tag:theconversation.com,2011:/global/topics/regulators-9825/articlesregulators – The Conversation2023-12-21T17:37:07Ztag:theconversation.com,2011:article/2199292023-12-21T17:37:07Z2023-12-21T17:37:07ZScrutiny of OpenAI and Microsoft relationship could affect how AI industry grows and innovates<figure><img src="https://images.theconversation.com/files/566952/original/file-20231220-19-jnbdub.jpg?ixlib=rb-1.1.0&rect=71%2C44%2C5838%2C3907&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sam Altman, CEO of OpenAI.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/openai-cofounder-chatgpt-ceo-sam-altman-2390534439">MeSSrro/Shutterstock</a></span></figcaption></figure><p>The boardroom of OpenAI, the business that developed ChatGPT, has seen some turbulent times recently. But while the drama around the sacking and reinstatement of CEO Sam Altman has subsided, the company now faces investigation by the UK competitor authority – a regulator that’s been increasingly training its spotlight on big tech in recent years. </p>
<p>After the surprise sacking of Altman by OpenAI’s board in November, he was immediately hired by tech giant Microsoft, which also pushed for him to be reinstated as CEO of OpenAI. A few days later it was confirmed that Altman was back as OpenAI CEO, alongside a new board on which Microsoft was granted a non-voting observer seat. </p>
<p>Microsoft is the biggest investor in the commercial arm of OpenAI. It has put around <a href="https://www.cnbc.com/2023/04/08/microsofts-complex-bet-on-openai-brings-potential-and-uncertainty.html">US$13 billion</a> (£10.3 billion) into the business. It’s also the exclusive supplier of the cloud computer services that OpenAI uses to develop and operate its AI models. </p>
<p>Even though Altman was only out for less than a week, the episode could have a significant impact on OpenAI’s future. It revealed the strong links between OpenAI and Microsoft, prompting UK competition regulator, the Competition and Markets Authority (CMA), to <a href="https://www.gov.uk/government/news/cma-seeks-views-on-microsofts-partnership-with-openai">announce an investigation</a> into their relationship. </p>
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<a href="https://theconversation.com/the-openai-saga-demonstrates-how-big-corporations-dominate-the-shaping-of-our-technological-future-218540">The OpenAI saga demonstrates how big corporations dominate the shaping of our technological future</a>
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<h2>Competition regulation</h2>
<p>The CMA wants to examine whether the current partnership between OpenAI and Microsoft is essentially a merger – that is, whether there has been an acquisition of control by Microsoft or a change in the nature of control. But it also signals the regulator’s intent to continue to closely examine big tech firms as it aims to protect consumers. </p>
<p>In addition to its investments, Microsoft only has non-voting observer status on OpenAI’s board. But if the CMA concludes the partnership is in fact a merger, it will start looking into whether this merger has led to a substantial lessening of competition (SLC). The CMA would then need to consider how to remedy the harm and this could result in a change in the governance structure of OpenAI.</p>
<p>Microsoft’s supply of cloud computing services to OpenAI will also be a crucial part of the investigation. If Microsoft is denying or restricting supply of these services to OpenAI’s rivals, the CMA could conclude that this harms competition. </p>
<p>OpenAI has also developed general-purpose AI systems that can improve a range of applications used widely by consumers, for example productivity software and search engines. The CMA will look at Microsoft’s <a href="https://www.sciencedirect.com/science/article/abs/pii/S0167718723000553">ability and incentive</a> to restrict the supply of AI systems to companies competing in these markets, for example rivals of Microsoft’s Bing search engine. </p>
<p>Either scenario could ultimately damage the choice and quality of services available to consumers – something competition authorities pledge to protect. </p>
<h2>Increased scrutiny of big tech</h2>
<p>The CMA’s examination of OpenAI marks a new level of scrutiny of high-tech sectors, which competition authorities across the globe have been keeping a close eye on for the last two decades. The CMA established a <a href="https://www.gov.uk/government/collections/digital-markets-unit">Digital Markets Unit</a> in 2021. </p>
<p>Its recent high-profile decisions include delaying Microsoft’s acquisition of Call of Duty game developer Activision Blizzard until it amended the terms of the deal. Before that, it ruled that Facebook owner Meta’s acquisition of GIF video provider Giphy was anti-competitive, <a href="https://www.theguardian.com/technology/2022/oct/18/facebook-meta-sell-giphy-cma">forcing it to sell Giphy</a>. </p>
<p>Concerns about restricting supply of products or services to rivals were also central to these cases. And its decisions demonstrate the ability and willingness of the CMA to impose significant structural remedies on companies. It’s even prepared to fully unwind deals that it deemed would harm competition. Other national regulators had already <a href="https://theconversation.com/microsoft-and-activision-the-big-questions-that-will-decide-whether-the-us-68-billion-deal-goes-ahead-209803">given the deal the green light</a> before the CMA’s intervention was resolved.</p>
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<img alt="Two hands holding a smartphone with the CMA logo, brightly coloured background." src="https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566957/original/file-20231220-25-freci9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Competition and Markets Authority promotes competitive markets and aims to protect consumers from unfair business activity.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/march-21-2023-brazil-this-photo-2277590033">rafapress/Shutterstock</a></span>
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<h2>The challenges of regulating tech companies</h2>
<p>There are some factors that make it difficult for competition authorities to regulate high-tech markets, however. First, these markets are extremely dynamic and can evolve in ways that are unexpected. This makes it hard for competition authorities to accurately determine harm to competition and the impact potential remedies will have. </p>
<p>Second, these investigations often involve large, powerful companies with substantial lobbying power and major global presences. When the merger between Microsoft and Activision Blizzard was initially blocked by the CMA, the companies got a lot of press by claiming the decision showed the UK was “closed for business”. </p>
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<p>On the other hand, the dynamic nature of these markets makes it essential for competition authorities to carefully scrutinise and, where necessary, intervene early-on as high-tech sectors emerge. Otherwise, there is a danger that first-movers can quickly entrench and exploit their dominant positions. Competition authorities allowed Facebook to acquire Instagram in 2012, for example, but now Instagram is so popular <a href="https://www.washingtonpost.com/outlook/2018/09/28/case-breaking-up-facebook-instagram/">this decision</a> has been criticised. </p>
<p>The potential for AI to drastically change all walks of life makes it imperative that the CMA (and other competition authorities) take this opportunity to shape how the sector develops and who benefits. </p>
<p>It’s still early days for AI, but the CMA could call on OpenAI to alter its ownership structure or it could even regulate how it operates or what it sells. This could give the CMA more control over how the market evolves, but would also require it to extensively monitor this complex market. </p>
<p>Either way, it has the potential to have a significant effect on how OpenAI grows and innovates, and who is able to benefit from its creations – as well as those from other companies in the burgeoning AI market.</p><img src="https://counter.theconversation.com/content/219929/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If the CMA concludes the partnership is in fact a merger, it will start looking into whether this has reduced competition.Matthew Olczak, Reader in Economics, Aston UniversityJon Guest, Senior Teaching Fellow in Economics, Aston UniversityKarishma Patel, Teaching Fellow in Economics, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1927042022-10-20T13:14:12Z2022-10-20T13:14:12ZCorporate spending in state politics and elections can affect everything from your wallet to your health<figure><img src="https://images.theconversation.com/files/490190/original/file-20221017-7289-9wr57o.jpeg?ixlib=rb-1.1.0&rect=0%2C4%2C2916%2C2004&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">From Alaska to Alabama, corporations spend money to shape their local business environments, resources and regulations. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/campaign-donations-royalty-free-image/1398882607?phrase=political%20donations&adppopup=true">Douglas Rissing/ iStock / Getty Images Plus</a></span></figcaption></figure><p>Political spending by corporations is big business. </p>
<p>As one corporate executive with experience in business-government relations says, “A company that is dependent on government that does not donate to politicians is engaging in corporate malpractice.” </p>
<p>Our research group heard that statement during a series of interviews with industry insiders that we conducted for <a href="https://journals.aom.org/doi/abs/10.5465/amj.2017.1258">a study on corporate political strategy and involvement</a> in U.S. state politics. </p>
<p>In the 2020 election cycle, private interests spent <a href="https://www.opensecrets.org/political-action-committees-pacs/2022">US$486 million on campaign contributions</a> to U.S. federal election candidates and over <a href="https://www.opensecrets.org/federal-lobbying">$7 billion</a> to lobby Congress and federal agencies.</p>
<p>The 2022 cycle could be a record period if recent trends are any indication. At the federal level, <a href="https://www.opensecrets.org/news/2020/12/most-expensive-races-of-all-time-senate2020/">nine of the 10 most expensive Senate races to date happened during the 2020 election cycle</a>. Notably, Georgia was home to the <a href="https://www.opensecrets.org/news/2021/01/georgia-senate-races-shatter-records/">two most expensive Senate contests of all time in 2020</a>, with candidates and outside groups spending over $800 million on the two races combined.</p>
<p>Data from campaign finance monitor the <a href="https://www.opensecrets.org/federal-lobbying/top-spenders">Center for Responsive Politics</a> shows that those companies most affected by government regulation spend more. The operations of Facebook owner Meta, for example, could be heavily affected by government legislation, whether from laws concerning <a href="https://www.bbc.com/news/technology-42096185">net neutrality</a>, <a href="https://gdpr.eu/the-gdpr-meets-its-first-challenge-facebook/">data privacy</a> or <a href="https://www.abajournal.com/magazine/article/social-clashes-digital-free-speech">censorship</a>. Meta spent nearly $7.8 million in contributions and $36.4 million in lobbying <a href="https://www.opensecrets.org/orgs/summary?toprecipcycle=2020&contribcycle=2020&lobcycle=2020&outspendcycle=2020&id=D000033563&topnumcycle=2020">during the 2020 cycle</a>. </p>
<p>This kind of political spending is also common across state governments. From Alaska to Alabama, <a href="https://www.followthemoney.org/">corporations spend huge sums of money</a> to influence policymaking because they depend on their local business environments, resources and regulations. </p>
<p>Contributions to gubernatorial and state legislative candidates <a href="https://www.followthemoney.org/research/institute-reports/joint-report-reveals-record-donations-in-2020-state-and-federal-races">set records during the 2020 cycle</a>, nearing $1.9 billion. That was up from $1.57 billion during the 2016 cycle and $1.4 billion during the 2012 cycle. Contributions in the 2020 cycle represented a nearly 21% increase from 2016. Both major political parties tend to receive roughly the same level of contributions, though the numbers can vary from year to year.</p>
<p>As the next election approaches, corporate involvement in state politics is vital to understand. </p>
<p>Companies’ attempts to manage state regulations have important effects on their operations directly as well as on state revenues and on the lives of state residents. Corporations can affect <a href="https://academic.oup.com/sf/article-abstract/90/3/947/2235830">the air that you breathe, the water you drink</a> and <a href="https://apnews.com/bd8a878c5fe84ea48ffbcf05b4edba0e">the taxes you pay</a>. </p>
<h2>External forces spark donations</h2>
<p>A <a href="https://journals.aom.org/doi/abs/10.5465/amj.2017.1258">study we conducted</a> with colleagues <a href="https://robins.richmond.edu/faculty/asutton/">Trey Sutton</a> and <a href="https://business.fsu.edu/person/bruce-lamont">Bruce Lamont</a> provides insight into the details of when and why corporations contribute to state gubernatorial and legislative candidates. </p>
<p>We examined political contributions by publicly traded companies in elections for governor and the legislature across the 50 U.S. states. The companies we studied (e.g., ExxonMobil and 3M) all operate in environmentally intensive industries – oil and gas, chemical, energy and manufacturing industries. Specifically, the companies in these industries have industrial manufacturing processes <a href="https://www.forbes.com/sites/christopherhelman/2013/06/10/americas-20-worst-corporate-air-polluters/#403cf82d41c6">that create toxic releases</a>. </p>
<p>We also interviewed industry insiders, political affairs consultants and lobbyists to complement our empirical findings. </p>
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<img alt="" src="https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=470&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=470&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343567/original/file-20200623-188882-1tzlhzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=470&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">ExxonMobil is one of many companies that will likely spend a lot of money on upcoming elections.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/anastasia-hinchsliff-fuels-her-suv-at-an-exxon-mobile-gas-news-photo/103157613?adppopup=true">John Gress/Getty Images</a></span>
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<p>At the core, companies spend when they are dependent on states, meaning that they have vested interests and operations in a state that are subject to regulation. Regulation creates uncertainty for managers – which they don’t like. Spending helps alleviate the uncertainty by influencing what regulation may be imposed. </p>
<p>Our study went beyond this observation, and had four major insights:</p>
<p><strong>1. Corporations spend when they are worried about negative media coverage prompting what they perceive to be potentially harmful regulations.</strong></p>
<p>As one executive told us, “We spend a lot of time tracking media and local advocacy groups. We track [them] on a daily basis, and I get a report each week.” </p>
<p>Media coverage can drive public perceptions of corporations and influence politicians’ views. In particular, media coverage can amplify misdeeds of companies across states, which worries managers who do not want to see new regulations. In line with this, we found that the companies spent 70% more in states they operated in when national media coverage was more negative rather than less negative. </p>
<p>We found that this effect was exclusive to national media coverage as opposed to local media coverage. Specifically, when local media coverage was more negative, it did not appear to affect political spending. </p>
<p><strong>2. Corporations spend when there are powerful social movement organizations – for example, environmental protection groups – within a state.</strong></p>
<p>“Public relations firms are routinely engaged to monitor activists and the media, because if you don’t watch them, they can create regulatory change. You have to get ahead of it,” an executive said. </p>
<p>Social movement organizations (e.g., Sierra Club and the Rainforest Action Network) help <a href="https://www.jstor.org/stable/3312913?casa_token=5XA3RUoopBYAAAAA%3Agc06Z6cwRA6ODbgPUOkHwk2Ea7XB43KocZhFtMZjaTyH0UlKbOim5uAZS9QniQ1k9hXjtwGYyCEbovm__npFAuKOb467j57cqa12omJC4o1tzHJrUl--&seq=1#metadata_info_tab_contents">shape public opinion on important issues, pursue institutional change and can prompt legal reform</a> as well, which is a concern to corporations. Our research indicated that in states where they had operations, companies spent 102% more when facing greater opposition from social movement organizations than they would have on average. </p>
<p><strong>3. Corporations spend to gain a seat at the legislative table to communicate their interests.</strong></p>
<p>A political affairs consultant and lobbyist said, “Regulations are a negotiation, there is not a logic, no rule of law, lobbyists come in here…” In essence, legislators rely on policy experts and analysts, among others, when crafting new legislation, but often, solutions can be unclear with competing demands and interests. </p>
<p>Our interviewees shared with us that companies spread their contributions around to those politicians who they believe will listen to their causes and concerns – regardless of party. </p>
<p>They described themselves as wanting their voices heard on particular issues and as important players in the states in which they operate due to the employment and tax base they bring to states. </p>
<p>Boeing, for example, was the <a href="https://www.bizjournals.com/seattle/news/2021/10/06/amazon-microsoft-boeing-largest-employers.html">largest private employer in Washington state for decades</a> and has been able to <a href="https://www.reuters.com/article/us-boeing-incentives/boeing-lobby-group-team-up-to-defend-8-7-billion-in-state-tax-breaks-idUSKBN14U23V">secure tax breaks</a> as a result. This is despite <a href="https://www.seattletimes.com/seattle-news/environment/boeing-discharge-to-duwamish-violates-pcb-standards/">documented environmental problems that Boeing’s operations have had in the state.</a> </p>
<p><strong>4. Corporations spend because they see it as <a href="https://www.businessroundtable.org/about-us">consistent with their responsibility to stakeholders</a>.</strong> </p>
<p>“Companies mostly want certainty, they want to know the bottom line, and engagement can create opportunities,” said one political affairs consultant. </p>
<p>Corporations have a legal and ethical responsibility to their stakeholders. Company leaders often believe they are upholding their responsibilities to shareholders, employees, communities, customers and suppliers by participating in the political process. </p>
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<img alt="" src="https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343565/original/file-20200623-188936-v56a1n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">California lawmakers often set more stringent environmental policies than most other states.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/state-capitol-building-sacramento-california-news-photo/661870070?adppopup=true">Education Images/Universal Images Group via Getty Images</a></span>
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<h2>What are the stakes?</h2>
<p>There can be huge repercussions for companies in state regulation. As one political affairs consultant told us, “[Regulation] is the pot at the end of the rainbow that could create endless possibilities of profit. It’s the only thing that stands between them and unending profits …” </p>
<p>Ride hailing service Uber, for example, mounted <a href="https://www.theregreview.org/2018/06/28/schriever-uber-lyft-lobby-deregulation-preemption/">protracted political campaigns</a> aimed at state legislatures and local governments to protect the company’s interests. One result: The ride hailing service has been able to get independent contractor status for their drivers in many states, which means the company does not have to provide unemployment insurance, workers’ compensation and other benefits. </p>
<p>Passage of regulations in large states like California, for example, can have nearly as much impact as a national regulation, making their passage far more significant for companies working nationally. </p>
<p>Since California sets more <a href="https://theconversation.com/why-california-gets-to-write-its-own-auto-emissions-standards-5-questions-answered-94379">stringent emissions standards</a> for vehicles than most other states, manufacturers designing cars for the U.S. market must make sure their vehicles can pass these standards. In this way, California and other states <a href="https://www.latimes.com/politics/story/2020-06-22/nevada-will-adopt-californias-car-pollution-standards">following its lead</a> pose a larger regulatory hurdle for auto manufacturers. </p>
<h2>Where does this leave us?</h2>
<p>Corporate involvement in state politics is an important phenomenon. Corporations provide needed products and services, and also bring jobs and increased investment to states, which can strengthen communities and state economies. Their operations also can bring health and environmental problems for state residents.</p>
<p><a href="https://fivethirtyeight.com/features/where-are-georgias-senate-candidates-getting-all-that-cash-from/">As the 2020 Georgia U.S. Senate races suggest</a>, campaign donations for candidates for federal office increasingly come from outside the state. <a href="https://www.followthemoney.org/research/institute-reports/joint-report-reveals-record-donations-in-2020-state-and-federal-races">While this pattern does not pervade state elections yet</a>, it raises questions about politicians’ responsiveness to the issues most relevant to their local constituencies.</p>
<p>Given the changed business landscape – <a href="https://www.wsj.com/articles/how-much-covid-19-cost-those-businesses-that-stayed-open-11592910575">and increased operating costs</a> – caused by the coronavirus pandemic, we expect that businesses across the country will continue to be interested in influencing policies ranging from workplace safety to local and state tax breaks. This interest will likely translate into significant spending in the upcoming election, to both major parties and their candidates.</p>
<p>And that political spending will affect everything from your wallet to your health.</p>
<p><em>This is an updated version of a <a href="https://theconversation.com/money-talks-big-business-political-strategy-and-corporate-involvement-in-us-state-politics-140686">story originally published on June 29, 2020</a>.</em></p><img src="https://counter.theconversation.com/content/192704/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Businesses can spend huge amounts of money to influence Congress. But sizable lobbyist and campaign donations also go to state campaigns and lawmakers to influence policymaking.Richard A. Devine, Assistant Professor of Management, DePaul UniversityR. Michael Holmes Jr., Jim Moran Professor of Strategic Management, Florida State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1827502022-06-01T19:29:19Z2022-06-01T19:29:19ZTo prevent disasters like Lac-Mégantic, private interests cannot be allowed to affect regulations<figure><img src="https://images.theconversation.com/files/466417/original/file-20220531-12-upxzmj.jpg?ixlib=rb-1.1.0&rect=4%2C0%2C2982%2C1836&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A policy decision to allow the Montreal, Maine & Atlantic Railway — a company with a poor safety record – to run its trains through a town in Québec with single person crews resulted the fourth deadliest railway disaster in Canadian history in 2013. Eight years later, Transport Canada is still suffering from safety issues.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Graham Hughes</span></span></figcaption></figure><p>On July 6, 2013, the <a href="https://www.chapters.indigo.ca/en-ca/books/the-lac-m%c3%a9gantic-rail-disaster/9781459413412-item.html">fourth deadliest railway disaster</a> in Canadian history took place. A train hauling 72 tankers filled with crude oil derailed in Lac-Mégantic, Que., killing 47 people.</p>
<p>The roots of the Lac-Mégantic rail disaster can be traced to a combination of corporate negligence and regulatory failure. It is what spurred the publication of my <a href="https://www.chapters.indigo.ca/en-ca/books/corporate-rules-the-real-world/9781459416956-item.html">recently edited volume</a> about how Canadian corporations have co-opted government agencies for private interests.</p>
<p>Just prior to the disaster, the Canadian railway lobby had redrafted the <a href="https://tc.canada.ca/en/rail-transportation/rules/2021-2022/canadian-rail-operating-rules">Canadian Rail Operating Rules</a>, permitting freight trains to operate with a single-person crew. </p>
<p>Transport Canada then granted permission to the Montreal, Maine & Atlantic Railway — <a href="https://www.thestar.com/news/canada/2013/07/10/lac_megantic_disaster_mma_railway_had_poor_safety_record_in_us.html">a company with a poor safety record</a> — <a href="https://montrealgazette.com/news/montreal/railway-companies-scaling-down-to-single-crew-member-on-some-lines">to run its trains through Lac-Mégantic with single-person crews</a>.</p>
<p>This policy change was a significant contributing factor to the disaster. It exemplifies why regulatory capture is so dangerous and why it needs to be stopped.</p>
<h2>Defining regulatory capture</h2>
<p>Regulatory capture occurs when regulations are taken over, or captured, by the <a href="https://www.investopedia.com/terms/r/regulatory-capture.asp">private interests of an industry</a>, instead of being used to <a href="https://www.canada.ca/en/government/system/laws/developing-improving-federal-regulations/requirements-developing-managing-reviewing-regulations/guidelines-tools/cabinet-directive-regulation.html#toc3">protect citizens’ health and safety, and the environment</a>.</p>
<p>This primarily occurs when industries are the ones shaping policy, legislation and regulations, instead of the government. Industries often frame regulations as being <a href="https://www.hsa.ie/eng/topics/health_and_safety_myths/myth_3_red_tape_hindering_business/">detrimental to job and wealth creation</a>. This enables them to block or delay new regulations, and exert pressure to remove or dilute existing ones.</p>
<p>The increase in regulatory capture can be traced back to Prime Minister Stephen Harper’s 2012 <a href="https://www.canada.ca/en/government/system/laws/developing-improving-federal-regulations/requirements-developing-managing-reviewing-regulations/guidelines-tools/cabinet-directive-regulatory-management.html">Cabinet Directive on Regulatory Management</a> policy that framed regulations as an administrative burden and a business cost that needed to be “streamlined.”</p>
<p>The policy’s centrepiece was the <a href="https://www.cbc.ca/news/politics/red-tape-report-touts-one-for-one-regulatory-rule-1.1261264">“one-for-one” rule</a>, which mandated regulatory agencies to offset each new or amended regulation by removing at least one existing regulation. </p>
<figure class="align-center ">
<img alt="A man in a suit gesturing while he speaks" src="https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=439&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=439&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=439&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Stephen Harper’s Cabinet Directive on Regulatory Management policy involved the ‘one-for-one’ rule which mandated regulatory agencies to offset each proposed new or amended regulation by removing at least one existing regulation.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Graham Hughes</span></span>
</figcaption>
</figure>
<p>The one-for-one rule put regulators in an awkward — and potentially dangerous — position. If regulators want to propose new regulations, they have to remove an already existing regulation, with potentially dangerous health and safety consequences. Unsurprisingly, this policy has resulted in catastrophic accidents and is in desperate need of reform. </p>
<p>Since the introduction of Harper’s policy, regulatory capture has spread far and wide in Canada. Experts in my edited volume illustrate how embedded it has become in various areas, from the pharmaceutical industry, as illustrated by pediatrician and clinical pharmacologist <a href="https://cfe.ryerson.ca/people/mich%C3%A8le-brill-edwards">Michèle Brill Edwards</a>, to the petroleum industry, as illustrated by the <a href="https://www.corporatemapping.ca/">Corporate Mapping Project</a>’s co-ordinator, <a href="https://www.sfu.ca/sustainabledevelopment/People/william-k-carroll.html">William Carroll</a>.</p>
<h2>Confronting and overcoming regulatory capture</h2>
<p>Until the Cabinet Directive on Regulatory Management is reformed, regulators need to take the necessary steps to offset regulatory capture. My book offers <a href="https://www.chapters.indigo.ca/en-ca/books/corporate-rules-the-real-world/9781459416956-item.html">concrete suggestions that regulators can follow</a> to ensure regulations are once again made in the public interest.</p>
<p>As a result of regulatory resources being defunded over the years, many agencies have been forced to become dependent on corporations to develop and manage their own safety oversight regimes. To overcome this issue, regulatory agency resources must be bolstered, including hiring more personnel and increasing research capacity.</p>
<figure class="align-center ">
<img alt="Two oil pumps silhouetted against the sky as the sun sets" src="https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pump jacks extract oil from beneath the ground east of New Town, N.D., in May 2021. Regulatory capture has spread to a number of industries, including the petroleum industry.</span>
<span class="attribution"><span class="source">(AP Photo/Matthew Brown)</span></span>
</figcaption>
</figure>
<p>Regulators must also develop <a href="https://www.ourcommons.ca/Content/Committee/412/ETHI/Reports/RP6365946/ethirp01/ethirp01-e.pdf">more robust conflict-of-interest provisions</a> <a href="https://www.mqup.ca/too-critical-to-fail-products-9780773551619.php">to clear up oversights</a>, along with whistleblower protections. </p>
<p>In 2021, two international bodies <a href="https://whistleblower.org/wp-content/uploads/2021/03/Are-Whistleblowing-laws-working-REPORT_02March21.pdf">ranked Canada in last place</a> among 37 countries for the effectiveness of its whistleblowing frameworks. It is clear that we need to do better as a country.</p>
<p>Similarly, law professors <a href="https://uniweb.uottawa.ca/members/1009">Steven Bittle</a> and <a href="https://uniweb.uottawa.ca/members/404">Jennifer Quaid</a> found that regulatory enforcement and accountability provisions have been hollowed out in Canada, allowing corporations to avoid serious legal liability — including criminal wrongdoing and corruption. </p>
<p>To counteract this, civil and criminal liability regimes must be reformed to hold senior government officials, corporate executives, directors and owners accountable for actions that result in accidents, destruction, illness and death.</p>
<h2>Citizens must be involved</h2>
<p>The vast majority of citizens expect their governments to take the necessary measures to protect their health, safety and environment. Understandably, opinion polls regularly indicate that the <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.582.613&rep=rep1&type=pdf">public does not trust corporations to regulate themselves</a>.</p>
<p>Regulatory capture is likely to happen in a <a href="https://doi.org/10.1111/capa.12412">revolving door fashion</a>, where people move seamlessly between private and public sector jobs and influence policies to suit the interests of both parties. </p>
<p>One way to stop the revolving door is by improving <a href="https://ottawacitizen.com/opinion/beeby-world-press-freedom-day-its-time-canadas-access-to-information-law-was-enforced">public access to information legislation</a>. This would ensure that information shared between corporations and regulators under the veil of “<a href="https://www.priv.gc.ca/en/privacy-topics/privacy-laws-in-canada/the-personal-information-protection-and-electronic-documents-act-pipeda/pipeda_brief/">commercial confidentiality</a>” would publicly accessible.</p>
<p>Citizens should also be involved in the regulatory process, since regulations are supposed to be created to protect them. <a href="https://www.ohchr.org/sites/default/files/Documents/Issues/ToxicWaste/RightToInformation/AarhusConventionUNECE2.pdf">Effective public participation</a> means the right to know, the right to participate in decision-making and the right to remedy or compensation for regulatory breakdowns.</p>
<p>Regulators should improve mechanisms for public participation in regulation-making processes, including <a href="https://www.bangthetable.com/public-engagement-software/">online engagement</a>. </p>
<figure class="align-center ">
<img alt="A man looking at a bulletin board covered in photos and scraps of writing" src="https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A man looks at photos of some of the victims of the Lac-Mégantic rail disaster in 2014. Corporate negligence and regulatory failure has lead to a number of fatal disasters in Canada.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Ryan Remiorz</span></span>
</figcaption>
</figure>
<p>Overcoming regulatory capture will require widespread mobilization, from citizens to members of industry alike. It will require a broad toolbox of collective actions from the public, including non-violent protest, advocacy, campaigns and more. Courageous parliamentary and bureaucratic leadership is also vital to achieving fundamental change. </p>
<p>At a time when the threat of potential disaster looms on the horizon, the stakes could not be higher. Last year — eight years after the Lac-Mégantic disaster — <a href="https://www.thestar.com/opinion/contributors/2021/07/05/eight-years-after-the-lac-mgantic-disaster-the-window-for-a-recurrence-is-still-open.html">an auditor general report on railway safety expressed serious concern</a> about defects in Transport Canada’s safety oversight regime. If we are to prevent future disasters from happening, regulatory capture must be overcome.</p><img src="https://counter.theconversation.com/content/182750/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Campbell is affiliated with
The Group of 78; the Canadian Centre for Policy Alternatives; the Polaris Institute; Rideau Institute for International Affairs</span></em></p>Industries have blocked or delayed new regulations and pushed to remove or dilute existing regulations by framing regulations as detrimental to creating jobs and wealth.Bruce Campbell, Adjunct Professor, Faculty of Environmental and Urban Change, York University, CanadaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1486942020-10-30T14:09:51Z2020-10-30T14:09:51ZThere is a revolving door between industry and regulators, but does that really make for a ‘cosy relationship’?<figure><img src="https://images.theconversation.com/files/365204/original/file-20201023-13-1yvzwje.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">blurAZ / shutterstock</span></span></figcaption></figure><p>Toby Willison, a senior executive at the UK’s Environment Agency, is departing for the private utility firm Southern Water. Willison has been with the agency since 2002 and is currently its director of operations. The <a href="https://www.theguardian.com/environment/2020/oct/20/anger-as-environment-agency-executive-takes-job-at-southern-water">Guardian</a> and <a href="https://www.dailymail.co.uk/news/article-8861695/Watchdog-quits-Environment-Agency-join-water-firm-embroiled-crime-probe.html">Daily Mail</a> report concerns that this is yet another example of regulators enjoying a “cosy relationship” with a regulated industry, though a <a href="https://www.theguardian.com/environment/2020/oct/20/anger-as-environment-agency-executive-takes-job-at-southern-water">spokesperson for the EA and Willison</a> said that once he accepted the new job “clear rules around conflict of interest” were put into place.</p>
<p>The matter has not been helped by Southern Water pleading guilty to <a href="https://www.ft.com/content/3efb3e7b-3388-4f27-85ac-44b00aa1fd37">failures in its sewage treatment sites</a> after an investigation by the EA. Campaigners have accused the EA of lax supervision of the industry, arguing that the agency is too <a href="https://www.theguardian.com/environment/2020/oct/20/anger-as-environment-agency-executive-takes-job-at-southern-water">slow to act</a> when companies fail to adhere to environmental standards.</p>
<p>Willison’s move is not an isolated case of the “revolving door”. For instance, Stephen Lightfoot recently became <a href="https://pharmaintelligence.informa.com/resources/product-content/2020/08/28/13/28/stephen-lightfoot-appointed-new-chair-of-uk-mhra">chair of the UK’s medicines regulator</a> after thirty years in the life sciences industry. And there are rumours that Paul Dacre, former editor of the Daily Mail, may be appointed as <a href="https://www.independent.co.uk/news/uk/politics/boris-johnson-paul-dacre-ofcom-charles-moore-bbc-b627465.html">chair of Ofcom</a>, the broadcasting regulator.</p>
<p>I currently lead a three year UKRI-funded project on <a href="https://capturerevisited.org/">industry influence on regulators</a>. So what does the academic research tell us about the “revolving door” and its effects?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A large beach with wooden beach huts." src="https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/365206/original/file-20201023-21-73z2pq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Whitstable Beach, one of several beaches Southern Water has admitted to polluting.</span>
<span class="attribution"><span class="source">Melanie Hobson / shutterstock</span></span>
</figcaption>
</figure>
<p>The best studies on the subject focus on US regulatory commissions. In contrast to most other regulators, these bodies take some regulatory decisions by vote and the records are public. This makes <a href="https://www.cambridge.org/core/books/preventing-regulatory-capture/4DF3FC5A3202552A18F3D41835D46833">empirical study of this difficult subject</a> more feasible. </p>
<p>A study of the US <a href="https://www.jstor.org/stable/2110801?seq=1">Federal Communications Commission (FCC)</a> focused on the voting behaviour of commissioners who had moved from the cable and broadcasting industry to the regulator. On average, commissioners who moved from the industry indeed voted in its favour. However, the effect was modest and commissioners’ political affiliation had a more pronounced effect on voting behaviour. </p>
<p>Chairs of British regulators lack this type of direct power over individual regulatory decisions. The findings may still not be of great comfort to anyone worried about Paul Dacre’s potential appointment to Ofcom.</p>
<p>But what about people who move to the regulated industry from the regulator? Are they rewarded with lucrative jobs for being lax regulators? The best evidence again comes from <a href="https://www.jstor.org/stable/2111268?seq=1">a study of the US FCC</a>. Surprisingly, commissioners who moved to jobs in the industry after their time as regulators were less likely to vote in favour of the industry’s interest. </p>
<p>However, this behaviour reversed in the commissioners’ last year before leaving the regulator, during which they were more likely to vote in favour of the industry. In light of these findings, it is possible that people moving to the regulated industry are partially “rewarded” for being competent in their regulatory jobs, rather than for being “soft touches”.</p>
<p>The relatively weak effect of the “revolving door” has also been confirmed <a href="https://press.princeton.edu/books/hardcover/9780691642703/industry-influence-in-federal-regulatory-agencies">in another classic US study on the subject</a>, as well as in a high-quality <a href="https://www.cambridge.org/core/journals/journal-of-public-policy/article/in-and-out-of-the-revolving-door-making-sense-of-regulatory-capture/D385205D3B1B33EA9A203DA791FC4868">study focused on nursing home inspectors in Australia</a>. This study found that another explanation for lax enforcement by inspectors was their workload: giving a tough assessment of a particular nursing home involved a lot of further work, which a favourable assessment did not. </p>
<p>Research also shows, however, that some relationships are indeed “cosy”. Perhaps the starkest example of this is the relationship between BP and the US Mineral Management Service, which was disbanded after the 2010 Deepwater Horizon oil spill. In this case, regulatory officials and industry workers had often known each other since childhood. This, however, is <a href="https://www.cambridge.org/core/books/preventing-regulatory-capture/4DF3FC5A3202552A18F3D41835D46833">not regarded</a> as <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/rego.12062">the only cause of the immense regulatory failure</a> that resulted in this environmental disaster.</p>
<p>Overall, existing research highlights that the effects of the “revolving door” exist but are not as powerful as often assumed. This is not to say that regulators are not too lax on regulated industries, or that the performance of the UK’s Environment Agency has always been exemplary. </p>
<p>But it is an important reminder that we need to carefully assess the causes of a lack of effective regulation. Industry influence may play a role, but there are other potentially important causes too, such as a lack of resources: being tough on the regulated industry is far more resource-intensive than being lax. This matters when resources are stretched.</p>
<p>Southern Water have hired Willison for the role of natural environment and capital director. The company has said that the move signals a shift to a greater focus on environmental issues. </p>
<p>It is often assumed that people moving from industry to a regulator are “too lax” because of their close personal links to the people there are supposed to be regulating. In this case, then, there is hope that Willison’s strong ties to the EA will ensure he leaves no stone unturned to prevent the type of behaviour Southern Water has recently admitted to.</p><img src="https://counter.theconversation.com/content/148694/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eva Heims receives funding from UKRI. </span></em></p>People often leave industry watchdogs to work for the very companies they were previously regulating.Eva Heims, Lecturer in Public Policy, University of YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1235722019-09-24T12:58:42Z2019-09-24T12:58:42ZSouth Africa is planning more regulators: this is a bad idea<figure><img src="https://images.theconversation.com/files/293544/original/file-20190923-54759-1kttft7.jpg?ixlib=rb-1.1.0&rect=0%2C88%2C664%2C397&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's energy regulator failed to assure a stable pricing path for electricity and is partly to blame for energy provider Eskom's troubles.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There are a host of reasons why a country’s economy must be regulated. One of the main ones is to ensure that dominant firms, whether public or private, don’t abuse their market power. When it comes to state-owned enterprises, government has a further obligation – to ensure that they perform in the public interest.</p>
<p>Since state-owned enterprises are owned by government, one option is to hold them directly accountable to a political and administrative head. A popular alternative in recent decades has been to establish economic regulators, mandated to operate at arms-length from the government which acts as shareholder on behalf of society.</p>
<p>South Africa followed this trend after 1994, creating the National Energy Regulator, which regulates electricity and other energy sources. The other regulators are the National Ports Authority and the Independent Communications Authority. Proposals to expand this approach to transport and water have now been endorsed in the draft policy document recently <a href="http://www.treasury.gov.za/comm_media/press/2019/Towards%20an%20Economic%20Strategy%20for%20SA.pdf">released by the National Treasury</a>.</p>
<p>However, the model has failed dramatically to achieve its objectives in both the energy and communications sectors. In our view, it has also been a wasteful use of scarce expert capacity and institutional resources. This is our conclusion based on an analysis of independent regulation as applied <a href="https://static1.squarespace.com/static/52246331e4b0a46e5f1b8ce5/t/5d245da812c9e000010e3093/1562664362134/ACER+Week+2019_Conference+Programme+Draft.pdf">in South Africa</a>.</p>
<p>An important example is how the energy regulator failed to assure a stable pricing path for electricity. This is it’s most basic function. And in trying to perform its function, it is now <a href="https://www.businesslive.co.za/bd/national/2019-04-08-energy-regulator-nersa-wipes-out-eskoms-r69bn-bailout/">hindering</a> the resolution of the crisis at the state-owned power utility Eskom by awarding tariffs that offset support from the Treasury
– at a time when the country faces serious <a href="https://theconversation.com/south-africas-finances-are-in-bad-shape-its-running-out-of-time-to-fix-them-121464">fiscal</a> and <a href="https://theconversation.com/why-restructuring-south-africas-power-utility-wont-end-the-blackouts-114333">energy</a> threats.</p>
<h2>What’s not working</h2>
<p>South Africa’s state-owned enterprises are supposed to provide a foundation for the country’s development. Yet many are performing badly, or not at all. In some cases they are doing actual harm by, for example, draining public resources. </p>
<p>Existing independent regulators are supposed to:</p>
<ul>
<li><p>set fair prices to ensure that users are not ripped off; </p></li>
<li><p>ensure that the performance of enterprises meets minimum standards, and ideally keeps improving;</p></li>
<li><p>make decisions that reflect government policy goals; and,</p></li>
<li><p>at the same time, avoid short-term or otherwise inappropriate political pressures.</p></li>
</ul>
<p>There are four main reasons why South African economic regulators are failing to achieve these objectives.</p>
<p>First is policy incoherence. Independent regulators are supposed to protect enterprises from the short-termism, opportunism and the fickleness of politics. But they cannot do that effectively if state owned enterprises must give effect to government policy that is still in flux.</p>
<p>Second is a lack of government support. Regulators can never be entirely free from political influence precisely because they need supportive decisions and actions by the state. And that support often hasn’t been forthcoming. </p>
<p>The National Ports Regulator is a good example. The regulator wanted the Minister of Transport to separate port services from the rest of Transnet’s operations as envisaged by the relevant legislation. But that hasn’t happened because Transnet has been lobbying government to retain the revenue from the profitable port business. And government itself is disinclined to tackle the financial challenges that would arise if the Ports Regulator was allowed to do its job and reduce bloated tariffs.</p>
<p>Third is the issue of performance. Most state owned enterprises are performing badly but in many sectors the primary challenge is poor performance at municipal level that results from weak governance. Whether in the local supply of electricity, water, or sanitation services, municipal failure can either compound the failure of state enterprises, or diminish any benefits they might bring.</p>
<p>In such instances, national-level economic regulation will have limited impact if service delivery mechanisms fail. Fiddling with pricing decisions is of little significance to citizens and firms that don’t have reliable access to water, electricity or transport services.</p>
<p>Part of the problem is that independent regulation was often <a href="https://www.tandfonline.com/doi/abs/10.1080/0376835X.2013.830558">promoted as a pathway to privatisation</a>. But that has not happened. And in many instances the case for privatisation has not been convincing, meaning that it might just replace public dysfunction with notional accountability mechanisms for private dysfunction with little accountability. If privatisation is not the way forward, at least for now, these entities should be managed differently with a focus on public performance. </p>
<h2>Technical capacity</h2>
<p>The final practical consideration is that independent regulation needs substantial technical capacity. There are various parts to this.</p>
<ul>
<li><p>The regulator must have the staff who can evaluate enterprises, challenge them where appropriate but not intervene unnecessarily. </p></li>
<li><p>The regulated enterprise must employ people to engage with their regulator. </p></li>
<li><p>Government must have the capacity to set up and support the regulator. If more than one department is involved, all must have appropriate capacity.</p></li>
<li><p>Policy makers must provide clear policy expectations and resolve uncertainty quickly. </p></li>
</ul>
<p>Ideally, other parts of society also need to be able to engage with regulatory issues. Civil society needs to have a voice as do companies that use the services of the state-owned enterprise. And courts need to be capable of dealing with these specialised issues.</p>
<h2>Alternatives</h2>
<p>The question then is whether further proliferation of regulatory capacity is possible, or even desirable.</p>
<p>We believe the answer is no. And argue that there is a radical, but simple, alternative. </p>
<p>It’s a given that political decision-making will guide the oversight of state enterprises – that’s because the government wants to use them to promote broader development policy. This means that the focus should be on building government’s capacity to guide the process. That way, political heads will be clearly accountable and failures cannot be blamed on other parties.</p>
<p>The water sector has been cited as one where a new regulator might be introduced. But it actually serves as a case study of how public entities can deliver well without an independent regulator. Bulk water prices <a href="http://www.dwa.gov.za/IO/Docs/Water%20Resource%20Finance/Pricing%20Strategy.pdf">are set</a> by the national government department, using criteria legislated 20 years ago. The department calculates the tariffs and consults with major stakeholders. These include municipalities, big users such as Eskom and Sasol as well as organised agriculture. Price increases greater than inflation have to be justified.</p>
<p>Unlike the electricity case, this system has worked reasonably well and <a href="http://www.hsrc.ac.za/en/research-outputs/ktree-doc/1388">tariffs have increased</a> smoothly and predictably. User participation keeps government honest in its calculations. </p>
<p>That’s not to say that the water department doesn’t <a href="http://pmg-assets.s3-website-eu-west-1.amazonaws.com/180327AGSA-Challenges_Water_Sanitation.pdf">have challenges</a>. But a <a href="http://www.dwa.gov.za/Projects/PERR/documents/Economic%20Regulator%20Review%2029%20June%202012.pdf">2012 study</a> found little evidence that a formal independent regulator could contribute greatly to fixing these. </p>
<p>Some organisations <a href="https://outa.co.za/projects/water-and-environment/independent-water-regulator">still argue</a> that a regulator would reduce mismanagement. But this ignores the lessons of experience and is based on a superficial notion of democratic accountability. </p>
<p>By contrast, in energy a <a href="https://www.gsb.uct.ac.za/files/SAEconomicRegulatorsConference.pdf">former regulator and sector expert acknowledged</a> that the regulatory agency’s price setting had produced huge fluctuations in the tariff which caused uncertainty. Yet, Treasury inexplicably wants to replace a relatively successful model (in water) with a failed one (in energy). </p>
<h2>The way forward</h2>
<p>We believe that ending dependence on failed independent regulators will ensure that there’s much more direct accountability. It will also lead to a focused effort to improve governance in both government departments as well as state-owned enterprises. And limited capacity can be integrated from disparate departments, entities and regulators. </p>
<p>There is no getting round the fact that tough action needs to be taken, and soon. If government doesn’t get oversight of public enterprises right, a different form of “regulation” will be imposed on the country by international financial institutions and other lenders. But their focus will be on what’s needed to ensure debt repayment, not the broader national interest.</p><img src="https://counter.theconversation.com/content/123572/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He is affiliated with the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. He previously advised parliamentarians on the financing of state-owned enterprises while at the South African Parliamentary Budget Office, from which he resigned in 2016. The views expressed are his own.</span></em></p><p class="fine-print"><em><span>Mike Muller has received funding from the Financial and Fiscal Commission for a review of the funding of the water sector and has been engaged on an advisory basis by a range of government and other organisations. He recently presented to AGRISA on agriculture’s current predicament - managing uncertain climates, both weather and politics</span></em></p>South Africa’s independent regulators have failed. Instead of introducing new ones, alternatives need to be found.Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of JohannesburgMike Muller, Visiting Adjunct Professor, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1061992018-11-08T11:42:41Z2018-11-08T11:42:41ZHow the ‘wave of women’ now in Congress could turn the #MeToo movement into concrete action<figure><img src="https://images.theconversation.com/files/251316/original/file-20181218-27773-vuevbz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The women elected to the 2019 congress pose for a photo.</span> <span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/Women_in_the_United_States_House_of_Representatives#/media/File:House_Democratic_Women_of_the_113th_Congress_(8342801079).jpg">Nancy Pelosi/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The 2018 midterm elections represented the first electoral referendum of the #MeToo era. </p>
<p>More than <a href="http://cawp.rutgers.edu/potential-candidate-summary-2018">500 women</a> ran in primaries for federal office, a pipeline that ultimately led to a <a href="https://www.politico.com/story/2018/11/26/congress-new-members-women-1014696">record</a> number of women taking office this month.</p>
<p>Even so, it also reveals how far women are from achieving parity in politics – they hold <a href="https://www.vox.com/2018/12/6/18119733/congress-diversity-women-election-good-news">a little more than a fifth of seats</a> in the House and Senate. For comparison, that’s <a href="https://www.cnn.com/2018/05/11/middleeast/iraq-elections-gender-quota/index.html">less than in Iraq</a>, where the post-Saddam Hussein <a href="https://sites.hks.harvard.edu/fs/pnorris/Acrobat/Kellerman%20c06%20proofs.pdf">Constitution sets a 25 percent minimum</a> for female representation in the national assembly.</p>
<p>In a way, it reflects the ways in which the #MeToo movement, for its many achievements, has mostly stalled at the federal level. After more than a year of <a href="https://www.refinery29.com/en-us/2018/10/212801/me-too-movement-history-timeline-year-weinstein">#MeToo headlines</a>, Congress has not passed any harassment-related legislation beyond <a href="https://www.usatoday.com/story/news/politics/2018/12/12/house-senate-agree-anti-sexual-harassment-bill/2295234002/">cleaning up</a> its own internal process for handling complaints.</p>
<p>With Democrats now in control of the House but not the Senate, the question is whether Congress will finally roll up its sleeves to tackle the root causes of the crisis.</p>
<h2>Crisis management</h2>
<p>In many ways, the #MeToo crisis is similar to the financial collapse of 2008. </p>
<p>That crisis was a <a href="https://www.stlouisfed.org/financial-crisis">slow-moving train wreck</a>, the accumulation of years of <a href="https://www.theguardian.com/film/2011/feb/17/inside-job-financial-crisis-bankers-verdicts">morally bankrupt conduct</a> that companies were willing to overlook in favor of what appeared to be larger business concerns. </p>
<p>As I argued in a recent <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3170764">law review</a> article, the #MeToo crisis resulted from a similar slow buildup – companies failed to adequately respond to workplace harassment, permitting harassers to continue to rise up the ranks, while victims saw their careers sidelined.</p>
<p>But in both cases, it was about more than just bad people making bad choices and covering their tracks. Business decisions, like board games, are constrained by the rules of the game. If players figure out a way to <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3016624">“hack” the rules</a> or decide there is more to be gained by breaking them, their behavior probably won’t change without changing the rules.<br>
Just as brokers peddling subprime loans were enabled by bad business practices and regulatory gaps, employer indifference to harassment was <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2518520">made possible</a> by <a href="https://www.nytimes.com/2017/11/29/opinion/harassment-employees-laws-.html?module=inline">out-of-date</a> harassment laws that gave companies a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2857238">free pass</a>. </p>
<p>The #MeToo crisis also raises concerns about how companies handle discrimination complaints and whistleblowers – since internal processes for doing so are often the same as for harassment.</p>
<h2>Diverging paths</h2>
<p>In some ways, though, the #MeToo crisis succeeded where the response to the financial crisis fell short. </p>
<p>Consumers who lost their homes to foreclosure never saw much in the way of justice – though <a href="https://money.cnn.com/2016/04/28/news/companies/bankers-prison/index.html">a few</a> bankers <a href="https://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html">went to jail</a>, the biggest fish did not. #MeToo, by contrast, brought the chickens home to roost for <a href="https://www.ajc.com/news/world/from-weinstein-lauer-timeline-2017-sexual-harassment-scandals/qBKJmUSZRJqgOzeB9yN2JK/">countless men</a> with a track record of harassment. </p>
<p>On the other hand, the financial crisis produced more political scrutiny into the systemic factors that caused the problem. Congress held <a href="https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm">numerous hearings</a> on its root causes. Lawmakers also created a <a href="https://fcic.law.stanford.edu/about/history">commission</a>. These efforts culminated in the <a href="https://corpgov.law.harvard.edu/2010/07/07/summary-of-dodd-frank-financial-regulation-legislation/">Dodd-Frank Wall Street Reform and Consumer Protection Act</a> and the creation of the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a>.</p>
<p>By contrast, the #MeToo movement has produced no meaningful federal legislation and not even a hearing – unless you count the <a href="https://www.washingtonpost.com/news/national/wp/2018/09/27/kavanaugh-hearing-transcript/">Brett Kavanaugh confirmation</a>. Current <a href="https://www.congress.gov/bill/115th-congress/house-bill/6406/text">legislative</a> <a href="https://www.congress.gov/bill/115th-congress/house-bill/6406/text">proposals</a> are mostly focused on whether employers can keep harassment secret. </p>
<p>It’s fair to regulate the cover-up. But eventually, we’ll need to tackle the crime.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=464&fit=crop&dpr=1 600w, https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=464&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=464&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=583&fit=crop&dpr=1 754w, https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=583&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/251318/original/file-20181218-27779-l2ikd7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=583&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">In 1955, there were significantly fewer women in congress than in 2018.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-Associated-Press-Domestic-News-Dist-of-/5ee32c6a067d466abdc60df612a87740/7/0">AP Photo/Bill Allen</a></span>
</figcaption>
</figure>
<h2>Time for CSI Congress?</h2>
<p><a href="https://www.theatlantic.com/ideas/archive/2018/11/trump-subpoena/575086/">Political commentators</a> have noted that Democratic control over the House will mean more oversight of the executive branch – and in particular, investigation of ethics violations and the president’s own conduct and financial dealings.</p>
<p>But committees can also hold hearings to <a href="https://www.congress.gov/congressional-hearings/about">gather information</a> from experts and inform legislation. As hard as it may be to imagine after the explosive Kavanaugh hearings, they need not be bitterly partisan. </p>
<p>Here, Congress could take a cue from the Equal Employment Opportunity Commission, which reconvened its task force on workplace harassment over the summer. I testified at the <a href="https://www.eeoc.gov/eeoc/task_force/harassment/6-11-18.cfm">meeting</a> and was struck by the good faith efforts of all stakeholders – including businesses, a union representative and lawyers from both sides – to examine the issues in depth and assess different legislative proposals. </p>
<p>The task force itself also represents an admirable model of bipartisan cooperation, co-led by <a href="https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/lipnic-eeoc-acting-chair.aspx">Acting Chair Victoria Lipnic</a>, a Republican, and <a href="https://www.eeoc.gov/eeoc/feldblum.cfm">Chai Feldblum</a>, an appointee of President Barack Obama. </p>
<p>In separate press conferences after the election, both President Donald Trump and potential soon-to-be-speaker Nancy Pelosi expressed <a href="https://www.realclearpolitics.com/video/2018/11/07/watch_live_president_trump_responds_to_2018_midterms.html">some hope</a> that they could <a href="https://www.cbsnews.com/news/nancy-pelosi-holds-news-conference-after-democrats-take-the-house-today-11-07-2018-live-updates/">work together</a> on certain issues – though #MeToo does not seem to be among them. </p>
<p>Nevertheless, it’s worth at least trying to extract #MeToo from the culture wars and treat it like a serious policy issue. As odd as it sounds, we should treat it more like a financial crisis.</p><img src="https://counter.theconversation.com/content/106199/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth C. Tippett does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>After a year of headlines and ousted CEOs, Congress has yet to pass a single piece of legislation on sexual harassment – let alone hold a hearing. That may change as lawmakers get to work in 2019.Elizabeth C. Tippett, Associate Professor, School of Law, University of OregonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1027582018-09-12T10:38:48Z2018-09-12T10:38:48ZAnniversary of Lehman’s collapse reminds us – booms are often followed by busts<p>Only a decade has passed since the collapse of <a href="https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp">Lehman Brothers</a>, and it seems the mortgage crisis and subsequent <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a> are already ancient history in the minds of many investors, bankers and regulators.</p>
<p>All it took was a few short years of <a href="https://www.housingwire.com/articles/41000-spexperian-mortgage-default-rate-at-lowest-level-in-a-decade">low default rates</a> and <a href="https://www.clearbridge.com/perspectives/institutional/2018/bank-balance-sheets-loan-growth-interest-rates.html">good loan growth</a> to re-create the kind of heady atmosphere of <a href="https://www.marketwatch.com/story/this-irrational-exuberance-indicator-could-spell-trouble-for-the-stock-market-2017-06-21">irrational</a> <a href="https://www.cnbc.com/2017/10/31/spooky-market-valuations-at-greenspan-irrational-exuberance-level.html">exuberance</a> that <a href="http://blog.runnymede.com/alan-greenspan-warns-of-irrational-exuberance-in-bonds">transforms</a> staid bankers into high-wire risk takers. </p>
<p>For those who have forgotten, such risk takers are the the ones who <a href="https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176">caused</a> the 2008 crisis, which resulted in the collapse of investment bank Lehman Brothers on Sept. 15 and the worst recession since the 1930s. </p>
<p>With their hubris restored, bankers once again have convinced themselves and others that they are the “<a href="https://www.harpercollins.com/9780887309328/masters-of-the-universe/">masters of the universe</a>,” with superhero risk management skills. </p>
<p>At the same time, regulators are beginning to <a href="http://dealbook.nytimes.com/2014/10/22/u-s-loosens-reins-but-mortgage-lenders-want-more-slack/?_r=0">loosen</a> their reins, in part on the belief that the booming economy, flush with the <a href="https://www.usnews.com/news/business/articles/2018-01-03/fed-officials-hopeful-for-economic-boost-from-tax-cuts">gains</a> from tax breaks and deregulation, no longer needs such restraints.</p>
<p>But, as <a href="https://scholar.google.com/citations?user=mm2zaS8AAAAJ&hl=en&oi=ao">my research</a> into <a href="http://dx.doi.org/10.2139/ssrn.2587168">past financial crises</a> has shown, the seeds of the next bust tend to be sown during the boom times.</p>
<h2>Boom foreshadows doom</h2>
<p>A psychological bias known as the <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/availability-heuristic/">availability heuristic</a> helps explain why this happens. </p>
<p>This is sort of a mental shortcut in which people rely on only the most readily available information, such as from the very recent past, to arrive at inferences about the current and future state of affairs. In other words, if things are going well, it’s easy to convince yourself that they’ll continue that way indefinitely.</p>
<p>And this bias becomes very prevalent on Wall Street when times are good, leading to the kind of reckless behavior that sparks crises. </p>
<p>Research into the conditions that existed prior to the major financial crises of the past eight centuries shows that virtually every one <a href="http://www.nber.org/papers/w13761.pdf">was preceded</a> by an asset price bubble in the economy – which makes it appear like it’s booming – and an excessive amount of debt held by banks, conditions that suggest an environment tolerant of high risk. </p>
<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2587168">My own research</a> into the conditions and causes of the last two major financial crises – in the 1980s and 2008 – reveals that the longer a lending boom lasts, the more trouble it foreshadows. More generally, during booms, any aspects of risk management in financial institutions <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2565499">get corrupted</a> by a kind of overconfidence in the skills of bankers. </p>
<p>And that’s exactly the environment we have now. A <a href="https://www.forbes.com/sites/bradmcmillan/2016/07/07/should-we-be-worried-about-record-low-interest-rates/">decade of ultra-low interest rates</a> across the world have led to <a href="https://www.cnbc.com/2018/07/11/global-debt-hits-a-new-record-at-247-trillion.html">ever-rising debt loads</a> for every type of borrower in most countries and have created incentives for <a href="https://voxeu.org/article/new-take-low-interest-rates-and-risk-taking">increased risk-taking</a> among investors and traders in the pursuit of high yields. </p>
<p>I believe this is putting the global financial system at risk of another collapse if regulators don’t act soon.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/u0PUIljjL_k?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The author explains how booms can turn into crises.</span></figcaption>
</figure>
<h2>Stemming the cycle</h2>
<p>So is there something we can do to break this cycle and avert another crisis? </p>
<p>In my view, it primarily comes down to capital requirements, which are rules meant to ensure banks have enough equity – and not too much debt as percentage of total assets – to absorb the risk they’re taking with their investments. </p>
<p>In short, the <a href="http://www.bis.org/bcbs/basel3.htm">current requirements</a> are just not high enough to protect banks and the financial system. Furthermore, regulators tend to loosen them and <a href="https://www.npr.org/sections/thetwo-way/2018/05/22/613390275/congress-to-undo-part-of-dodd-frank-easing-rules-for-mid-sized-smaller-banks">other lending requirements</a> when the economic picture is improving – the precise time when they should be raising them. </p>
<p>Asking banks to hold more capital in good times, like now, will put in place the right incentives to prevent the kind of behavior that puts entire economies at risk. That’s because the more capital banks have, the more circumspect they’ll be in terms of how much risk they take, thus making a bust caused by the kinds of investments they made in the run-up to the last financial crisis much less likely. </p>
<h2>Beefing up Basel III</h2>
<p>One way regulators could do this is by beefing up <a href="http://www.bis.org/bcbs/basel3.htm">Basel III</a>, a voluntary, global regulatory framework on bank capital adequacy, stress-testing and market liquidity risk. </p>
<p>Basel III set banks’ so-called leverage ratio – a measure of how much capital a lender has relative to debt – at 3 percent. U.S. regulators have gone a bit further, requiring 5 percent. But that’s <a href="http://apps.olin.wustl.edu/faculty/Thakor/Website%20Papers/PostCrisis_JFS_37(2018).pdf">far too low</a> for a healthy banking system. </p>
<p>Regulators <a href="http://dx.doi.org/10.2139/ssrn.2341835">should be aiming</a> for 15 percent because research has shown that such a ratio will reduce the systemic risk of the banking sector significantly. With that much equity capital on their balance sheets, banks will resist the temptation to take undue risks that jeopardize the safety net taxpayers provide them through deposit insurance and occasional bailouts. </p>
<p>The greater cushion will also give them more time to adjust when the next crisis comes, as it inevitably will. And the more capital a bank has, the more time it has to take protective actions before going belly-up as losses start wiping out its equity. </p>
<p>Just imagine, would a bank ever give you a reasonably priced home mortgage if you only put 5 percent down and wanted to borrow the other 95 percent? </p>
<p>Some <a href="https://www.americanbanker.com/opinion/theres-more-to-bank-regulation-than-higher-capital">bankers complain</a> this will hurt shareholders because being required to hold more equity as a share of total assets will lead to lower returns.</p>
<p>A paper <a href="https://doi.org/10.1093/rfs/hhq022">I co-authored in 2009</a>, however, found that higher bank capital levels are actually associated with greater bank values, not to mention a safer and sounder banking system. </p>
<h2>Preventing the next big one</h2>
<p>I’m not suggesting that regulators and banks do this overnight, but I think when the economy is doing well, <a href="https://money.cnn.com/2018/05/22/investing/banks-record-profits-fdic-deregulation-bill/index.html">lenders are doing well and profits are high</a>, it’s relatively easy to build up capital over a period of three to five years. </p>
<p>And it’s the most effective means of preventing a financial crisis.</p>
<p>What regulators often do instead is focus on restricting banking activities and driving up the costs of complying with regulations. Rather than creating systemic protection, this simply leads banks to move their riskier activities to areas of the industry where regulators aren’t looking. </p>
<p>Regulators can only do so much to keep these firms from taking excessive risks. What they can do is ensure banks have enough capital to absorb future shocks so that the global financial system isn’t once again brought to the brink of collapse. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/beware-of-bullish-bankers-their-bubbles-and-the-inevitable-burst-42084">article</a> published on May 27, 2015.</em></p><img src="https://counter.theconversation.com/content/102758/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anjan V. Thakor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s when times are good that the seeds of the next financial crisis are sown.Anjan V. Thakor, Professor of Finance, Washington University in St. LouisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/961612018-05-10T10:48:47Z2018-05-10T10:48:47ZTrump’s deregulatory record doesn’t include much actual deregulation<figure><img src="https://images.theconversation.com/files/218359/original/file-20180509-34009-t1mee9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cutting red tape is a high priority, but the execution hasn't always led to results.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump/3931664f4baa417da1e391972a111416/2/0">AP Photo/Evan Vucci</a></span></figcaption></figure><p>One year ago, the Trump administration’s <a href="https://www.politico.com/interactives/2017/trump-war-on-regulations/">deregulatory push</a> was in full swing. The administration was preparing a proposed rule to <a href="https://www.eenews.net/stories/1060056742">repeal</a> the Waters of the United States (WOTUS) regulation, and to delay and <a href="https://www.eenews.net/stories/1060080679">repeal the restriction of methane emissions</a> from oil and gas extraction on public lands. </p>
<p>Surely these well-publicized deregulatory initiatives which the Trump administration has made a big show of taking credit for have taken effect by now. </p>
<p>Well, not exactly. The WOTUS proposal has not been finalized, and the methane extraction rule is tied up in a <a href="https://www.eenews.net/assets/2018/05/03/document_gw_03.pdf">thicket of court cases</a>. </p>
<p>President Trump’s record on deregulation has gotten a great deal of attention. He <a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-delivering-deregulation/">brags about it regularly</a>. It is often placed alongside the tax cuts passed by Congress when his <a href="http://thehill.com/homenews/administration/366429-trumps-top-10-accomplishments-of-2017">chief accomplishments</a> are recounted. To listen to the president (or the media), one would think that thousands of regulations were repealed. </p>
<p>But as the WOTUS and Bureau of Land Management extraction rules indicate, the actual extent of deregulation is much more limited. At the same time, other moves to dismantle the “administrative state” have quietly been more effective. </p>
<h2>No more easy routes</h2>
<p>Early in the Trump administration, Congress used the Congressional Review Act, a statute that allows the Senate to bypass the filibuster to repeal recently issued regulations. <a href="https://regulatorystudies.columbian.gwu.edu/sites/g/files/zaxdzs1866/f/downloads/CRA%20Tracker%204-18-2018%20%28Resolution%20Number%29.pdf">By May 17, 2017</a>, Congress had repealed 14 Obama regulations using the CRA in a wide array of policy areas. They would add one more regulation from the Consumer Protection Financial Bureau by the end of 2017. </p>
<p>But these repeals are largely the work of Congress and frequent punching bag for President Trump, Senate Majority Leader Mitch McConnell. And now, most Obama-era regulations are off limits for the CRA (although Congress has explored <a href="http://thehill.com/policy/finance/383751-senate-votes-to-repeal-cfpb-auto-loan-guidance">expanding its use</a>). That leaves President Trump and his administration to rely on the typical route for writing and revising regulations – the executive branch – if they want to repeal any more of the <a href="https://theconversation.com/obamas-use-of-regulation-to-make-environmental-policy-not-unusual-and-not-illegal-42875">thousands of regulations issued during the Obama administration</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/218360/original/file-20180509-34038-zf8tc3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In seeking to roll back fuel economy standards and other regulations, EPA Administrator Scott Pruitt’s staff hasn’t shown the same attention to the rule-making process as his predecessor.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/gageskidmore/32342717143/in/photolist-Rh1T1c-RWf4U9-V4Xcrs-RenG4j-Rh1BKT-Rh25qB-ERurNv-25rELGh-Ssp19S-SspigN-Sw4d8r-Shfo7o-Reo2JG-Shfryd-ShfmbE-ShftRE-r9heYS-8vGwz2-Rh23mB-SspkYb-Sspgdj-Sspozo-RenHeq-T3o2LB-qu4gpp-rqKgqb-V7JDmR-roxxSu-U5LrWz-8sDtvi-8sGwmo-ShEL5N-25rERTQ-JpzTw5-QTaihm-eac2U8-8sGsxU-GTigPc-JpzRTW-JpzUFu-8sDqtn-JpzRJC-QTafPW-bRXWVF-nbGnqM-U5LqiV-r7wfNP-rqQygP-U2Uuy1-r9oDqD">Gage Skidmore</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Making announcements about a desire to repeal regulations is easy. President Trump <a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-delivering-deregulation/">did so in December</a> (although his claim that 22 regulations had been repealed for every new regulation was <a href="https://www.theregreview.org/2018/01/29/lets-be-real-trumps-first-year-regulation/">vastly exaggerated</a>). Actually repealing significant regulations is much harder, as the administration is finding out.</p>
<p>An agency must start by developing a proposal to repeal a regulation. This must often be accompanied by a detailed economic analysis of the repeal. The proposal and the analysis are then sent to the Office of Management and Budget for a review. When that review is complete, the proposal is published in the Federal Register for public comment. Agencies must review the public comments, respond to them, make any changes they feel necessary to their proposal and analysis, and then resubmit it to OMB before publishing a final rule. Finally, the rule is subject to litigation.</p>
<p>To navigate this process takes time and expertise. President Trump and his Cabinet members, particularly <a href="https://theconversation.com/us/topics/scott-pruitt-34386">Scott Pruitt at the EPA</a>, have instead tried to rush through the many steps of this process. This has meant that the last step, the litigation over regulatory repeals, has proven particularly problematic for the administration. At the EPA, courts have struck down delays or repeals of regulations <a href="https://www.nytimes.com/2018/04/07/climate/scott-pruitt-epa-rollbacks.html">six times already</a>. This pattern holds across the government.</p>
<h2>Another kind of damage</h2>
<p>Part of the problem for the Trump administration is that while they have been hasty in trying to repeal regulations, the Obama administration was <a href="https://theconversation.com/promises-promises-how-legally-durable-are-obamas-climate-pledges-51786">thorough in promulgating them</a>. Over the course of eight years, Obama appointees solicited comments on their proposals, did detailed economic analyses, and built strong cases for many of their regulations. For example, the former EPA administration compiled a 1,217-page analysis done over years to buttress its fuel economy rules, while the current administration <a href="https://www.eenews.net/stories/1060077987">generated a 38-page document</a> dominated by auto industry comments to justify reviewing and rescinding them.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/218361/original/file-20180509-184630-1b8cg34.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Repealing existing regulations requires the work of government staffers who know the processes but a number of agencies, including the EPA, have lost many significant employees.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/EPA-Pruitt/048cf6fb149a4c0c9443eaacd968b18e/1/0">AP Photo/Alex Brandon</a></span>
</figcaption>
</figure>
<p>In order to repeal these regulations, the Trump administration will have to convince courts that there are sound legal reasons to ignore all of this work. The statute that governs the creation of regulations, the Administrative Procedure Act, requires agencies to demonstrate that they are not arbitrary and capricious.</p>
<p>To do so, the Trump administration will have to rely on the expertise that lies within the federal bureaucracy. But President Trump and his appointees have <a href="https://www.axios.com/scott-pruitt-environmental-protection-agency-trump-unhappy-8507d121-946a-410d-922c-60d7de92355f.html">regularly denigrated those whose help they now require</a>. As a result, many of the most talented people at the agencies have left public service. At the EPA alone, more than <a href="https://thinkprogress.org/epa-employees-leaving-under-pruitt-11b36a220062/">700 employees have left during this administration</a>. </p>
<p>This means not only has the administration failed thus far to repeal many regulations beyond those overturned by Congress using the CRA, but their prospects for doing so in other cases are not strong. These cases include the WOTUS regulation, the Clean Power Plan to limit carbon emissions from power plants, and the recently announced plans to roll back emission standards for automobiles and <a href="https://www.nytimes.com/2018/03/29/climate/epa-cafe-auto-pollution-rollback.html">take on California over their auto emission requirements</a>. </p>
<p>Stephen Bannon <a href="https://www.youtube.com/watch?v=kPFpTergAGQ">listed the deconstruction of the administrative state</a> as a goal of the Trump administration. The repeal of regulations is often trumpeted as the most important sign that Trump is <a href="https://www.usatoday.com/story/opinion/nation-now/2017/12/20/president-trumps-successes-have-been-underreported-gary-varvel-column-nation-now/968842001/">succeeding</a>. But while the administration is failing at the piece of deconstruction they are talking about most loudly, there are signs that they are succeeding in other ways.</p>
<p>The first is the enforcement of existing regulations. While the Trump administration has ramped up enforcement of immigration regulations, it has <a href="https://www.nytimes.com/2017/12/10/us/politics/pollution-epa-regulations.html">ratcheted down enforcement of environment and worker safety requirements</a>. This selective pattern of <a href="http://www.nydailynews.com/opinion/law-enforcement-trump-article-1.3879201">enforcing regulations</a> sends signals to firms that they don’t need to worry about complying with the law when it comes to the environment or public health.</p>
<p>Meanwhile, there has been an exodus of employees from the federal government which will likely have a corrosive long-term effect. Replacing talented public servants is not something that can be done overnight, even by a new administration dedicated to doing so. Training these new government employees will take even longer. As government becomes less effective because of the talent drain, faith in government diminishes further and a cycle of cynicism about public service is made worse.</p>
<p>The Trump administration has <a href="http://theweek.com/articles/723199/how-trump-launched-biggest-regulatory-rollback-american-history">declared war on the regulatory state</a>. But the things the administration is reluctant to take credit for, notably not enforcing the law and driving out talented public servants, are likely to have a much larger impact than its largely nonexistent regulatory repeals.</p><img src="https://counter.theconversation.com/content/96161/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stuart Shapiro does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A review of Trump’s stated war on regulations doesn’t find many successful repeals. But it is hurting regulatory enforcement in quieter ways.Stuart Shapiro, Associate Professor and Director, Public Policy Program, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/843672017-10-01T23:03:49Z2017-10-01T23:03:49ZBeyond Bitcoin: The power struggle over trust-based technology<figure><img src="https://images.theconversation.com/files/187875/original/file-20170927-17012-1hfb0br.jpg?ixlib=rb-1.1.0&rect=1478%2C0%2C2634%2C2695&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">One of China's biggest bitcoin exchanges recently stopped trading after regulators ordered all digital currency exchanges to close — demonstrating traditional institutions' nervousness about distributed trust technologies. In this 2013 photo, a staff member at Bitcoin mining company Landminers in southwestern China checks a computer used for that purpose.</span> <span class="attribution"><span class="source">(Chinatopix via AP)</span></span></figcaption></figure><p>Technology blogs and financial news networks are buzzing about <a href="https://theconversation.com/demystifying-the-blockchain-a-basic-user-guide-60226">blockchain</a>, a <a href="https://www.khanacademy.org/computing/computer-science/cryptography/crypt/v/intro-to-cryptography">cryptographic</a>, distributed trust technology. The key innovation is how it <a href="https://theconversation.com/blockchain-is-useful-for-a-lot-more-than-just-bitcoin-58921">reduces the need for central third-party institutions</a> to serve as central authorities of trust — banks, courts, large corporations, stock markets and even governments, for example. </p>
<p>Distributed trust enables co-operative forms of organization without a centre. It can distribute power away from centralized institutions to those that <a href="https://theconversation.com/can-blockchain-technology-help-poor-people-around-the-world-76059">traditionally have less power</a>. Such powerful institutions do not let go of their influence easily. </p>
<p>The ongoing debate about how to regulate distributed trust technologies <a href="https://theconversation.com/can-blockchain-a-swiftly-evolving-technology-be-controlled-73471">assumes</a> that the advocates of the technologies will seek both legal status and enforceability. Scholars <a href="https://theconversation.com/the-big-business-revolution-why-the-future-is-blockchain-78409">propose</a> that such developments in distributed trust are a competitive threat to nation-state paper currencies. </p>
<p>Much of the current, popular focus is on cryptographic currency — or cryptocurrency — applications such as <a href="https://theconversation.com/now-that-bitcoins-are-worth-more-than-their-weight-in-gold-is-it-time-for-central-banks-to-make-their-own-73984">Bitcoin</a>. </p>
<h2>Bitcoin vs. banks</h2>
<p><a href="https://theconversation.com/can-cryptocurrencies-like-bitcoin-survive-scrutiny-from-central-banks-84137">Regulators are struggling</a> to deal with a fundamental shift in market structure. National central banks are <a href="https://theconversation.com/can-cryptocurrencies-like-bitcoin-survive-scrutiny-from-central-banks-84137">implementing policies</a> to keep control and regulate distributed trust technology. </p>
<p>For example, the <a href="https://theconversation.com/chinas-crackdown-on-cryptocurrency-trading-a-sign-of-things-to-come-84014">Chinese government</a> has banned several types of distributed trust activities, and is launching its own non-distributed, centralized digital currency. </p>
<p>The Japanese government has made Bitcoin a <a href="https://www.cnbc.com/2017/04/12/bitcoin-price-rises-japan-russia-regulation.html">legal payment method</a>, and major Japanese banks are planning to launch a <a href="https://www.cnbc.com/2017/09/27/japanese-banks-cryptocurrency-j-coin.html">J-Coin</a> digital currency pegged to the Yen which <a href="https://www.technologyreview.com/the-download/608963/japanese-banks-are-planning-to-launch-j-coin-a-digital-currency-meant-to-kill/">may be built on a blockchain</a>. </p>
<p><a href="https://www.cnbc.com/2017/09/08/reuters-america-russia-to-regulate-bitcoin-market-finance-minister.html">Russia</a> initially treated non-approved currency trades as illegal, but is now determining how to regulate them.</p>
<p>In fact, traditional centralized, powerful organizations like banks, <a href="https://www.technologyreview.com/s/608910/governments-are-testing-their-own-cryptocurrencies/">governments</a>, regulators and technology behemoths are all <a href="https://theconversation.com/whats-holding-up-the-blockchain-79038">spending billions</a> figuring out how to use and control distributed trust technologies. </p>
<p>But distributed trust technologies have <a href="http://journals.sagepub.com/doi/10.1177/1056492617734942">many uses</a> beyond cryptocurrency. </p>
<h2>Volunteer-driven communities</h2>
<p>Organizational theory has a lot to say about this transition. Distributed trust technologies are organized in what we call a Community Form (<a href="https://www.researchgate.net/publication/235306022_An_Initial_Description_of_the_C-Form">C-Form</a>) of organization. </p>
<p>C-Forms are not new. They have been around since the <a href="https://www.researchgate.net/publication/235306022_An_Initial_Description_of_the_C-Form">1800s</a> when the Oxford English Dictionary was created by a distributed community of volunteers. </p>
<p>The growth of C-Forms was accelerated by technological developments enabling inexpensive peer-to-peer communication. C-Forms came into focus with the last internet-enabled major organizational shift to distributed information-creation platforms. </p>
<p>As a result of that innovation, we have seen many forms of information production shift to C-Forms. Open source software such as the Linux computer operating system, which competes with Microsoft Windows and Apple macOS, is produced and shared by individuals in C-Forms instead of centralized software companies. Encyclopedias such as Wikipedia are created by individuals in a C-Form instead of a centralized publishing house. Video content on Vimeo is produced and shared by individuals in a C-Form instead of centralized studios. </p>
<p>Similarly, distributed trust technologies are shifting the organizational landscape of how trust is produced and managed from centralized institutions to a C-Form. </p>
<p>The development of distributed trust technologies is having a similar enabling effect on the growth of C-Forms replacing the trust functions of centralized institutions. </p>
<p>Fundamentally, this is a decentralization of power.</p>
<h2>Power shift</h2>
<p>Many of our previous assumptions about formal organization are being challenged by shifts to distributed forms of trust. </p>
<p>Individuals can now enter into direct peer-to-peer trusted exchanges with strangers. They no longer need a central institution to vouch for the other party. A <a href="https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york/">blockchain-enabled microgrid</a> in Brooklyn is already allowing individuals to sell their excess solar energy directly to neighbours without involving a central utility company. </p>
<p>This is a drastic shift to many of the underlying assumptions about how markets and society are organized. As power centralizes, <a href="https://www.researchgate.net/publication/315847798_Network_Opportunity_Emergence_and_Identification">opportunities emerge</a>. </p>
<p>Many Silicon Valley success stories are simply centralized platforms. They capitalize on the power and legitimacy of <a href="http://journals.sagepub.com/doi/10.1177/1056492617734942">enabling trusted interactions for others</a>.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/187879/original/file-20170927-20330-1vmibf0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Uber is an example of a Silicon Valley centralized platform company facing a future threat from distributed trust technologies.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Centralization creates new opportunities</h2>
<p>Just as Uber matches riders to drivers, Facebook matches consumers to advertisers. This centralization of power has created an opportunity for distributed trust. </p>
<p>The major platforms stand to lose their power as distributed trust takes hold. Such powerful organizations will no longer be needed.</p>
<p>But those in power tend to try to hold onto power. </p>
<p>Microsoft faced a challenge to its centralized market power as open-source software C-Forms grew. The “<a href="https://en.wikipedia.org/wiki/Halloween_documents">Halloween Documents</a>” were internal Microsoft communications about responding to the strategic threat of open-source software. One tactic detailed was “FUD” (fear, uncertainty, and doubt). </p>
<p>We are now seeing similar responses to distributed trust technologies. </p>
<p>JPMorgan Chase & Co. CEO Jamie Dimon called Bitcoin a “<a href="https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html">fraud</a>,” and <a href="https://www.cnbc.com/2017/09/22/bitcoin-jpmorgans-jamie-dimon-lays-into-bitcoin-again.html">claims</a> governments are going to close down “crypto things.” He is being <a href="https://www.cnbc.com/2017/09/22/bitcoin-jpmorgans-jamie-dimon-lays-into-bitcoin-again.html">accused</a> of market abuse in Sweden by a company called Blockswater. Blockswater alleges he “deliberately spread false and misleading information.” </p>
<p>In other words, Dimon is being accused of creating FUD. </p>
<h2>The future of distributed trust</h2>
<p>We used to assume that large centralized organizations had legitimacy and power. But that’s starting to change. As distributed trust technologies develop, we will continue to see this power shift. </p>
<p>We must <a href="http://journals.sagepub.com/doi/10.1177/1056492617734942">question the role of centralized organizations in a time of distributed trust</a>. The key now is to ensure that we use insights from organizational theory, and sociology, to shape our joint societal future in a world of distributed trust. </p>
<p>It’s a world where the role of powerful central institutions will be greatly diminished. With such insight, we will be able to design a more equitable future for all.</p><img src="https://counter.theconversation.com/content/84367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc-David L. Seidel receives funding from the Social Sciences and Humanities Research Council of Canada and Mitacs Canada. He is an academic partner of the Blockchain@UBC research cluster.</span></em></p>The development of distributed trust technologies is making traditional institutions like banks, corporations and governments nervous. Those who have power like to hold onto it. What’s next?Marc-David L. Seidel, RBC Financial Group Professor of Entrepreneurship & Associate Professor, OBHR Division, University of British ColumbiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757452017-04-05T08:34:21Z2017-04-05T08:34:21ZPublic enterprises played a big part in South Africa’s credit ratings downgrade<figure><img src="https://images.theconversation.com/files/164044/original/image-20170405-11362-hdwogb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>With the broader implications of last week’s cabinet reshuffle in South Africa still being digested, capital markets have been quick to react. It took only a few days for S&P to formally report on its rating action in which it <a href="http://www.fin24.com/Economy/breaking-sp-downgrades-sa-to-junk-status-20170403">downgraded</a> South Africa’s foreign currency government debt to sub-investment grade status. </p>
<p>S&P cited as its concerns changes in the country’s executive leadership. It believes this has put policy continuity at risk which in turn increases the likelihood that economic growth and fiscal outcomes could suffer.</p>
<p>Not to be lost in this chain of events is the significant role played by South Africa’s state owned enterprises. </p>
<p>S&P highlighted this in its note on the downgrade. Its main worry is that plans to improve the underlying financial positions of parastatals such as Eskom, South Africa’s massive power utility, may not be fully implemented. This is critical, as S&P has forecast government guarantees used to underwrite public enterprise liabilities reaching R500bn by 2020. That’s roughly 10% of South Africa’s current GDP. </p>
<p>No doubt S&P had in mind the continued investment in expensive state sponsored power generation programmes. These are contracted to Eskom for off-take, but must be underwritten by government guarantees to secure financing. Even more troubling is the fact that existing low-cost facilities are to be retired ahead of schedule. This is to make room for the new found excess in power generating capacity. </p>
<h2>Regulations are being ignored</h2>
<p>It’s important to keep in mind that the overhang of government guarantees by itself wouldn’t necessarily have led to a ratings downgrade. With the right governance structures and regulatory frameworks in place, state owned enterprises could be transformed from a liability to an asset. They could then support relatively high levels of debt for investments done on a prudent and value adding basis. </p>
<p>But there’s been little evidence of positive movement in this area. And it should come as no surprise that, at the moment, S&P sees state owned enterprises as risks — not enablers. </p>
<p>As a glaring example, take the National Energy Regulator South Africa decision on tariffs for Eskom. The North Gauteng High Court found that the regulator had deviated from its own set of regulatory rules in setting the tariffs. The regulator has since been granted leave to appeal that decision, arguing that the deviation had <a href="http://www.ee.co.za/wp-content/uploads/2016/10/NERSA-application-to-appeal-6-Sep-2016-1.pdf">little practical effect</a>. In effect it argued that the end justified the means. </p>
<p>While the argument put forward by the regulator may have some factual basis, the real issue is that it has shown little real concern over the general lack of procedural fairness and transparency applied to its decision making process. It will be interesting to see how the Supreme Court of Appeal views the matter on review.</p>
<p>The <a href="https://theconversation.com/south-africas-airports-company-faces-a-hard-landing-why-this-is-bad-news-for-the-country-72115">decision over airports tariffs</a> is another disturbing example of poor regulatory processes. In December last year Airports Company of South Africa, which regulates the sector, called for a 35.5% decrease in airport charges. Despite concerns previously raised by credit rating agencies over the lack of transparency in setting airports tariffs, the regulator is yet to publish the basis of its decision, or any of the underlying analysis that would have informed its tariff order. </p>
<h2>Perception or reality?</h2>
<p>S&P’s downgrade decision doesn’t represent a consensus view of the global rating agencies. Importantly, Moody’s has so far stopped short of issuing a downgrade. Instead, it’s opted to place South Africa on review to determine if recent events signal a fundamental weakening of the country’s institutional, economic and fiscal strength. </p>
<p>The newly appointed Minister of Finance Malusi Gigaba was <a href="http://www.sabc.co.za/news/a/ab2e1d8040a8b726ad60fdd9ce9b621f/Gigabaundefinedurgesundefinedcountryundefinedtoundefinedreigniteundefinedeconomicundefinedgrowth-20170404">quick to respond</a> to these concerns. Importantly he’s recognised the value of putting forward the case for South Africa cogently and systematically. </p>
<p>He also highlighted the fact that National Treasury will be focused on reversing the triple challenges of poverty, unemployment, and inequality. </p>
<p>Rating agencies would no doubt support these aims, and recognise the fundamental importance of achieving them. </p>
<p>What’s been lost in stating the case for South Africa is a tangible plan for strengthening governance and regulation of its state owned enterprises. With the public sector playing a huge role in the nation’s overall economy, well designed regulatory frameworks need to be articulated by government, implemented by its officials, and embraced by those entities to which they apply. This isn’t overly difficult or costly - it only takes the policy appetite to do so.</p><img src="https://counter.theconversation.com/content/75745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Stephen Labson has previously acted as a regulatory adviser to South African state owned enterprises. He has not received any payment or other benefits for writing this article. </span></em></p>What has been lost in stating the case for South Africa’s credit rating is a tangible plan for strengthening governance and regulation of its state owned enterprises.Stephen Labson, Director, Trans African Energy, and Senior Research Fellow, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/668952016-11-18T03:34:21Z2016-11-18T03:34:21ZDeutsche Bank turmoil shows risks of weakening bank capital standards<p>Deutsche Bank, a venerable 146-year-old bank whose very name symbolizes the German financial system, has recently found itself in considerable turmoil. </p>
<p>The kicker came in September when the <a href="http://www.wsj.com/articles/deutsche-bank-is-asked-to-pay-14-billion-to-resolve-u-s-probe-into-mortgage-securities-1473975404">Department of Justice slapped</a> it with a US$14 billion fine for alleged wrongdoing during the financial crisis. But Deutsche Bank was already being buffeted by a string of bad news. Its <a href="https://www.theguardian.com/business/2016/sep/26/deutsche-bank-share-price-lowest-mid-1980s">stock price has slumped</a> over the past year due to a decline in investment banking and dim prospects for its commercial banking business. </p>
<p>This has led to <a href="https://www.google.com/search?client=safari&rls=en&q=deutsche+bank+lehman+moment&ie=UTF-8&oe=UTF-8">speculation</a> about whether the German government will have to bail it out and, if it doesn’t, whether markets will soon experience another “Lehman moment” – referring to how the collapse of the U.S. investment bank sparked a global financial meltdown in 2008. </p>
<p>As I see it, these concerns obscure the much deeper problem that afflicts the European banking sector and that a bailout alone will do nothing to resolve: a lack of capital. </p>
<p>It also offers a stark warning for U.S. regulators amid talk of changes to banking rules – <a href="http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">especially Dodd-Frank</a> – under the new administration. While some changes to the U.S. financial system may be worthwhile, easing capital standards would be a mistake and make another financial crisis much more likely. </p>
<p>Instead, regulators on both sides of the Atlantic need to make sure there’s no question their banks are able to withstand a shock – whether a billion-dollar fine or something much more severe. </p>
<h2>Why Deutsche Bank won’t be bailed out</h2>
<p>While allowing a bank that has the size and prominence of Deutsche Bank to fail is obviously an event that could have seismic repercussions, bailing it out is not something that would be easy for the German government to do. </p>
<p><a href="http://www.cnbc.com/2016/09/30/deutsche-bank-bailout-would-be-political-suicide-for-merkel-analysts-warn.html">There are many reasons for this</a>. One is reputational. Angela Merkel, the German chancellor, has been critical of other governments (especially in Europe) for using taxpayer funds to bail out their banks.</p>
<p>Second, there is little support among German taxpayers for the bailout, so it would also be politically costly.</p>
<p>While it’s interesting to speculate about this, there are other questions that are even more pertinent. First, what is the real problem here? Why is Deutsche Bank in the mess it finds itself in? What can we do to prevent our major financial institutions from being so fragile in the future?</p>
<p>There are many factors responsible for what ails Deutsche Bank. Perhaps none figures more prominently than its capital position during and after the crisis. </p>
<h2>Who’s the riskiest of them all?</h2>
<p>Among its peer institutions, Deutsche Bank is the riskiest based on its “leverage ratio,” which essentially measures how much equity capital it has as a percentage of total assets. </p>
<p>On June 30, its leverage ratio stood at a <a href="http://www.bloomberg.com/news/articles/2016-09-20/deutsche-bank-s-low-capital-makes-it-no-1-for-risk-hoenig-says">shockingly low 2.68 percent</a>, or about half the average for the eight biggest U.S. banks, according to the Federal Deposit Insurance Corporation. That means it had only $2.68 in equity for every $100 in assets. </p>
<p>A low ratio means it has less cushion if there’s a problem. Since banks are required to mark many of their assets to market, an adverse price movement that reduces the value of its assets by just 3 percent would completely wipe out its equity. </p>
<p>We can see that the bank’s low capital is bad from at least two perspectives. One is that a 2.68 percent leverage ratio is less than what Bear Stearns had (2.78 percent) in early 2008 <a href="http://www.slate.com/articles/business/moneybox/2008/03/bear_run.html">before it collapsed</a> and had to be rescued by the U.S. government via a deal with JPMorgan Chase. </p>
<p>Another is that under the <a href="http://www.bis.org/bcbs/basel3.htm">Basel III’s capital rules</a>, banks are required to have a leverage ratio exceeding 3 percent. As an interesting contrast, U.S. bank regulators have adopted a 5 percent minimum leverage ratio for domestic banks. (One caveat is that European regulators [European Banking Authority] gave Deutsche Bank a ratio of 2.96 percent earlier this year,slightly higher than what the FDIC gave it, but still very worrisome.) </p>
<h2>The ‘doom spiral’</h2>
<p><a href="http://rfs.oxfordjournals.org/content/early/2011/02/09/rfs.hhq022">Extensive academic research</a> has revealed that a lot of bad things can happen when a bank has critically low capital. </p>
<p>One is that its internal culture gets skewed in favor of growth and excessive risk taking. Deals that can make the bank a lot of money if they pan out (but can also cost the taxpayers a lot) become more attractive. The other consequence is that there is “debt overhang” – so much debt that shareholders are unwilling to infuse any more equity into the bank since most of the benefits of the new equity will flow to the depositors and other creditors.</p>
<p>So this creates a sort of “doom spiral”: More equity is needed to rescue the bank, but excessive debt stands in the way. So the government finds itself on the horns of a dilemma, either let the bank fail or infuse taxpayer money to rescue it.</p>
<p>Finally, more highly levered banks also make a bigger contribution to systemic risk, which is the risk that the whole system will fail, as we saw during the financial crisis.</p>
<p>We see some evidence of these forces operating at Deutsche Bank. <a href="http://www.zerohedge.com/news/2016-10-08/deutsche-bank-raises-3-billion-debt-hedge-fund-explains-what-its-bail-would-look">Reports suggest</a> the bank is unlikely to raise new equity because its stock price is “too low” and trading at about 25 percent of the book value of its equity. That means the market thinks the value of the bank’s equity is worth just 25 cents when the bank’s balance sheet states it as one dollar. Put slightly differently, if Duetsche bank states its shareholders equity on its balance sheet as $100, the market will actually pay only $25 to buy it.</p>
<p>One reason for the low stock price is its dim business prospects, thanks to anemic economic growth in Europe and tighter banking regulations. The other, of course, is the aforementioned debt overhang.</p>
<p>With such low capital, it is also hardly surprising that its <a href="https://www.ft.com/content/9a018afe-3e37-11e6-9f2c-36b487ebd80a">U.S. unit failed the Federal Reserve Bank’s stress test</a> in June. The only other major bank that failed was the U.S. unit of Santander. When a bank fails a test, it is not allowed to remit dividends back to its parent company and may face harsher sanctions. In addition there is reputational damage and potential loss of customer trust, which can be very damaging to the stock price.</p>
<p>Moreover, consistent with the predictions of <a href="http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110613-034531">academic research</a>, the <a href="http://www.bloomberg.com/news/articles/2016-06-30/deutsche-bank-may-be-top-contributor-to-systemic-risk-imf-says">International Monetary Fund named</a> the bank as “the most important net contributor to systemic risk.” In other words, by keeping capital that is too low from a prudential regulation standpoint, Deutsche Bank is creating risk, not only for itself but for the whole global financial system. </p>
<h2>The real concern</h2>
<p>So, the real problem for global financial stability is not whether Deutsche Bank will be bailed out. It is the question of what bank regulators are going to do to get more equity capital into banking. </p>
<p>In this regard, U.S. bank regulators have done considerably better than European (and <a href="http://www.wsj.com/articles/warning-from-tokyo-dont-let-bank-regulators-create-another-japan-1470084857">Japanese</a>) bank regulators. During the financial crisis, the U.S. government took equity stakes in banks, effectively recapitalizing them. When the shareholders of these banks repurchased the government’s stakes, private equity capital replaced taxpayer-provided capital, and the U.S. banking system ended up on a much sounder footing as a result. </p>
<p>By contrast, this did not happen in Europe. In fact, <a href="http://uk.reuters.com/article/uk-banks-leverage-idUKBREA0C0G020140113">banks in Europe lobbied</a> their bank regulators to water down the Basel III capital rules so as to avoid having to raise billions of euros in new capital. As a result, banking fragility in Europe remains considerably higher than in the U.S.</p>
<p>What should be done going forward? I think the single biggest regulatory imperative in banking is to get banks to have significantly higher capital ratios, both in the U.S. and in Europe, although the problem in Europe is more pressing. </p>
<p>And American taxpayers and bank regulators cannot afford to be smug about American banks being better capitalized than European banks. There may be lobbying of the new administration to water down capital requirements but doing so will be bad for the economy, both here and globally. Hopefully we will not repeat the mistakes made in Europe.</p>
<p>We live in a highly interconnected global financial system. European banking fragility imperils the U.S. and indeed the global financial system. Bailouts generally do not foster future financial stability; higher capital does. That’s where the answer lies.</p><img src="https://counter.theconversation.com/content/66895/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anjan V. Thakor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Is the financial system headed for another ‘Lehman moment’? Perhaps, but a bailout isn’t the solution. More capital is, something Trump should remember as he rewrites U.S. bank rules.Anjan V. Thakor, Professor of Finance, Washington University in St. LouisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/673612016-10-26T03:23:47Z2016-10-26T03:23:47ZHere’s why our next president should block AT&T’s Time Warner tie-up<p><a href="http://www.nytimes.com/2016/10/23/business/dealbook/att-agrees-to-buy-time-warner-for-more-than-80-billion.html?action=click&contentCollection=DealBook&module=RelatedCoverage&region=EndOfArticle&pgtype=article&_r=0">AT&T’s plan to buy Time Warner</a> for US$85.4 billion is only the latest of a string of mega corporate mergers that have been announced in recent years. </p>
<p>That deal would combine the second-largest U.S. cellphone carrier with one of the biggest content producers in the world, with cable networks including HBO, TBS and CNN, as well as Warner Bros. film and TV studio.</p>
<p>But it’s hardly the only tie-up in the offing. <a href="http://www.investors.com/research/ibd-industry-themes/qualcomm-seals-deal-to-buy-nxp-semiconductors/">Qualcomm</a> wants to merge with NXP Semiconductors and create the world’s second-largest chipmaker. Bayer’s bid for Monsanto would <a href="http://www.reuters.com/article/us-monsanto-m-a-bayer-deal-idUSKCN11K128">result in a company</a> that produces more than a quarter of the world’s seeds and pesticides. </p>
<p>After years of consolidation, the top four airlines control two-thirds of the U.S. <a href="https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/">market</a>. <a href="http://www.newyorker.com/news/daily-comment/we-need-real-competition-not-a-cable-internet-monopoly">In most cities</a> there is one or at most two cable companies. Internet service <a href="http://www.newamerica.org/oti/policy-papers/the-cost-of-connectivity-2014/">is far more expensive</a> and slower than in most countries in Europe or East Asia. <a href="https://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/">Four cellphone companies dominate</a> 98 percent of all subscriptions.</p>
<p>While recent articles about the AT&T-Time Warner merger have reminded readers about the negative consequences of industry consolidation in terms of the impact on <a href="http://www.npr.org/sections/alltechconsidered/2016/10/25/499185907/the-at-t-time-warner-merger-what-are-the-pros-and-cons-for-consumers?ft=nprml&f=499299869">consumers</a> and <a href="http://www.nytimes.com/2016/10/05/upshot/liberal-economists-think-big-companies-are-too-powerful-hillary-clinton-agrees.html?action=click&contentCollection=The%20Upshot&module=RelatedCoverage&region=EndOfArticle&pgtype=article">income inequality</a>, there is another reason to block this and similar mega mergers – and try to roll back ones already completed such as drug company <a href="http://www.wsj.com/articles/SB123293456420414421">Pfizer’s purchase of Wyeth</a> in 2009: Such behemoths manipulate Congress and regulators, undermining our democracy.</p>
<p>As <a href="http://www.emeraldinsight.com/doi/pdfplus/10.1108/S0198-8719%282014%290000026007">my research shows</a>, nearly a half-century of corporate consolidation has transformed American politics in ways that have undermined the ability of government agencies to respond to voters’ desires and to implement policies that challenge corporate power.</p>
<h2>Checks and balances</h2>
<p>The U.S. political system tends to be seen as one of checks and balances, with tensions and competing power centers among various branches of government as well as between federal, state and local officials. And for most of the 20th century, there has also been the same sort of balance in the business world as well, with political power and influence split between national and regional companies.</p>
<p>In other words, in many industries government policies such as <a href="http://www.federalreservehistory.org/Events/DetailView/25">Glass-Steagall Act of 1933</a> and the <a href="https://transition.fcc.gov/Reports/1934new.pdf">Communications Act of 1934</a> helped ensure a balance between large national companies and smaller ones that operated at a regional or state level. </p>
<p>For example, Glass-Steagall reformed the <a href="https://global.oup.com/academic/product/managed-by-the-markets-9780199216611?cc=us&lang=en&">financial industry</a> to limit the number of nationally chartered investment and commercial banks that could sell their products anywhere, and forbade them from lines of business reserved for savings and loans. State-chartered savings and loan institutions, meanwhile, <a href="http://www.annualreviews.org/doi/abs/10.1146/annurev-soc-073014-112402">were restricted</a> in where they could do business. </p>
<p>Similarly, the <a href="http://web.asc.upenn.edu/gerbner/Asset.aspx?assetID=2575">government licensed</a> television and radio stations to operate in specific localities. National networks could own only a limited number of stations and broadcast only at certain hours, leaving most of the day for locally produced shows. </p>
<p>As a consequence of this national-regional split, local <a href="http://www.emeraldinsight.com/doi/pdfplus/10.1108/S0198-8719%282014%290000026007">companies had more influence</a> over their state senators and representatives, both through the financial largess of their owners and the electoral power of their employees. Thus the influence of America’s elite on U.S. politics was more spread out, and regionally focused businesses were able to limit the reach of large national companies. <a href="https://deepblue.lib.umich.edu/handle/2027.42/43654">This prevented</a> a few giant corporations from controlling government policy and markets. </p>
<p>But that balance depended on vigorous antitrust enforcement. </p>
<p>Part of the problem is that regulators tend to judge mergers on whether they raise prices and reduce choice for consumers. This vague standard leaves a lot of wiggle room for the Justice Department’s antitrust division and the political appointees who supervise the career of government lawyers. </p>
<p>Enforcement from <a href="http://repository.law.umich.edu/cgi/viewcontent.cgi?article=1117&context=law_econ_current">Franklin Delano Roosevelt through Lyndon B. Johnson</a> was strict enough to prevent the emergence of oligopolies or single industry-dominating firms. The policy changed abruptly in 1969, <a href="https://www.ftc.gov/sites/default/files/documents/public_statements/modern-evolution-u.s.competition-policy-enforcement-norms/0304modernevolution.pdf">when the Nixon administration</a> became more tolerant of within-industry mergers, even when they significantly reduced competition. </p>
<p>Newly formed <a href="http://www.nber.org/chapters/c8650.pdf">mega companies and massive banks</a> used their enhanced political power and influence over policy to lobby for more deregulation in the financial, telecommunications and other industries, which in turn <a href="http://www.people.hbs.edu/estafford/papers/newevidence_perspectivesonmergers.pdf">made more mergers possible</a>. By the 1990s, <a href="http://www.jstor.org/stable/2096400">few restrictions</a> were left. </p>
<p>This is why <a href="http://onlinelibrary.wiley.com/doi/10.1002/ddr.430300411/abstract">Americans tend to pay more for pharmaceuticals</a>, cell and <a href="http://www.newamerica.org/oti/policy-papers/the-cost-of-connectivity-2014/">internet services</a> and <a href="http://www.newyorker.com/news/daily-comment/we-need-real-competition-not-a-cable-internet-monopoly">other products</a> than people in many other countries, and why a <a href="https://www.amazon.com/State-Innovation-Governments-Technology-Development/dp/1594518246">growing share</a> of government spending goes to <a href="https://object.cato.org/sites/cato.org/files/pubs/pdf/PA703.pdf">corporate subsidies</a>. One noteworthy example of that is Medicare D, which is forbidden by law from negotiating prices with pharmaceutical companies for drugs, <a href="http://www.nytimes.com/2015/01/08/upshot/the-drugs-that-companies-promote-to-doctors-are-rarely-breakthroughs.html?hp&action=click&pgtype=Homepage&module=second-column-region&region=top-news&WT.nav=top-news&abt=0002&abg=1">many of which were developed</a> in government labs or with federal grants to university labs. </p>
<h2>Challenging corporate interests</h2>
<p>So before all these mergers, regional companies served as an effective check on the power of their national competitors, providing more room for elected officials to formulate policies that challenged their more monopolistic corporate interests. </p>
<p>As one or a few companies have come to dominate major industries, they have the power to block policies that benefit consumers. These businesses <a href="https://www.amazon.com/Fracturing-American-Corporate-Elite/dp/0674072995">are also able to enrich themselves</a> at the expense of rivals and others and to appropriate resources needed for the investments in infrastructure and education that are needed to sustain American competitiveness. </p>
<p>Enron, which <a href="https://www.amazon.com/Smartest-Guys-Room-Amazing-Scandalous/dp/1591840538">imploded into bankruptcy in 2001</a>, was emblematic of the political effects of such monopolistic companies. Enron was able to gain control over energy markets in a number of states, including California. The company’s leverage over federal and state regulators ensured that it was able to overcharge California industrial businesses as well as ordinary consumers. </p>
<h2>The importance of reinvigorated enforcement</h2>
<p>The Obama administration <a href="https://www.stanfordlawreview.org/online/has-the-obama-justice-department-reinvigorated-antitrust-enforcement/">has been tougher</a> in reviewing mergers than any administration since Nixon’s. Yet Obama has not been tough enough to reverse the tide of consolidation. </p>
<p>Most often Obama administration regulators have merely imposed limited conditions before allowing mergers to proceed. In other words, the “gigantification” that has dominated corporate America for the past 40 years has proceeded largely unhindered. </p>
<p>The question is whether this will change under the next administration. Fortunately, in my view, <a href="http://www.reuters.com/article/us-time-warner-m-a-at-t-idUSKCN12N0OF">there are signs</a> that it will.</p>
<p>Hillary Clinton, for her part, <a href="http://www.nytimes.com/2016/10/05/upshot/liberal-economists-think-big-companies-are-too-powerful-hillary-clinton-agrees.html?action=click&contentCollection=The%20Upshot&module=RelatedCoverage&region=EndOfArticle&pgtype=article">had pledged</a> before the AT&T news to increase antitrust enforcement, with some of her own economic advisers arguing that consolidation has worsened inequality by concentrating profits with a handful of companies. She said AT&T’s deal <a href="http://www.reuters.com/article/time-warner-m-a-at-t-clinton-idUSKCN12N0UX">deserves close scrutiny</a>. </p>
<p>Donald Trump <a href="http://money.cnn.com/2016/10/22/media/donald-trump-att-time-warner/">has come out forcefully against</a> the merger, declaring it “a deal we will not approve in my administration because it’s too much concentration of power in the hands of too few.”</p>
<p>If the next administration is able to follow through – which it’s free to do without Congress’ approval – room would be created for more competitors in various industries. Those new, or newly viable older, businesses will bring their particular and conflicting interests to bear on the making of regulations and legislation and on decisions about federal and state spending. Legislators will come under more diverse pressures and will have expanded opportunities to attract support and build coalitions. </p>
<p>Politics won’t be a confrontation between the interests of one or a few corporations against citizens who usually are disorganized and not mobilized. Conflicts among firms within and across industries would create openings for less wealthy citizens to gain leverage as firms need allies in legislative and regulatory arenas they no longer can control through sheer size. </p>
<p>Antitrust was rightly <a href="http://www.theatlantic.com/politics/archive/2016/06/the-forgotten-wisdom-of-louis-d-brandeis/485477/">understood</a> a hundred years ago as a way to empower citizens as well as to reduce prices and improve product quality for consumers. </p>
<p>Antitrust again can help reduce the advantage the biggest corporations have in politics.</p><img src="https://counter.theconversation.com/content/67361/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Lachmann does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>AT&T’s planned merger would add to a growing list of mega deals that have not only harmed consumers and exacerbated inequality but also undermined our democracy.Richard Lachmann, Professor of Sociology, University at Albany, State University of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/541642016-02-15T03:20:38Z2016-02-15T03:20:38ZEnding the ‘arms race’ at the centre of utilities regulation<figure><img src="https://images.theconversation.com/files/110696/original/image-20160208-12837-8u4lq4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Energy network owners are frequently using legal battles to draw out the regulatory process.</span> <span class="attribution"><span class="source">From www.shutterstock.com</span></span></figcaption></figure><p>Generators, retailers and consumers should be able to negotiate deals with energy, telecommunications and water network owners to keep the system honest, <a href="https://business.monash.edu/__data/assets/pdf_file/0005/404195/Rethinking-Utility-Regulation-in-Australia-Final.pdf">new research argues</a>. Utilities regulators are hamstrung by legislation that allows utilities network owners to drag out decisions and pass on costs.</p>
<p>The length of regulatory decisions and associated documentation has grown by over 2000% in some cases. Decisions regularly take several years to make and are also more complex and hence less transparent with no clear benefits to customers.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=542&fit=crop&dpr=1 600w, https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=542&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=542&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=681&fit=crop&dpr=1 754w, https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=681&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/110283/original/image-20160204-3002-1eikwfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=681&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Data from published determinations available from the AER. ‘t.’ refers to ‘transmission network’, ‘d. refers to ‘distribution network’.</span>
</figcaption>
</figure>
<p>Legal battles appealing the regulators decisions have been especially frequent in energy and to a lesser extent in telecommunications. Energy network owners appealed the regulator’s decision 40% of the time since 2006. Not only does this lead to costs and delays, it also has increased the businesses’ allowable revenue by an additional $3 billion.</p>
<p>An alternative approach is needed to deal with the complexities of utility regulation. An example of this is a system that puts users at the centre of the regulation. The available evidence from <a href="http://www.sciencedirect.com/science/article/pii/S0301421512005290">United States</a>, <a href="http://www.sciencedirect.com/science/article/pii/S0301421509004339">Canada</a>, and in Australia (the <a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwjq693G9d_KAhULnZQKHUSYAF0QFggnMAI&url=http%3A%2F%2Fwww.econ.cam.ac.uk%2Fdae%2Frepec%2Fcam%2Fpdf%2Fcwpe1218.pdf&usg=AFQjCNEtzFyJwuVjwy35IFXeXP2wlH3Vog&bvm=bv.113370389,d.dGo">Hunter Valley decision</a>) indicates that allowing negotiation between users and owners of these networks with regulatory backup can lead to quicker, simpler decision making as well as more prudent investment decisions and lower overall prices. </p>
<p>Generators and retailers are also likely to have a much better idea of what they need from the networks than the regulator. They are also much more likely to be knowledgeable about the optimal timing and nature of new investment in the network. They also have an incentive to keep these costs low.</p>
<p>The benefits of introducing competition and greater consumer choice are substantial. For example, the Productivity Commission’s 2005 <a href="http://www.pc.gov.au/inquiries/completed/national-competition-policy/report">review of National Competition Policy</a> estimated gains to our national income from these reforms of 2.5%, adding roughly $40 billion annually.</p>
<p>The regulation of utilities is necessary because some of these networks, such as the networks of poles and wires in electricity, are well recognised monopolies. Legislation requires regulators such as the Australian Competition and Consumer Commission (ACCC) and the Australian Energy Regulator to establish an “efficient price” for utilities that reflects a competitive market.</p>
<p>However, such an approach to regulation is proving to be too difficult and expensive. The information and expertise needed by the regulator is just too great. Utilities network owners (with more information and knowledge than the regulator) have the incentive to get regulatory approval for higher costs. This in turn allows them to charge greater prices.</p>
<p>To capture higher prices, utility network owners can try to game the regulatory system in various ways. For example they can provide excessively lengthy and detailed information backed up by a range of experts, or they can provide it late in the regulatory process. Not only does this slow the whole process down; the regulator can risk being appealed if it does not adequately consider the information put to it as we have seen in the electricity sector.</p>
<p>The result can be an “arms race” of ever increasing use of experts and complexity and evermore resources used in the process.</p>
<p>A greater concern is that regulation appears to be contributing to a misapplication of resources in some sectors, particularly in energy and telecommunications.</p>
<p>For example, the asset base of electricity transmission and distribution companies has grown by 45% and 120% respectively in around a decade. The total increase in the asset base over this period sits at around $35 billion. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=484&fit=crop&dpr=1 600w, https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=484&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=484&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=608&fit=crop&dpr=1 754w, https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=608&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/110285/original/image-20160204-3006-3kp9fx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=608&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Data from AER State of the Energy Market Reports (https://www.aer.gov.au/publications/state-of-the-energy-market-reports)</span>
</figcaption>
</figure>
<p>This increase cannot be explained by total electricity transmitted and distributed as this has declined since its peak in 2008. Nor can it be explained by number of customers or growth in peak demand. Some tightening of the reliability standards may have contributed to this expenditure but can hardly explain increased expenditure of this magnitude. Which begs the question – how can this cost be justified to users? </p>
<p>Requiring generators, retailers and consumer representatives to negotiate with network providers would not be without its challenges as they would have to actively engage with the regulated business in the first place. In the end, however, putting the primary stakeholders in control of their fate (and using regulators only as a backup to negotiations) will ensure decisions are made under the best possible incentives.</p><img src="https://counter.theconversation.com/content/54164/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joe Dimasi is has been involved in the regulation of utilities for two decades. He is a former Commissioner and Senior Executive of the ACCC and continues to work in the regulation of utilities.</span></em></p><p class="fine-print"><em><span>Peter J. Lambert does not have any affiliations with any organisation that would benefit from this article.</span></em></p>Generators, retailers and consumers should be central to regulating utilities because network operators are gaming the system.Joe Dimasi, Professorial Fellow, Department of Economics, Monash UniversityPeter J. Lambert, Assistant Researcher, Monash Business Policy Forum, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/254032014-04-11T13:10:27Z2014-04-11T13:10:27ZSAC Capital and the curious economics of insider trading<p>A US judge has approved a US$1.2 billion settlement and <a href="http://www.reuters.com/article/2014/04/10/us-saccapital-crime-idUSBREA391B520140410">accepted a guilty plea</a> by hedge fund SAC Capital in what has been described as the largest insider trading settlement in the country’s history.</p>
<p>Eight people related to the fund have now been found guilty in a wide-ranging investigation of insider trading in US stock markets. Given the economics of insider trading aren’t widely understood, let’s remind ourselves why SAC did ought to be punished.</p>
<p>Insider trading simply means trading based on important undisclosed information. Insiders make profits by buying shares when they have confidential information about positive developments or can avoid losses when they sell shares based on undisclosed negative information. As financial instruments and transactions become increasingly complex so other ways to profit from insider information evolve to match them.</p>
<p>Insiders buy or sell shares from or to less informed investors who are willing to sell or buy anyway, unlike thieves who steal against someone’s will. This leads some to call insider trading “<a href="http://www.marketwatch.com/story/why-insider-trading-should-be-legal-2011-05-17">victimless crime</a>”.</p>
<p>Building on this argument, <a href="http://online.wsj.com/news/articles/SB10001424052748704224004574489324091790350?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704224004574489324091790350.html">some economists</a> say insider trading should be legalised entirely as it levels the playing field. According to this theory, allowing insider transactions would mean stock prices that reflect all information, whether public or private. This in turn makes markets more efficient (an “efficient market” after all is simply a market where prices reflect all information). Investors could therefore make more accurate decisions, and corporations could raise capital at fair prices.</p>
<p>But this argument clearly hasn’t won over regulators throughout the world. Insider trading remains prohibited, primarily to increase confidence and trust in markets. </p>
<p>If insider trading was allowed, those investors without access to the best information might hold on to their cash. After all, who wants to make bets with someone who knows more than you do? As such, insider trading decreases market liquidity, increases the cost of trading and consequently makes it more difficult for corporations to raise capital. None of these effects do much good for the economy.</p>
<h2>Fine lines</h2>
<p>Insider trading is difficult to detect and prosecute as the line between legal and illegal is extremely fine. Investors collect and analyse huge amounts of information and frequently trade across a large pool of stocks. It’s very tough to prove that they made a specific investment decision based on specific piece of information which was undisclosed to the public.</p>
<p>Given these obstacles, insider trading investigations tend to be long and expensive. The digital forensic techniques used – analysing emails, phone records and so on – aren’t simple.</p>
<p>For example, the UK’s Financial Services Authority successfully prosecuted six individuals in 2012 for insider trading which made them a combined profit of £732,000. To build their case, the FSA obtained and reviewed over 200,000 lines of trading in 130 brokerage accounts and 375,000 lines of telephone call records. More than 300 witness statements were included and the trial itself was four and a half months long. That’s a lot of effort just to uncover a scam worth less than £1m.</p>
<h2>Economic benefits</h2>
<p><a href="http://deepblue.lib.umich.edu/bitstream/handle/2027.42/40127/wp741.pdf?sequence=3">Empirical evidence</a> is in favour of prohibiting insider trading. Interestingly though, what brings benefits is not the fact that insider trading law are enacted. Apparently insider trading laws on books do not matter <a href="https://faculty.fuqua.duke.edu/%7Echarvey/Teaching/BA453_2005/BD_The_world.pdf">until they are first enforced</a>. </p>
<p>This supports the efforts of regulators around the world to detect and prosecute insiders. The benefits of effective insider trading laws include lower costs of raising capital, greater stock market liquidity, more accurate (and not less accurate, as proponents of deregulation of insider trading argue) pricing driven by a larger group of market participants, including analysts, willing to collect information and participate in the stock market when they have confidence that insider trading is not rampant.</p>
<p>Finally, it is worth bringing up an argument made by those who look at the economics of crime. Prohibition of insider trading and relevant enforcement will discourage or eliminate smaller insiders but will not eliminate insider trading entirely. Instead, it will create <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1354-7798.2005.00285.x/abstract">large monopoly profits</a> available to the few who still decide to break the law. SAC Capital’s gains from insider trading may be one such example.</p><img src="https://counter.theconversation.com/content/25403/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Piotr Korczak does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A US judge has approved a US$1.2 billion settlement and accepted a guilty plea by hedge fund SAC Capital in what has been described as the largest insider trading settlement in the country’s history. Eight…Piotr Korczak, Senior Lecturer in Finance, University of BristolLicensed as Creative Commons – attribution, no derivatives.