Belmont Club

Hope is coming

The connection between regulation and money was again in the news as the Citizens for Responsibility and Ethics in Washington (CREW) sent letters to the SEC and Secretary of Education Duncan to share information suggesting there may have been leaks that could have led insider trading with the Department of Education. “These documents show high-level Education officials colluded with Wall Street short-sellers, improperly leaking the contents of highly controversial gainful employment regulations in advance of their publication.”

It is ironic that the Department’s attempt to regulate the for-profit-educational industry might lead to profits — for someone else. Or is it?

Two days ago, the Daily Mail described how the prestigious London School of Economics received money and lent its name to the conduct of Mohammar Khadaffi and his son, Saif al-Islam which many are now trying to walk back.  Senior members of the British government, including an official from MI6 were brought into the circle.

Some see the LSE’s Professor David Held as among the biggest fools, if you like, in this unsavoury saga. For four years, as Saif did his thesis, the international politics specialist was his adviser. He was also put on the board of the LSE’s North African research programme, a charity set up and funded by Saif Gaddafi. Professor Held introduced Saif to the audience when the dictator’s son — astonishingly, you may think — delivered the Ralph Miliband Memorial lecture, an annual occasion dedicated to Labour leader Ed Miliband’s Communist father who taught at the LSE and remains one of its most revered figures.

‘I’ve come to know Saif as someone who looks to democracy, civil society and deep liberal values as the core of his inspiration,’ boomed Professor Held.

The old adage in organized crime was to “hold your friends close and your enemies closer”.  Libya’s leader realized he could get a far better return on his defense dollar investment by investing, not in fighter jets or old Soviet tanks — which could be easily destroyed — but in cocktail parties, junkets, consultancies and foundations for Western opinion leaders.  Khadaffi’s goal was simple. To capture the custodians. Once he had captured the educational, media and political elite of the UK, what further fear need he have of the old British lion?

The process of regulatory capture is contingent, ironically enough on the pervasiveness of regulation. Any regulatory regime that is powerful enough to determine the winners and losers of an industry is attractive enough to be captured.

In economics, regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at “capturing” influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.

Therefore the mindless expansion of regulatory power is not always a good thing. Increasing the power of government without a corresponding increase in transparency, does not, as many liberals believe, lead to the control of “rent-seeking capitalists” by the state, but on the contrary, leads to the control of the state and the industry by individuals whose key competitive advantage is the skill at corrupting public officials. We wind up working for the players. When business is globalized, then regulatory capture may be effected by foreign businessmen. Those businessmen are often indistinguishable from foreign leaders, especially in the case of the oil-rich Middle East. And the foreign leaders/businessmen end up capturing the regulatory mechanism. Then we wind up working, as some dons and British politicians wound up working, for the Brother Leader who is, as everybody now realizes,  a complete homicidal maniac.

But it seemed like a good idea at the time. A combination of unaccountable, but powerful regulatory agencies in a globalized economy sets the stage for the capture of agencies by foreign despots. One of the dangers of the President’s “healthcare reform” and “Green energy” policies is that it creates precisely those conditions for the huge medical and oil industries. By centralizing control of the the healthcare industry, which is nearly 1/6 of the US economy, Obama has set up a target for regulatory capture more tempting than anything that had ever come before.

Since all roads ultimately lead to the White House — and therefore through him — the accumulation of power mean untold opportunities for political influence and patronage. It is probably a process not unknown in Chicago. Who says he can’t win a second term? Who says Rahm Emmanuel didn’t live in Chicago?

Therefore all attempts at “financial reform”, “healthcare reform” and “Green Energy” must be scrutinized very carefully because regulatory expansion is a two-edged sword. It may lead, not to the protection of the “little guy” by the government, but to his proxy enslavement to special interests through the mechanism of the state. This risk has been known for a long time.

In 1913 Woodrow Wilson wrote: “If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it.”

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