You are currently browsing the tag archive for the ‘regulatory capture’ tag.

regulatory-capture.jpg

My uncle and my mother have a long-standing (and enormously frustrating) argument which is useful to revisit because it reflects a circle which the rest of the nation is trapped in. My uncle always says “The government is corrupt and wishes to control the market in unfair ways! We need to diminish the role of government so that people are free to pursue business opportunities and live a life of super-awesome freedom!” My mother says, “business concerns subaltern the government in ways which individuals are ill-equipped to understand or to counter.”  Then there is eristic back-and-forth about the market versus the state. Sometimes this is followed by interesting talk of K-Street lobbyists, environmental regulations, defense contracts, monopolies, and what have you. However, in the current political age it is more usually devolves completely (indeed, I am not even sure they are talking to each other in the era of Trump).

The argument frustrates me because I am not sure it should be an argument.  My uncle is narrowly right: the government is indeed unresponsive to obvious and pressing societal needs…but only because it has been captured by special moneyed interests with deeeeeeeeeeeeeep pockets.  The forces of monopoly and market capture are equipped with an infinite ocean of dark money, a bunch of anonymous Caimen Island LLCs (or is it supposed to be Cayman?), and armies of Ivy League lobbyists & attorneys.  They can easily spend all day, every day writing complicated legislation and explaining it to their favorite legislators (who also take campaign money and aid from the same anonymous backers).

I suppose another way to say this is: I agree with my mother. The government has been subject to regulatory capture at just about every level. Small businesses or individuals look to it for succor against the depredations or excesses of big business. Yet when the regulations come out, they are revealed to favor large corporations or influential insiders. This is often accomplished with rules which sound outwardly appealing but are actually fiendishly designed to destroy small competitors or diminish the common good.

I can already feel some of the audience getting bored or frustrated with this abstruse language so let me provide a couple of examples.  Back when I was a toymaker (circa 2007), the world’s largest toy companies were making unsafe toys in China.  Mattel and Learning Curve were particularly at fault.  These giants pressured their Chinese suppliers to make toys ever more cheaply and then turned a blind eye as to how this was accomplished (with lots of lead paint, as it turns out).  When the big companies were caught selling lead toys, my business partner and I thought the scandal would help smaller companies like us.

How wrong we were! The large toy companies blamed the Chinese manufacturers (who were doing what they were told to do) and then came forward with their own proposed consumer protection legislation.  Not only did the new rules mandate that each factory-run of toys would be extensively tested for lead and other hazardous materials, but the legislation also immediately phased out certain plasticizing chemicals.  This “industry-supported” legislation became the backbone of the consumer product safety act of 2008 and it was ruinous to small companies.   Fully testing a factory-run of toys cost about $15,000.00.  For Mattel a factory run is millions of units and $15k was negligible.  For small companies, a factory run was much smaller and $15k was most of the profit margin.  Additionally, the legislation allowed no time to sell through existing toys made with the old plasticizing compound.  The big companies knew the legislation was coming (having written it) and they used a different (although equally problematic) chemical.  Small companies were prohibited from selling their products.  Child safety advocates were delighted with the new rules.  The big toy companies used a scandal they created through unsafe acts to drive small companies under and to claim the (undeserved) moral high ground.

screen_shot_2018-10-08_at_1.37.25_pm.png

My mother worked for the Department of Defense doing environmental clean-up and restoration and she saw different sorts of tactics.   The DOD used to have vast tracts of land under its control.  Often this was desirable land.

Real estate developers (or their dupes) would show up and say “The Defense Department is polluting such-and-such beautiful coastal rain forest!  They need to clean it up at full taxpayer expense!” As soon as this was done (at enormous cost), the base would be decommissioned.  The land would be turned over to cronies and crooked developers who would cut down the forest and sell the timber.  Then they would build shoddy (yet expensive) subdivisions and a tacky resort.  There would thereafter be no rainforest, polluted or otherwise.

9e9374547dac64a920186ba181076f6a

Vieques Island Resort, Puerto Rico

These private sector tricks can be understood and explained, but it takes time, resources and clever people.  Additionally the monopolists and insiders are running their own splashy PR campaigns which are perfectly tailored to appeal to voters and non-specialists who don’t necessarily have the time, bandwidth, or inclination to understand all of the complicated details of what is going on.

The current presidential administration is such a naked smash-and-grab by private interests that some of these tactics aren’t even necessary anymore. Yet regulatory capture is always out there–it is a form of corruption which we all need to guard against.  I suppose what frustrates me about my uncle’s argument is that it rewards the real malefactors (the vested interests) by blaming the government.  The government should represent all of us, but it is made into a sad puppet by clever oligarchs.  They are the true malefactors!

united-brandnew.jpg

Hey did you see this United deplaning business on the news?  If you are here on the internet, I suspect you know exactly what I am talking about, but, in case you are reading this post in the far future or found it stapled to a tree or something, here is what happened: United Airline needed some seats on a full flight in order to move their staff around.  Instead of bribing their customers to take a different plane, the airline coerced the passengers with the fine print of the ticket contract (which, as you can imagine, allows airlines to do anything they want in exchange for zooming you across the continent at 700 miles an hour). One customer was aggrieved and refused to leave his seat, so they called in militarized corporate guards (or the police? Who can tell these days?) to beat him up and drag him off the plane. The United CEO then issued a statement basically saying “We can do as we like. Our market is guaranteed.”

Airline market share

As you can imagine, this has stirred up some hard feelings among the general public, but the CEO was right.  There is a cartel of four carriers which controls the majority of flights around America.  If you wish to fly, you must do so at the cartel’s terms (or else you need to buy a plane).  This consolidation has allowed the airlines to cut service, increase fares, and add a proliferation of fees. Most markets are under the thumb of a single carrier and, if you want to fly where they have suzerainty you will have to use that carrier or not fly.  Good luck getting a train or even a bus in America.

2Mp7dD3HM1Q7Q4QSc5zTjUym.jpeg

I don’t mean to pick on the airlines: cable service provider, pharmaceutical companies, oil conglomerates, insurance companies, major banks…even toy companies all operate the same way in today’s deregulated society.  America has a monopoly problem: but today’s companies are smart enough to avoid having one entity take complete control of a market.  Business schools and the school of hard knocks have taught the heads of these companies to be slightly subtler about the way they fix prices and collude.   With their record profits, they have also bought up politicians and control the relevant legislation that goes in front of them.  Do you care about flight regulation legislation enough to lobby your congressperson?  I personally do not, but I bet United sure does!

domestic-airlines-in-india-leveraging-price-13-638

The bigger takeaway here is that capitalism is facing challenges of extreme success which are causing it to morph into naked oligopoly.  This in turn is stifling competition and innovation.  It is also breaking our political process. The Republican mantra that “government is the problem” and cartel companies like United or Aetna should be allowed to run everything for the benefit of a tiny number of great aristocrats does not really seem like a platform which was drafted by groundlings!  The Democrats pretend otherwise but they abandoned responsible attempts to reign in business cartels back in the 70s.  The parties have different favorites, but they are both content that the game is rigged.

It is not supposed to work this way.  In an ideal market, you could punish United and its smug multimillionaire CEO by spending three dollars more to take an airline that doesn’t beat up its passengers and drag them off the plane screaming.  In a better democracy, you could vote in a district where the winner was not already predetermined by gerrymandering.

image.jpg.png

This sort of thing means we are going to have to pay attention. We all need to be aware of regulatory capture: an endemic species of corruption whereby giant companies write rules which look reasonable, but which actually price smaller competitors out of the marketplace.  Politicians rubber stamp these rules and claim they are looking out for the public interest (while the cartels support their subsequent careeers).  We are going to need to be more attentive and smarter, or we are all going to be doing what giant corporations and their pet politicians tell us to do.  The moment where we can act is quickly passing. We must push for effective new antitrust measures or we will all have to take our tiny expensive seat and shut up while brownshirts probe and beat us to their hearts’ content… not just when we fly but everywhere all of the time.

Ye Olde Ferrebeekeeper Archives

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031