Ryan Tracy of the WSJ discusses a new paper on the revolving door between Wall Street and regulators.
its findings suggest that the revolving door may be driven by an entirely different force. Instead of “regulatory capture,” the paper provides evidence consistent with “regulatory schooling” – the idea that people take regulatory jobs to become experts on complex regulations before cashing in with a private sector job. Instead of having an incentive to go easy on banks, the “regulatory schooling” hypothesis suggests regulators have an incentive to make rules more complex.
The paper comes from the research staff at the New York Fed.
This is absolutely true with the fda. Fda folks retire and become consultants to pharma to explain the obscure rules they wrote as regulators. I also think this explains why so many regs are not straight forward.
It’s also true with banking.
The only other thing that all these discussions get wrong, is that they assume everyone prefers the job that provides more money. I’ve known people in DC happily that 80% pay cuts. The relevant question in New York may be, “how much money do you make?” In DC, it’s, “who do you work for?”
Anyone who has ever worked with the Center for Medicare Services will recognize the truth of this instantaneously.
It’s kind of like a protection racket for smart people, isn’t it? You write as many pages of complicated regulations and “guidance” as possible in opaque legalese when you’re working in a regulatory agency, back them up with fines, penalties, or other sanctions, then you go and charge the regulated to explain to them what it all actually means so they can avoid said fines and penalties.
It can actually go both ways with both regulatory schooling and capture. The regulator and the regulated industry form a codependent relationship far more opaque and exclusive than either could achieve by itself.
In Wilson’s The Politics of Regulation (1982), the chapter on antitrust described the same incentive process. Government expanded the boundaries of enforcement, and then left the Justice Department as the very people to defend you from this new interpretation of the law.
I don’t think this is deliberate, though it may be in the back of some regulator’s minds. When I did antitrust, the government lawyers seemed to honestly believe they were doing good. After all, lawyers are socialized to believe that more laws mean more justice.