Bureaucracy’s Paradox: When Fewer Regulations Mean Less Freedom

"To limit abuse by the rulers, ancient Rome wrote down the law and permitted citizens to read it. Under Dodd-Frank, regulatory authority is now so broad and so vague that this practice is no longer followed in America. The rules are now whatever regulators say they are."
–Former Texas Senator Phil Gramm

Much federal law comes not from Congress but from the myriad agencies to which it has delegated power. Often, agencies merely issue “guidance” rather than formal rules.

In recent work and also in a new Cato Unbound exchange on “Questioning the Administrative State,” I’ve explored such regulatory “dark matter” and groped at its relationship to ordinary laws and to ordinary Administrative Procedure Act (APA) regulations that purportedly incorporate public comments.

Policymakers debate regulatory costs, from OMB’s few dozens of billions for the 116 major rules it has presented as having both cost and benefit analysis since 2002, to an estimated $2 trillion aggregate annual cost, to twice even that amount in lost economic output. But dark matter’s unfathomed and unmeasured consequences go beyond the countable and escape such surveys, compromising our ability to measure anything as far as regulatory impact or cost of intervention.

The federal government’s running of America’s basic retirement system, on top of trust fund sleight of hand, is not counted as a cost of intervention. Yet the cost is the extra wealth people could personally accumulate, and the inability to bequeath an estate to heirs after a lifetime of garnishment. Yet government seeks more control to deal with the income inequality it has in no small measure directly caused (See the new paper by my colleagues Iain Murray and Ryan Young). Also not counted is antitrust’s periodic reformatting of American industries and competitive processes as seen recently in the Federal Communications Commission’s 348-page “memorandum opinion” that, while approving the Charter Communications and Time Warner Cable Inc. merger, attached strings (“conditions”); alas, a common practice.

In other words, as government grows to encompass more spheres of activity (health care, finance, the “neutral” Internet), agencies will be able to issue fewer written rules yet expand control nonetheless. They won’t need a law from Congress, need not bother with notice-and-comment rules, and perhaps can even avoid writing down interpretive guidance, memos and the like altogether. Fewer “regulations” may, counterintuitively, mean less freedom when weighty bureaucracies run the show. Consider the Credit Union Times’ warning to the industry about the Dodd-Frank financial law’s “unfair, deceptive, or abusive acts and practices” provisions:

"UDAAP does not have any implementing regulations and it probably never will. In fact, CFPB Director Richard Cordray said the bureau will not issue any regulations that define exactly what actions or practices violate the law…. So how will a bank, credit union or other financial services provider know if it has violated the law?"

As modern bureaucracies take this stance, “law” can become more arbitrary, more non-democratic than ever. The Consumer Financial Protection Bureau tells regulated parties, “You can contact our Office of Regulations to receive informal guidance from a staff attorney about the Bureau’s regulations. … Any such informal guidance would not constitute an official interpretation or legal advice.” Many agencies use such disclaimers, yet compel nonetheless.

Another example of the descent into arbitrary, unwritten lawmaking reconfiguring an entire economic sector is the Federal Communications Commission’s order on net neutrality. Here, on page 106 of a 400-page regulatory order, one observes the actual birth of unashamedly authoritarian “advisory opinions,” and cannot fail to appreciate the Mother-May-I culture that will result to the great detriment of communications industry autonomy and innovation, but to the benefit of the agency and attorneys. I quote this at some length, with a highlight:

"We conclude that use of advisory opinions similar to those issued by DOJ’s Antitrust Division is in the public interest and would advance the Commission’s goal of providing legal certainty. Although the Commission historically has not used advisory opinions to promote compliance with our rules, we conclude that they have the potential to serve as useful tools to provide clarity, guidance, and predictability concerning the open Internet rules. Advisory opinions will enable companies to seek guidance on the propriety of certain open Internet practices before implementing them, enabling them to be proactive about compliance and avoid enforcement actions later. The Commission may use advisory opinions to explain how it will evaluate certain types of behavior and the factors that will be considered in determining whether open Internet violations have occurred." (Emphasis added.)

It’s backward enough that FCC is regulating tomorrow’s Internet as yesterday’s common carrier utility. Companies will be degraded and reduced to checking with FCC first before conducting business. Note that, if it stands, no laws need be passed by Congress, and no further APA-compliant rules need be issued by the agency to control the future of the sector. Despite assurance to the contrary by FCC, this regime will eventually encompass the content and app sectors.

Incidentally, some groups favorable toward net neutrality regulation in principle now have concerns in recognition of the consumer benefits of practices like “zero rating” (not counting certain online uses against one’s data limit) that puritans argue technically violate net neutrality. The Information Technology and Innovation Foundation (or ITIF), for example, is concerned that “strict interpretation” would be “misguided,” and won’t harm the open Internet after all and calls for the FCC to deem the practice in the “public interest.”

But central agencies shouldn’t be deeming anything, they should be letting us be.

Still another case of tomorrow’s rules being whatever rulers say was a Department of Justice initiative informally called “Operation Choke Point,” a campaign intended to urge banks to cut off services to legal businesses like pawn shops and gun stores. Again, a major undertaking that “developed not out of any law, Executive Order or rule making procedure, but rather as an initiative of President Obama’s Financial Fraud Enforcement Task Force within the DOJ.” No actual written regulations, but enemies lists, threats, and pressure.

Energy is often ill-defined as the ability to do work. But the “dark energy” corollary of regulatory dark matter might be thought of as that which halts work and productivity. Only the most well-positioned companies and newer kinds of politically entrepreneurial entities will be able to thrive amid non-free-enterprise. Like the dark matter that makes up the bulk of the universe, regulatory dark matter may be what matters most for the preservation of economic liberty.

Originally posted to Forbes.