Why Public Policy Is Inconsistent

January 19, 2012

by Chidem Kurdas

Jamie Dimon, the chief executive of JP Morgan Chase, says regulatory policy is working against economic recovery and as such is contradictory. His complaint is about the new bank rules, but in fact government actions in myriad areas are at odds with each other.

Consistency does not appear to be an object in policymaking. For many years subsidies for tobacco growers co-existed with anti-smoking measures. A couple of months ago NYU law professor Richard  Epstein wrote about regulatory and legal over-reach in the anti-smoking fightOne of his conclusions: “There are other steps the government could take. The United States should promptly cut to zero the near $200 million in tobacco subsidies that it shelled out in 2010.”

The US is not alone in this. The EU also subsidized tobacco farmers.  Eventually the European Parliament cut most of the tobacco subsidy, but recently there was a report about subsidies to cigarette factories.  Meanwhile the EU runs anti-smoking ads.

Regarding financial regulation, Mr. Dimon says higher bank capital requirements may be reasonable in the future but are not reasonable now, in the midst of the European debt crisis. New capital rules discourage short-term lending to other banks and purchases of risky bank assets, getting in the way of stabilizing the financial system. This is not good for creating jobs and is making recovery slower and more painful, he argued.

A simple explanation for seemingly incompatible policies is that different government entities have different goals and do not coordinate their efforts. Thus Mr. Dimon suggested that policymakers should talk to each other.

Bureaucracies typically resist working with other bureaucracies for fear that their own power and budget might decline as a result. If high-ranking politicians wanted to, they could insist on coordinated policymaking. But they don’t, because coordinating does not matter to them. The ultimate goal for a politician running for office is to get elected. From that vantage point,  politicians tend to consistently push for policies that will bring them votes, funds or both. Anti-smoking gestures and agricultural subsidies are consistent with politicians’ self interest.

As for creating jobs, this is a means to getting elected but not the only means and not the most effective one, because it is uncertain. Government actions supposed to create jobs in reality often don’t. Raising money is probably more important because it allows for greater propaganda in which you can claim to be creating jobs, a more straightforward way to influence public opinion than attempting the real thing. Regulations that threaten the interests of large potential donors like banks are good for getting funds – the threatened businesses pay protection money – while also getting votes via the populist theme of attacking fat cat banks.

If policies were few and transparent, job creation, a goal desired by most of the population, would be more likely to be pursued consistently. Or at least, there would be fewer actions that go against it. That’s another argument for limited government. As things now stand, there are interventions for each objective and also for its opposite, all benefitting the political class.

9 Responses to “Why Public Policy Is Inconsistent”


  1. If policies were fewer, they would benefit a smaller political class less, and burden the nonpolitical class concomitantly less.

    But the (few) people losing the benefit would be far more aware of losing the benefit than would the greater number of people gaining it.

    So inconsistency will continue, as one of the lesser evils of the situation.


  2. I am tired of hearing those who feed at the public trough complain about rules limiting access to it. Before deposit insurance and bailouts, bank capital ratios were 20-25 percent. The principal reason they fell deep into the single digits are the public guarantees put in place over the years. Banks leveraged up, transfering risk to the taxpayers.

    Now capital ratios are being raised modestly, still far from where they should be. So the bankers scream at the prospect of their bonuses shrinking.

    The Swiss are holding their banks to much higher capital requirements, up around 17-19 percent. I see no reason they should be lower in the United States.


  3. O’Driscoll: Is that real capital or risk-weigthed? Risk weights have so many items at 0% weight that they conceal leverage more than they reveal.

    a 17% of real capital is a leverage of 6, with such a leverage it would exceedingly hard to have a financial crisis. it would greatly help.

  4. Bill Stepp Says:

    Tobacco subsidies amid the anti-smoking crusade is not the only area of contradiction in the ag patch. The People’s Nanny State(s) of San Francisco and New York (to name two) are waging war against fat, while the State subsidizes all sorts of ag production (hi Ted Turner and John Mellencamp) in the supply chain of Ronald McDonald et al.
    And of couirse the Nanny State’s cops while away quality time at Dunkin Donuts, which takes away from the time they could use to bust a Big Mac consumer. At least they’re not spending $16 on a donut.

  5. chidemkurdas Says:

    N. Joseph Potts–
    RE “But the (few) people losing the benefit would be far more aware of losing the benefit than would the greater number of people gaining it.”
    True, that is the basic logic of policy making, as public choice economics shows.

  6. chidemkurdas Says:

    Jerry O’Driscoll–
    Both the Basel rules and Dodd-Frank are relevant here. But Dimon’s objection is to the current, immediate effect in the midst of the European debt crisis. He seems to have less problem with a long-term phasing in.

  7. chidemkurdas Says:

    The one argument that makes sense for capital ratios is to set them higher for larger banks. This was suggested by Gary Becker in 2009– as I mentioned in a post then:
    https://thinkmarkets.wordpress.com/2009/11/18/big-bad-bank-and-little-red-trustbuster/


  8. Banks have been awash in excess reserves, and loaded up on Treasuries. They have shown no great urge to lend.

    Excuse making.


  9. Bürokrasinin genellikle kendi güç ve bütçe bir sonucu olarak düşüş korkusuyla diğer bürokrasi ile çalışan karşı. Üst düzey politikacıları istedim, onlar koordineli politika konusunda ısrarcı olabilir. Koordinatör onlara önemli değil çünkü Ama onlar yok. Ofis için çalışan bir politikacı için nihai hedef seçilmek için olduğunu. Bu noktadan, siyasetçiler bunları tutarlı oy getirecek politika, fon veya her ikisi için itme eğilimindedir. Anti-sigara jestler ve tarımsal sübvansiyonların politikacıların kendi ilgi ile tutarlıdır.


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