Agency Capture Benefits Wall Street?

The Center for American Progress recently held a panel discussion on the topic of executive agency overreach, which several panelists called “regulatory capture.” Their major problem with executive agencies, such as the Environmental Protection Agency and others, is how regulators in these agencies are influenced by the private industries they are supposed to regulate.

Princeton political professor Nolan McCarty said the real issue is semantics, adding that regulatory capture should be called “regulatory capacity.” The Princeton professor said, “We can’t really expect regulators to effectively pursue the public interest.” The current system that has “biased” regulators who oversee private industries, where they have an interest, is a “second best solution.” He wanted to see more efforts to make “sure regulators are on the same playing field as the industry” they regulate, especially where their salaries are concerned.

He said that Singapore pays their regulators “much more than SEC regulators do,” and blamed regulators’ low pay on “an American political culture where public servants” are not paid enough. The real problem is that the U.S. has “cultural capture” where we “put people in the same room too many times.” McCarty called it “a political problem…it has come down to the fact that different parties have different priorities.” And, both Congress and the executive branch takes the regulatory decisions “out of the public discussions.”

McCarty said that “increasing the political transparency of the decisions to hold political leaders accountable has to be a first order problem” because “we regulate the hell out of it.” He felt the problem with being a regulator, and even a whistleblower, is that it is “hard to stand up and go against the tide” of private industries. “In a democracy, they’re just not going to have the ability to do that” because it requires “prudential regulation in the first place” to avoid being dependent on biased regulators.

Daniel Carpenter, a Freed Professor of Government at Harvard, said that he agreed with others to establish “an organ or an office” to oversee executive agency overreach. He did say that too often, politicians complain about agency capture when their definitions are flawed. He called the whining “fatalism” and said that if an agency tilts one way or the other, it is not capture. Carpenter then asked the question, “If agencies can be captured, why regulate at all?”

He criticized the two typical approaches to capture, where there is a “heaven or hell” mentality from the Chicago School and the European model of nationalization. Carpenter admitted, “Some agencies and some policy frameworks are doing this better than others.”

First, Carpenter suggested that “we can better exploit our system of federalism” to “open up the process and open up the pure bilateralism” between agency and industry. Because of the current system, he says, “We tend to see the over-diagnosis…on the Right and on the Left.” Carpenter claimed that academics are asking for evidence and hypothesis on both sides and are trying out theories and hypotheses for the time being. But, he sees “a young wave of kind of passionate civil servants working in a new agency, which does have some built-in protection” in the Elizabeth Warren-created Bureau of Consumer Protection. Yet, in the end, he concluded, “I don’t think we’re stuck in a fatalistic trap.”