Ideal Regulation

Newmark posts two conclusions drawn from the same, agreed-on set of facts.

James Surowiecki points to the fact that each of the recent major collapses and SNAFUs in the market were aided and abetted by lax regulators. He concludes that the problem is the laxness of regulation of market failures brought about by overzealous deregulation:

pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

The Wall Street Journal's editorial followed up by coming to the other conclusion:

The liberals' fury at the President is almost as astounding as their outrage over the discovery that oil companies and their regulators might have grown too cozy. In economic literature, this behavior is known as "regulatory capture," and the current political irony is that this is a long-time conservative critique of the regulatory state....
In the better economic textbooks, regulatory capture is described as a "government failure," as opposed to a market failure. It refers to the fact that individuals or companies with the highest interest or stake in a policy outcome will be able to focus their energies on politicians and bureaucracies to get the outcome they prefer.
Perhaps if liberals read more conservative economists, they might understand that this is a common consequence of the regulatory state that they have so diligently constructed over the decades. It is also a main reason that many of us are skeptical of the regulatory solutions routinely offered in response to every accident or business failure.

One of the commenters asks a legitimate question:

so, do you believe that without regulation, Massey Energy would have spent more on safety, A.I.G. written less credit-default protection, Enron and WorldCom and Bernie Madoff would have been honest (or caught sooner?) and investment banks would have been less leveraged? ...

[Would] all these bad things that transpired under regulation ... have somehow been avoided with less regulation? Whether less regulation would make us better off with regard to the frequency and severity of bad things. It's not obvious to me that the observation that regulation has been ineffective (and has tendencies to always be always be ineffective to some extent) necessarily leads to that conclusion. ... For me, it's a case-by-case thing.

The question is whether the government failure is ineptness or corruption. If the former, adding regulations by itself won't solve the problem, but improving bureaucratic capacity may help. Though that may be termed "strengthening" government, it is not in the sense of making government more intrusive, only more effective at the jobs we the people have asked it to accomplish. If the latter - if government agencies deliberately turned blind eyes, set regulations to favor the powerful, etc, etc - then giving government more ability to regulate will likely lead to worse solutions, attacking corruption directly may help (but it tends to be just putting out fires), and deregulation may indeed be useful in increasing competition along lines that consumers care about, like environmental protection, and reducing the outbreak of fires. I tend to think of those as empirical questions, answered on a case-by-base basis also.

For a follow-up, Leonhardt's recent article on environmental regulation is interesting, comparing command-and-control regulation, cap-and-trade marketesque regulation, and none.(HT: MR)