Monday, July 19, 2010

Regulatory Capture

By Mike Dorf

Law professors and pundits sometimes refer to Supreme Court confirmation hearings as an opportunity to educate the public about the work of the Court.  As I and others have noted, given the posturing involved, the education thus provided is at best uneven.  Nonetheless, confirmation hearings do surface concepts and issues that do not ordinarily register on the public consciousness--matters like stare decisis and the role of history in constitutional interpretation.

Other major news events can and do educate the public about other aspects of law, of course.  One thinks about the OJ trial, the Clinton impeachment, etc.  To that illustrious list, I would now consider adding the news coverage of the financial reform bill that President Obama will sign this week.  Having paid reasonably close attention to the coverage of the bill as it worked its way through Congress, I think it fair to say that the public has very little understanding about what the bill contains (e.g., will it prevent, encourage or have no impact on future bailouts?) but that the bill did bring to the forefront a phenomenon that we public lawyers know quite a bit about but that is generally below the surface in public discourse: regulatory capture.

Just about every major new legislative initiative passed by Congress leaves substantial gaps that then must be filled in through administrative agencies.  Those agencies are subject to the perverse logic of collective action: The public interest in effective regulation is diffuse, while the private interest in avoiding regulation is concentrated, and so the regulated industries will have a built-in advantage.  Add to that the possibility of corrupting relatively poorly paid regulators  (See, e.g., Mines and Minerals, Department of) and you have the phenomenon of regulatory capture.

Despite the ubiquity of this dynamic, my own subjective sense of the coverage of the financial reform bill is that to a much greater extent than usual, the media have pointed out both: (a) that the bill leaves very important details to be filled in; and (b) that this means that Wall Street banks have the opportunity to gut whatever substantive checks the bill was supposed to provide.  I'm not sure exactly why the coverage of this legislative effort has been different, but I do think it is potentially a positive development.  In the conventional view, members of Congress pass tough-sounding laws that then get undermined at the implementation phase by some of the very people and entities who make campaign contributions to those members of Congress--and this works because once the seemingly landmark legislation is passed, the public loses focus.  Perhaps as a result of the recent coverage, the public will remain alert to the possibility of regulatory capture, which in turn will make it slightly less likely in this instance.


Bob Hockett said...

Very nice, Mike, many thanks.

FWIIW, my guess is that the Dodd-Frank bill attracts more public attention to regulatory capture by dint of (a) the rather greater-than-average degree to which we confer discretion upon the finance regulators in particular, combined with (b)the special salience of those regulators' bailiwick right now, post-crisis.

I'm also tempted to note a particular irony in connection with Dodd-Frank's more-than-the-usual degree of punting to the regulators: Boehner's call last week for a moratorium on all new regulations. In the present context, that of course amounts to a call not to implement Dodd-Frank at all. Since he's already calling for repeal, however, I suppose it's hardly surprising. Perhaps next he'll talk state attorneys general into mounting constitutional challenges to the bill -- on grounds, say, that financial markets do not implicate the commerce power!

All best,

egarber said...

I think another variable relates to the party in the White House. It seems to me you could see vastly different rules, depending on who does the executing. I suppose this would be most drastic when a presidential veto is over-ridden, vs. a scenario where the president pushed for a bill he signs.

I also think this might be more pronounced, to the extent a president adopts a form of the unitary executive as a governing philosophy.
For this reason, I think the argument on enforcement energy -- we don't need new laws, we just need better enforcement of existing ones -- sometimes gets short-changed.

This is not to say that presidents are overtly running afoul of their constitutional duties when they apply or remove pressure, but I still think it can add up in the final product.

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