Thursday, November 05, 2009

Moving Targets

-- Posted by Neil H. Buchanan

In a particularly good example of the value of blogs and comment boards, my latest FindLaw column (available here later today) picks up on comments from two Dorf on Law readers who responded to my post on October 22. In that post, I had discussed how to protect people against abuses by credit card companies, banks, mortgage companies, etc. One reader raised the point that it is possible to use equitable doctrines of contract law (especially unconscionability) to rein in financial actors. Another reader suggested that creating a regulatory agency (the proposed Consumer Financial Protection Agency, which I endorsed) would be arguably better for business because it would reduce the (mythical) tsunami of lawsuits that is bringing down American businesses.

In today's FindLaw column, I analyze the choice between regulation-by-lawsuit and regulation-by-executive-agency. Both are forms of regulation, because both necessarily involve the government in deciding what types of arrangements will be enforced by law. After describing the equitable doctrines that are available under the law -- and how well those doctrines would seem to apply to financial market abuses (sub-prime loans being the modern equivalent of the Williams v. Walker-Thomas Furniture case that is the foundation of the modern unconscionability doctrine), I point out that those doctrines are deliberately underused by courts.

I then point out that even a beefed up regime of equitable relief in court would not be enough to protect consumers, because individual consumers will never be able to play the litigation game in the way that large corporations do. Conclusion: We need to improve financial market regulation, and courts (as important as they are) cannot do what is needed nearly as well -- nor as inexpensively -- as agencies. [Note: The use of the term "beefed up" in this paragraph is not anti-vegan.]

I briefly touch on the "relief from lawsuits" point in the column, but I will use that as a starting point here to discuss the phenomenon of the political "moving target." The DoL reader made the seemingly simple point that business spokespeople constantly complain about facing lawsuits (supposedly frivolous, often extortionary), which means that they should be excited about a system that would reduce lawsuits. Of course, businesses do not want to deal with a regulatory agency either. Understandably (but not defensibly), they want it all: no lawsuits, no restrictions on their profit-seeking actions.

It is not, therefore, necessarily a matter of having a moving target to be opposed to both alternatives. It is a moving target, however, when the arguments against one alternative invoke the availability of the other. "People don't need regulatory agencies, because the courts will protect them." "People don't need lawsuits, because there are regulatory agencies to protect them."

Another example of this phenomenon is the question of how to fight obesity. A few years ago, when a lawsuit was filed in New York by an obese 14-year-old against McDonald's, the reaction was swift and derisive. Beyond the standard tabloid-driven nonsense, however, one argument that I heard was that the problem of obesity was too pervasive to deal with through lawsuits. It should, instead, be dealt with by the FDA or some other agency. This, of course, ignores the incentive effects that make lawsuits effective for far more than the litigants; but we can set that aside for now. The bigger point was that the courts were the wrong place to regulate, and the agencies were the right place to regulate.

When bills were proposed to expand the FDA's powers to address obesity, it should not be a surprise that the argument changed. We then heard nothing but bad things about the inefficiencies of regulatory agencies. "If there is really a legal abuse, the courts can handle it." In addition, a third possibility arose. Taxation is more efficient than regulation, because it allows businesses to respond to incentives rather than bear the burden of command-and-control rules written by some bureaucrat who knows nothing about the business.

Now, we are in the midst of the debate over taxes on fatty foods, etc. Again, we learn that this is the wrong solution. Either it really is not a problem (a position that a few people cling to), or it is. If it is, however, then we seem to have exhausted the solutions: Lawsuits are out, because it is better to regulate via agencies. Agency regulation is out, because it is better to regulate via taxes. Taxes are out, because taxes are bad.

The remaining alternatives -- educating people to make better choices, changing food manufacturers' distorted incentives to make unhealthy food -- merely return us to a different kind of agency action. Every solution still involves government action, either through changes in food policy or outreach programs to improve people's choices. Moreover, opting for no solution at all does not make the problem go away. It merely turns it into a health care problem. No regulatory issues there!

There are many other examples of this type of deceptive reasoning. I am starting to work on a book that describes how the moving-target phenomenon works in debates over income and wealth inequality. The arguments are fascinating in their perversity.


egarber said...

So you have this swirl of tactics to oppose everything, in the name of preventing "too much government" from taking hold.

But of course in the end, something like the credit crisis hits, and there's no choice but to drastically ratchet up the government's role. So we end up with too much government regulation now, because we had too little before.

In a lot of ways, the preventive healthcare metaphor applies to the economic system, I think. Do some easy, frequent, minimal things now, so you can avoid the need for ridiculously expensive and instrusive heart surgery later.

egarber said...

Intrusive, I mean.

tjchiang said...

Although you need to elaborate more for me to be sure, I suspect that you are falling to victim to the common phenomenon of regarding all opposition to your favored policies as a monolithic "they"; and then labeling that opposition as a bunch of hypocrites. The opposition, of course, is not a monolithic block, and many of them may be acting entirely consistently and in good faith. If you propose taxing fast food, you are going to provoke the anti-tax crowd. Propose some other alternative and you provoke some other constituency. This is hardly a new phenomenon in public choice theory--100% of the people favor change, but the best result is the status quo because 50% each favor diametrically opposite changes and the status quo is everyone's second preference.

Neil H. Buchanan said...

In response to tjchiang: Thank you for making this important point. Yes, it's possible that the people making the "not the courts" argument are not the same as those making the "not the agencies" argument, and that still others are making the "no taxes" argument. If I were writing a scholarly article about the political economy of obesity, I would certainly want to demonstrate that the people I'm talking about really are making inconsistent arguments. For what it's worth, my very strong impression is that it really is the same people saying these things, in an entirely opportunistic fashion. As I write my book applying this basic argument to distributive justice, I will certainly pay attention to this important possibility.

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