Category Archives: regulation

Paralysis by serial veto

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Church of Holy Sepulcher entranceIf you look at the picture on the left, you’ll see a ladder on the upper right window looking at the entrance to the Church of the Holy Sepulchre. You may not believe it, but there’s more chance than is usually the case with relics that the church is on the right spot. It’s location was not arrived at in the middle ages, but in the third century by St Helena, Constantine’s Mum who turned up in Jerusalem and looked for relics.

Anyway, the attentive viewer might assume that the ladder will be moved some time soon, it’s job in lifting up some tradesman to work on the window done. But you’d be wrong, something which is well illustrated by the companion photo from the late nineteenth century. There’s that ladder again!

In fact the ladder turned up sometime in the 1850s. So what’s it still doing there? This is the explanation offered by Atlas Obscura which offers itself as a “compendium of the world’s wonders, curiosities, esoterica (I guess this qualifies in the latter two categories).

The church is run by six denominations – Greek Orthodox, Armenian Apostolic and Roman catholic church, with lesser duties shared by Coptic, Ethiopian and Syriac Orthodox churches.

The whole edifice is carefully parcelled into sections, some being commonly shared while others belonging strictly to a particular sect. A set of complicated rules governs the transit rights of the other groups through each particular section on any given day, and especially during the holidays. Some of the sections of the church however still remain hotly disputed to this day. Arguments and violent clashes are not uncommon. In November 2008 the internet was flooded with videos of a fistfight between Armenian and Greek monks in one such dispute. A small section of the roof of the church is disputed between the Copts and Ethiopians. At least one Coptic monk at any given time sits there on a chair placed on a particular spot to express this claim. On a hot summer day he moved his chair some 20cm more into the shade. This was interpreted as a hostile act and violation of status quo. Eleven were hospitalized after a fight resulting from this provocation.

This state of affairs makes any agreement about renovations or repairs on the edifice impossible. The church is in a state of decay as a result.

The famous immovable ladder is a bizarre outcome of this religious stubbornness pushed to extremes. Some time in the first half of the 19th century, someone has placed a ladder up against the wall of the church. No one is sure whom he was, or more importantly, to which sect he belonged. The ladder remains there to this date. No one dares touch it, lest they disturb the status quo, and provoke the wrath of others. The exact date when ladder was placed is not known but the first evidence of it comes from 1852.

The ladder hasn’t moved since.

The immovable ladder is a nice metaphor for decision making with large groups or within complex systems of rules or regulations.  Satisfying them all can be hard. And when the obstacles are not ‘hard’ ones, they can be soft sociological ones.  Within bureaucracies one is ill-advised to offend anyone gravely – often even if they’re not very important.  People don’t like other people getting their noses seriously out of joint and will go to some lengths to preserve harmony and consensus.  So the immovable ladder goes into my slide pack to illustrate the problems of paralysis by serial veto. And below the fold, you’ll find a spooky codicil to the story.  Just spooky. Come in Dan Brown, come in.

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“Financial planning” – a sales force masquerades as a profession

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A bunch of new rules are being introduced to Parliament today governing what is usually called the “financial planning” industry. Big new regulatory schemes often have large unintended consequences, and this one could too. But if ever an industry needed to change its behaviour, it is “financial planning”.

I put the words “financial planning” in scare quotes because I can’t bring myself to take the title seriously. The industry is simply not designed to offer financial planning. That’s not how it works. A small group of planners charge consumers for their advice by the hour, but most live on the commissions from the product providers. Their customers are mostly not consumers who need financial plans. Their customers are mostly large financial firms who need people to sell products to consumers. When financial products providers – AMP, AXA, MLC, BT, Perpetual and so on- write the checks, they’re the customers.

So at the level of the consumer, the industry is basically a sales force masquerading as a profession.

This is why calling the industry “financial planning’ is like calling the brothel business “personal counselling”. Sure, you might get some counselling as a byproduct, but the people in the industry are, by and large, being paid for something else entirely.

I seem to recall that Alan Kohler – a journalist who actually understands the role of sales in business – once suggested that the industry could most simply be reformed by forcing “financial planners” to call themselves “salespeople”. He was right. Rather than passing new legislation, the government might simply have told the ACCC they had its support to apply existing law to the industry’s marketing patter.

Don’t believe me? Have a read of this piece from the well-informed recruitment news service eFinancialCareers:

The skill shortage in financial planning is nothing new but employers are becoming more innovative in their efforts to solve it, according to the recent eFinancialCareers roundtable in Melbourne, which was attended by HR professionals from several international and Australian firms.

“We’re all in the market for them and there aren’t too many of them around,” said one of the panelists, all of whom asked not to be named in this report.

So what to do? Well, one firm is recruiting business-to-business salespeople from outside the financial sector, putting them through fin planning qualifications and providing training.

“They have the fundamental skills and importantly they are used to working on long-term deals, unlike those from retail sales who have a shorter-term mentality. We need salespeople who we think will stick with the business and fit into our culture,” said the firm’s representative.

Read the full piece at eFinancialCareers.

Regulatory Responsibility NZ style

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I’ve posted before on New Zealand’s Regulatory Responsibility Bill which has become the Regulatory Standards Bill on its passage from advisory taskforce into the Parliament (and it’s often referred to in this post as the Regulatory Responsibility Bill or RRB). In the spirit of virtually all the other initiatives around to world to improve regulation, it does so by reference to the Michelangelo theory of regulation. This teaches us that all we have to do to get the best possible regulation is to increase the difficulty of making bad regulation. In furtherance of this approach governments around the world have regulated regulators to require new regulations to receive satisfactory regulatory impact analysis in order to become regulation. It’s a good idea (at least as far as it goes – it might be useful having some specific attention given to enhancing regulatory outcomes, and not just minimising regulatory costs). But it turns out that even the negative part of the agenda doesn’t seem to work very well.

Here are some reasons why:

The need to win elections leads politicians and their parties to develop a very good understanding of the factors that drive public opinion. Media exposure is “political oxygen”, mainstream media analyse the politics and not the policy of an issue, and the media require instant reactions and ready sound bites.

Consequently, Ministers feel the pressure to:
• respond quickly and decisively to the latest risk, accident or misdeed;
• commit to concrete action, even without evidence that the action will address the problem, or that benefits are likely to exceed costs;
• stick to a political commitment once made; and
• deliver on the commitment as soon as possible.

In the case of legislation, the pressure to deliver quickly is exacerbated by two factors – pressure to deliver results within a short three-year Parliamentary term and pressure to minimise the call made on precious House time.

The incentive issues are not just confined to Ministers:
• MPs have limited incentives to carefully scrutinise and improve proposed legislation, as it does not bring them media attention;
• Government MPs who hope to be Ministers won’t readily risk disfavour by providing strong independent scrutiny or insisting on good process;
• Public servants are often reluctant to give advice that Ministers don’t want to hear, because of their duty of loyalty to the government and their desire not be dragged into the political contest if the advice becomes public;
• Agencies tend to work in policy silos – they lack a whole-of-government perspective and are reluctant to put resources into playing a wider role;
• Private interests are often willing to lobby for regulation that will benefit their interests at the expense of others; and
• Anyone that promoted a particular piece of legislation has few incentives to look for and publicly report evidence that it isn’t working as intended.

Those aren’t my words, but the words of a regulatory impact statement.

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The idiocies of regulation edition #473

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One of the things I have against academics is that they are supposed to be smart. They are smart.  Yet get enough of them together and you get this – from Robin Hanson. Words fail me.

Once upon a time some researchers gave people diseases without their consent or knowledge. Other researchers let volunteers think that they were torturing folks. This so horrified many that they created a system of regulation where any academic “experiments” must have prior approval by an Institutional Review Board (IRB). And that system has expanded to the point of requiring prior approval for any interaction between researchers and non-researchers intended to be the basis of an academic publication.

That is, researchers seeking publication can’t talk to people (e.g., survey), or buy or sell something with them, or even pay them to do trivial tasks like correcting spelling mistakes, without first writing out a detailed plan months in advance and getting that approved by a committee of other academics.

One common rule is “informed consent” – people must be informed in great detail of the consequences of their interacting with the researchers – they must be told much more than ordinary people must tell when they deal with each other. A second common rule is that people must benefit in some other way than money – they must gain some sort of intellectual insight or learning. A third common rule is that no record can be kept of people’s identity unless a really strong reason is offered to the contrary.

IRBs seem a good example of concern signaling leading to over-reaction and over-regulation. It might make sense to have extra regulations on certain kinds of interactions, such as giving people diseases on purpose or having them torture others. But it makes little sense to have extra regulation on researchers just because they are researchers. That mainly gets in the way of innovation, of which we already have too little.

Notice that researchers continue to be allowed to publish their results, and give lectures and media interviews, without such prior approval. Yet couldn’t ordinary people be harmed by reading articles that induce them to have unethical or unpleasant beliefs?  Of course they could – it is only an accident of history that regulation does not also require prior ethical review of publications.

I learned today that you are not allowed to handle food – even at your school fete – without a certificate of food handling.  My daughter told me – and has the requisite certificate. The certificate costs about $85 to get and takes about three hours.  It could be an OK rule I guess – justified by cost/benefit analysis.  But (assuming this is state regulation rather than school regulation) I’d like to see the analysis – and I must confess to being irritated by it.  Back in the day  . . .  we managed without such certificates.

And it’s hard to believe you couldn’t do it a lot more simply with a course on the net for next to nothing.

The future of economic productivity inducing economic reform

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Saul Eslake asked a bunch of people for comments on the recent Grattan Institute study of productivity and I sent him back a long email which I reproduce with some editing here. Nothing very surprising for people who are regular visitors here, but perhaps worth posting in case it provokes any thoughts.

  • We’ve done a lot of micro-economic reform in basic goods and services and it’s driven productivity up.
  • There’s only a bit more to do here.
  • What we do to follow up on that brings in sectors like health, education, government services of various kinds.

 
These areas are different in a variety of ways:

  • They are areas in which government is much more inextricably involved than they are in lots of the more easily ‘privatisable’ areas.
  • They’re areas in which it’s not nearly as clear how to reform things (though there are admittedly some self evidently destructive things that one can reform – like egregious incentives to cost shift in health).
  • They’re areas in which it is difficult and sometimes essentially impossible to measure productivity.
  • Indeed, I was intrigued by a blog post I recently blogged about myself that many of these sectors are not just producers of ‘credence goods’ to a substantial extent, which is to say they produce goods which the customer may never know the quality of (even after consuming them). They are goods where the practitioners are feeling their way also. A teacher for instance often doesn’t know what works but plugs away doing the best they can.
  • There’s a sense in the paper that ‘reform’ is fairly unproblematic, and I think the well of unproblematic problems is drying up. This amounts to more than saying that the low hanging fruit has been picked – though it has mostly been picked. It also means that further progress requires a lot more thought – not just action and bemoan  – or to change the metaphor the low hanging fruit has to a substantial extent been picked.
  • That having been said there are many areas of potential micro-economic reform that have barely been spoken about.  To give just one example, our legal system is a ramshackle mess requiring people to bet their life savings on resolving disputes, many of which could be solved much more fairly, quickly and cheaply by a better designed system.  That would have huge benefits for many other areas of economic activity where a range of rigidities exist simply because the legal system is so dysfunctional.  Anyway I’ve set out some possible areas in the attached piece I did for Crikey a while back.

Regulatory reform is currently virtually useless. 
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Kevin Kelly’s What Technology Wants: and regulation

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I’m reading Kevin Kelly’s What Technology Wants which is quite good.  It is a ‘book of the article’ type of book, but I like  it nevertheless. Part Two and some of the chapters at the end are the best part of the book.

Copying from the top review on Amazon sets out the basic plot.

The central thesis of the book is that technology grows and evolves in much the same way as an autonomous, living organism.

The book draws many parallels between technical progress and biology, labeling technology as “evolution accelerated.” Kelly goes further and argues that neither evolution nor technological advance result from a random drift but instead have an inherent direction that makes some outcomes virtually inevitable. Examples of this inevitability include the eye, which evolved independently at least six times in different branches of the animal kingdom, and numerous instances of technical innovations or scientific discoveries being made almost simultaneously.

And thinking about regulation, as I often do I was struck by this passage on the exponential growth of information:

The quantity of scientific knowledge, as measured by the number of scientific papers published, has been doubling approximately every 15 years since 1900. If we measure simply the number of journals published, we find that they have been multiplying exponentially since the 1700s, when science began. Everything we manufacture produces an item and information about that item. Even when we create something that is information based to start with, it will generate yet more information about its own information. The long-term trend is simple: The information about and from a process will grow faster than the process itself. Thus, information will continue to grow faster than anything else we make.

Against this it doesn’t seem so strange that the volume of regulation seems to grow something like exponentially (see diagram above and the diagram on this page).  Of course that’s a scary business, because no-one can possibly comprehend all the regulation that exists – and now they can’t really do it even in some special area – like tax law. Still, it has been this way for a long, long time. ‘The law’ was impossible for any one person to know at the time of federation. For each case is part of the law, and there were thousands of pages of law to know in 1901 on any subject – comprising the hundreds or thousands of cases in the area and all the statutes and regulation.

For a long time I’ve been suggesting that those scary graphs we see of mounting regulation – measured in the pages of new legislation and regulation are not an indication of regulatory Armageddon.  They’re the natural result of our lives and in particular the world of information becoming more complex. The line I’ve used in presentations is that what’s happening with regulation – which resembles an exponential growth curve – is similar to the shape of the curve measuring the size of software packages – like Microsoft Word.  They just get bigger and bigger over time representing an increase in functionality.

Now it would be easy to send up what I’ve just said, and say that the mounting volume of regulation measures it’s dysfunctionality. To some extent that’s probably right – but as the world gets more complex the interactions of government with that world must become more complex. If you’re regulating finance for instance as you must even with the most laissez faire system (because you must determine tax treatment) your regulatory system must comprehend the complexity of what is evolving before it.

In some ways I’d say this is one of the flaws in Hayek.  He has a strong intuition of the increasing richness and complexity of the market, but thinks the division between government and the market can be reduced to immutable principles.  Of course there’s some appeal in that, but it has its limitations. Although Hayek has attracted a strong following, his vision of the rules that should be imposed upon government rule making doesn’t seem to be coming into existence anywhere. Rather government, like lots of other things is ‘emergent’, and one’s political philosophy must somehow derive its vision of what should be, from some realistic understanding of what could be which is based upon a close understanding of what is and why.
And below the fold is a quote from Kelly’s book which has little to do with this post.  I copied it from my Kindle to here and got the wrong quote!  But it’s a good quote, so I’ll leave you with it. Over the fold. Continue reading →

Michelangelo and the Whitehouse Office of information and regulatory affairs: We’re under-regulated: shock!

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Business is not happy with Barack Obama – and why should they be? After all they were spoiled by having a real pro in the job before Obama got there. Anyway, Obama has been leaning heavily on all arms of government – fiscal policy (obviously), monetary policy (OK, well via the Fed) and regulatory policy.  He’s been trying to get poor people socialised access to medical care (which explains why a lot of Americans want their country back).

In any event regulations come with costs and benefits.  And if this graph below – with the no doubt Herculean assumptions necessary for getting such a nice neat result – is anything to go by, at least in America we’re still at the point where more regulation (if its quality is not too bad) is good for us – ie it generates more benefits than costs – and indeed so long as you’re a Democrat, it seems that benefits outweigh costs by about three or four to one. The other relationship is that the more regulatory costs you impose, the higher the net benefits (which you’d kind of expect, all other things being equal, if we were substantially below the optimal amount of regulation).

Of course thinking in terms of whether we’ve got the optimal total volume of regulation makes about as much sense as wondering whether the script of a play has the optimal number of letters in it. It’s a sufficiently crude way to think that it ‘s likely to do more harm than good. However if the graphs are to be believed it reinforces a pretty important point that I’ve been making for a long time which is that we’re unlikely to get far with what I call the Michelangelo theory of regulation.

You will recall that Michelangelo described his own miraculous sculpture as involving nothing more than taking a block of marble and removing the marble that didn’t belong to the sculpture. This formulation is memorable and funny for various reasons, not least of which that being aware of this idea does nothing to help us sculpt like Michelangelo. And yet this is the basic theory behind ‘regulation review’. The idea is that one erects procedural quality hurdles which act as obstacles to bad regulation and the result will be . . . good regulation.  But if regulation can generate such net gains, is this a smart way to be trying to optimise the value of regulation. I think not.

Btw, this argument applies whether one thinks the charts above are broadly right or not. I don’t have a view on that – and for the reasons explained, don’t need one!

Constraining infrastructure boondoggles

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I was reading an article the other day that I can’t now find, by a pollster whose name I can’t remember (increasing age is like that). It dealt with Coalition strategist Mark Textor’s highly successful four part 2010 campaign theme for Tony Abbott: stop the boats, no big new taxes, end the deficit, stop the waste.

I’ve already said more than enough about the boats. But the success of Textor’s tax/deficit theme was quite remarkable given that Australia had (and still has) the lowest deficit of any western nation by a very long way, and is the lowest taxing western nation bar the US (and will still likely have that status even if the Gillard government succeeds in introducing a carbon tax and minerals resource rent tax as promised). Abbott’s success with those slogans was as much due to the ineffectiveness of Labor’s campaign as to Textor’s skills in reading and exploiting the zeitgeist.

However the waste issue is in another category. There really was significant waste, at least in the pink batts scheme, green loans and the Building the Education Revolution program (at least in NSW; it was pretty efficient and delivered value for money in the other States according to the Orgill Report), and it was an entirely legitimate election issue.

However, there were two aspects of these waste items worth highlighting:

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