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Regulatory capture

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In economics, regulatory capture occurs when a state 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. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.

The theory

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether.[1] Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.

Likelihood of regulatory capture is a risk to which an agency is exposed by its very nature. This suggests that a regulatory agency should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all lest the agency become victim, in which case it may serve its regulated subjects rather than those whom the agency was designed to protect. A captured regulatory agency is often worse than no regulation, because it wields the authority of government.

Economic rationale

The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are more likely to be motivated to influence the regulatory body than dispersed individual consumers,[1] each of whom has little particular incentive to try to influence regulators. When regulators form expert bodies to examine policy, this invariably featured current or former industry members, or at the very least, individuals with contacts in the industry.

Some economists, such as Jon Hanson and his co-authors, argue that the phenomenon extends beyond just political agencies and organizations. Businesses have an incentive to control anything that has power over them, including institutions from the media to academia to popular culture, and thus will try to capture them as well. They call this phenomenon "deep capture."[2]

American examples

Central Intelligence Agency (CIA)

The CIA kept quiet about the Kyshtym disaster and other Soviet nuclear disasters to protect the public image of the Western nuclear industry.

Federal Communications Commission (FCC)

Legal scholars have pointed to the possibility that federal agencies such as the Federal Communications Commission, a federal regulatory body in the United States, had been captured by media conglomerates. Peter Schuck of Yale University School of Law has argued that the FCC is subject to capture by the media industries’ leaders and therefore reinforce the operation of corporate cartels in a form of “corporate socialism” that serves to “regressively tax consumers, impoverish small firms, inhibit new entry, stifle innovation, and diminish consumer choice”.[3] The FCC selectively granted communications licenses to some radio and television stations in a process that excludes other citizens and little stations from having access to the public.[4]

Food and Drug Administration (FDA)

The United States Food and Drug Administration has also been accused of acting in the interests of the agricultural, food and pharmaceutical industries (and supporting monopolies) at the expense of consumer health interests. Monsanto's growth hormone, rBGH, which has been linked to cancer in cows and humans,[5] has been banned in numerous countries, but is unlabeled and legal in the United States.[6] Margaret Miller, a former chemical laboratory supervisor at Monsanto,[7] wrote a scientific report that was to be submitted to the FDA to obtain approval of the drug. Shortly before the report was submitted, Miller quit Monsanto to take a job at the FDA, where her first job was to approve the report she had just written while employed at Monsanto.[6][8] Michael R. Taylor, the FDA's deputy commissioner for policy, and a former staff lawyer at Monsanto, where he worked on rGBH legal issues, wrote the FDA's labeling guidelines for rGBH.[5]

Interstate Commerce Commission (ICC)

Historians, political scientists, and economists have used the Interstate Commerce Commission, a federal regulatory body in the United States, as a classic example of regulatory capture. The creation of the ICC was the result of widespread and longstanding anti-railroad agitation, but the Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, they claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.[9]

Minerals Management Service

In the aftermath of the 2010 Deepwater Horizon oil spill, the Minerals Management Service, which had regulatory responsibility for offshore oil drilling, was widely cited as an example of regulatory capture.[10][11][12]

Nuclear Regulatory Commission (NRC)

Then-candidate Barack Obama said in 2007 that the five-member Nuclear Regulatory Commission had become "captive of the industries that it regulates" and Joe Biden indicated he had absolutely no confidence in the agency.[13] The NRC has given a license to every single reactor requesting one, prompting Greenpeace USA nuclear policy analyst Jim Riccio to refer to the agency approval process as a "rubber stamp".[14] In Vermont, ten days after[15] the 2011 Tōhoku earthquake and tsunami that damaged Japan's Daiichi plant in Fukushima, the NRC approved a 20-year extension for the license of Vermont Yankee Nuclear Power Plant, although the Vermont state legislature had voted overwhelmingly to deny such an extension.[14] The plant had been found to be leaking radioactive materials through a network of underground pipes, which Entergy, the company running the plant, had denied under oath even existed. Representative Tony Klein, who chaired the Vermont House Natural Resources and Energy Committee, said that when he asked the NRC about the pipes at a hearing in 2009, the NRC didn't know about their existence, much less that they were leaking.[14] On March 17, 2011, the Union of Concerned Scientists (UCS) released a study critical of the NRC's 2010 performance as a regulator. The UCS said that through the years, it had found the NRC's enforcement of safety rules has not been “timely, consistent, or effective" and it cited 14 "near-misses" at U.S. plants in 2010 alone.[16] Tyson Slocum, an energy expert at Public Citizen said the nuclear industry has "embedded itself in the political establishment" through "reliable friends from George Bush to Barack Obama", that the government "has really just become cheerleaders for the industry."[17]

There have also been instances of a revolving door. Jeffrey Merrifield, who was on the NRC from 1997 to 2008 and was appointed by presidents Clinton and Bush, left the NRC to take an executive position at The Shaw Group,[14] which has a nuclear division regulated by the NRC.[note 1]

Office of the Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency has strongly opposed the efforts of the 50 state attorneys general, who have banded together to penalize banks and reform the mortgage modification process, following the subprime mortgage crisis and the financial crisis of 2008. This example was cited in The New York Times as evidence that the OCC is "a captive of the banks it is supposed to regulate".[18]

Securities and Exchange Commission (SEC)

The United States Securities and Exchange Commission has also been accused of acting in the interests of Wall Street banks and hedge funds and of dragging its feet or refusing to investigate cases or bring charges for fraud and insider trading.[19] Financial analyst Harry Markopolos, who spent ten years trying to get the SEC to investigate Bernie Madoff, called the agency "nonfunctional, captive to the industry."[20] The SEC has been found by the U.S. Senate Committee on Finance, the Senate Judiciary Committee and a federal district court to have illegally dismissed an employee in September 2005 who was critical of superiors' refusal to pursue Wall Street titan John Mack. Mack was suspected of giving insider information to Arthur J. Samberg, head of Pequot Capital Management,[21] once one of the world's largest hedge funds.[22] After more than four years, of legal battles, former SEC investigator Gary J. Aguirre filed papers in an Freedom of Information Act (FOIA) case he had against the SEC, seeking an order to force the SEC to turn over Pequot investigation records to him on the grounds that they had not charged anyone. Aguirre had already provided incriminating evidence of Pequot's insider trading involving Microsoft trades to the SEC in a letter on January 2, 2009.[23] The morning after Aguirre's FOIA papers were filed,[23] the SEC announced they had filed charges against Pequot and Pequot had agreed to disgorge $18 million in illegal gains and pay $10 million in penalties.[22][24] A month later, the SEC settled Aguirre's wrongful termination lawsuit it for $755,000.[25] The list of officials who have left the SEC for highly lucrative jobs in the private sector and who sometimes have returned to the SEC includes Arthur Levitt, Robert Khuzami,[26] Linda Chatman Thomsen,[27] Richard H. Walker,[28] Gary Lynch[29] and Paul R. Berger.[30] Reporter Matt Taibbi calls the SEC a classic case of regulatory capture[31] and the SEC has been described as an agency that was set up to protect the public from Wall Street, but now protects Wall Street from the public.[32]

Canadian examples

Canadian Radio-television and Telecommunications Commission (CRTC)

Based on recent testimony of Konrad von Finckenstein [33] regarding usage-based billing imposition on Internet wholesalers,[34] the Canadian Radio-television and Telecommunications Commission was likely to have been captured by Bell Canada, and to some degree[weasel words] Rogers Communications, Telus, Shaw and Videotron.[citation needed]

International examples

World Trade Organization (WTO)

The academic Thomas Alured Faunce has argued the World Trade Organisation Non-violation nullification of benefits claims, particularly when inserted in bilateral trade agreements, can facilitate intense lobbying by industry which can result in effective regulatory capture of large areas of governmental policy.[35]

Japanese examples

Nuclear and Industrial Safety Agency (NISA)

Despite warnings about its safety, Japanese regulators from the Nuclear and Industrial Safety Agency approved a 10-year extension for the oldest of the six reactors at Fukushima Daiichi just one month before a 9.0 magnitude earthquake and subsequent tsunami damaged reactors[36] and caused a meltdown. Nuclear opponent[37] Eisaku Sato, governor of Fukushima Prefecture from 1988–2006, said a conflict of interest is responsible for NISA's lack of effectiveness as a watchdog.[36] The agency is under the Ministry of Economy, Trade and Industry, which encourages the development of Japan's nuclear industry. Inadequate inspections are reviewed by expert panels drawn primarily from academia and rarely challenge the agency.[36] Critic Takashi Nakata, a seismologist said, "The regulators just rubber-stamp the utilities' reports."[38]

Both the ministry and the agency have ties with nuclear plant operators, such as Tokyo Electric. Some former ministry officials have been offered lucrative jobs in a practice called amakudari, "descent from heaven".[36] A panel responsible for re-writing Japan's nuclear safety rules was dominated by advisers from utility companies, said seismology professor Katsuhiko Ishibashi who quit the panel in protest, saying it was rigged and "unscientific". Yoshihiro Kinugasa helped write Japan's nuclear safety rules, later conducted inspections and still in another position at another date, served on a licensing panel, signing off on inspections.[38]

Ministry of Health, Labour and Welfare (MHLW)

In 1996, the Ministry of Health and Welfare (now combined with the Ministry of Labour) came under fire over the scandal of HIV-tainted blood being used to treat hemophiliacs.[39] Although warned about HIV contamination of blood products imported from the U.S., the ministry abruptly changed its position on heated and unheated blood products from the U.S., protecting Green Cross and the Japanese pharmaceutical industry by keeping the Japanese market from being inundated with heat-treated blood from the United States.[39] Because the unheated blood not taken off the market, 400 people died and over 3,000 people were infected with HIV.[39] No senior officials were indicted and only one lower-level manager was indicted and convicted.[40] Critics say the major task of the ministry is the protection of industry, rather than of the population.[39] In addition, bureaucrats get amakudari jobs at related industries in their field upon retirement, a system which serves to inhibit regulators.[39] Moriyo Kimura, a critic who works at MHLW, says the ministry does not look after the interests of the public.[40]

Quotes

Richard Olney, the US Attorney General circa 1889, opined upon the Interstate Commerce Commission: "The Commission is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, while at the same time that supervision is almost entirely nominal."[41]

In 1913 Woodrow Wilson wrote: "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."[42]

See also

Footnotes

  1. ^ Pete Domenici, a former U.S. senator now promotes nuclear energy. Over the course of his 20 years in government, he received $1.25 million in political contributions connected with the energy sector. From 2000 to 2010, the nuclear industry and people who work in it, contributed $4.6 million to members of Congress, in addition to the $54 million spent by electric utilities, trade groups and other supporters to hire lobbyists, including some former members of Congress. (See Eric Lichtblau, "Lobbyists’ Long Effort to Revive Nuclear Industry Faces New Test" The New York Times (March 24, 2011)

References

  1. ^ a b Timothy B. Lee, "Entangling the Web" The New York Times (August 3, 2006). Retrieved April 1, 2011
  2. ^ Jon Hanson & David Yosifon, The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture, 152 U. Pa. L. Rev. 129 (2003).
  3. ^ Travis, Hannibal (2007). "Of Blogs, eBooks, and Broadband: Access to Digital Media as a First Amendment Right". Hofstra Law Review, vol. 35, p. 148. President and Trustees of Hofstra University in Long Island, New York, quoting Peter H. Shuck, The Politics of Regulation, 90 YALE L.J. 702, 707-10 (1981) (book review). Retrieved June 4, 2010.
  4. ^ Travis, Hannibal (2007). "Of Blogs, eBooks, and Broadband: Access to Digital Media as a First Amendment Right". Hofstra Law Review, vol. 35, p. 152. President and Trustees of Hofstra University in Long Island, New York, citing Red Lion Broad. Co. v. FCC, 395 U.S. 367, 389, 396 (1969). Retrieved June 4, 2010.
  5. ^ a b Jennifer Ferrara, "Revolving Doors: Monsanto and the Regulators" Republished with permission from The Ecologist (September/October 1998). Retrieved April 4, 2011
  6. ^ a b "Monsanto, FDA, U.S. Government: Connections" Annie Appleseed Project. Retrieved April 4, 2011
  7. ^ "Lies and Deception: How the FDA Does Not Protect Your Best Interests" Smart Publications: Clarifying the Complex World of Nutrition Science. Retrieved April 4, 2011
  8. ^ "Lies and Deception: How the FDA Does Not Protect Your Best Interests" Smart Publications: Clarifying the Complex World of Nutrition Science. Retrieved April 4, 2011
  9. ^ Free to Choose, Milton Friedman
  10. ^ Frank, Thomas (24 June 2010). "Obama and 'Regulatory Capture'". The Wall Street Journal. Retrieved 24 June 2010.
  11. ^ Schmitt, Mark (22 June 2010). "Failed States". The American Prospect. Retrieved 23 June 2010.
  12. ^ O'Driscoll, Gerald (12 June 2010). "The Gulf Spill, the Financial Crisis and Government Failure". The Wall Street Journal.
  13. ^ Justin Elliott, "Ex-regulator flacking for pro-nuke lobby" Salon.com (March 17, 2011). Retrieved March 18, 2011
  14. ^ a b c d Kate Sheppard, "Is the Government's Nuclear Regulator Up to the Job?" Mother Jones (March 17, 2011). Retrieved March 18, 2011
  15. ^ "Vermont Yankee Nuclear Power Station-License Renewal" NRC, official website. Retrieved April 04, 2011
  16. ^ Jia Lynn Yang, "Democrats step up pressure on nuclear regulators over disaster preparedness" The Washington Post (March 18, 2011). Retrieved March 19, 2011
  17. ^ Eric Lichtblau, "Lobbyists’ Long Effort to Revive Nuclear Industry Faces New Test" The New York Times (March 24, 2011). Retrieved March 25, 2011
  18. ^ Joe Nocera, "An Advocate Who Scares Republicans" The New York Times (March 18, 2011). Retrieved March 19, 2011
  19. ^ Matt Taibbi, "Why Isn't Wall Street in Jail?" Rolling Stone (February 16, 2011). Retrieved March 3, 2011
  20. ^ "Madoff Whistleblower Markopolos Blasts SEC" Bloomberg News (June 5, 2009). Retrieved March 29, 2011
  21. ^ "Gary J. Aguirre v. Securities and Exchange Commission, Civil Action No. 06-1260 (ESH)" United States District Court for the District of Columbia (April 28, 2008). Google Scholar. Retrieved March 1, 2011
  22. ^ a b "Pequot Capital and Its Chief Agree to Settle S.E.C. Suit for $28 Million" The New York Times (May 27, 2010). Retrieved March 4, 2011
  23. ^ a b "SEC Settles with Aguirre" Government Accountability Project (June 29, 2010) Retrieved February 21, 2011
  24. ^ "SEC Charges Pequot Capital Management and CEO Arthur Samberg With Insider Trading" U.S. Securities and Exchange Commission press release (May 27, 2010). Retrieved March 3, 2011
  25. ^ Gretchen Morgenson, "SEC Settles With a Former Lawyer" The New York Times (June 29, 2010). Retrieved February 21, 2011
  26. ^ "Robert Khuzami Named SEC Director of Enforcement" U.S. Securities and Exchange Commission Press Release (February 19, 2009) Retrieved January 9, 2011
  27. ^ Kara Scannell, "Davis Polk Recruits Ex-SEC Aide" The Wall Street Journal (April 13, 2009) Retrieved February 26, 2011
  28. ^ "Deutsche Bank Hires Former S.E.C. Official" The New York Times (October 2, 2001). Retrieved March 4, 2011
  29. ^ Reed Abelson, "Gary Lynch, Defender of Companies, Has His Critics" The New York Times (September 3, 1996). Retrieved March 4, 2011
  30. ^ Walt Bogdanich and Gretchen Morgenson, "S.E.C. Inquiry on Hedge Fund Draws Scrutiny" The New York Times (October 22, 2006) Retrieved March 4, 2011
  31. ^ Matt Taibbi interviewed on his article, "Why isn't Wall Street in jail?" Democracy Now! Video and transcript. (February 22, 2011). Retrieved March 4, 2011
  32. ^ Don Bauder, "Gary Aguirre Major Source in Taibbi Blockbuster" San Diego Reader blog post (February 17, 2011). Retrieved February 19, 2011
  33. ^ "CRTC Chair Defends UBB Decision at Industry Committee Meeting amidst Backlash" OpenMedia.ca (February 3, 2011). Retrieved April 4, 2011
  34. ^ "Telecom Decision CRTC 2010-255" CRTC, official website. Retrieved April 4, 2011
  35. ^ Faunce TA, Neville W and Anton Wasson A. Non Violation Nullification of Benefit Claims: Opportunities and Dilemmas in a Rule-Based WTO Dispute Settlement System in Bray M (ed) Ten Years of WTO Dispute Settlement: Australian Perspectives. Office of Trade Negotiations of the Department of Foreign Affairs and Trade.Commonwealth of Australia. 123-140
  36. ^ a b c d Hiroko Tabuchi, Norimitsu Onishi and Ken Belson, "Japan Extended Reactor’s Life, Despite Warning" The New York Times (March 21, 2011). Retrieved March 22, 2011
  37. ^ "Comments by Fukushima Prefecture Governor Eisaku Sato Concerning Japan’s Pluthermal (MOX fuel utilization) Program and the Nuclear Fuel Cycle" Green Action (June 4–5, 2002). Retrieved March 22, 2011
  38. ^ a b Jason Clenfield and Shigeru Sato, "Japan Nuclear Energy Drive Compromised by Conflicts of Interest" Bloomberg News (December 12, 2007). Retrieved March 22, 2011
  39. ^ a b c d e Masao Miyamoto, "Mental Castration, the HIV Scandal, and the Japanese Bureaucracy" Japan Policy Research Institute (August 1996). Retrieved April 1, 2011
  40. ^ a b Tomoko Otake, "Ministry insider speaks out" Japan Times (November 1, 2009). Retrieved April 1, 2011
  41. ^ Thomas Frank, "Obama and 'Regulatory Capture'" The Wall Street Journal, June 24, 2009.
  42. ^ Woodrow Wilson, The New Freedom: A Call For the Emancipation of the Generous Energies of a People

Bibliography

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