thinking strategically about regulations

8/14/2019 Thinking Strategically About Regulations

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MARKET INCENTIVES

THINKING STRATEGICALLY ABOUT REGULATIONS

1Friday, October 23, 2009


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PRESUMPTIONS

SUSTAINABLE ECONOMIC GROWTH REQUIRESTECHNOLOGICAL INNOVATION AND LABOR BE APPLIED TO

KEY SECTORS OF THE ECONOMY

TASK OF MARKETS IS TO ALLOCATE CAPITAL TO MOSTPRODUCTIVE PARTS OF THE ECONOMY

MARKET TRANSACTIONS REQUIRE ECONOMICINFORMATION TO ADOPT TECHNOLOGICAL INNOVATIONS& REALLOCATE LABOR TO MORE PRODUCTIVE USES



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PRESUMPTIVE FALLACIES

MARKETS ARE RATIONAL - MARKET TRANSACTIONSARE NOT REGULATED UNLESS THEY MUST BE

CAPITALISM MEANS UNREGULATED MARKETS -INDUSTRIAL INPUTS & OUTPUTS OF ECONOMY ARE NOTREGULATED UNLESS THEY NEED TO BE

NOTE: MARKETS CANNOT ALLOCATE CAPITALEFFICIENTLY IF SYSTEMIC RISKS ARE NOT COSTEDPROPERLY



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REGULATORY CHOICES

THOU SHALT NOT

IF....THEN

OFFSETS PURCHASE THROUGH MARKET MECHANISMS

BEHAVIORAL ECONOMICS



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MINOR PROBLEMS

REGULATIONS ARE ALMOST ALWAYS AFTER-THE-FACT

OFTEN REGULATIONS ARE MUCH TOO LATE - AFTER THEHORSE IS OUT OF THE BARN

REGULATIONS MUST BE FOUGHT FOR AGAINST ANEXPECTATION OF NO REGULATIONS

TYPICALLY, REGULATIONS ENACTED AMELIORATE THESITUATION ONLY FOR AWHILE, AS THEY ARE GAMED



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MAJOR PROBLEM

REGULATIONS OFTEN DO NOT ADDRESS SYSTEMIC RISKIN MARKETS

EXAMPLE: SYSTEMIC RISK IN CDOS (COLLATERALIZEDDEBT OBLIGATIONS) WAS NEITHER COSTED NORREGULATED. RESULT: TAXPAYERS ASKED TO PUT-UPRESERVES OF $17,500 BILLION IN 2008/09

MANY EXAMPLES: ANTHROPOGENIC CARBON EMISSIONSTREATING EARTHS ATMOSPHERE AS FREE COMMONS.RESULT: IF 350 PPM CO2 - $20,000 BILLION COST



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REGULATORY STRATEGY

PRESUMPTION: ALL INDUSTRIAL INPUTS & OUTPUTSMUST BE REGULATED. Q: HOW?

APPLY BEHAVIORAL ECONOMICS WIDELY - AIM FORMARKET INCENTIVES VS. THOU SHALT NOT

TRIAGE: FOCUS ON INPUTS & OUTPUTS OF HIGHESTVALUE FOR ECONOMIC GROWTH

USE ANALYSIS TO SET ECONOMIC COST ADJUSTMENTSURCHARGES FOR KEY INDUSTRIAL INPUTS/OUTPUTS



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BEHAVIORAL ECONOMICS

BUILD ECONOMIC COST OF SYSTEMIC RISK INTO COST OFINDUSTRIAL INPUTS AND OUTPUTS

THIS ENABLES BETTER DATA FOR MARKETTRANSACTIONS - POTENTIAL FOR BETTER CAPITALALLOCATION DECISIONS (ECONOMIC ROIC METRIC)

NOTE: MARKETS WILL ALWAYS DISCOUNT COST OFSYSTEMIC RISKS - REGULATIONS ARE MOST EFFICIENTMEANS TO ADD THIS DATA TO MARKET TRANSACTIONS



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SYSTEMIC RISK EXAMPLES

APPLY A FOSSIL FUEL INPUT FEE TO ALL SOURCES OFCARBON INPUTS

APPLY COST SURCHARGE/METRIC TON FOR ALL CO2EMISSIONS - NO EXCEPTIONS

APPLY WASTE STREAM FEE FOR ALL WASTE STREAMS -SOLID WASTE, LIQUID WASTE, AIR EMISSIONS

APPLY A WATER USE FEE FOR ALL FRESHWATERWITHDRAWALS FROM ALL SOURCES



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ADJUSTMENTS

IMPORTS - WILL NEED TO ADD ECONOMIC COSTADJUSTMENT SURCHARGE TO ALL IMPORTS. THIS FEEWILL BE A FACTOR GREATER THAN 1.00X DOMESTIC FEE

ENFORCEMENT - SURCHARGE IS APPLIED UNIVERSALLY -NO EXCEPTIONS. BURDEN IS ON FIRMS TO PROVEEXCEPTION

CHEATERS: PAY FEES W/ PENALTIES; IF PUBLICCOMPANY, SUSPENSION OF MARKET TRADES FOR ATIME; IF PRIVATE, CANCELLATION OF CORPORATECHARTER



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GAPS & BLACK SWANS

UNLIKELY TO CATCH ALL SYSTEMIC RISK DUE TOEMERGENCE & THE UNCALCUABILITY OF RARE EVENTS

NEED TO ESTABLISH RAPID RESPONSE REGULATORYCAPABILITY - CATCH EMERGING RISK BEFORE ITREACHES A CRITICAL COLLAPSE STAGE. ASSUMPTIONMUST BE PROACTIVE, ESTABLISH NEW REGS IN < 6 MOS

DO THE BEST WE CAN DO TO AVOID THE WORST.IMPORTANT TO SUPPORT CAPITALISM OVERCORPORATISM; AVOID CORPORATE WELFARISM



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CAPITAL MARKETS RESEARCH

LYLE BRECHT

410.963.8680

[email protected]

Expertise: identifying &

developing means for

managing systemic risk fornational security & sustainable

economic growth


thinking strategically about regulations

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