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Market Failure and the Regulatory State

I have been thinking a lot lately about the idea of market failure. As someone involved in the housing business, this is something that is pretty much always on my mind. But the intensity was dialed up because I had to deal with something in another completely broken industry: the car business. There was a minor recall on my Jeep and after pleading with my wife unsuccessfully for several months to handle it for me, I finally accepted my fate. 

When I first called the dealership the service department told me they didn’t take appointments. But when I called them again the next day, they happily scheduled an appointment for me. What gives?

Of course, my experience was terrible. The staff was friendlier than usual thankfully but still spoke to me as if I were a giant burden to their existence. The whole process was annoying, slow, and administratively burdensome. For the life of me, I cannot understand why car dealers are still using dot matrix printers.

Is there anything worse than a car dealership? Yes, there is sadly. It’s called the American healthcare system. I had a run-in there as well this week.

As a middle-aged man, I was due for everyone’s favorite procedure—the colonoscopy. Thankfully, everything checked out ok! By the way, I’m no medical professional, but given everything I’ve been reading and hearing about the rise of colon cancer cases, this is something I highly recommend. It’s not as bad as it seems plus you can use the mandatory preparation as a chance to do a nice 24-hour fast, which has benefits of its own.

Anyway, health care is interesting because the problems there are a function of both market failure and regulatory overreach. With car dealerships, the market failure is more a function of the nature of the business itself. The cycle time for auto sales is so long—how often do you buy a car or go for service?—that a perverse incentive system has developed where car dealership operators basically just want to maximize every single encounter for a short-term win rather than play the long game based on repeat business. 

Healthcare has a similar problem in a sense. Outside of sectors like dentistry and ophthalmology, it's not like there’s a natural demand for repeat business. But the market breakdown is exacerbated by a Frankenstein-like system of regulation that is so badly designed that health care market dynamics make absolutely no sense. 

As a consumer, it’s nearly impossible to find out the actual price of a procedure. It’s hidden behind complicated insurance policies with co-pays, co-insurance, deductibles, in-network and out-network pricing variability, and out-of-pocket maximums. Who benefits from all this? Certainly not ordinary Americans. 

I think there’s a strong case to be made for blowing up the whole regulatory structure around health care and trying to design something new that makes a little more sense. This is an area where—to borrow an idea from our inspiring podcast guest Leonora Camner—a citizen’s assembly might make some sense. But that’s a story for another day.

A big part of the work we have to do to improve America involves the regulatory state. I’m not one of those laissez-faire, free market fundamentalists who believe that some libertarian ideal will fix all our problems. There’s a place for government at the table as well. We know too much to leave everything to the market. That being said, it’s insane to sit back and accept existing regulatory frameworks that clearly aren’t working. This is true in health care, housing, and even education. We’re talking about our most important industries here. Regulatory reform is clearly something that should be on our radar and in a big way.

People tend to forget that the regulatory state—what some call the 4th branch of government—is relatively new on the scene. An outgrowth of the Depression and WWII, it’s barely 100 years in the making. But it has become a massive force in the economy, impacting almost every industry. It’s the reason almost 3M people are working for the Federal Government on any given day in America.

And it’s become a legal behemoth. With over 180,000 pages of regulations on the books, we are far, far from the days of laissez-faire capitalism.

In other words, it’s no joke, supports the lifestyle of a whole lot of lawyers, and is something we cannot ignore.

The battle over the future of the regulatory state has already started actually. There’s a big issue on the table right now. The Supreme Court has agreed to hear a case that will challenge something called the Chevron Doctrine. For an excellent summary and coverage of the issue please check out this article from our good friends at Tangle. 

The Chevron Doctrine is based on a 1984 Supreme Court case that established a rule where, in cases where the law was ambiguous, courts would give deference to the interpretation of the administrative officials in charge. In other words, courts would stay out of the business of interpreting the legal language in all these thousands of pages of regulations. The theory being:  Congress can always just pass a law to clarify things if they don’t like how Federal Government employees are interpreting things. Of course, it’s not so simple.  

Over the years, politicians and lobbyists have loved the Chevron Doctrine because it places power in the hands of people who are easier to control—government employees, who can be hired and fired instead of judges, who are often there for life. This, by the way, is one of the big reasons Trump was talking about “draining the swamp” back in 2016. Step 2 of the plan involved, not filling in the swamp, but rather appointing/hiring more like-minded people. 

The whole story of the Chevron Doctrine is a perfect illustration of one of the big problems with the regulatory state: the law of unintended consequences. Conservatives were the ones originally advocating for the idea as they wanted to give Regan-era appointees and employees the firepower to withstand environmental challenges from the progressives. Little did they know that the Chevron Doctrine would increasingly be used as a key weapon against their policies as the tables turned in Washington. Now after several decades of appointees, it is the right that is clamoring for a reversal. Woops!

My Constitutional legal training consists of one semester of Con Law 101, so I cannot really opine on the merits of the law, but my gut says the Chevron Doctrine should be reversed. The whole problem here in these administrative law cases is that Congress keeps passing laws with ambiguous language. They are doing this on purpose, of course. The more confusing the better. But we’d all be better off if we just forced Congress to do a better job. The Chevron Doctrine gives them a pass on this and creates a situation for money to wield an outsize influence on the outcome. In many cases, the ambiguous language is being fed directly to Congress on purpose from the armies of lobbyists and lawyers representing big industry.

Many of the features of the administrative state—things like Social Security, Medicare, the FDA, and the SEC just to name a few—are not things we should just up and abandon. But if we want to get serious about ensuring America remains a competitive capitalist democracy, we have to take a hard look at the 180,000 pages of regulations on the books. 

Ps.

The Coin of Mattering from an inspiring Profit+ reader

Some cool Extreme Brainstorming Prompts

&

Finally, even for those who aren’t religious or spiritual, here’s an excellent podcast about the power of money in life.

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