President Obama’s State of Regulation

January 26, 2012

by Chidem Kurdas

Barack Obama sounded a number of themes in his 2012 State of the Union Address this week, all underpinned by the proposition that socioeconomic ills can be solved by interventionist government in general and his administration in particular.

Indiana governor Mitch Daniels, giving the Republican rebuttal, effectively replied to the main claims. He pointed to the failure of  the President’s “grand experiment in trickle-down government.” Programs spend borrowed money in attempts to boost the middle class. “In fact, it works the other way: a government as big and bossy as this one is maintained on the backs of the middle class,” Mr. Daniels said.

Mr. Obama’s points about regulation drew less attention.  Acknowledging that “some rules are outdated, unnecessary, or too costly,” the President said he approved fewer regulations than his Republican predecessor did in his first three years and ordered every federal agency to eliminate rules that don’t make sense.

Truth, regulatory expansion in the age of Obama has been massive in healthcare and finance, with hugely expensive new requirements imposed on large numbers of individuals and businesses. But in broad terms he is right that regulatory expansion went on unabated under the second George Bush, indeed as it has under many US presidents since the 1930s.

From that perspective, the sprawling healthcare and Dodd-Frank financial regulation laws are additional links in the chain of government controls that bind American society ever tighter in almost every area. Certainly the trend is not new.

The issue Mr. Obama did not address is that much regulation is not just outdated, unnecessary, or too costly; it simply does not work. Case in point is the Financial Crimes Unit he proposes to create. Consider the mission of this new bureaucracy, in Mr. Obama’s words: “to crack down on large-scale fraud and protect people’s investments.” As if there were no law and officialdom that does this until now.

Fraud has always been subject to criminal law. The Justice Department, the FBI, state and local police forces are responsible for apprehending perpetrators and handing them over to the courts for punishment. Besides criminal prosecution, since the early 20th century the US developed an elaborate body of law and regulation meant to prevent financial fraud. There came to be numerous civil bureaucracies to enforce the rules and investigate violations. These range from the Securities and Exchange Commission to the specialized overseer of Fannie Mae and Freddie Mac, the government-backed mortgage finance giants.

Close regulatory oversight did not prevent accounting shenanigans at Fannie and Freddie, let alone stop them from playing the role of enabler to the housing bubble, subsequently  in effect becoming insolvent. They remain dependent on Congressional handouts of taxpayer money.

Then there are the astounding failures of the Securities and Exchange Commission to intervene when alerted by whistleblowers to the giant Ponzi schemes of Bernard Madoff and Allen Stanford.

Mr. Obama wants to establish a new bureaucracy because the existing ones failed to do what they were supposed to do. Were the existing agencies private entities, they would have gone out of business and been replaced by better functioning firms (if warranted by market conditions). But since they’re part of the government, they don’t disappear. At most they change their names and get re-organized, as happened to the Fannie supervisor.

New ones are set up to compensate for the dysfunction of the old ones—a pattern public choice economics pioneer Gordon Tullock described in his book, The Politics of BureaucracyAdding an extra bureau is the stock response to regulatory failure. Hence Mr. Obama’s proposed Financial Crimes Unit.

But this is futile. Tullock pointed out that after a few years new bureaucracies become like old bureaucracies in that they mainly look after themselves while pretending to carry out their supposed tasks. Nothing is achieved, while taxpayers and consumers pay for offices, salaries and other expenses. When failures show up, yet another bureaucracy is created.

Tullock called the resulting system of pullulating government organizations the emerging bureaucratic order. That was in 1965. It is no longer emerging, it is already here and Mr. Obama is adding to it.

11 Responses to “President Obama’s State of Regulation”


  1. On a visit to Italy in 1998, I was struck by the large number of officially labelled cars (with flashing lights, if I recall correctly) bearing the legend “Policia Finanziera” or such (pardon my Italian).

    Financial Police? It looked as though these cops might swoop down on someone shortchanging a customer, or such. They were everywhere, as was, I subsequently learned, financial crime itself, a consequence primarily of suffocating Italian law governing the subject.

    I’m happy to report that I was myself never descended upon by these enforcers, though I suspect I many times fell victim to perpetrators they might properly have taken in hand.

    Every day, back in the USA, I expect more and more to see Financial Police on our streets.

    And I fear that, unknowingly, I may become their target as well. Just going about my daily business, as I always have.

  2. Track Cellphone Says:

    Thanks for this post, I really learned a lot from it. Do you think you will be featuring more posts on this topic? I’ll definitely be back to read more from you!


  3. I must once again disset.

    The tone here is that regulations are “anti-business.” I don’t think being pro-business or anti-business is a useful dichtomy. Businesses use regulation to help themselves and hobble their competitors. It is crony capitalism against free markets.

    In a crony capitalist world, big business on average advances as big government advances. It is a symbiotic relationship.

    Jamie Dimon and his ilk are mad because Obama wants to redivide the spoils. Sorry, I just can’t get myself worked up about that.

    The real losers in all this are the small businesses, small banks, small entrepreneurs, and taxpyers who will be victimized no matter how the macro-battle over the division of economic rents plays out.

  4. bill butos Says:

    Chidem’s narrative is spot-on as a narrative about the slide into a regulatory world. And, of course, it’s not just about Obama – although he is effective in selling his interventionism to the public, it’s everywhere in all levels of government. The players are driven by the spoils which includes power and control over people. Chidem rightly reminds us that the growth of regulation is continuing. .

  5. chidemkurdas Says:

    Jerry O’Driscoll
    RE “The real losers in all this are the small businesses, small banks, small entrepreneurs, and taxpyers who will be victimized no matter how the macro-battle over the division of economic rents plays out.”
    Yes, agreed. But by the same logic, you should object to the advance of big government + big business

  6. chidemkurdas Says:

    That is, expansion of regulation opens up yet more opportunities for crony capitalism

  7. chidemkurdas Says:

    N. Joseph Potts–
    Italy is an interesting example. People who are not part of the crony establishment seem to just stay away from the government apparatus as much as possible and pay up when necessary.

    Kind of the same way Sicilians must have co-existed with their Cosa Nostra.

  8. chidemkurdas Says:

    Bill Butos–
    Arguably this has been going for around 80 years, on and off, waxing and waning.

    So “it’s not just about Obama” Well put.


  9. Close regulatory oversight did not prevent accounting shenanigans at Fannie and Freddie, let alone stop them from playing the role of enabler to the housing bubble, subsequently in effect becoming insolvent. They remain dependent on Congressional handouts of taxpayer money


  10. kapat düzenleyici gözetim müflis olma etkisi daha sonra, konut balonu için kolaylaştırıcı rolü oynamaya engel Bırakın, Fannie ve Freddie az muhasebe maskaralık engel değildi. Onlar mükellef para Kongre bildiriler bağımlı kalır


  11. [...] President Obama in his 2012 State of the Union Address boasted that he ordered every federal agency to eliminate rules that don’t make sense and approved fewer regulations than his Republican predecessor.  But what’s eliminated is trivial compared to what’s added. Getting rid of useless rules is claimed to save $10 billion over several years; Dodd-Frank alone will cost several times that every year to financial services consumers such as your pension fund. [...]


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