Liars: Why Government Regulation Fails

The recent outrageous dereliction of duty by the SEC, and the transparent effort to hide the worst failures from the public, is entirely predictable where government has a great deal of power over business. Over-regulation, particularly regulation intended to favor some businesses over others, predictably leads both government officials and business people to commit fraud. And more regulation also tends to favor big businesses over small ones, unless the small ones have direct political connections.

An important piece in the Wall Street Journal: An Economy of Liars

When government and business collude,

it's called crony capitalism.

Expect more of this from the financial reforms

contemplated in Washington.

Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. . . .

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve's Jackson Hole Conference in 2008, economist Willem Buiter described "cognitive capture," by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in "Staffer One Day, Opponent the Next."

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. . .

Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

Read the whole thing. See if he can convince you.