Balanced Government

Conventional wisdom says that as the world becomes more and more complex, the case can be made for increasing government regulation.  After all, in a world of increased complexity, how can the innocent be expected to be protected?  Who, in other words, looks out for the little guy?

I was asked recently which version of the financial reform bill I thought was better, the House’s or the Senate’s.  So, I went about reading the Senate’s version, which appears to be the one that will come out of committee.  A few key point about the Senate bill:

Department of Commerce. We're going to need a bigger building.

It is 1,336 pages, so, no, I didn’t read it in its entirety.  The table of contents alone is 10 pages long.  The bill amends 22 prior Acts.  By my count, it creates six new regulatory councils or agencies: The Financial Stability Oversight Council, the Office of Financial Research, the Orderly Liquidation Authority Panel, the Office of National Insurance, the Investor Advisory Committee (and the Office of the Investor Advocate) and the Bureau of Consumer Financial Protection.  The bill does one redeeming thing, by most published accounts: it ends the precedent of “too big to fail.”  I can’t help but wonder why legislation is needed to say no.

Complex?  You bet.  Necessary?  That’s a little harder to answer.

I threw out a bunch of frozen concentrate apple juice the other day, and my son and I had a talk about why.  It was a store brand, and as I was making it, I noticed it looked pretty dark for apple juice.  The date looked fine, but it was made in China.  He wondered what was wrong with juice being made in China.

I shared with him that while wonderful products do indeed come from China, there have been some notable problems, and food really shouldn’t have to travel all that distance to make it to our freezer.  I explained that we have rules governing food preparation/manufacturing and safety in the United States, and for my dollar, I just prefer food grown in America.

We got to talking about how food is prepared and how it used to be prepared.  Yes, in “ye olden times” there were risks that food wouldn’t be prepared safely.  However, it hardly needs mentioning that there are regular outbreaks of food borne illness today, so regulation hasn’t exactly solved the food safety problem.  When people got their food from a local farm, what ensured food safety was reputation and family attachment: a farmer with a bad reputation wouldn’t be able to sell his food to his community, and his farm would fail.  This would have consequences for his family.

Q: Why would a company make apple juice concentrate in China? A: It is cheaper.  There are lots of apples and related products right here in the United States.  The grocery store where I purchased the store-brand juice had it made in China because the costs of doing that and shipping it to the United States were lower than buying “made in the USA.”  Presumably, all of the costs are lower, but one in particular we can be sure of: labor.  We have minimum wage laws in the United States, and China does not.  Therefore, the jobs associated with preparing apple juice concentrate that meets the price requirement of the grocery store are all located in China.

Now, this is any corporation’s right, to source products globally in an effort to deliver goods to Americans at the lowest possible prices.  But food production, for example, isn’t by nature a complex system, at least not as complex as we think it is.  It has become complex because of unintended consequences of well-intentioned regulation.  The world becomes more complex, then, as well-intentioned do-gooders seek to protect people from bad decisions.

We are suffering a financial hang-over, so to speak, as a result of a binge of mortgage financing and an explosion of home ownership.   Were people across the board doing better than they did 30, 40, or 80 years ago?  Or had the rules of the game changed?  Was there external pressure in the form of mandates and regulation pushing an ownership society, even if the “beneficiaries” of such well-intentioned actions would eventually be hurt?

So the financial reform bills coming out of Washington will of course spawn more agencies and government, attempting to do things that they certainly cannot do.  In time, another crisis will come, based upon unintended consequences resulting from the passage of this reform.  Less regulation is counter-intuitive, but is the likeliest long-term solution for problems and crises as they arise.