Topic: Regulatory Studies

“Fear Placebos” and Homeland Security

In the ongoing Cato Unbound discussion about how the government should respond to excessive fear of terrorism, Bernard Finel writes:

The cynical response focuses on continuing the sorts of grand, empty gestures we have already pursued since 9/11. We can continue to pack our shampoo in 3 oz bottles and ignore the color coded signs and tolerate the petty annoyances. Over time, fear will fade and it is unlikely that this unfocused motion will result in grievous consequences.

Finel rejects this approach in favor of what he calls a pragmatic one. I wonder if the cynical approach is the pragmatic one. A realist might say that we can never get the public to be rational about the odds of dying from terrorism, so let’s hold down spending and try to push it toward uses that have benefits other than counterterrorism, sort of like how fear of Soviet missiles justified spending on scientific research and highways. I called this the “fake it” option in a list of possible approaches to homeland security. This approach is dishonest and patronizing, but not necessarily wrong, especially if efforts to correct overwrought fears fail.

Apparently, Obama’s nominee to head the Office of Information and Regulatory Affairs is on the same page. Here’s the conclusion to a working paper called “Overreaction to Fearsome Risks” that Cass Sunstein wrote with Richard Zeckhauser:

Government regulation, affected as it is by the public demand for law, is likely to stumble on the challenge of low probability harms as well. The government should not swiftly capitulate if the public is demonstrating action bias and showing an excessive response to a risk whose expected value is quite modest. A critical component of government response should be information and education. But if public fear remains high, the government should determine which measures can reduce most cost effectively, almost in the spirit of looking for the best “fear placebo.” Valued attributes for such measures will be high visibility, low cost, and perceived effectiveness.

They meant, I believe, to include the word “it,” meaning “public fear” after “reduce.” So, in other words, fake it. It’s not surprising that Sunstein wrote this – his books, from which I learned a lot, head toward the same conclusion. But it will be interesting to see whether this kind of talk, shrouded though it may be in academic speak, gets him into any trouble now that he’s up for an important government job.

In other cost-of-fear-of-terrorism news, both Stephen Dubner of the Freakonomics blog and Bruce Schneier ask whether the diversion of federal attention from crime to terrorism since 9-11 helped cause an outbreak of financial fraud. They cite this New York Times article discussing the shift of FBI resources to counterterrorism. Dubner is unsure, but I say it’s a no-brainer that moving 2,400 FBI agents from crime to counterterrorism and the resulting 40 percent drop in financial crimes referred to US Attorney’s for prosecution caused more financial crime.

We will be discussing the cost of counterterrorism at the conference taking place Monday and Tuesday. Registration is closed because we’re full. But the event will be webcast live on Cato.org. C-SPAN will also be taping Monday afternoon.

Cass Sunstein and the Cato Institute

The Washington Post is reporting that Harvard law professor Cass Sunstein will be named director of the Office of Information and Regulatory Affairs, the White House’s regulatory review office. The appointment is baffling, not because the Obama administration has chosen Sunstein (he is a first-rate thinker), but because Sunstein has (apparently) accepted it. OIRA chief is one of the most thankless jobs in Washington, and the office has historically shown itself to be a victim of the political winds no matter how sharp-minded and sincere the chief is.

Sunstein would not fit the label “libertarian,” but he is, in his own way, a supporter of liberty. And he has been a good friend to the Cato Institute, speaking here and writing for Regulation (1, 2).

I wish Cass well in this difficult new job.

Liberty Tavern? Not So Much

When it opened in 2007, the Liberty Tavern became an instant hit among libertarians in the Clarendon neighborhood of Arlington, Virginia, of which there are quite a few, given the proximity of the Institute for Humane Studies, Mercatus Center, Institute for Justice, and Atlas Foundation. Now, however, the Liberty Tavern has sadly failed its inspiring name. Barista/bartender/blogger and former Cato colleague Jacob Grier explains:

Virginia Governor Tim Kaine is predictably pushing once again for a comprehensive statewide smoking ban. Not so predictably, he’s teamed up with the owners of Clarendon’s Liberty Tavern to launch his campaign:

This year, he believes momentum is on his side. At a news conference Tuesday at a Clarendon tavern, Kaine said the public is increasingly supportive of such bans…

Stephen Fedorchak, owner of The Liberty Tavern, the restaurant where Kaine held his news conference, said he has been in the business long enough to know smoking was once entrenched in bars and restaurants. But those days have passed, he said.

He said he does not regret the decision to ban smoking in his restaurant and said these days “smokers are somewhat used to going out in a … fresh-air environment” and no longer assume they will be allowed to light up.

Fedorchak is happy to be running a smoke-free restaurant. So why does he want the state to force all the bars and restaurants in Virginia to follow the same policy? Why not allow owners and customers a choice? Maybe some people like to smoke at a bar or a restaurant. I don’t, and I prefer to patronize smoke-free establishments. But I don’t feel the need to force my preferences on everyone else by law.

Let’s hope The Liberty Tavern will renounce its support for nanny-state authoritarianism and once again be worthy of its Revolutionary name.

“A Real Regulator”

Sunday’s Meet the Press had a fascinating colloquy on securities regulation, revealing Washington’s immense capacity for self-deception.

David Gregory set up the story, on which CNBC’s Erin Burnett commented:

MR. GREGORY: … I want to stay in New York and something else that has rocked Wall Street beyond the economy, and that is Bernard Madoff. Big money man, investment man who was the darling of Wall Street for many, many years. Now it turns out he ran a giant Ponzi scheme and billions have been lost, from the small investor to, to Jewish organizations and, and philanthropies across the country. Steve Pearlstein, who writes about the economy for The Washington Post, wrote this: “With the Madoff story, it is now revealed that the masters of the universe aren’t just too clever by half—they’re not that clever at all. For years, they not only allowed themselves to be bamboozled by a con artist but also willingly and enthusiastically served as his market agent, offering friends, relatives and favorite charities the opportunity to invest with their good pal, Bernie Madoff. (So much for the idea that wealthy individuals and ‘sophisticated’ institutional investors don’t need the protection of government regulators.)” Was anybody watching?

MS. BURNETT: It, it is incredible, because there had been credible complaints brought to the SEC that said along the lines of, “This is too good to be true. You don’t get these sorts of consistent returns.”

MR. GREGORY: Mm-hmm.

MS. BURNETT: And they didn’t do anything about it. But they’re—you know, I was talking to Mort Zuckerman, the New York real estate man, earlier this week, and he had lost $30 million in one of his charities that was invested with Bernie Madoff. And he said, “I didn’t even know who the guy was. I had given my money to somebody else who actually”…

MR. GREGORY: Right.

MS. BURNETT: …”entrusted the entire $30 million to one guy, a guy I’d never heard of, and then I get a letter finding out that it’s completely gone.” So you’re talking about some very sophisticated people who were completely duped, and maybe some of them should have been doing more due diligence. Some of them were trusting that role to others…

MR. GREGORY: Right.

MS. BURNETT: …who had a fiduciary responsibility to do it. But there’s no question we need a real regulator.

“[W]e need a real regulator.”

Ms. Burnett, the SEC that failed to prevent this is a real regulator.

When regulators fail to address a problem ahead of time, when they regulate inefficiently, when they hand their rulemaking organs to the industries they are supposed to oversee, those are all the actions of real regulators. That’s what you get with real regulation.

What Burnett meant when she called for a “real” regulator, of course, was “the regulator I can imagine.” The regulators people imagine are foresighted, interested only in the public good, they’re resistant to lobbying, and they run efficient organizations. But these characteristics are simply imaginary.

Watching discussions like these, you come to realize how legislation and regulation thrive on self-deception and the appeal to ego.

Thousands of people come to Washington and stay because they believe that they can design the ideal regulatory system. They think they know how to write a law or a regulation that works for everyone, that protects consumers, that doesn’t pick winners and losers in the marketplace, that doesn’t make the glaring errors that we see month in and month out on Sunday morning political shows.

(If only voters didn’t elect the wrong guy. If only lobbyists didn’t ‘corrupt’ the system. If only, if only, if only … .)

Alas, we’re stuck with real regulators. They fail, and when people rely on them, the failures of regulation are magnified. (Not that Mort Zuckerman should get his money back from anyone other than Bernard Madoff. No bailout.)

Libertarians and pro-Washington people (for lack of a better term) have the same goals: honest, transparent marketplaces, productive economies, healthy and happy people. The difference is that Washingtonians strive to defeat human nature rather than harnessing it, and they build a bigger and bigger machine for doing that, sometimes calling it “real regulation.”

Law and Disorder in Philadelphia

This mini-documentary does a great job of capturing how the drug war is wreaking havoc in our cities.  Police engage in a futile game of cat & mouse with low level “corner boys.”  Gang members kill one another over turf (drug sales territory).  And the chasm between the ordinary residents and the government (police, prosecutors) is palpable.  The police are frustrated by the lack of citizen cooperation.  Witnesses and victims do not come forward with information, for example.  But there is little mystery here.  If the police cannot protect witnesses from retaliatory attacks, coming forward is practically suicidal.   Criminals oversee a thriving black market drug trade while policymakers dither about drug courts and “Plan Colombia.”

Excellent work, Mr. Theroux.  These festering problems are too often ignored by our MSM.  Americans get excessive coverage of OJ Simpson, Natalie Holloway, and Caylee Anthony.  For scholarly work on the drug war go here, herehere, and here.     If you liked this mini-doc, be sure to check out The Wire.

Obama Transition Transparency: A Good Start

The President-elect’s Change.gov Web site announced a new feature on Friday, called Your Seat at the Table: “The Obama-Biden Transition Team will be hearing from many groups over the next several weeks. On this page, you can track these meetings, view documents provided to the Transition, and leave comments for the team.”

Says a memo from transition head John Podesta, itself posted online, “[A]ny documents from official meetings with outside organizations will be posted on our website for people to review and comment on.”

This is a very good start at transparency. John Wonderlich at the Sunlight Foundation wonders what this might look like across the entire executive branch. If the default rule were online disclosure of documents submitted to government agencies, that would make a big change in the conduct of the public’s business.

There are many dimensions of transparency, of course. Along with openness in political and regulatory processes, we should also have openness in functional information, and in results. Where is the money going? What are we getting in return? Answers to these questions can validate or invalidate government programs in ways never before thought possible.

Wednesday at noon, we’ll be having a policy forum here at Cato entitled: Just Give Us the Data! Prospects for Putting Government Information to Revolutionary New Uses. Ed Felten, Gary Bass, and Jerry Brito will discuss how access to government data in useful formats might revolutionize public oversight.

Register here now.