A New Regulatory Order?

Harvard economist Larry Summers has some ideas for a new regulatory order in the Financial Times. In typical Summers fashion, his recommendations are moderate. His moderation comes at the cost of ignoring incentives.

His first principle is “no regulatory competition.” Regulators shouldn’t compete against each other. Let’s take this principle to its logical conclusion. Only one regulator would be allowed — that would be the federal government. As with most monopolies, bad incentives abound.

It is a good thing that, say, investment firms are free to move to New Jersey if New York’s regulations are too stringent. Or if taxes are too high; the same arguments apply to tax competition. “Forum shopping” gives regulators more incentive to be reasonable.

Summers also expresses concern over regulatory capture. His concern is legitimate, but there’s no correlation with forum shopping, as he implies. Regulatory capture happens when something is regulated. The only way to stop regulatory capture is to stop regulating, period.

When constructing a regulatory order, we have three choices: 1) no regulators, 2) a single regulator (the federal government), and 3) multiple, competing regulators (the states).

I think I know which I prefer. Failing that, I’ll take the third option.