In the 1990s I was part of a congressional delegation to Argentina. At that time the Argentine economy was growing strongly and steadily, inflation was low, the currency was pegged to the dollar, convertible 1-for-1. Trade barriers were being lowered, commerce was booming. I recall asking Argentines what could possibly darken what seemed to be a very bright future. They were quick to reply: “Here in Argentina we have no rule of law. You can have no confidence in getting justice from the courts.”
That reminded me of Washington Irving’s observation on a European judge, from his famous work, The Alhambra:
It could not be denied, however, that he set a high value upon justice, for he sold it at its weight in gold.
Not long after that visit, the politics of income redistribution and confiscation threw the Argentine economy into turmoil, where it has remained.
I recently spoke with an economist friend of mine, who was waxing eloquent about the attractive monetary and tax policies in Bulgaria. I remarked that this would probably invite foreign investment. He replied, “No, there is no rule of law there.”
The point is that good economic policy cannot long survive inadequate legal safeguards. Many businesses that made major investments in China, attracted by a market of a billion people, have learned that the lack of a reliable legal and justice system in China has undermined much of the business value they thought to find. A similar story has been holding back investment and economic development in Russia.
Bringing that home, I would venture that concern for changing rules (or even lack of rules)—the substitution of arbitrary bureaucratic powers in Washington over objective rule of law—has been inhibiting more robust investment in the United States, a major cause for our current anemic economic recovery.
An ancient king in the Western Hemisphere, named Mosiah, warned, “because all men are not just it is not expedient that ye should have a king or kings to rule over you.” (Mosiah 29:16) Because men are not consistently just, freedom has historically rested upon rule by law rather than rule by men.
Fundamentally, that was the very reason for the American Revolution. Our revolution was based on the rule of law, an assertion of the rule of law, a response to violations of the rule of law by the English king and parliament. Most of the Declaration of Independence is a lengthy litany of violations of law by the English rulers. The Revolution was designed to take power away from man and men and rest it upon laws and rights, soon to be secured by a written supreme law embodied in the Constitution. Any erosion in the force and effect of the Constitution is an erosion of the rule of law and of the freedoms that rely upon law for their defense.
The Progressive Movement that thrived about a century ago, and found a major advocate in the federal government in President Woodrow Wilson, aggressively proposed an alternative to the rule of law. This program was the Rule of Experts. Their new view—and it really was a very old view though they dressed it up in modern-sounding rhetoric—was that there are Benign People, Experts, who know the process of modern government better than most people do, to whom we can safely yield governing authorities.
It sounds akin to the ancient theory of Divine Right of Kings, that the monarchs of the world are chosen by God and endowed with greater wisdom and perspective than the average man and woman. To their benign expertise and fatherly care was to be entrusted the governance of the rest of us.
The modern Rule of Experts people have much the same view, that these experts were endowed by their universities and other sources of expertise with ability far above that of most, and it would be wise to trust ourselves to their benign care. Not very democratic, and in fact these Benign Experts make no secret of their impatience with the Congress and other constitutional brakes on arbitrary authority.
As King Mosiah wisely pointed out that men are not always just, it is also appropriate to recognize that putting men in government does not make them any more reliably wise than the rest of us. The American Founders thought to address this problem by dividing political power among not only three branches in the Federal Government but also by embracing the federal system of dividing government with the States.
The current regulatory structure and program of the United States rest heavily on the idea that Benign Experts should be entrusted with authority for many of the big questions facing Americans and for many of the much smaller questions, too. That is certainly the structure of the Dodd-Frank Act, to offer one recent, prominent example among many.
Charles Calomiris, of the Columbia University business school, described the theory of the Dodd-Frank Act and related regulations this way:
The implicit theory behind these sorts of initiatives, to the extent that there is a theory, is that the recent crisis happened because regulatory standards were not quite complex enough, because the extensive discretionary authority of bank supervisors was not great enough, and because rules and regulations prohibiting or discouraging specific practices were not sufficiently extensive.
(Charles W. Calomiris, “Meaningful Banking Reform and Why it Is so Unlikely,” VoxEU, January 8, 2013)
This program of federal regulation has been imposed increasingly in contravention of the basic constitutional principle of separation of powers, by merging legislative, executive, and judicial authority in “independent” regulatory agencies. The unelected federal regulator today decides the details and specifics of binding mandates, identifies violators of those regulations, assesses guilt, and applies penalties.
Taken together our current regulatory system, by merging rather than maintaining the separation of powers of the Constitution, is eroding the rule of law. It is returning us to the age old practice of rule by men, with all of the potential for abuse of rights and freedoms, abuses that fill up most of the sadder pages of human history.
During the debate over the creation of the new financial consumer Bureau, Senate Banking Committee Chairman Dodd boasted that with this new agency people would no longer have to come to Congress for the enactment of new consumer laws. The Bureau would take care of all that.
There are serious operational flaws—too often overlooked—in the program of governance by Benign Experts. First, the regulators are not dispassionate umpires, limited to calling the balls and strikes. These umpires are also players in the game, the federal agencies each having their own set of particular interests and incentives that they take care of first.
Second, reliance on Benign Experts assumes an unproven, undemonstrated level of knowledge, insight, and forecasting skills. AEI President Arthur Brooks, in his book, The Battle, provides one of many examples of this flaw:
Federal Reserve economists were still forecasting significant positive growth and moderate unemployment in May and June 2008. They believed that economic growth in 2009 would be 2.4 percent, and unemployment would be 5.5 percent. What we experienced instead was negative growth, double-digit unemployment, and the destruction of at least $50 trillion in worldwide wealth. No one can get the numbers exactly right, to be sure. But getting them this much wrong certainly lends a whole new meaning to the expression ‘margin of error.’
(Arthur C. Brooks, The Battle, p.46)
It is not that regulators are dumber than the rest of the population, but they are no smarter either. The regulatory problems are increasingly too great for any designated group of humans to solve.
Third flaw, mission creep: power attracts power. Even if the tasks are too great, require too much knowledge, insight, foresight, and other skills in unachievable degree, the regulators still take them on, especially if the task increases the reach and influence of the agency.
I offer two examples from an example-rich environment.
Basel III capital rules started from a simple idea, that banks all around the world should be subject to the same capital standards. Capital (the financial cushion a bank carries against losses) is one of the three key elements of sound banking, the other two being liquidity and earnings. These international rules did not remain simple. Developed by an international team of experts from around the world, who labored on them for years, the rules number hundreds of pages, affecting the entire financial structure and business model of a bank, any bank. Congress was not involved and has no particular role in approving the rules. When exposed to public review they attracted thousands of comment letters expressing dismay that they are a bad fit for the U.S. economy. In the end, though, the regulators can go ahead with what they alone think is best.
A second example would be the Federal Reserve. One hundred years ago this year the Fed was created with a specific, identifiable, and rather narrow purpose, to provide liquidity for the banking system in times of financial stress. Before long, the Federal Reserve gained control of monetary policy and built up the practice of controlling interest rates. Later, it was given the task of promoting maximum employment. Under Dodd-Frank the Federal Reserve’s role in supervising banks and bank holding companies was expanded to supervising any financial business considered to be significant for financial stability. Each of these powers has drawn the Federal Reserve away from its narrow, objective task, to broad fields of subjective authority.
Perversely, this expansion of authority into more judgmental areas is eroding the independence of the Federal Reserve, making it yet one more political player in Washington, with responsibilities that far exceed human ability to fulfill, but which reach to every business and every home. The Fed’s prolonged policy of keeping short-term interest rates at or about zero has penalized all who save and live off of their savings, transferring trillions of dollars from savers to borrowers, the biggest borrower being the Federal Government, a policy decided by a small group of Washington experts.
I offer a partial but simple solution to point us back toward strengthening the rule of law and reducing our exposure to the rule of man and men, however expert they might be. Return the lawmaking and the policy decisions to the elected representatives. It is a messy process, but exactly the messy process that the Founders intended to preserve freedom from the encroachment of arbitrary and oppressive government. The regulators, which are theoretically part of the executive branch, should be left with the duty of implementing the laws and policy decisions that the elected and accountable representatives make.
If Congress were required to write the rules and mandates and delegate to the executive agencies only the execution, the mandates of government would be circumscribed by the limitations of a legislative body forced to be directly accountable for what it has wrought. It is easy for legislators to complain about bad regulatory decisions, when all too often these are decisions that Congress never should have delegated to regulators in the first place.
We would still have laws and regulations, but the laws might be more direct and specific, and perhaps fewer and surely smaller. We would probably not have Dodd-Frank Acts that number thousands of pages read by no congressman or Senator, containing a cacophony of half-baked ideas and multiple solutions to the same problem, all left for the regulators to sort out.
And legislators might recall this caution, from Thomas Paine:
Laws difficult to be executed cannot be generally good.
(Thomas Paine, The Rights of Man)
(First published February 17, 2013)