Amy Traub

Regulatory Deficiency

By AMY TRAUB, cross posted from DMIBlog:

Deregulation. It’s right up there with tax cuts, tort deform, and trade liberalization on the list of conservative nostrums. Cutting government regulation is supposed to promote competition and unleash the power of the market. And sometimes it does, when ill-conceived or outdated rules give way to more appropriate guidelines. But all too frequently it doesn’t work out that way.

In a growing number of cases, the very industries that lobbied for preferential regulations are falling victim to their own reckless business practices. Lenders are the obvious contemporary case, from the credit card companies that lobbied for more punitive bankruptcy laws to the mortgage brokers who insisted they were providing opportunity by arranging high interest loans for borrowers who never had a prayer of paying them back. As Christian Weller succinctly puts it “bilking the customer in the current quarter beats making sure that the customer can still pay the bills next quarter.” Not a recipe for long term business success (unless, of course, you know you can count on the taxpayers to come bail you out – then it’s a highly lucrative strategy).

But finance is hardly the only industry suffering from regulatory deficiency, or even the only one making headlines: consider food. Today, consumers are worrying about tainted pistachios, even as we still get sick from contaminated peanut products with a long shelf life. Last year it was jalapeno peppers, but we didn’t realize that until after tomato growers suffered hundreds of millions in losses as the misidentified culprit in an outbreak of Salmonella poisoning. Under the current regime of lax regulation and “police yourself” enforcement, businesses can cut costs on food safety in the short-term, but risk devastating losses when customers abandon products linked to contamination. Customers clearly suffer, but so do businesses too short-sighted to invest in safety – and those caught in the cross fire.

It should be obvious that ripping off customers (not to mention getting the laws changed so you can rip them off more) is not in the long-run best interests of an industry. But it takes government oversight to impose the longer time horizon, to force companies to think beyond the next quarter or the profits from the next batch of tainted peanuts and insure that good actors are not undercut but unscrupulous competitors. That’s why the toy industry ultimately supported stronger federal regulation of its products. We might hear the same thing from financial firms if they weren’t so certain of a bailout.

Readers, I welcome your examples of other industries suffering from regulatory deficiency that has harmed not only customers (or employees, or neighbors) but the businesses themselves. Leave 'em in the comments.

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Posted at 9:04 AM, Apr 09, 2009 in Under-regulation
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