Saturday, February 21, 2009

Law for law's sake

Megan McArdle notes that the "mania for rules" in the public sector is different than in the private sector: in the private sector, "companies that become too encrusted eventually succumb to competition from nimbler firms," whereas in the public sector "[t]he feedback to discipline . . . is much slower and clumsier." That's generally true, but two points deserve mention: 1. The source of the mania for regulation is often the private sector itself. This is especially true in finance. Banks and other financial institutions have an almost insatiable need for "legal certainty." If a statute or regulation contains ambiguous terms, banks demand additional regulations that clarify the ambiguities and further define the terms. If a regulation's application to particular circumstances is uncertain, banks demand more regulations to clarify the application issues. No regulatory term left undefined, no contingency left unaddressed. Anyone who has ever had the misfortune of reading (or, worse, writing) public comments on proposed SEC rules, for example, understands how absurd the financial sector's demands can get. Unfortunately, clarity (or "legal certainty") usually requires more regulations than most outside observers would deem necessary. It's true that additional regulations aimed at providing further clarity sometimes end up adding to the legal uncertainty, leading to yet more clarifying regulations, and so on—I won't get into that. My point is simply that the mania for regulations isn't always a function of public sector inefficiency; often it's a function of private sector demand. 2. It's not necessarily appropriate to compare the public and private sectors' respective proclivity for rules. The Constitution places restrictions on the public sector that don't apply to the private sector, and these constitutional restrictions necessitate additional rules. For example, the process of terminating a federal government employee has to satisfy standards of due process, which requires an elaborate regulatory scheme that's absent from private sector employment law. Again, this isn't a function of public sector inefficiency; it's a function of, well....the U.S. Constitution.


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