The discussion of regulation is usually a debate between conservatives who want less (preferring free markets) and liberals who want more (preferring government.) Think about how much better it would be if the discussion were about making regulation more effective. Some recent examples:
1. Stock trading. Despite months of debate and thousands of pages of House and Senate bills on "Financial Reform", nobody apparently thought about the fact that computers can generate a trillion dollar market drop in minutes, in part because the different exchanges have their own rules about "circuit breakers" to slow trading in a rapid decline, and that orders can get unintentionally switched to an exchange where very low volume allows bottom feeders to clobber investors. Regulators - public or private - need to think of the industry, and not just let individual exchanges write their own rules. And how many other loopholes are there, not thought about by anybody except the guys with mansions out in the Hamptons. (Note to self: avoid "market orders" and "stop losses" which automatically trigger sales.)
2. Bernie Madoff. Bernie's $65 billion scam was not the result of inadequate regulations, just inadequate people enforcing them. Fortunately there was eventually a courageous whistle-blower. So, what's happened to those SEC guys who were asleep at the switch? A bit of public embarrassment; some shuffling of staff; congressional exhortations to do better; an apology.
3. Allen Stanford. Stanford limited his decade-long scamto $8 billion, but used congressional leaders to avoid investigation of his Antigua-based operation. Like Madoff, he'll get jail time and have to give up some of his gains, but the regulators... still there.
4. The Gulf oil spill. Among other things we find that the Minerals Management Service (which is responsible for safety and collecting royalties) relies on the rig operators to police their own safety procedures, and that US deaths are four times that of other countries doing offshore drilling. The safety management program propagated by the American Petroleum Institute is not audited. Lacking in the Deepwater Horizon incident were a "blowout plan" when drilling was originally approved, and a number of back-up devices used in North Sea operations.
5. The April 5 West Virginia coal mining accident which killed 29 miners. We find that the Mine Safety and Health Administration had thousands of deficiency notices against Massey Energy, none of which resulted in closing the mine. In fact, a "pattern of violations" rule passed in 1977 has been used only once to shut a mine and thousands of violations go unaddressed.
So, what lessons can we draw?
1. There needs to be some broad thinking and sharing of "best practices" among agencies upon which we rely - the Food and Drug Administration; the Securities and Exchange Commission; the Nuclear Regulatory Commission; the Department of Transportation; the Department of Agriculture; the Occupational Safety and Health Administration; the Justice Department; and several others. When I was in the food business in the 80's there was a shift from quality control checks of the final product to Japanese-style thinking about managing the critical risk points in the production process. (This sounds simple, but the change is profound.) Some experts advocate a similar shift in regulatory thinking. It is logical for the regulations to be led by industry groups who have detailed understanding, but audits must be frequent and enforcement must be sure.
2. There should be long "cooling off periods" during which senior regulators cannot seek employment in the industry being regulated.
3. Whistle blowers should be protected (and perhaps rewarded) and have access to Inspector General-types in the appropriate agencies.
4. Bums should be prosecuted.
We have had enough problems in enough agencies to recognize that this is a generic problem, and that results vary greatly across agencies. Hopefully the group regulating the nuclear industry has many of the answers - unlike coal and oil. As more and more of our lives and economy are being controlled by the government, it would be nice to know that the public's interests mattered more than the industries being regulated, the employee unions of the government regulators, the careers of the managers, and the campaign funds of the politicians. That is a bipartisan wish.
And again, the top fiscal conservative in the 102d Congress, Tom Campbell for Barbara Boxer's senate seat.
bill bowen - 5/14/10