The Self-Preservation of Government Regulators
Michael Lewis wrote Liar's Poker, The Big Short, Moneyball, The Blind Side, and The Undoing Project, which may be the worst title for a great book in recent history. It is about Amos Tversky and David Kahneman, Israeli psychologists, who together created a new field of economics, behavioral economics.
Lewis has a gift for words. If I could be as good as any non-fiction author, I would choose Lewis as my model, even without his movie royalties.
In The Blind Side, he describes a lady from the NCAA's department of improper boosterism. It looks for money or other favors that are given to college athletes.
The NCAA was best described 20 years ago by free market economist Ben Rogge [ROWEguee]. He said the NCAA is a cartel of officially non-profit enterprises that collude to keep down the price of college athletes.
Higher education in the United States is a government-created cartel. It is based on government licensing of what constitutes higher education. It is also based on a self-policing system of academic accreditation. The NCAA is simply an extension of the larger cartel.
In the book and in the movie, we see a grilling of All-American high school football star Michael Oher by an NCAA investigator. She comes to investigate whether the Tuohy family improperly provided Oher with gifts to get him to attend the University of Mississippi, their alma mater. Since the Tuohys were multimillionaire whites who had adopted the homeless black giant of a teenager, there was at least plausible suspicion that something fishy was going on.
Lewis offers this assessment of the NCAA's investigatory department. He begins by describing the views of Sean Tuohy, the man who adopted Oher.
Sean didn't trust these people. They didn't think in terms of right and wrong. All they cared about was keeping up appearances. The NCAA rules existed, in theory, to maintain the integrity of college athletics. These investigators were meant to act as a police department. In practice, they were more likely public relations wing of an inept fire department. They might not be the last people on earth to learn that some booster or coach had bribed some high school jock, but they weren't usually the first either. Some scandal would be exposed in a local newspaper and they would go chasing after it, in an attempt to minimize the embarrassment of the system. They didn't care how things were, only how they could be made to seem (p. 179).
Lewis understands exactly how the system works. I don't know if Mr. Tuohy thought this way, but Lewis certainly did.
In The Big Short, Lewis describes the Securities and Exchange Commission in a way reminiscent of how he describes the NCAA anti-bribery committee. The unwillingness of the SEC's lawyers to monitor what was going on in the capital markets, which led to the worst breakdown in postwar America's capital markets, is clear to anybody who either read the book or saw the movie. The regulators did not regulate anything in such a way that the disaster could have been avoided.
Inherent in every organization, but especially in a salaried bureaucracy, is the desire of the organization's employees to preserve their jobs, their reputations, and their self-respect. No matter what the goals were for establishing the bureaucracy, it is always transformed into a self-preservation society. The grandiose mission of the agency is always undermined over time. The sanctions that the agency sets up to police itself create a system of self-preservation that no superior bureaucracy or rival bureaucracy can ever penetrate to reform it. The bureaucracy ceases to serve the general mission, and it substitutes instead self-preservation. Every system of rules can be gamed by those inside the system. They have the incentive, the time, and the creativity to make the economic sanctions of the system protect the existing employees.
In a profit-seeking organization, the requirement to produce a profit keeps authority in the hands of customers. But in nonprofit organizations and in government bureaucracies, the sources of the funding are not self-interested customers. The sources of the funding are an even larger bureaucracy or else the political regime itself. The free market is self-policing. The sanctions of profit and loss keep sellers in line. But there is no comparable system of authority in either a nonprofit organization or government bureaucracy. It is far easier for employees to game the system if the system is either nonprofit or else based on political coercion.
Voters around the world believe that government regulators will protect them from profit-seeking businessmen. But who will protect them from the self-serving regulators? Who will protect them from bureaucrats who have power over their lives, and who use that power, not to protect the public, but to protect the richest members of the industries that the regulators are supposed to regulate?
If we think of the regulators in the way that Lewis describes the NCAA's investigators, namely, as the public relations wing of an inept fire department, we will better understand the nature of government regulation than if we regard the regulators as defenders of the public's interest.