Our Problem is Agency Costs

Stephen Doty

February 2019

Our Problem is Agency Costs

Agency costs are a silent killer of nations. We must recognize this first, then reduce them.

Voters are the principals, politicians are their agents, and agency costs occur when agents advance their personal interests, not those of their principals.[1]

The business of America used to be business.[2]But now we rank 12th on Heritage’s 2019 Index of Economic Freedom.[3]Besides our debt, that’s the real scandal of our federal government. It creates shackles for Americans that Hong Kong, Singapore, and New Zealand lack. Despite politicians blaming businessmen, our low rank is entirely the fault of government, because the index only measures what government does, e.g., labor laws, taxes, licenses, building permits.

The founder of Metro Bank in the UK says he can build 100 banks there before one in the USA.[4]And he’s an American. He used to build banks here. He says that Dodd-Frank is a good example of a bad law: too expensive to comply with, too stifling of bank formation, and wholly disconnected to the root problem of the banking crisis it responded to. People forget that government mandated quotas of loans to high-risk borrowers and then bought the promissory notes, removing the incentive that would result if a bank had to live with its own lending decisions.[5]Then politicians blamed Wall Street after the promissory notes lost value, as if selling the paper the government created was the sin. No mortgage crisis would have occurred if loans were made to qualified buyers.

We should not expect politicians to admit mistakes, however, nor require it before assigning blame. Self-serving denials are a natural reflex of politicians and children, to be seen through, not fooled by. A perfect example occurred in Argentina, where politicians blamed the high inflation they created on CEOs for raising prices.[6]

Our federal government seems so big that it is now self-perpetuating. Obama’s instructions to federal agencies to streamline their regulation added to it instead,[7]and we had a record volume of new regulations under his administration.[8]Politicians seem to cheerlead the economy with a one hand while slapping businesses with the other. They should be forced to take the physician’s oath – first, do no harm.

We seem to have lost sight of what a good law looks like. Compare the Uniform Commercial Code (UCC) to the Affordable Care Act (ACA). With fewer words, the UCC did far more good – providing short and fair rules for the sale of goods and lending. Whereas, the ACA was akin to raising a Titanic so leaky it immediately required hundreds of waivers & exemptions and dozens of illicit executive revisions. When Nancy Pelosi said, “We have to pass the bill so you can find out what’s in it,”[9] she was in effect addressing her fellow members of Congress, because none wrote it.

We just passed the hundred-year anniversary, in fact, of Congress outsourcing legislative drafting. In 1916, it began as a pilot program at Columbia Law School, and two years later the Office of Legislative Counsel was formed.[10] We don’t have legislators who write laws anymore. We have delegators. And they often write enabling statutes[11]that further delegate powers to federal agencies, such as the EPA, creating unelected drafters twice removed.

And the EPA’s regulations for the Clean Air Act were struck down by the Supreme Court as lacking a proper balancing of societal costs & benefits.[12]Proper balancing is what judges strive for so that our laws are fair overall.[13]

Justice Benjamin Cardozo called a law’s foreseen effects its final “arbiter”[14]and said that judges really legislatebetween the cracks and, therefore, require the foresight of a legislator.[15]Fitting that jurisprudence is derived from prudentia, a foreseeing.[16]And conversely, legislators require the fairness of judges in balancing competing interests, because bills originate most often outside Congress – mainly from the executive branch and from certain special-interest groups.[17]Laws that would benefit a special interest need to be kept in check by a legislator, lest a law help some and hurt many.

Our legislators should rise to the demand of real jurisprudence, to foresee consequences of laws such as the Community Reinvestment Act, Dodd-Frank, and the ACA, whose consequences legislators appeared blind to. Then after the train wrecks, they claim, “unintended consequences” – an automatic, phony excuse. We know the consequences were foreseeable, however, because others foresaw them and said so.

We need more Cardozos in Congress. Voters should be ashamed to vote for economically illiterate rabble-rousers who promise something for nothing from government. We’ve seen the results of envy-driven, business-hatred in Cuba, Venezuela, and Greece. And at committee hearings, we need expert witnesses like Richard Epstein, author of Simple Rules for a Complex World,[18] to remind legislators of the criteria for a good law — the incentives should create actions that benefit society more than the added cost of government.

Legislators also need more incentives between elections, because they are removed from the penalty or reward of their principals. They easily drift off task like an employee taking paid cigarette-breaks. Look at what legislators do. They go to fundraisers, lunch with lobbyists, meet with unions and groups that promise donations and votes en bloc for special favors. How does that help the overall country?

One way to reduce agency costs is to give principals more control between elections, as when Gov. Gray Davis was recalled in California in 2003.

Warren Buffett once said the way to eliminate government overspending quickly is to pass a law that says, “anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.”[19]That would work by reducing agency costs, although he didn’t mention the term – it aligns the agent’s interest with those of their principals. And a drastic measure to prevent the government’s wasteful spending of tax revenue?  Pass a law that makes those in Congress liable as fiduciaries to reimburse the Treasury for any tax revenue negligently misspent, including the money lost each year to fraud in Medicare and food stamps.

In theory, a principal, not an agent, would run the USA. Uncle Sam, say, would look out for our country’s long-term best interests. Absent that, Uncle Sam would probably say, I want you!– to vote, recall, and defund in order to reduce the agency costs of politicians.

________________________________

[1]For a definition of agency costs, see: http://www.economist.com/economics-a-to-z#node-21529323; see also, David Swensen, Pioneering Portfolio Management(New York: Free Press, 2009) 5: “Nearly every aspect of funds management suffers from decisions made in the self-interest of the agents, at the expense of the best interest of the principals.” By analogy, the same applies in government, I submit.

[2]President Calvin Coolidge, in 1925, said, “The chief business of the American people is business.” This was later paraphrased as, “The business of America is business.” See, http://www.thisdayinquotes.com/2010/01/business-of-america-is-business.html

[3]http://www.heritage.org/index/ranking

[4]“The Demise of the Small American Bank” Wall St. Journal 1 Aug 2015: A9.

[5]See generally, Thomas Sowell, The Housing Boom and Bust rev. ed.(Philadelphia: Basic Books, 2010).

[6]http://www.wsj.com/articles/SB10001424052702304450904579369241634828598

[7]http://www.wsj.com/articles/the-pause-that-refreshes-1440629374

[8]A record 81,611 pages was added to the Federal Register in 2015: http://thehill.com/regulation/administration/264456-2015-was-record-year-for-federal-regulation-group-says

[9]https://en.wikiquote.org/wiki/Nancy_Pelosi

[10]Harry Jones et al.Legal Method(Mineola, NY: Foundation Press, 1980) 267.

[11]Black’s Law Dictionary10th ed. (St. Paul, MN: Thomson Reuters, 2014) 1634.

[12]http://www.supremecourt.gov/opinions/14pdf/14-46_bqmc.pdf;

http://www.scotusblog.com/case-files/cases/michigan-v-environmental-protection-agency/. The court held: “The Environmental Protection Agency interpreted 42 U.S.C. §7412(n)(1)(A) of the Clean Air Act, which requires the agency to regulate power plants when “appropriate and necessary,” unreasonably when it refused to consider cost when making that decision.”

[13]David Dorsen, Henry Friendly(Cambridge, MA: Belknap Press, 2012) 167. On PP. 196-7: “Friendly once again proposed relying on a complex balancing approach that took into account individual differences… His position would, he said, take “judges into the business of judging by requiring them to base decisions on differences of degree,” pointing out that Holmes said, “The whole law does so as soon as it is civilized.”

[14]B. Cardozo, The Nature of the Judicial Process(New Haven: Yale, 1921) 98.

[15]Cardozo 102, 103, 113.

[16]Webster’s New World Dictionary4th ed. (New York: Pocket Books, 2003).

[17]“Less than half of legislation originates in Congress.” George Galloway, The Legislative Process in Congress. (New York: Crowell Co, 1955). “A majority of the bills that Congress acts on originate in the executive branch and many others are traceable to interest groups and political party organizations.” B. Bardes et al. American Government… (Boston: Cengage Learning, 2014) 324.

[18]Richard Epstein, Simple Rules for a Complex World(Cambridge, MA: Harvard, 1995) 27-34. From PP. 33-4: “The central trade-off that must be examined at all times is this: does the creation of some administrative structure… also create some desirable incentives for individual behavior such that the gain from this particular administrative expenditure is justified in terms of the overall improvement in incentives structures?”

[19]http://www.snopes.com/politics/quotes/buffett.asp