America's financial regulatory framework; The mess gets messier

Some things clearly show the failings of two party politics and that something is missing from mainstream public debate. An example is American regulation of all sorts of things, how its done and how much it costs our economy. The February 18, 2012 issue of The Economist contains three articles at pages 9, 22-24 and 77 (online here, here and here) that address the issue and describes some of the failings of both parties. Although not stated explicitly, The three articles hint at how and/or why the ideology of both Democrats and Republicans failed.

The page 9 lead opinion ("Over-Regulated America") notes that the 2010 Dodd-Frank Act is too long (for average people) and complex (for anyone) to read or understand. Dodd-Frank, which includes Wall Street reforms to eliminate the "too big to fail" threat to the U.S. economy, is nowhere near being fully implemented. It therefore cannot possibly be understood even now. The Economist supported such regulation, but points out how flawed the "fix" is going to be. The lead opinion also notes that complex health care regulations now generate 30-60 minutes of paperwork for every hour spent treating patients. It also notes that regulations cost certain small businesses about $10,585 per employee per year according to a 2008 federal study (see Executive Summary at page iv). The federal study estimated the 2008 federal regulation cost total for all U.S. workers at about $1.75 trillion.

The article at page 22 ("The Dodd-Frank Act - Too Big Not to Fail") shows how expensive, confused and bloated the Dodd-Frank Act is. The complexity and remaining uncertainty is a drag on U.S. businesses being able to function efficiently. It also points out the complexity and dysfunctional nature of the layers of state and federal regulatory agencies.

Finally, The Economist article at page 77 ("The Rule of More - Measuring the Imapct of Regulation") points out the sleight of hand that both Republicans and Democrats routinely use to justify and evaluate/obscure the efficacy of their regulations. The stench of political ideology weighs heavily on that arcane but important activity. Collectively, the three articles argue at least implicitly that the two party system has failed and will continue to fail as long as ideology dominates Democratic and Republican thinking.

What about the benefits?

The question is what is the benefit that came from that $1.75 trillion regulatory cost. If its lower than $1.75 trillion, we have a problem, the size of which varies with any imbalance significantly below or maybe above that number. Unfortunately, The Economist articles did not squarely address the benefits issue, so the size of the problem, if any, can't be assessed from that information alone. Given that, one just has to take The Economist at its word that the U.S. is over-regulated, i.e., regulatory costs significantly outweigh the benefits.


That's not a big leap of faith for most conservatives but it probably is for most liberals. From a pragmatic, non-ideological point of view, over-regulation feels like it is a real problem. The costs probably do significantly outweigh the benefits, e.g., by maybe $200-$300 billion/year or more. That's based on personal experiences in the real world, e.g., discussions with doctors, working for decades in a heavily regulated industry, watching the ongoing creep of some dumb regulations here in California under democratic ideologue rule, etc. Obviously, many other people's experiences and perceptions of reality will be at variance with that.


And, there may be some isolated exceptions: A 2011 federal OMB study concludes that American Indian benefits from federal regulations from 2000 to 2010 were about $132-$655 billion/year, while costs were estimated at $44-$62 billion/year (see Executive Summary at page 3). Of course, those benefits came from somewhere, e.g., U.S. taxpayers. Estimating benefits from regulation is understandably difficult, see, e.g., this OMB analysis of federal regulation benefits.


As The Economist and others (see this review of reviews of cost-benefit estimates) point out, the issue of regulatory costs and benefits varies with who is doing the estimating and what their political/ideological agenda is. Liberals usually estimate high benefit levels, conservatives estimate low. Liberals usually estimate low cost levels, conservatives estimate high. That's just how the poison of ideology routinely works in politics. That's an example of why and how ideologues are usually clueless.

Non-ideological pragmatism is AWOL

The other thing the three articles show is that non-ideological pragmatism is absent from mainstream American political debate - one doesn't hear this kind of analysis and argument from (i) anyone in politics or (ii) nearly anyone in the mainstream press. The articles present an even-handed pragmatic point of view that is grounded in facts and unspun reality and focused on efficient problem solving. The Economist recognizes and accepts the fact that reasonable regulation is needed in a complex society. Political or religious ideology, if it is part of the author's beliefs, isn't obviously distorting facts or logic. Its hard to detect any ideology as a driving force behind the facts chosen for, or logic expressed in, the three articles. They make the point that just the right amount of intelligent regulation is important. Too much is just as bad as too little.

The lack of pragmatism in politics and the attendant damage to the public interest is a point that has been argued here over and over. It is argued again. Ideology dominates political thinking and policy. That pushes Democrats to over-regulate and Republicans to under-regulate, with bad outcomes in both cases. It can even be bad when a moderate* gets it wrong, e.g., Pres. Clinton (with republican and some democratic help) deregulating the financial services industry. That arguably was a factor in the 2008 financial meltdown.

* As pointed out here before, a moderate isn't a pragmatist if being moderate means just compromising between the left and the right. There is a fourth way, i.e., relying on pragmatism/common sense, to do or think about politics. The 4th way may or may not overlap with what the left, right or compromising center thinks or wants for any given issue.

Both ideologies and sometimes compromise between them have led to failure. Ideologies distort reality and limit creative thinking. Garbage in, garbage out. As long as any flavor of ideologue stays in power and pragmatists are out of power, America will be in trouble.