Regulatory Capture

Why We Don't Let Foxes in the Henhouse

By DAVID MACARAY

"The Commission is, or can be made, of great use to the railroads. It satisfies the popular clamor for government supervision of the railroads, while, at the same time, that supervision is almost entirely nominal.” [italics added]

—Richard Olney, U.S. Attorney General, referring to the ICC  (Interstate Commerce Commission), circa 1889.

"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.” [italics added]

—Woodrow Wilson, 1913

Regulatory Capture is defined as the phenomenon where “….a 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.  [It] is a form of government failure, as it can act as an encouragement for large firms to produce ‘negative externality.’ The agencies are called Captured Agencies.”

It’s common knowledge that tobacco companies once enlisted shady doctors to deny the link between smoking and lung cancer, that corporations hire ex-IRS employees to advise them on how to avoid paying taxes, that coal mine companies have put mining safety regulators on their payrolls to grease the skids, and that ex-congressmen drool at the prospect of becoming top-dollar lobbyists.

Therefore, it shouldn’t come as any great surprise that Wall Street investment firms continue to hire government financial regulators to help them game the system.

And it’s not simply a matter of hiring these ex-regulators to assist in circumventing federal law.  As devious and sleazy as that practice has become, what’s even more alarming is the conflict-of-interest charges leveled against regulators accused of lying, falsifying data, and “looking the other way” as a condition of future employment.  But again, why would that shock anyone? 

The relationship between financial institutions and the agencies established to regulate them has become so ridiculously cozy, so maggoty, that the Securities and Exchange Commission (SEC) is now regarded as the Oversight Fairy’s notion of an elaborate prank.  The list of SEC officials who have left the Commission for highly lucrative jobs in the private sector is long and impressive (Linda Thomsen, Richard Walker, Bob Khuzami, Arthur Levitt, Gary Lynch, et al). 

So what’s the remedy?  How can we maintain the integrity of the agencies?  It can’t simply be a matter of paying higher salaries to these agency people, because corporations will always be able to offer more—just as the drug cartels will never be outbid by the Mexican government.  It’s no contest.

What needs to be done is to impose time restraints on changing teams.  We need to regulate the regulators.  Anyone who wishes to take a regulatory job with a Civil Service agency (which—let’s not forget—offers decent wages and benefits) must not be allowed to work for a private company within that same industry for a period of, say, seven years after leaving. 

If that seems too harsh, or if it violates one’s finely tuned libertarian sensibilities, then so be it.  If you can’t handle these restrictions going in, don’t work for the government.  The Peace Corps had a rule where ex-volunteers couldn’t engage in military intelligence for a period of five years following our leaving the host country.  It was part of the Peace Corps charter. 

When you take a federal job, you are, in principle, promising to serve the citizens of the United States.  These jobs should not be used as a springboard to higher paying positions within the industry you’re regulating, nor should they result in the very citizens you were empowered to serve being taken advantage of by your change of allegiance.  It’s a covenant that any enlightened fourth-grader would understand.   

David Macaray, a Los Angeles playwright, is the author of “It’s Never Been Easy:  Essays on Modern Labor”. He served 9 terms as president of AWPPW Local 672. He can be reached at dmacaray@earthlink.net