Regulatory Breakdown in the United States

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The Regulatory Review summarizes the work of leading scholars from the newly published book Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation.

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Events of the last several years have deeply shaken public confidence in the U.S. regulatory system. According to many observers, the financial crisis and the Gulf Coast oil spill would never have occurred but for lax regulatory oversight. Still others charge that the sluggish pace of the U.S. economic recovery stems in part from regulatory excesses, including the looming and uncertain new controls called for by the Dodd-Frank Act and the Affordable Care Act.

The modern United States regulatory system that emerged from the New Deal has never faced such a profound crisis of confidence. Public trust in government has declined and the political process has only grown increasingly polarized. Although we can expect more wrangling in Washington over fiscal matters in the months ahead, important and equally contentious debates over regulatory policy also seem likely to persist throughout President Obama’s second term.

In today’s heated political climate, academic research promises some much needed light.  If policymakers do truly seek to fix what has gone wrong with regulation in the United States, they will need to rely on more than their ideological dispositions. To effectuate the best solutions, what policymakers and the public need is clear analysis of the causes of our current crisis, a careful assessment of possible policy alternatives, and empirical evaluations that discern the true impact that regulatory changes make on the world.

The chapters in Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation speak to today’s need for clarity over regulatory policy and its reform. They also offer timeless lessons drawn from the experiences of the last several years. Edited by Penn Law Professor Cary Coglianese and written by some of the nation’s leading experts in law, economics, political science, and public policy, the book’s chapters collectively probe far beneath the surface-level diagnoses and debates that have characterized contemporary discourse.

In this series, The Regulatory Review features essays summarizing each of the chapters in Regulatory Breakdown.  Each essay is written by a Penn Law student about a chapter from the book. We aim for our series, like the book itself, to help illuminate the contemporary regulatory predicament and advance the cause of bringing greater analytical and empirical attention to what truly ails the U.S. regulatory regime.

Assessing Regulations in the Wake of Disaster

“Carrigan and Coglianese posit that after a national disaster, critics and lawmakers typically choose  regulation as their first object of blame. . . . Reforming regulation in the wake of disaster may feel like the necessary thing to do, but, as Carrigan and Coglianese demonstrate, it is not always needed or prudent.”

A Portfolio Approach to Addressing Catastrophic Risk

“According to the authors, no single institutional mechanism can be alone effective in mitigating all catastrophic risks, as each type of risk exhibits distinct characteristics and challenges.  Catastrophic risks can be caused by human behavior or by nature. . . . Good public policy requires a variety of responses to respond to the variety of risks.”

Improving the Regulation of Offshore Oil Drills

Maxwell Blum

“The problem with the current regulatory approach is that it decreases the importance of compliance with each fail-safe in the eyes of a cost-conscious firm, Bennear argues. . . . Both management-based regulation and a deposit-discount-refund-system offer strengths that may be able to mitigate the weaknesses of the current approach.”

How Should the U.S. Regulate Housing Finance After the 2008 Crisis?

Aimee Martin

“[Levitin and Wachter] suggest that in the future the implementation of some traditional command-and-control regulations will likely be necessary to ensure the functioning and stability of mortgage markets, whether these traditional regulations are in combination with a public option or not.”

Improving Crisis-driven Financial Regulation

“Romano argues that a solution to the problems of crisis-driven legislation would be to increase the use of sunset provisions.  Such provisions would make it easier to review crisis-driven legislation after the heat of the moment passes, giving regulators a second chance to ‘get it right.'”

Media, Polarization, and Regulatory Politics

“Baum concludes that, while some individuals do seek out news that spans an ideological spectrum, many more consumers are unmistakably trending toward self-selection of ideological preferences. Baum’s findings show how such self-selection by consumers, coupled with an ideologically-divided media landscape, can contribute to the public’s stubborn polarization on important regulatory issues like healthcare reform.”

Study Suggests that Public Attitudes Hinder Efficient Regulation

“Baron and his co-authors suggest that public misunderstanding of economic arguments for and against a variety of regulatory schemes prevents legislators from adopting the most efficient regulations.  Ultimately, the authors identified two primary causes of the incongruity between efficient regulation and public preferences—citizens’ lack of understanding of economic efficiency and ideological views.”

Is the Rulemaking Process Really a Quagmire?

“[Yackee and Yackee] found ‘suggestive evidence against the notion that our administrative state is systematically broken or prone to failure.’ They also caution against dramatic changes to the regulatory system in an effort to speed it up … [and] suggest that reformers look first to the particular realities within individual agencies.”

The Benefits of Public Advisory Committees at the FDA

“Moffitt [suggests] that ‘fewer post-marketing safety problems [arise] when drugs are reviewed by committees with few conflicts of interest,’ [and argues] that FDA may want to use public advisory committees more frequently—and include fewer members with potential conflicts of interest—as a way to overcome the public’s crisis of confidence in the agency.”

Empowering the SEC to Stop Corporate Fraud

“According to Bratton and Wachter, ‘fraud on the market’ … neither deters individuals from fraudulent behavior nor adequately compensates victims for their loss. As a solution, Bratton and Wachter propose a two-pronged overhaul of both the “fraud on the market” doctrine and [shift of anti-fraud enforcement to the SEC].”

Is Class Action Litigation a Response to Regulatory Capture?

“[The authors] suggest that rather than working in a coordinated fashion – whether as substitutes or complements – government regulation and the class action litigation system may be running entirely on separate tracks. This … only makes more complicated, Helland and Klick conclude, the search for policy prescriptions on how to create a more optimal balance between society’s reliance on regulation and litigation to achieve policy goals.”

A Prescription for the FDA

“Ruger explains that unless the FDA adapts and becomes more flexible and responsive to the most pressing public health concerns, America’s policy solutions to food and drug issues will eventually rest in the hands of other regulators, including state, local, and other federal agencies, as well as private entities.”