All Commentary
Wednesday, June 1, 2016

Government Regulators Are Unregulated

There Is a Better Way: Regulation by Market Forces

In “There’s No Such Thing as an Unregulated Market,” I claimed that regulation by market forces works better — gets better results for society — than government regulation. But why does government regulation work so poorly?

In government, the regulators themselves are in practice unregulated. Their accountability goes the wrong way — upward to politicians rather than downward to the public.

Regulation is so bad in our overregulated economy because our regulators are unregulated.Consider the regulation of school quality. For decades, Americans have deplored the low quality of our government-regulated schools, as compared to the higher quality of our market-regulated private-sector schools.

A Nation at Risk (National Commission on Excellence in Education) asserted in 1983 that “if an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war.”

Since then, nothing material has changed. There are some superb government schools, but there are also many in poor areas that are atrocious, and even average-quality government schools produce mediocre education at high cost. For example, in my hometown, the Baltimore City Public Schools spent $15,464 per child in the 2010–11 academic year. Meanwhile, the median tuition charged by private schools attended by students receiving partial scholarships from the Children’s Scholarship Fund (CSF) Baltimore was $5,050 total. (A scholarship of, say, $1,000 at the median-tuition school would mean the child’s family would have to pay only $4,500.)

And these are schools considered so much better by the children’s parents that they willingly pay out-of-pocket to send their children there. The numbers are not directly comparable because many of the CSF Baltimore schools include only grades K–8, while the Baltimore City Public Schools include high schools, which are more expensive. Nevertheless, the numbers suggest that Baltimore could get better schooling for less than half of what’s spent in government schools, if only the quality of those schools were decently regulated.

A properly regulated schooling industry would offer a wide range of approaches to K–12 education, would quickly weed out bad schools and teachers, and over time would weed out mediocre schools and teachers. It would reward good schools and teachers. It would foster innovation in curricula, school organization, and the use of information technology. It would lower costs and increase choice.

But we don’t have a properly regulated system. Those who regulate the quality of our government schools do it badly. Why?

Because those regulators are themselves unregulated. Officially, they are regulated from above by the political process, but the political process is so ineffective at regulating regulators that they are essentially unregulated. They are not accountable to the public in any meaningful way.

Consider how government school quality is supposedly regulated. Suppose that, somewhere in the country, instruction of children in government schools is poor. Suppose further that money is not the problem, as in my hometown of Baltimore, where per-pupil funding is nearly the highest in the state, and far higher than the average tuition in private-sector schools in the same area.

The essential structure of government regulation remains the same, no matter how many layers of government overseers are added on.Who is immediately responsible for regulating — that is, for improving and keeping at a high level — the quality of instruction? The principals are. It’s their job to make sure the teachers do a good job. But not all principals do a good job of making sure the teachers do a good job. They may allow poor instruction to continue because they lack the necessary authority, or experience, or competence, or motivation, or support from their own superiors. Whatever the reasons may be, when principals don’t do a good job, who is accountable? Who or what should regulate principals’ performance?

The school board should. It hires the principals; it is supposed to make sure the principals are getting good performance from teachers so that students can learn. But suppose the school board does a bad job — how is its performance to be regulated? A bad school board might not recognize the problems in its schools. It might be friendly with poor principals.

Or it might be doing the best it can, but be so tied down by the teachers’ union contract that it can’t require the changes it thinks are needed. Or, despite the best will in the world, the board might simply not know what to do to improve a mediocre school district. Whatever the reason, in such cases the unsatisfactory performance of the school board must not be tolerated. The school board itself must be regulated, held accountable, and required to do a better job. Who or what is to do that?

In most states, school board members are democratically elected, so the citizens of the district, in their capacity as voters, are responsible for regulating school board quality. If a particular board is doing a poor job, then voters should vote its members out and vote in a good board — one that can recognize problems in its districts and schools, resist the temptation to hire (or not fire) personal friends, stand up to teachers’ unions, and, most essentially, know enough about teaching, learning, and school management to regulate well the schools it oversees.

But voters as a whole are unlikely to be sufficiently well informed and motivated to hold school boards to account at the ballot box. While some voters have children in their government schools, most do not. Also, voters realize that any one person’s vote is unlikely to decide an election, and researching different candidates’ qualifications and positions takes time. Hence, it does not make sense for most voters to inform themselves of candidates’ qualifications. They are rationally ignorant about the needs or problems of their local school system and the qualifications of the school board candidates.

In some states, state departments of education take responsibility for regulating school boards. In extreme cases, a state government bureaucracy takes over underperforming schools or school districts and installs new management. But state departments of education may also perform well or badly, for the same reasons school boards do. Who or what regulates the state departments of education? Well, the state legislatures do.

And if a state legislature is doing a poor job of regulating the department of education, again it falls to the citizens, in their capacity as voters, to vote out the legislators who are not regulating the departments of education well and to vote in new legislators who will. But here again, most voters know little to nothing about their representatives’ or candidates’ positions on or competence in education policy.

We can add to the mix the federal government’s participation with President Bush’s No Child Left Behind policy, President Obama’s Race to the Top policy, the push to implement Common Core, and, most recently, the Every Student Succeeds Act signed by President Obama on December 15, 2015. The essential structure of government regulation of schooling remains the same, however, no matter how many layers of government overseers are added on. Government schooling is regulated in a monolithic, top-down manner by a chain of political authority. Teachers are regulated by principals, who are regulated by school boards, who are regulated by state departments of education, who are regulated by state legislators, who are regulated by voters.

Government schooling is regulated in a monolithic, top-down manner by a chain of political authority.Where, in all this, are the parents, the people with the most knowledge of their children’s needs and the greatest incentive to see them educated well? Ultimately, parents do have some decision-making authority over the government schools their children attend: they vote. But what a dreadfully attenuated control that gives them: only once every two years do they have any actual choice that affects this political structure. That choice is generally among candidates who may know or care little about education, and whose positions on a host of other issues those parents must consider also. And each voter’s vote has a vanishingly small chance of deciding the election.  

With government regulation of schooling, each higher level of regulatory responsibility is ever more distant from the students, classrooms, and teachers. At every remove from principal to school board to department of education, the regulators have less and less knowledge of the students, the teachers, the school’s culture, and teaching itself. At every remove, the incentives to act become more about politics and less about learning.

What all this means in practice is that the regulators of government school quality are really not regulated at all. The system does not force principals and school boards and legislatures to regulate well or to replace them if they don’t.

The same problem afflicts the regulation of all sorts of industries:

  • Taxi and rideshare regulators in many cities actively harm the public interest by impeding ridesharing services such as Uber and Lyft. They get away with this breach of duty because they are, in practice, unregulated by state legislatures.
  • The FDA, in practice unregulated by Congress, misregulates new drug development so badly that it can take 10 years and over a billion dollars for a new medicine to be developed and brought to market.
  • Wrongheaded bank capital regulation encouraged banks to load up on mortgage-backed securities during the housing boom and so aggravated the financial crisis that followed, but Congress does not meaningfully regulate the regulators responsible: the Fed, the Office of the Comptroller of the Currency, and the FDIC.
  • Occupational licensing boards routinely protect incumbent practitioners by blocking newcomers with excessively strict requirements, thereby harming the public with higher prices and fewer choices. These boards are in practice not regulated by their state legislatures.

Ironically, regulation is so bad in our overregulated economy because our regulators are unregulated.

There is a better way: regulation by market forces.

Regulators need not be accountable upward to ever more distant layers of a political bureaucracy and thence to the public as voters, who get to choose only every couple of years. In free markets, those who regulate are accountable downward to the public as customers, who choose day to day or even moment to moment, and thereby regulate the regulators very closely indeed.