Misery Economic Theater 2011

[cheesehead]

When composing this:

Originally Posted by cheesehead

(I'm rather surprised that this comes from someone who previously expressed distaste for unnecessary government regulation. :-)

I had in mind this, from a year-ago discussion that split off from the BP oil spill thread:

Originally Posted by Prime95

. . .

Let's see. Thousands of criminal laws are on the books detailing what I can and can't do. I'm in compliance with every one of them and haven't filed one shred of government paperwork. Magic!

. . .

I later asked about tax returns and licenses for vehicles and driving privilege, but the thread ended.

I left with the impression that you did not think you had any government paperwork in your life only because you weren't considering the paperwork involved in regulation of all the businesses with which you routinely directly deal. Grocers, restaurants, gas stations, department stores, banks, vehicle dealers -- each files government paperwork that is indirectly on your behalf, and many undergo inspections to ensure that they comply with health and safety laws. Your state weights and measures department periodically inspects and certifies the accuracy of grocers' scales and gas station pumps. Doctors, dentists and lawyers are licensed only when they show that their training satisfies state standards.

Then there are all the businesses, such as manufacturers and distributors, with which you interact only through the intermediaries of retailers. For your own protection, there are regulations and paperwork with which those entities comply.

Your "Magic!" gave me the impression that you think you (and, by extension, oil drillers) can do without paperwork and regulation ... just because you don't think about the ways in which others handle paperwork and regulation once- or twice-removed from your direct actions, but on your behalf.

Yet you proposed severe restrictions on commodities contracts which were far beyond what would be necessary to accomplish your intended purpose (curbing unwarranted speculation). I was struck by the apparent contrast between those views, and that spurred my comment.

It seemed to me that you were proposing that those second- and third-hand regulations, inspections and paperwork (as in the case of oil drillers) be abolished simply because you didn't stop to think what your life would be like without those regulations for ensuring that food establishments are clean, that measuring devices are accurate, that packaged foods are sanitary, that machines are reasonably safe to operate, that medicines are sanitary and effective, that oil spills do not occur more commonly and so on and so on ...

Thus, my strike-through.

What is your view of the regulations, inspections and paperwork that you never see directly in your everyday life, but which are conducted for reasons that very much affect your health, safety, and other qualities of life, which you never acknowledged in your arguments against drilling regulation, inspection and paperwork? How does that relate to your opinions about regulations, inspections and paperwork for oil drillers?

(BTW, throughout this I am referring only to regulations, inspections and paperwork that we would both agree are reasonable for the purposes for which they are intended.)

[Prime95]

Originally Posted by cheesehead

What is your view of the regulations, inspections and paperwork

There is a need for necessary regulations. We probably don't have a great deal of difference in what we view as necessary.

Where we have some difference may be in the enforcement of regulations. Your view appears to be government regulators and inspections and paperwork are the only possible (or at least the preferred) enforcement mechanism.

We've seen over and over again cases where this mechanism fails. The oil spill is one, the SEC and Fed failures Ernst has documented are another. More inspectors and more paperwork will not solve these problems.

I contend we might get better enforcement by adding hefty penalties for infractions. This will encourage businesses to self-police. It might allow us to get better enforcement with fewer inspectors.

[Christenson]

I don't think regulators being circumvented, and allowing themselves to be circumvented, is a new problem. It's not a function of the paperwork, it's a function of the incentives -- start with that revolving door between the regulators and the regulated, our FCC chairman being an excellent example.

In an situation where industry can always pay off an individual regulator with five times his government salary and a cushy job, and it being next to impossible to fire a civil servant, you need to do some serious thinking as to how to turn the incentives of the individuals involved around and in the direction of the public interest. The SEC got started after 1929 specifically because it was recognized that the great depression was in noone's (including the rich people's) interest, and nor was the boom/bust cycle which had characterised the stock market before that.

For the environment, I'll start with requiring the top personnel in an industrial enterprise to live adjacent to the plant, and to raise their children there.

I don't know what to do for the securities markets. Ideas? Analysis of the half-baked idea above?

[cheesehead]

Originally Posted by Prime95

Where we have some difference may be in the enforcement of regulations. Your view appears to be government regulators and inspections and paperwork are the only possible (or at least the preferred) enforcement mechanism.

No, government regulators/inspectors/paperwork are not the only possible way, and not the preferred way if something better can be demonstrated.

But no one demonstrates a better way!

What happens is that those not in favor of government regulation/inspection propose that we trust the goodness-of-heart and Christian morality of businessfolks, despite the long history showing that a certain fraction of business folks lack that goodness and/or fail to practice that morality.

As long as those who object to regulations fail to set forth a likely-to-be-more-effective, realistic (e.g., not dependent on the goodness-of-heart and Christian morality of prospective regulees) alternative, I'll view their objections simply as evidence of their naivete.

We've seen over and over again cases where this mechanism fails. The oil spill is one, the SEC and Fed failures Ernst has documented are another.

So, we analyze the weaknesses and take steps to correct them. We've seen that over and over, too.

Show us what's better, please -- and you don't do that by making faulty generalizations such as your next sentence:

More inspectors and more paperwork will not solve these problems.

Actually, in some cases, more inspectors is exactly what's required! Republicans tend to cut back and defund inspectors, which all too often is followed by problems that could have been headed off with adequate inspections.

As for paperwork, it's not a matter of "more" _if_ what's really needed is taking seriously what's already there. BP filed "safety plans" for its deepwater drilling operations that consisted of mere lists of names and phone numbers of service companies that might have something to do with cleanups. If instead it had been required to document a realistic, rehearsed plan -- that would be taking it more seriously.

I contend we might get better enforcement by adding hefty penalties for infractions.

Like for the Exxon Valdez? Yep, the prospect of hefty penalties sure did prevent the captain from drinking, and prevent the ship from running aground, and prevent the oil from leaking. Sure did, didn't it? Um hmm.

How many years did Exxon manage to drag that through the courts as they attempted to get the fines reduced?

Promptness and certainty beats delayed severity for deterrence.

Yours is not an alternative that has been historically shown to be most effective for preventing problems.

I contend that we get better prevention of problems by making folks go through more realistic steps for doing just that. Compare posting a diagram for where to go if the fire alarm sounds to actually holding fire drills witnessed by local firemen.

Where I used to work, in a building holding hundreds of people, there were serious flaws in the fire evacuation plans and drills ... and in the inspection thereof.

Because folks were told to group together in the front parking lots, by department, once they got out, when the fire alarms sounded everyone would head for the crowded front exits while three rear exit doors were completely unused. On one occasion, I opened one rear door and shouted at people 20 feet away who were mindlessly front-to-back shuffling their way _into the middle of the building_ simply because that was the way to get to the front doors. No one heeded me. They were putting perceived convenience ahead of best survival actions.

If no actual fire drill had been held, the arrows on the plan that directed people out the back doors would've continued to be assumed to represent reality. If a real fire had occurred, too many people would've let their habits take them in the wrong direction.

I went to HR and detailed my observations. They told me they had plans to make the next fire drills more realistic by using poster drawings of flames to block certain hallways. But when the next drill occurred, there was no sign of any such realism attempt.

In that case, we had failures of both the plan _and_ the inspection. I was astonished to find that the fire department's witnesses stood only out in front of the building. A serious inspection would've sent someone to watch what happened at the back of the building, but this one didn't. That's not adequate inspection.

I hope you'd not be in favor of considering that company's official fire evacuation plan adequate without any actual witnessed demonstration, or that the inspection was adequate without anyone watching what happened in back of the building. -- or that somehow, magically, some threat of hefty penalties in case of an actual fire would've spurred more effective prevention. History shows that almost all folks have to be required to go through preventive steps in order to put them into practice, and inspections are the only way to detect cases of noncompliance.

In the Triangle Building fire, there were the required number of fire door exits -- but they were locked by the owners. Regulation without inspection lets folks get away with that sort of thing, until there's a tragedy.

On the Titanic, they never held a lifeboat drill. Now (I hear), ships always have them. Why wasn't that obviously necessary _before_ the tragedy?

This will encourage businesses to self-police.

Too naive. Too many businessfolks lack enough conscience to do such self-policing. Show us how you'd handle those cases -- after you show us how to distinguish them from the others before a tragedy occurs.

It might allow us to get better enforcement with fewer inspectors.

... if it would work in some ideal Neverneverland with no sociopaths.

[Christenson]

*GOOD* regulation sets forth requirements, which are then inspected for....and preferably not on paper alone; all the paper fire evacuation plans are worth no more than the bonfire they would make if they aren't in the minds of those that must evacuate the building. I would argue that the most important thing to do on hearing the fire alarm is to stop a moment and think about how to get out and what to do if the first exit is blocked.

I see this as a problem of incentives...and even with fire regulations, there are still periodic tragedies, including rather memorable ones involving gathering places for the members of the owning classes, as happened in the mid 1970s at a nightclub in Cincinnati (at southgate, DrH might remember), as happened to the Titanic, as I believe has happened to a famous hotel in Galveston. The regs were there on paper, but short-term incentives lead to violations, and the owners had lots of rather powerful friends capable of overruling anyone complaining about the emporer's new clothes.

If you want me to believe that businesses will self-police, you need to demonstrate how the short-term incentives for businesses involved align with that policing, that is, (as was shown much more recently in a chicken plant fire with locked doors), how following the regulations for the greater good will not harm this quarter's profits.

You can't fault the business people for maximising profits, or for failing to have sufficient imagination to imagine all of the consequences of their actions, something my Boss's boss admitted to the entire plant last week in respect to even the costs of opening up a new building 2 miles down the road....after all, they are human, and most of them aren't even as good as crank mathematicians.

I really think that imagination is the hardest part. Imagine if X.... just ask any smoker, or any of us who aren't exercising this week like we should....or eating properly...or treating our workers properly...or lots of other "properlies" and "shoulds" that are difficult in practice.

[R.D. Silverman]

Originally Posted by Prime95

There is a need for necessary regulations. We probably don't have a great deal of difference in what we view as necessary.

Where we have some difference may be in the enforcement of regulations. Your view appears to be government regulators and inspections and paperwork are the only possible (or at least the preferred) enforcement mechanism.

We've seen over and over again cases where this mechanism fails. The oil spill is one, the SEC and Fed failures Ernst has documented are another. More inspectors and more paperwork will not solve these problems.

I contend we might get better enforcement by adding hefty penalties for infractions. This will encourage businesses to self-police. It might allow us to get better enforcement with fewer inspectors.

Make the senior executives at the company CRIMINALLY responsible.
Impose heft sentences. How to determine who is responsible? By fiat.
Make everyone at the VP level and higher responsible (including the board).

[cheesehead]

Originally Posted by cheesehead

No, government regulators/inspectors/paperwork are not the only possible way, and not the preferred way if something better can be demonstrated.

But no one demonstrates a better way!

1) Note that there I'm discussing matters of health and safety.

I'm not insisting that the same applies to other regulation contexts, such as commodity markets or public transportation. Perhaps, on further thought, I'd better understand George's opinions about speculation once I'd sufficiently contemplated the differences in context.

2) I apologize for not having taken my further comments about oil drilling back to the oil-drilling-related thread.

Originally Posted by Prime95

I contend we might get better enforcement by adding hefty penalties for infractions. This will encourage businesses to self-police. It might allow us to get better enforcement with fewer inspectors.

I could have more agreement about that in regard to different subject areas (e.g., commodity speculation vs. health/safety).

When I was first astonished by your suggestion, it didn't occur to me to evaluate it differently in different contexts.

[Christenson]

Originally Posted by R.D. Silverman

Make the senior executives at the company CRIMINALLY responsible.
Impose heft sentences. How to determine who is responsible? By fiat.
Make everyone at the VP level and higher responsible (including the board).

Do you think that would have worked for Arthur Anderson? Or Enron? Do you think that the suicide of TEPCO's president (now probable) will be enough for the Fukishima meltdown? Chrysler had to be nearly destroyed before Lee Iaccoca was able to exert enough leadership to turn it around.

I've been around a number of non-functioning organizations...and someone recently told me that the dysfunctions are, in fact, inescapable unless I want to be a hermit.

It has taken a decade and a half for the dysfunctions that were obvious to me, those around me, and many others to lead to major layoffs at my former employer, GE Fanuc. From this, I conclude that most companies (and governments, too) are full of screw-ups, leading to rather long feedback loops with major delays causing instability. I have also seen this at my present employer, who took, by a reasonable opinion, far too long to get rid of certain non-functioning, unproductive employees. One, in particular, had to screw up in front of the company president before finally being let go. He had previous letters from customers requesting he not be sent on their sites to work, but this was not enough.

It simply takes too long for the world to catch up with the cheaters and the dysfunctional in both the companies and the agencies that supposedly monitor them to place our trust in government regulations. If you want things to work, you *must* align the short term incentives of the leaders with the greater good, which is usually a long-term proposition.

I'd start with requiring company stock to be held for a minimum of a year, possibly a futures contract to be held for a minimum of 1/3 its life. They all complain about the day traders, but that's exactly what the pros do...

[Prime95]

Originally Posted by cheesehead

Yours is not an alternative that has been historically shown to be most effective for preventing problems.

Au contraire. In old Japan, company leaders would commit suicide for gigantic failures such as the BP oil spill or the Lehman collapse. I'll wager monumental screw-ups were much less common there.

You take a rather odd position that my ideas (or anyone else's) won't work because they aren't proven to work. Yet any idea you could come up with will suffer the same problem. Pray tell, how many more SEC regulators do we need to hire before we get just one significant prosecution? How many more oil rig inspectors were needed to avoid the BP oil spill? How many more pages are required in an oil rig safety plan?

Prove that each of your answers to the above question are true. Obviously, you can't prove it. Does that mean any idea you propose is without merit???


Aside #1: Do not confuse my beliefs with Republican's. They seem to think that taking a regulation/inspection system that isn't working and reducing regulations and inspectors will somehow result in a great outcome. I agree with you that this idea is ludicrous. Obviously, you will not get a better result unless you do at least one of the following: 1) have more effective regulations, 2) more inspectors, 3) better incentives to keep inspectors on the ball, or 4) different incentives to make businesses comply.


Aside #2: R.D. Silverman's idea is interesting. People decry the pay for senior executives. Making them criminally responsible would at least make their job risks commensurate with their pay.


Aside #3: Thanks to your input, I'll modify my oil futures proposal to allow selling a contract to someone else who must take delivery when the contract ends. This should make futures contracts a better reflection of supply and demand. I am not against oil speculation. I'm sure Wall St. (or Las Vegas) wizards can create iShares or SPDRs or ETFs or options or whatever based on oil prices that allow speculators to gamble to their hearts content.


Ugh: I composed the above before your latest post.

Note that there I'm discussing matters of health and safety.

By and large, I think the government's current health and safety inspections are working rather well.

[cheesehead]

Originally Posted by Prime95

Au contraire. In old Japan, company leaders would commit suicide for gigantic failures such as the BP oil spill or the Lehman collapse. I'll wager monumental screw-ups were much less common there.

Let's look at the context for my statement.

I wrote "Yours is not an alternative that ..." in reference to what I had quoted above it in the post where I wrote that:

Originally Posted by Prime95

I contend we might get better enforcement by adding hefty penalties for infractions.

That is, I was responding to the specific suggestion for "hefty penalties" (which I took to be financial: fines).

Are you now saying that your "hefty penalties" included suicides by Japanese company leaders?

1) Those suicides may have been cultural norms, but they were not imposed by the government, so I don't see how they're relevant to discussion of government regulation.

2) Your statement was about "enforcement", and that that led to deterrence. My concern was about prevention.

Deterrence can lead to prevention, but I think a more effective approach than saying to someone only, "we'll punish you if you do the wrong thing" is to say, "here's how to do the right thing." Now, I don't mean to imply that regulations always perfectly specify the best approach to health and safety, but instead that regulations can incorporate best known practices and, if they're constructed properly, still allow for even better practices. The key is to specify goals of prevention and punish failures of those rather than insistence on strict adherence to specified practices that can be shown not to be optimal.

Originally Posted by Prime95

You take a rather odd position that my ideas (or anyone else's) won't work because they aren't proven to work.

Exaggeration. I said only that the particular idea you proposed ("hefty penalties for infractions") had been shown not to work. I made no claim about your ideas in general. I made no claim about anyone else's ideas.

Your inclusion of those exaggerations suggests that you can't refute my argument by sticking to only what I was talking about, but instead must try to slip in an unwarranted expansion of scope so that you can pretend my statement is false.

(Note that I did not use the two-syllable "s" word in that response, though that rhetorical term would have been more concise.)

Pray tell, how many more SEC regulators do we need to hire before we get just one significant prosecution?

Well, we could start by rehiring the ones the GOP Congress forced out before the succeeding rise in violations. Once it's shown that the same number of regulators we had in the past leads to lowering the rate of violations back to what it was before they were laid off, then we'll know it was effective.

How many more oil rig inspectors were needed to avoid the BP oil spill?

Enough to carry out an effective inspection program, of course. What a silly question.

How many more pages are required in an oil rig safety plan?

Perhaps all that's needed is to make the pages that are already there more meaningful by requiring entries that reflect a reality of preparation (a demonstrated plan) rather than mere listings of names and phone numbers.

Prove that each of your answers to the above question are true. Obviously, you can't prove it.

It can't be proven that restoring the numbers of inspectors that were sufficient before their reduction will lead to a restoring of the previous safety record? Sorry, but it can -- restore the inspectors and watch what happens to the safety record. QED

Obviously you aren't trying to make a fair objection to my idea, but are relying on exaggeration to pretend to criticize it.

Does that mean any idea you propose is without merit???

What we've just shown is that your particular attempt to substitute exaggeration for fair refutation is without merit.

Aside #1: Do not confuse my beliefs with Republican's.

I'm not doing that. I'm mentioning Republican events and ideas only when they seem sufficiently parallel to your suggestions for a comparison of their results to be relevant to this discussion. If you don't like such comparison, don't suggest parallels to Republican ideas, or at least make it clear how your ideas differ from theirs.

They seem to think that taking a regulation/inspection system that isn't working and reducing regulations and inspectors will somehow result in a great outcome. I agree with you that this idea is ludicrous.

But you seem to suggest doing away with the regulation/inspection system entirely, to get a better result. That's not parallel????

Obviously, you will not get a better result unless you do at least one of the following: 1) have more effective regulations, 2) more inspectors, 3) better incentives to keep inspectors on the ball, or 4) different incentives to make businesses comply.

Okay, I agree with that. But it doesn't seem to be what you were proposing earlier where I objected. Why did you object when I proposed better regulations (of oil drilling) earlier?

By and large, I think the government's current health and safety inspections are working rather well.

Then, perhaps I did not understand what you were proposing, which seemed incompatible with that sentiment.

[Prime95]

Cheesehead, as is often the case, an argument with you makes little forward progress and ends in mindless debates of minutiae. This will be my last post on the subject of regulations and enforcement so that this thread can start the new week covering the financial news of the day.

Originally Posted by cheesehead

Are you now saying that your "hefty penalties" included suicides by Japanese company leaders?

No, but now that you mention it, I'm not against the death penalty for particularly egregious crimes. I was stating that hefty penalties (and I can't imagine any more hefty than the cultural norm of suicide), in general, can led to effective deterrence. This does not seem to be too hard a concept to grasp.

Deterrence can lead to prevention, but I think a more effective approach than saying to someone only, "we'll punish you if you do the wrong thing" is to say, "here's how to do the right thing." Now, I don't mean to imply that regulations always perfectly specify the best approach to health and safety, but instead that regulations can incorporate best known practices and, if they're constructed properly, still allow for even better practices. The key is to specify goals of prevention and punish failures of those rather than insistence on strict adherence to specified practices that can be shown not to be optimal.

Ah, so we do agree with "deterrence can lead to prevention". So that means you do agree that my proposal to add hefty penalties can lead to prevention?

To summarize your beliefs, you think the pro-active "here's how things should be done" approach is best. I have no problems with that at all, nor do I have any disagreements with your comments on best practices and strict adherence to non-optimal or outdated practices. You then believe that inspections and paperwork and fines should be used to keep businesses in compliance.

We seem to only be in disagreement as to how to fix cases where the inspections/paperwork/fines system isn't working. The SEC is in bed with Wall Street. You can hire 1000 times as many regulators and you will get a thousand fold increase in prosecutions, that's still zero. The oil rig inspectors were asleep on the job or in bed with the oil companies. Hiring more ineffective inspectors will not make a broken system work. If I'm not mistaken, your past answer has always been, well let's hire effective inspectors or make the current ones effective. That is a great idea in theory, but you've never addressed how to keep Big Oil and Big Finance's money from corrupting the whole enforcement process.

Sorry, but it can [be proven] -- restore the inspectors and watch what happens to the safety record. QED

So, your ideas are provable because we can try them to see if they work. But my ideas are unprovable?? Why not try them and see if they work?? Dismissing ideas because they are not yet proven is somewhat lame.

But you seem to suggest doing away with the regulation/inspection system entirely, to get a better result. That's not parallel????

No, it's not. Republicans are in favor of fewer regulations/inspections with nothing to replace it. I am in favor of increasing penalties significantly, which if they provide enough deterrence may allow us to reduce the inspections and paperwork kind of enforcement.

Then, perhaps I did not understand what you were proposing, which seemed incompatible with that sentiment.

Food inspections, restaurant inspections, the CDC, and numerous other examples are, to the best of my limited knowledge, working well. The regulations/inspections regime seems to fall down badly when dealing with industries with too much clout. The problem starts in Congress where the clout is used by industry to write their own regulations. The problem continues in the enforcement arena with revolving door jobs and other forms of corruption.

I am under no illusion that my modest proposal for stiffer penalties alone will solve the problem. The SEC is unwilling to enforce existing rules on the big players (other than token slaps on the wrist). The companies/executives must have a reasonable fear of being caught.

Take Goldman Sach's evil plan to take to take its worst toxic crap that it knew would fail and sell it to its own customers. What if the penalty were 100x damages enforceable both on the company and personally, and lawsuits would be fast-tracked, and could be filed by any hungry trial lawyer (not just the SEC) on behalf of the damaged party? Under such a scenario, GS may well have decided to eat the toxic crap rather than risk a hundred fold worse situation down the line.