Externalities result from this since they have no owner who is capable of limiting consumption. When goods are non-excludable, it is impossible or at least impracticable for the producer to prevent non-payers from enjoying it.

Problem with Layering

Layering The federal bureaucracy is notable for the sheer number of political appointees who penetrate deeper into the bureaucracy, creating a "thickening" of the leadership cadre in federal agencies. This development largely reflects two factors that together increase pressures for promotion: (1) the rapid aging of the federal workplace as baby boomer employees unleash what one study calls a "retirement tsunami," and (2) the desire to circumvent frequent congressional pay freezes. Bureaucratic thickening is to blame for NASA's Challenger and Columbia tragedies and the FBI's failure to notice its low-level agents' warnings about specific terrorist threats before 9/11. Leaders' openness to technical expertise also declines as the layering between them and their career subordinates increases. Reorganization can actually magnify the thickening problem, rather than help it.

Morrill Act of 1862

MORRILL ACT: Senator Morrill (VT) proposed land grant colleges that would teach military tactics and agricultural science and engineering (idea was using land grants to encourage states to implement federal policies) States received land grants of 30,000 acres for each of its members of congress When fed government didn't own enough land in a particular state to fulfill grant terms, it gave that state a scrip with which it could acquire and sell federal land in other states, and used proceeds to purchase land for the college within its own borders Second Morrill Act in 1890: extended grants (now cash not land) to former confederate states but required they adopt either a race-blind admissions policy or establish a separate but equal institution for persons of color. States chose the latter, which led to deplorable discrimination. NOTE: Schuck does not explicitly explain why this is a policy success

Lessons for Policymakers - Public Goods

Non-rivalrousness is relevant in determining the appropriate policy response to non-excludable goods. Policymakers should regularly revisit policies aimed at addressing non-excludable goods to ensure that they remain warranted in light of technological developments rendering certain amenities excludable. Policymakers should strive not for ideal production (because no approach can attain that), but rather for the best achievable outcome. Optimal approach: Policymakers should catalogue available policies, assess outcomes under each, and select the approach that generates the highest level of welfare. A good starting point for policymakers confronted with a non-excludable, non-rivalrous good is to ask whether this type of public good is regularly provided by the private sector in this type of community. Most publicly viewable art projects are probably best provided by the private sector. Government provision is almost certainly optimal for national defense. Flood protection may be somewhat in the middle. Policymakers should always remember, though, that there are pros and cons to both private and government provision of public goods, and they should opt for the latter (government) only when they have sound reasons to believe that it promises greater net welfare. Because both government and private provision of public goods are likely to diverge from the ideal production level, the optimal approach is the one that is likely to diverge less. Because private providers of public goods rely on voluntary participation by contributors, they face a constraint that will prevent overprovision and lean toward underprovision.

Agency Cost Problem

Problem (very pervasive) Type of Market Failure Combination of an EXTERNALITY and an INFORMATIONAL ASYMMETRY problem Externality The separation of ownership and control creates externalities b/c the principal cares a lot about incremental value but the agent does not → results in social waste Informational Asymmetry The principal does not always know that the agent has failed to maximize their resources The agent often knows much more about how to best allocate the principal's resources Agency Costs = welfare losses that result from principal-agent relationships Agency Costs = principal monitoring costs + agent bonding costs + the residual allocative inefficiency that occurs when agents still act unfaithfully See below Definition of Principal / Agent Relationship: Results when one person (principal) manifests consent that another (agent) act on his behalf and subject to his control and the agent consents to do so Your lawyer and your stockbroker are your agents, your barber is not (they provide a discrete service, but do not purport to BE you) Nearly every type of business involves agency relationships Employees are agents of the company Directors and CEOs are agents of shareholders Principal - Agent relationships involve separation of ownership and control Principal owns resources but agent controls those resources Ultimate ownership of the value that the agent creates using the principal's property belongs to the principal BUT the principal will typically distribute some of that value to the agent as compensation for their services

Mismanagement

Problem: Informational Asymmetry / Incentives / Agency Costs Endemic fraud, waste, abuse, and corruption are the clearest signs of mismanagement (abbreviated often as FWA and analyzed as a whole, rather than 3 separate elements) Fraud = "A type of illegal act involving the obtaining of something of value through willful misrepresentation" Tax fraud, documentary fraud (immigration) Waste = "Involves the taxpayers not receiving reasonable value for money in connection with any government funded activities due to an inappropriate act or omission by players with control over or access to government resources. . . . waste relates primarily to mismanagement, inappropriate actions and inadequate oversight" 10 most wasteful programs in US accounted for $107bil in improper payments in 2011 Abuse = "Involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances" FWA occurs because officials' incentives to combat it are relatively weak Program fragmentation and overlap (programs with nearly identical missions but separate overheads) Even if a program is mismanaged, it might be better than no program at all Ex: Social programs, defense contracting Examples: Kidneys Potentially half of discarded kidneys could be transplanted if federal Organ Procurement and Transplantation Network weren't poorly managed outdated computer matching program, red tape, overreliance on inconclusive tests, and even federal age discrimination laws DEA Had to pay $4mil to a student it mistakenly jailed for 4 days and who almost died as a result Veterans Administration Long claims-processing delays which even predated 9/11 makes program a mockery when it's supposed to provide benefits to disabled vets Congress's Hypocrisy Congress often violates the same rules it imposes on others Clean fuel requirements, Secret Service sex scandal Government Contracting Especially vulnerable to FWA Often managers in government lack business skills to be effective managers

Rigidity

Rigidity Congress and the executive branch should require that new subsidies and expenditures come with proposed offsetting reductions in other areas (aka "paygo") Apply CBA to corporate welfare programs to see where waste can be cut Mandatory disclosure for interest groups Sunset provisions for federal programs that require Congress to reevaluate them for effectiveness Disadvantages: Congress may just blindly renew it, reconsideration of existing policies may magnify credibility problems

Simplifying Markets

Simplifying Markets "Most common form of market simplification is to provide consumers with better information in more standardized formats" p 255 Benefits of disclosure regulations Compliance costs seem low Respect consumer choices (presumably by allowing consumers to make more informed decisions but not mandating a specific decision) Promise to make choices better informed and more rational (barring influence of behavior psychology issues discussed elsewhere) Reasons why disclosures fail to achieve desired ends "information imperfections in product markets and workplaces do not seem to cause significant welfare loss" Schuck argues that many of the benefits associated with improved labelling would likely have occurred anyway through market driven disclosure or media efforts Example is graphic warnings on cigarettes arising concurrent with or after significant litigation on hazards of smoking where public already knew smoking was bad Also risk requiring disclosures that are not targeted to solve problem or require policy makers to make decisions on how to target disclosures which may create misperceptions amongst consumers and prompt them to make decisions which might not achieve desired policy outcome of said disclosure Example of Dodd-Frank disclosure of ratio between CEO pay and median salary led to significant conflict in setting exact bounds of policy prior to enactment (took government three years to finalize) and still is subject to skewing by including or excluding certain lower salaries to make ratio seem higher or lower while still complying with regulatory mandate; has had perverse effect of CEOs seeing what their peers are making at other companies and demanding higher pay

Private Goods

Strong excludability and strong rivalrousness Examples: Most consumer products and services Beer Brats

Regulation of Public Goods and Quasi-Public Goods

Steps to take: Before using government power to secure public good production, policymakers should ensure that the amenity at issue really is non-excludable. Two points should be kept in mind: A non-rivalrous amenity is not a public good simply because the producer cannot exclude some consumers from its enjoyment. If there are some consumers who (1) can be excluded from an amenity and (2) collectively value that amenity enough to finance its creation, the amenity is not a public good. Example: Broadcast radio programming with advertisements. NOTE: Advertisement-free radio is a public good. Technological change may transform amenities from one type of good into another. Example: Radio programming Advertising-free radio was a public good because it was non-rivalrous and non-excludable for all consumers. BUT, technological developments allowing for the creation of satellite radio programs like Sirius and XM made it so that FCC could allocate certain radio spectrums to broadcasters and specific broadcasters could avail its amenities to pay consumers. IMPORTANT: Technological developments enabling excludability may not be sufficient to transform public and commons goods into club and private goods; regulatory adjustment may be needed as well. For the example included above, the FCC allocating certain radio spectrums to broadcasters was crucial to the effect technological innovation had on radio programming. Public goods can be supplied by both the private sector and the public sector, although the private sector does not normally do an adequate job. Problems that thwart private efforts to provide public goods: Failure of project due to inadequate funds → Mechanisms to fix: "assurance contracts" or "dominant" assurance contracts. Assurance contract: In an assurance contract, project organizers promise potential donors that if sufficient funds are not raised (or committed), the organizers will return (or refrain from collecting) the donors' contributions. "Dominant assurance" contract: Under such a contract, an entrepreneur seeking to provide a public good promises potential donors that if the project fails for lack of sufficient funding, their funds will be returned and they will be paid some amount (or given some other tangible benefit). Side-note on club goods: Club goods typically exist in abundance because they are non-rivalrous and excludable, which means they can't be over-consumed, and they DO NOT entail negative externalities. Because of this, there is generally no need for affirmative government responses to prevent welfare-reducing shortages. IMPORTANT: Although government responses are not need to prevent the non-existent welfare-reducing shortages stemming from club goods, certain institutions are necessary to preserve the excludability that facilitates optimal production of club goods. Most notable are property rights. Property rights and the right to exclude (a stick in the bundle) help ensure the optimal production of club goods. This is true whether the amenities are tangible or intangible. The only difference would be the type of property right (real, personal, intellectual). Without property rights, the amenities spoken of would be underproduced public goods (weak rivalrousness and weak excludability). NOTE: Technological development (intellectual property rights) can move goods from public goods to club goods. Legal considerations: There would be a significant downside to legal changes reducing property protections for tangible and intangible amenities, particularly broad rights to exclude.

Suppressing Markets

Suppressing Markets Works on function of higher costs of regulatory compliance, the more likely it is that market actors will decide to avoid incurring those costs by transacting in a closely substituting market (i.e. grey markets, black markets) Compliance cost must exceed some level of moral or economic unwillingness to leave a particular market (e.g. while it may be somewhat uneconomical to continue operating in the formal, legal market; some companies will remain in that market rather than depart to avoid reputational harms or the possibilities, however remote, of enforcement for departing; ex: a bank may incur higher than purely economically efficient costs for remaining in the formal, legal market, because departure to operate in a black market or not comply with laws would incur significant reputational harm) "every reason to believe that regulation is an important driver of informal markets, and also that these markets engender yet more regulation as officials desperately seek to control them by cracking down with new rules and more intensive enforcement." P 253 Example of London Olympics where strong regulation and enforcement of anti-scalping/secondary market ticket resale laws led to banks of empty seats at events Classic situation where bootleggers and Baptists combine forces to continue market suppression regulations to achieve the moral ends "Baptists" seek while protecting the high profits ("rents") which the bootleggers extract by their participation in black/secondary markets sustained through market suppression regulations Classic example is Prohibition or War on Drugs pp 254-55

Limits of Law

The Limits of Law Related to ch.9, he proposes four principles for improving the balance between law's complexity and simplicity: Cost distribution principle: Call attention to situations in which policies are needlessly complex in a way that advantages the party in power and disadvantages beneficiaries Audience principle: Make the law sufficiently simple that the people who will be implementing it can understand Mimicking principle: Analyze how people are using the law to identify confusing portions User fee principle: "Tax those who benefit from legal complexity for the extra costs associated with those benefits" The federal government should use broader grants to support state implementation of federal policies because: States play an important policy role (see ch. 3 and 4) States can already work around federal mandates to achieve policy goals They are more politically accountable and efficient than they were in the past Likely to know best how to deliver benefits to citizens Simpler regulation can be more effective! Look to implement things closer to Sunstein's nudges. Allow more discretion by those implementing the policy, because they know the situation better Control risks by relying on existing systems of private law (i.e. torts, contracts, etc) rather than creating new, confusing systems