Romer on Regulation

A stimulating contrast of views on regulation by John Cochrane and Paul Romer. I lean towards Romer’s perspective that the foundation of successful regulation is good meta rules.

I ran in to a lovely little paper on regulation, thinking about financial regulation, from Paul Romer.

In my thinking about financial regulation, I’ve been heading toward the idea that we should regulate assets, not institutions; that regulations should be few and simple; that regulations should be rules, not licenses for regulators to do whatever they want; that rights and recourse for the regulated are important limits on the abuse of even well-intentioned power; and that pre-commitment, limiting the power of regulators ex-ante to bail out ex-post is important. That view is in an earlier blog post, and in an article in Regulation. More to come of course.

Paul comes to about the opposite conclusion, in a very thought-provoking way.

Paul cites Myron Scholes’ law, “Asymptotically, any finite tax code collects zero revenue,” to suggest that simple clear rules will never work. He cites the FAA’s regulation of flight safety and the Army’s integration as successful examples in which regulators, given wide latitude but rewarded on results achieved. And he cites the OSHA as an example of the hopelessness of a rules-based approach. For example (…)

[From Romer on Regulation]

Another issue I have with Cochrane is the principle that institutions should function well no matter who the people are — i.e., if the institution is designed right we only care that the bureaucrats are competent. Otherwise, anyone can do the job.