Why Government Fails So Often: And How It Can Do Better (44 page)

At a general level, some of the distortions that plague command-and-control regulation also afflict market-based systems, although the specifics will vary. First, political factors may undermine the effectiveness of market schemes. Indeed, the initial allocation of entitlements to pollute, and the exceptions that are allowed, reflect political factors both because the economic and competitive stakes are high and because political support is needed if the scheme is to be adopted in the first place. Inevitably, these initial allocations favor some polluters over others and the status quo over newer firms that try to enter or secure a niche in the market. Another political difficulty with market-based schemes is that liberal politicians and environmental advocates often denounce them as “licenses to pollute,” which indeed they are—as are traditional tort liability rules. To an economically oriented policy maker, of course, this criticism misses the crucial point—that we should price a polluting activity at its full social cost, thus creating incentives to conduct it more efficiently—but this technocratic explanation only inflames those who find such an approach immoral.
¹⁵⁹

Third, market-recruitment schemes’ effectiveness depends on manipulating the incentives of market actors to achieve programmatic goals, so the schemes must be based on accurate information and carefully designed to prevent distortions, abuses, evasions, and perverse consequences.
¹⁶⁰
This danger is exemplified by the federal program creating a market in renewable energy credits that has already experienced more than $100 million in fraudulent, counterfeit credits,
¹⁶¹
and a United Nations scheme that has encouraged firms to actually increase pollutants so that they will be paid to reduce them.
¹⁶²
Unless the program gets the prices right—which is even more difficult when managing natural resources whose ecosystems perform
hard-to-value functions (e.g., wetlands) than when controlling pollution
¹⁶³
—they will send the wrong market signals. For example, the European Union’s leading cap-and-trade program for greenhouse gases allocated so many allowances that demand for the credits, especially given reduced economic activity, has sagged so low that the program faces collapse.
¹⁶⁴
After all, the market did not fully price the externality before the program was established, so no reliable price standard exists until there is active trading in a thick market. Moreover, the price equivalents of nonmarket costs like the added insult of being exposed to a pollutant involuntarily, or fairness concerns about trading-induced “hot spots,” are hard to resolve.
¹⁶⁵

Fourth, market schemes are difficult to enforce because the main administrative sanction—reducing or withholding an allocation in the future—may be too powerful to be credible. Indeed, this sanction could be the death knell for a firm that cannot operate without polluting. Fifth, just as pollution does not respect politiojurisdictional boundaries, a pollution market must be transjurisdictional to be fully effective, as pollution sources that are outside the scheme will have even more incentive to pollute to gain competitive advantage over those subject to the scheme’s controls. This prisoner’s dilemma dynamic may actually increase total pollution. Yet it may be impossible to get every jurisdiction to participate and comply. The goal of the Clean Development Mechanism (CDM) established under the Kyoto Protocol is to reduce carbon emissions in those countries where it is cheapest and most efficient to do so. Yet the United Nations panel assessing the CDM found, in the words of the usually understated
Economist
magazine, a “complete disaster in the making,” with an oversupply of pollution permits (along with the economic recession) driving their price down so low that the scheme is a shambles.
¹⁶⁶
In April 2013, the
New York Times
confirmed this prediction, reporting that the European Union’s Emissions Trading System under the CDM was “dealt a potential death blow” when it refused, despite very low market prices for permits due to economic stagnation and other factors, to raise the price to reduce pollution,
¹⁶⁷
and this failure may doom other emissions trading plans, especially global schemes.
¹⁶⁸

Again, my point here is not that market-recruiting regulation is ineffective. Quite the contrary; it may be superior to command-and-control alternatives in particular cases. For example, the 1990 Clean Air Act amendments, which established an emissions trading scheme for sulfur dioxide, have been overwhelmingly successful.
¹⁶⁹
Rather, the point is that recruiting markets for regulatory purposes sometimes fails. Here as elsewhere, God (and the devil) is in the details.

*
The ineffectiveness of highly touted government programs targeted at creating jobs and getting low-skilled inner-city residents into the workforce, as in the Oakland Project, above, is an all-too-familiar story. Although politicians differed sharply in their predictions about how many new jobs the 2009 stimulus would create, subsequent reports suggest that the actual number was relatively limited. See Ianthe Jeanne Dugan & Justin Scheck, “Cost of $10 Billion Stimulus Easier to Tally Than New Jobs,”
Wall Street Journal
, February 24, 2012 The research on these programs is briefly summarized later in this chapter.

*
The
Economist
’s February 12, 2012, briefing on Dodd-Frank used some numbers to capture this complexity. The Glass-Steagall Act, which governed the banking system from 1933 to 1999, ran 37 pages; Dodd-Frank is 848 pages. Five agencies weighed in on the Volcker Rule, which will be almost 1000 pages! Under the rule’s then-version, firms were required to answer 383 questions, broken down into 1,420 subquestions, with compliance involving 355 distinct steps. The statute ordered the agencies to issue 400 rules; deadlines had already been missed for 40 percent of them; legal challenges to the rules were just beginning. It also mandated 87 studies, of which more than 40 percent had not been completed.

†
The president of the Federal Reserve Bank of Dallas notes that Dodd-Frank gives the twelve largest banks—which account for only 0.2 percent of banks, hold 69 percent of bank assets, and are less accountable to shareholders—two immense and perverse advantages: a legal status of “systemically important financial institution” and taxpayer backing that make them in effect “too big to fail,” and the lower borrowing cost that this status confers. By impeding the transmission of the Fed’s monetary policy, these megabanks also reduce our economic growth. See Gretchen Morgenson, “How to Cut Megabanks Down to Size,”
New York Times
, January 20, 2013.

‡
Indeed, barely a week after the rule was finally issued, officials prepared to backpedal out of concerns about its adverse impact on small and midsize banks. Ryan Tracy, “Regulators Rethinking Rule on Bank Debt,”
Wall Street Journal
, December 19, 2013.

*
Some verdicts are relatively clear. Thus, the Magnuson-Stevens Fishery Conservation and Management Act of 1996 succeeded in returning many fish species to earlier population levels by limiting catches. Regulation also reduced dangerous lead levels. On the other side, some regulation has utterly failed. The Environmental Protection Agency’s glacial pace in protecting endangered species is one example. See Michael Wines, “Coming Soon: Long-Delayed Decisions on Endangered Species,”
New York Times
, March 6, 2013. Its non-implementation of the Toxic Substances Control Act of 1976 is another. See John M. Broder, “New Alliance Emerges to Tighten Chemical Rules,”
New York Times
, May 25, 2013.

*
Some of these costs have been exaggerated or misrepresented. For example, a recent review of drug policy finds that although the prisons and jails are full of people who use drugs and whose current sentence is not for a violent offense—the estimated number of drug offenders behind bars exceeded 525,000 in 2009—“people whose only offense is using drugs almost never go to prison and rarely spend much time in jail.” Mark A. R. Kleiman, Jonathan P. Caulkins, & Angela Hawken,
Drugs and Drug Policy: What Everyone Needs to Know
(2011), 58.

*
The Department of Justice’s own inspector general excoriated the agency for recklessly mismanaging this operation. See Charlie Savage, “Justice Inquiry Faults Its Own in Guns Fiasco,”
New York Times
, September 20, 2012.

*
Even automobile fuel economy disclosures, mandated by the EPA and highly salient to auto shoppers, are quite misleading, especially with newer technologies. See Joseph B. White, “Why Your Car’s Mileage May Not Always Measure Up,”
Wall Street Journal
, January 30, 2013.

*
Airlines, fully deregulated at the federal level, still face market restrictions locally where monopolistic airport authorities control terminal and other operating rights. See Michael E. Levine, “Airport Congestion: When Theory Meets Reality,”
Yale Journal on Regulation
26 (2009): 37–88.

CHAPTER 9

The Limits of Law

L
aw is everywhere. Like the metaphorical fog in Charles Dickens’s
Bleak House
, it seeps silently into each nook and cranny of our lives, affecting virtually all behavior and relationships. This is simply a fact of life. We may want more or less of it, and we may wish that it took different forms, contained different principles, and prescribed different rules. But like the air we breathe, we cannot do without it.

Law is the dominant instrument of public policy, and the American polity entertains growing ambitions for it. Modern public law—the body of statutes, agency rules, and court decisions that aims to shape primary behavior by authorizing officials to allocate resources or impose sanctions—assigns redistributive and regulatory roles that are more expansive than ever before. Neither conservative nor neoliberal resistance to its advance has stemmed this tide, which has reached into domains of choice and intimate relations previously unregulated by law. Sexual harassment law now regulates much workplace speech and conduct. Disability law now shapes job and building designs, management practices, and educational policies. Environmental law affects activities ranging from indoor smoking to outdoor barbecues. The list of law’s imperial conquests in recent decades is very long indeed. “Never before,” Jonathan Rauch writes, “has the government concerned itself so minutely with the detailed interactions of daily life.”
¹

Law’s contemporary reach was not inevitable, at least in retrospect. Policy makers did not extend law to new activities inadvertently;
they did so only after receiving grim warnings of slippery slopes, unforeseen consequences, and the tendency of law to beget more law. Despite having been advised “don’t go there,” they did, often eagerly. Significantly, this pressure for more law has come both from liberals advocating more state regulation and redistribution, and from conservatives eager to criminalize or curtail private conduct of which they disapprove.

Law’s strengths are formidable and essential. In principle and often in practice, it secures order and justice; resolves disputes; facilitates transactions; guides and restrains official power; expresses public values; shapes our incentives to advance our goals; and assures a degree of fairness to, and formal equality among, fellow citizens. Every state that values these goals (alas, many do not) has sought to achieve them through some system of formal rules and sanctions. As legal scholar Neil Komesar has shown, cultural norms, formal education, markets, and all other social institutions for shaping behavior exhibit their own characteristic features and drawbacks.
²
To say that law fails, then, is only to say that it fails to be perfect. As noted in
chapter 2
, the pivotal question is always, failure compared to what?

Precisely because of law’s powerful allure, policy makers must attend carefully to its limits—by which I mean constraints or incapacities that are inherent in the use of
any
law; so long as we use law to make public policy, they are essentially inescapable. (It is hard to think of a public policy that does not take the form of law. Jawboning or efforts at moral suasion, valuable as they may be, do not count as “public policies” in my usage). In thinking about how to design policies, policy makers need to distinguish these inevitable entailments of law
qua
law, on the one hand, from the limits that are contingent on law’s use to form a given substantive policy, on the other hand. This distinction, of course, is clearer analytically than in practice: we cannot always be sure whether the causes of a particular policy failure are the inherent, inescapable limits of law, or are instead causes that might be remedied by improving a particular law’s substantive content.

I focus here on law’s inherent limits because these limits seriously diminish law’s performance and reputation, whereas those limits that are “merely” contingent to particular policies are far too numerous and policy-and content-specific to be cataloged in the way that the inherent ones can. Advocates beguiled by laws’ promises should be curious about why so many of them disappoint us, why our disappointment is itself a problem, and how this problem might best be addressed. I presume that a public that better understands the sources of law’s failures will entertain more realistic expectations about its possibilities. Laws that first arouse and then dash people’s hopes also discredit the reformist impulse, leaving in its wake the kind of mistrust evidenced in
chapter 1
. Only by realistically assessing law’s capacities can we preserve and extend its immense contributions to social progress, while at the same time minimizing the effects of its entailments on future policy failures. A more critical, refined appreciation of these limits might, perhaps paradoxically,
increase
public support for those reforms that law
can
successfully implement.