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Another Strategy To Avoid More Government Bureaucracy

Breaking The Cycle That Drives Government Regulations

David Grace
David Grace Columns Organized By Topic
10 min readAug 18, 2016

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Reducing the Pain Of Government Regulations

I recently wrote an article about how new technology might greatly reduce the pain of government rules and regulations (Could This Be The New Trillion Dollar Product That Vastly Reduces Bureaucracy?)

But that’s only part of the story.

Reducing the Amount & Scope Of Government Regulations

In addition to making the existing bureaucracy easier to deal with, what can we do that might actually reduce the quantity and complexity of government new regulations in the first place?

To do that we first have to ask:

What’s the societal force driving the adoption of more and more complex government rules and regulations?

No, it’s not evil socialists. It’s not evil anything. It’s human nature.

What Triggers Government Regulations?

People are profit driven. They’re always looking for ways to make more money. Lots of times those schemes are dangerous or dishonest or abusive. Unfortunately, there are lots of people who don’t care. They will do anything that they think they can get away with in order to make more money:

Junk mortgage-backed securities; companies providing food products tainted with mold, listeria, salmonella; cars that die suddenly at freeway speeds; an insurance company that doesn’t pay legitimate claims; an airplane that crashes into a house because the owner refused to perform needed maintenance, etc. etc. etc.

That “more money” conduct leaves a trail of victims who, naturally, see that activity as unfair or wrong. In response to that conduct people who have been injured or fear that they may be injured in the future demand that “something must be done.”

In a perfect world companies would honor their obligations and individuals would act reasonably and fairly. But that’s not how real humans work in the real world.

Human Nature On The Normal Curve

Let’s go back to the normal curve. In a neutral environment most people will act fairly and reasonably. Those people are in the middle of the normal curve. Of course, you will also have some better than average people who will act kindly and generously. They’re at right-hand side at the “very good people” end of the normal curve.

Then you have the people at the other end of the normal curve who will do all kinds of abusive things in order to make more money.

These are the people who run food companies whose equipment is tainted with mold or salmonella. They’re executives in insurance companies that hire crooked adjusters who wrongfully reject claims. They operate water treatment plants that poison entire cities with lead in order to save a few dollars. They’re the executives who don’t repair defective gas lines that eventually explode and burn down whole neighborhoods. The list goes on and on.

But those people whose greed puts them at the “do anything for money” end of the normal curve are only part of the problem.

Monkey See, Monkey Do

When people get away with their schemes the other people in that industry notice and some of those other people who normally wouldn’t engage in that abusive conduct shift their behavior away from the “That’s wrong, I won’t do it” position to the “Anything for more money” end of the normal curve. Why? Because they are in competition with the people who are making a profit by cutting corners and if the money is there for the taking they feel that they are obligated to take it.

If there’s a speed limit of 25 MPH on Main Street and people who speed are regularly given expensive tickets, most people will more or less obey the law. But, if everyone knows that you can go 50 MPH on Main Street and nothing will happen to you that knowledge will shift the normal curve and many more people will drive over 30 because “I’m in a hurry and everyone else is getting away with it.”

So, even though we may start out with a relatively small group of people who are going to do reckless, dangerous, and unfair things for money because that’s their nature, the size of that “anything for money” group will increase, the normal curve will shift to the left, when the “bad” people are seen to be profiting from their bad conduct.

Profitable Bad Conduct Leads To More Profitable Bad Conduct

And, no, the market will not self correct to counter these abuses. Just the opposite. The financial success flowing from these abuses incites more bad conduct, not less.

Here’s a real-world illustration of that principle:

A few years ago generic drug makers realized that they could organize themselves into de facto monopolies by voluntarily ceasing production of selected drugs.

For example, there were six companies making digitalis, then four suddenly dropped out of the market. The remaining two companies both coincidentally raised their prices by over 600%.

In spite of what libertarian fantasy theories claim would happen in response to this price increase, no other companies jumped into the market to price compete. Just the opposite.

Other generic drug manufacturers self-organized themselves into even more mini-monopolies around other generic drugs and this monopoly practice has grown substantially.

Over the last few years the only competitor of the epi-pen ceased operations and the price of an epi-pen has increased from $100 to $600 even though it only delivers about $4 worth of medication. No other major competitor has entered the epi-pen market.

For Every Action There Is An Opposite Reaction

Conduct that generates profits encourages more people to engage in the same conduct. People’s lives are hugely impacted by this conduct and they’re not going to stand for it forever.

For every action there is an opposition reaction.

The response to these generic-drug de facto monopolies will be more laws.

It’s only a question of time before new laws, rules and regulations are enacted to regulate the price of generic drugs. Again, that’s human nature.

The cycle of regulation is:

1) Someone figures out that they can make a lot of money by acting in a way that most people would think is unfair or dangerous.

2) Other people in the same industry notice and they begin doing similar unfair or dangerous things so that they too can make more money. Their justification is that they owe it to the shareholders.

3) People get tired of being taken advantage of or hurt by this conduct and they demand that the conduct be made illegal or that more comprehensive regulations be enacted or that enforcement be ramped up to counter this conduct.

4) Some level of government responds with laws or new regulations meant to “fix” the problem but, naturally, those laws apply not only to the 10% or 20% of the industry that is causing the problem but also to the 80% or 90% of the industry that previously was operating in a fair and reasonable manner.

Demanding that nothing be done because of the theoretical argument that some day, maybe five or ten years from now, maybe never, the market will somehow self-correct the problem isn’t a realistic or convincing response.

If we want to reduce the level of government regulations we have to break the cycle that sparks the regulations before we get to step “2”.

Reducing Bad Business Practices

In many cases there are already civil laws that apply to the disliked business conduct, e.g. statutes concerning breach of contract, fraud, breach of express and implied warranties, but in most cases those laws have no hope of deterring the “bad” conduct for a very basic reason: the civil penalties are not imposed on the people who actually choose to do the bad things.

Positive and negative incentives only work if they are applied to the people whose conduct is sought to be encouraged or discouraged.

If I’m an executive at Volkswagen and I know that on the upside I will get a bonus and a promotion for setting up a diesel-engine emissions cheating scheme and I know that if the scheme is ever discovered, which may be years in the future or never, the most that will happen to me is that I’ll be fired, I’m going to help the company cheat because if it all goes to hell I’m not going to be the one who’s going to have to pay the bill. That will be VW’s problem, not mine.

Heads I win, tails the company loses.

Punishing my brother if I get caught taking cookies from the jar is far less likely to stop me than if I’m the one getting punished. Punishing the maid if I get caught taking cookies from the jar is absolutely not going to deter me from stealing cookies.

If you want to break the cycle that leads to more government regulation, if you want to stop the “bad” conduct before it becomes so painful that it goads the government into enacting more stringent rules then you have to set up a system that deters the humans who are actually responsible for that bad conduct in the first place.

How do you do that?

Executive Disincentives For Bad Business Conduct

(1) Publicize The Executive’s Identity.

I’m likely to think twice about soliciting that prostitute if there’s a good chance that my friends and neighbors will find out that I’ve done it.

PG&E was criminally convicted of falsely claiming that its gas pipeline was safer than it was and for obstruction of the investigation into the causes of the massive pipeline explosion that killed eight people and damaged or destroyed 46 homes.

Not one article has reported the names of the PG&E executives who were in charge of maintaining that pipeline, keeping the records, handling safety issues or delivering the company’s records to investigators. To this day the public only knows that the faceless corporation, PG&E, did X and Y even though all of its actions were, of course, performed by specific human beings.

Who are the PG&E executives who were in charge of the departments that broke the law? No one knows.

Who were the executives at VW who ordered, designed, implemented and oversaw the diesel-engine cheating program? No media outlet has ever reported any names.

Who were the executives at Bear Stearns and Lehman Brothers who oversaw the purchase of all those junk mortgage-backed securities? No one knows.

If the executives at General Motors who approved, directed and authorized the company’s refusal to fix the ignition switch problem knew at the time that if it all turned to shit that the headlines would be “John Smith of Grosse Point, Michigan, the Senior Vice President for Vehicle Safety, made the decision not to replace the defective ignition switches with a more reliable design in order to save $.57/car” Mr. Smith might have been far less willing to act the way he did.

If the media adopts a policy of reporting the names and cities of residence of the executives whose departments engaged in the illegal or dangerous or wrongful conduct there might be substantially less such conduct occurring.

So, that’s one disincentive to bad business conduct — publish the names of the individuals who direct or whose departments are responsible for engaging in the abusive conduct.

2) Make Executives Financially Liable For Damages

A second disincentive to bad business conduct is to financially punish the humans who authorize or engage in that conduct.

The San Bruno pipeline explosion cost PG&E billions of dollars. It didn’t cost the executives who actually engaged in, directed, or knowingly allowed that conduct anything more than the possible loss of their jobs. It didn’t even cost them their bonuses, pensions or severance packages.

But, suppose we revised the law to make the executives who have knowledge of wrongful conduct and the power to do something about it personally responsible for 50% of the fines and damages up to some cap of maybe $5M each unless they clear themselves by doing two things: (1) they report the problem in writing to their superior and request the authority and the budget to fix it and (2) if permission is refused that they also report the problem to the applicable state and federal agencies.

If they did those two things they would be exempt from financial responsibility. Of course, by reporting the problem to their superior their superior would then himself/herself become financially liable unless he/she either authorized the fix or requested authority to fix the problem from his/her superior.

In short, to escape liability executives would have to tell their bosses about the problem and request authorization to fix it and if the boss wants to escape liability he also has to tell his boss and so on, and so on and so on, all the way up the chain of command.

Whoever knows about the problem, could fix it, and refuses to authorize it’s correction will end up being personally liable for half the bill. Of course, it would be illegal for the company to indemnify or reimburse the executive for any such charges.

This one policy would vastly decrease corporate wrongdoing.

Holding executives personally liable for certain company expenses is not a new concept. Many states already impose personal liability on corporate officers and directors for their company’s failure to pay sales taxes and pay employee income-tax withholding obligations. This new policy would just extend the concept of personal liability to some of the company’s other obligations.

Do you want to reduce the scope and complexity of business regulations?

If so, then you need reduce the bad business conduct that incites and drives those regulations.

The Disconnect Between Who Acts Badly And Who Pays The Costs For Acting Badly

Right now there is a disconnect between the humans who engage in the wrongful conduct and the financial penalties that result from that conduct.

If you fix that disconnect, if the humans who have the choice of whether or not to engage in that conduct know that if they go for it and it all goes wrong that they, as well as the company, will be financially on the hook, that they personally have skin in the game, then that abusive conduct will materially decrease and with it will decrease the demand for increased government regulation.

So lets give executives a disincentive to do the wrong thing.

  • Publicize the names of the executives who choose profit over following the rules.
  • Make the responsible executives personally liable for a big chunk of the bill.

Do that and those executives will think twice about shipping something labeled as baby’s apple juice that’s actually only colored sugar water (Beech-Nut), about selling cars that cheat emissions tests (VW), about failing to replace defective gas lines and a failure to add automatic shut-off valves (PG&E), about selling tainted antibiotic cream (GlaxoSmithKline), etc. etc.

If you want the system to self-regulate then apply the age-old principle of deterrence directly to the people whose bad conduct drives the demand for and the need for the regulations in the first place.

–David Grace
www.DavidGraceAuthor.com

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David Grace
David Grace Columns Organized By Topic

Graduate of Stanford University & U.C. Berkeley Law School. Author of 16 novels and over 400 Medium columns on Economics, Politics, Law, Humor & Satire.