Platt Perspective on Business and Technology

Considering a cost-benefits analysis of economic regulatory rules – 5

Posted in in the News, macroeconomics, outsourcing and globalization by Timothy Platt on April 22, 2012

This is my fifth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64, 66, 69 and 70 for parts 1-4.) I have been discussing this complex of issues through a series of case studies drawn from United States history and from more current events. In Part 4 I began a discussion of a piece of regulatory legislation that at the time of writing had passed its way through the US House of Representatives and that was then facing scrutiny and potential action in the US Senate: the Jumpstart Our Business Startups (JOBS) Act.

I wrote in Part 4 about how political goals can shape regulatory and other legislation, supporting or blocking it. In the days since writing Part 4, on March 22, 2012 the Senate passed a version of this bill. And I add a further note as to the political pressures at play here with that. In a presidential election year, Republicans in Congress might be resistant to seeing President Obama gain a victory through passage of a piece of legislation that he has actively supported. But many of those legislators are coming up for election too, and control of the House and Senate are potentially in play too. So they need to pass laws that they can argue show they have been doing a good job to their constituents and districts. The Senate passed a version of the JOBS Act of 2012 and everyone will claim this to have been their accomplishment and their victory. But the simple fact that both the House and Senate have passed versions of this bill does not mean it has, or even that it will become law. I am fairly certain that President would sign this into law, provided that the final version sent to him from Congress does not contain clauses or amendments that would poison it completely. But when the House and Senate pass different versions of some same bill, those versions have to be reconciled so a single bill and a single version thereof can be sent to the President for signing. For budgets this means the two versions go through a joint House and Senate reconciliation committee and in accordance with a process devised as part of the Congressional Budget Act of 1974. And for budgets, the timeline and other restrictions for resolving these differences are strictly defined and enforced. For other bills requiring reconciliation – this means the Senate version of the bill going back to the House to be voted upon again there. Then this version, if passed there too would go to the White House for signing after all of the political back and forth involved in this process.

This would not be needed if the House and Senate simply agreed on the same version of the bill under consideration in the first place, but as noted in Part 4 of this series, the House and Senate have been debating fundamentally different versions, and for a lot more than just the maximum size of the business that would be covered under the JOBS Act as being exempt from full regulatory compliance requirements.

Of note, both House and Senate versions of the bill allow for crowd-sourced funding of the newly legally defined emergent businesses that would be covered here with up to $1 million in capital raised, exempt from the requirements of Security and Exchange Commission filings. And the Senate version of this bill restored the House version’s cap of having this bill apply to businesses having up to $1 billion in annual revenue. And with that and similar wording, many have expressed concern that this piece of stimulus and jobs growth legislation is simply disassembling regulatory protections in place – and in a way that has had a long and troubling history in contributing to and causing economic crises. This is an election year and President Obama has already stated that he will sign this bill into law when it reaches his desk.

And this case study follow-through brings me to the core topic I would address in this series installment, which I preface with a single overarching comment in summary to all of the case study examples I have been discussing up to now.

• Different people approach regulatory law and the issues of regulatory oversight in disagreement as to what is necessary or even prudent because they approach this looking at different core requirements as taking precedence.

For the JOBS Act this means looking to this as a means of jobs and unemployment reduction, and of enabling small businesses to be more competitive in the global marketplace. Or this is about taking unnecessary and long-term foolish risks by at least limiting if not dismantling a series of protective regulatory requirements that were put into place specifically because bad experience proved them necessary. And according to this second view, the fact that these regulatory restrictions and requirements were put into place because the marketplace and businesses and the economy as a whole had suffered for their absence, would indicate they might still be needed now too.

The debates and disagreements of opinion that play out in the case studies I have outlined, and in regulatory law and its history in general do not arise because some people prefer risk and other find themselves aversive to it. These differences, and their consequences in what is enacted and of that what is left as-is and what is changed, stem from differences in opinion as to the nature of which positive good should be protected, and preferentially. For the JOBS Act both sides and in fact all sides legitimately claim to be championing worthy goals. They just see the allocation of risks and benefits very differently for the options and alternatives under consideration. And that applies to every fork in the road decision as to whether regulatory oversight and restrictions are good and beneficial or bad and needlessly hindering.

And that brings me very specifically to the points I raised at the end of Part 1 of this series, that in a fundamental sense this entire series has been directed towards. And the basic underlying question that arises here is one of how best to decide between the competing goals and requirements that shape the political debate for regulatory law.

I would contend that any valid approach cannot simply be ad hoc as or based on the level of the appeal that the two sides would project, as if their concerns were poster children being championed. Any valid and systematic approach to this is going to have to be based on as clear an understanding of the actual risks and benefits as possible, and where possible as they can be quantified. And key to those calculations would be determination of who faces what potential risks and who faces what potential benefits.

And with that, I repeat my bullet points from Part 1:

• The absolute levels of potential risk and benefit are not as important as the symmetrical distribution of risk and benefit as shared – ideally, at least, equally by all involved stakeholders.
• And the real risk of instability and crisis comes from risk and benefits distribution asymmetry.

I was initially planning on delving into the issues underlying those points in this posting but I have been adding more background detail by way of completing discussion of my JOBS Act case study. So I will turn in more detail to that in my next installment.

Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization.

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