Wherein A Libertarian Argues For Regulation Enforcement

I got to thinking today about regulation and its enforcement in this imperfectly government-dominated world after reading this Jon Stewart quote as relayed by Kevin Drum:

With this administration, if a passenger blows up a plane, it's a
failure in the war on terror. But if the plane just blows up on its own
"” eh, it's the market self-regulating.

What struck me that I had not thought of before is the question of whether non-enforcement of a published regulatory regime was the same as letting a market self-regulate.  And my answer was:  No, at least not in the short to medium term.

The reason is that the government regulatory regime crowds out private mechanisms that might attempt to achieve the same goals.  What do I mean by crowding out?  For example, if the government published car reliability metrics and regulation for all cars, no matter how imperfect, would JD Power and Consumer Reports bother with the investment to do the same?  For decades, insurance companies wrote de facto building codes and performed fire inspections of their insured structures.  They no longer do so, because the government has taken on that role (arguably less well than the insurance companies, who had the reputation of being tigers on such inspections).  Would Moody's exist to rank bond risks if the government had regulations in place that theoretically forced all securities to (I don't know how) have the same risk?  My marina liability insurer conducts occasional inspections of my marinas.

As a result, insurers don't inspect airlines, nor do manufacturers enforce inspection and replacement regimes (as automobile companies do, to some extent, to protect their warranty).  Third parties rate airlines for customer service but not for safety.  The whole private evaluation regime for airlines exists on the assumption that the government has regulatory program X and Y in place that is enforced.  In the long term, if the government were to abandon enforcement, and this lasted long enough for that expectation to exist in the market, new private regulatory methods would arise [arguments would most certainly exist between libertarians and others whether these new regimes were as effective as the old regime, but almost undoubtedly something would emerge].  But in the near term, we don't have a self-regulating market or even the expectation of one. 

As a result, I come to the conclusion that while deregulation may be needed, the absolute wrong way to do it is via non-enforcement of existing regulations.  So there you have it, a libertarian calls for better enforcement.  Comments?  I am just starting to think about this and would appreciate feedback.

  • jt

    This is an important question, and I think you're heading in a good direction. But--I see a couple of issues:
    1. How do you prevent self-regulation from becoming an excuse for monopolistic behavior? If airlines self-inspect, you can bet the major carriers will find all kinds of "risks" when low-cost upstarts enter the market.
    2. At the other extreme, what if the market is so overcrowded that it's unable to self-regulate? The taxi business is highly regulated by local governments in most Western countries, but much less so in places like India. The result is absolute chaos. The market *seems* unable to self-regulatefor all the usual tragedy-of-the-commons reasons.

  • jt -- good points. However, your point 1) is already a problem with govt regulation, via 'regulatory capture' whereby the existing regulated players in the market are the ones writing the rules, thus raising the bar to entry for new competition.

    2) I don't know much about the taxi business in India, having only been to Bombay and not speaking the language, but given that
    a) all the taxes charge the same amount and b) they all look the same, what basis do you have for your claim that the taxi market there is not regulated?

  • GU

    This argument applies to laws and statutes in general. Should there be a statute against jaywalking? I don't know, but if there is going to be one, then we have to enforce it. Rarely enforcing rules allows police (i.e. the state) to pull a Gotcha! and write you a jaywalking ticket when they are short on funds. This is a relatively benign example, there are far scarier ones. I would call this the personal rights argument against non-enforcement. After we set the rules, you have to enforce them so we really know what our rights entail.

    Coyote is making the commercial version of a similar argument.

  • mark

    A couple of comments.

    First, the problem in some cases with non-governmental regulatory bodies is that the cost of inspections and regulatory compliance is very expensive. If you were an insurer would you want to go through all of the time and expense of regulating the airlines? Determining their mainetenance and inspecting? I think that would make insurance incredibly expensive, and probably cost prohibitive. The airlines would not be able to afford it and no one could offer it cheaply. Many airlines would probably forgo such expensive insurance costs and opt out of any regulatory scheme. THis would be very bad for consumers.

    So, I guess the point one is that there is a rational basis for government regulatory schemes.

    Second, continuing that point. Since there is a rational basis for some government regualtion, the next question should be how to define that rational basis. At a minimum, the industry in question should serve a public purpose, as exhibited by the airlines or public infrastructures.

    Third, the problem with third party paid regulatory compliance is that if someone else, in this case the taxpayer, is paying the bills more regulation will be sought than is required. A for profit insurance comapny paying for its own inspections would spend exactly to the profit maximizing cost on inspections, balancing the expected risk with the costs. The SOCIAL UTILITY maximization point, where the regualtions are carried out to maximize everyone's social utlity probably lies to a regulatory level in between.

  • Tim

    So why has no-one at the FAA lost their job because of this, or did I just miss the firings??? I love South West and when they announced the *issues* I was over in Ireland. My wife's reaction was one of despair; she said something like, "well, there goes the last good airline". Then I get home and find out an issues with South West were the making of the FAA. Then, United and American have the same issues. As I speak, I am sitting in Atlanta waiting for the last flight back to Chicago in 3 hours on AA. This whole thing has been reported as some kind of airline problem. No, this is a government incompetence problem, so, you know, government business as usual.

    As a Shakespearian aside; when did all the flight attendants get old? The last 3 flights I was on, the lady that delivered my drink was pushing a walker and had an oxygen tank...

  • mark

    " Rarely enforcing rules allows police ("

    But the actual rational for a statute like jaywalking or speed limits is not to prevent this conduct, but to find an acceptable distribution of foot traffic and traffic speed. Enforcement is done to keep the planned distribution.

  • The insurance companies didn't do a great job of requiring buildings to be fire-resistant - you can read some of the history of how fire codes developed in my grandfather's book, Building Construction for the Fire Service. One of the reasons is that a given shoddy building didn't necessarily have to have insurance, and so therefore was not required to comply with any particular safety regime. This led to a lot of secondary effects where a bad building catches on fire, and it then sets other buildings on fire, and the spread takes out several blocks. Not a good situation.

    I've got a lot of libertarian tendancies, but when someone else's negligence can spread and affect me, I think that regulation is a reasonable solution.

  • diz

    I don't so much have a problem with the government issuing some sort of safety seal of approval on airlines or other things.

    Just so long as such government programs are funded by fees paid by those who get the seal, not the general fund.

    My libertarian instinct says that such seals should be optional. That is, an airline should be able to decide whether or not it wanted to participate in (and pay for) the government safety program and get the seal. But I think the issue is probably largely moot.

  • tribal elder

    David B. wrote-The insurance companies didn't do a great job of requiring buildings to be fire-resistant - you can read some of the history of how fire codes developed in my grandfather's book, Building Construction for the Fire Service. One of the reasons is that a given shoddy building didn't necessarily have to have insurance, and so therefore was not required to comply with any particular safety regime. This led to a lot of secondary effects where a bad building catches on fire, and it then sets other buildings on fire, and the spread takes out several blocks. Not a good situation.

    Hence, fire insurance maps- the urban Sidwell maps- identified construction type, heating mode, industrial activity, so the underwriter for the insured building evaluated the offsite risks.

  • Jody

    When I was in India, I had no problem with the Indian taxis. As a bonus, I got to negotiate prices.

  • Excellent point. Now apply it to immigration.

  • septagon49

    In the private sector negligence would be considered criminal. People would be arrested, indicted, and jailed. In the public sector these short comings are almost expected. Usually the media does some story exposing the harm of government indifference. This usually leads to much hand wringing, show hearings with contrite bureaucrats, calls for more money, more regulations, and two weeks later it is forgotten. Government is an exercise in power and is not equipped to control commercial activity. While the top down approach can initially yields results, in the longer term it becomes part of the problem. It hinders innovation and creativity by restricting the possible about calcified rules. Changing the regulations becomes a herculean efforts and usually only takes place after some tragedy. If government is not going to enforce its own rules what is the point of having government?
    There seems to be a misplaced faith in the government's ability to actual control the industries they say they regulate. Planes still crash, food is still poisoned, drugs still harm, doctors malpractice, building burn, cars crash, tires explode, bridges fall, etc... One cannot say that bottom up market based mechanisms would have done worse. I would say that the producers of goods and services have a greater interest in not harming their customers, and they are in a far better position to prevent such harm. Failure to correct defects usually leads to bankruptcy so responses are far more dynamic.
    The information problem will always hamstring government. A small group of people on a committee trying to create regulations will be unable to collect, analyze, and cogitate enough information to be affective. The marketplace where millions act on their unique knowledge about their specific situations will always be able to process more information than any central planning board. It will always be the fatal conceit of any government with the temerity to think they can successfully control any industry, market or business.

  • bryan

    As a company that is a supplier and maintenance provider to airlines we are frequently audited by both the FAA and the QC departments of airlines. In general the airlines auditors are better, more thorough, and stricter, but at the same time more fair and consistent. Not being restricted to the "letter of the law" they can be flexible in areas where it makes sense and putative on issues that may not be technical failings but would cause problems. The airlines QC departments also act pretty independently and don't seem to mind calling attention to an issue even if they know it will cause delays or hassles on the operations side. As the airlines outsource more and more functions, more and more of the useful inspecting, auditing and regulating is provided by the airlines themselves. The FAA provides more of a bureaucratic hurdle, and from what I see makes decisions as seemingly arbitrary as that traffic cop.
    We recently had new inspectors for our district rotate in, and now we are enduring shut down threats over procedures that were fine for the previous 4 years under our old inspectors . . . not to mention numerous airlines.

  • In the first comment, jt raised the specter of monopolistic behavior if regulation (the most monopolistic behavior of all) goes away. What he goes on to describe, though, is not self regulation but industry self regulation. It's still regulation and certainly subject to the abuses he brings up.

    But withouth regulators, insurers will have to be more involved out of self interest. And while the cost of doing so may be high, the cost of not doing so would be unacceptable to anyone, themselves, the airlines or the public.

    The result of real deregulation is not self regulation but market regulation.

  • Ken

    I couldn't believe that is was true when you mentioned it, but you're right: March 18 is actually celebrated in Mexico as "Oil Expropriation" day, though it's not an official holiday. See:
    http://en.wikipedia.org/wiki/Expropiaci%C3%B3n_Petrolerahttp://en.wikipedia.org/wiki/Expropiaci%C3%B3n_Petrolera