2012-01-13

Capture Theory (Broadcast Media)




Regulatory capture

In economics, regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called "captured agencies".

The theory

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented. For an example of this, see a statement by US Attorney General Richard Olney in the ICC section below.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.

Likelihood of regulatory capture is a risk to which an agency is exposed by its very nature. This suggests that a regulatory agency should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all lest the agency become victim, in which case it may serve its regulated subjects rather than those whom the agency was designed to protect. A captured regulatory agency is often worse than no regulation, because it wields the authority of government.

Economic rationale

The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are more likely to be motivated to influence the regulatory body than dispersed individual consumers, each of whom has little particular incentive to try to influence regulators. When regulators form expert bodies to examine policy, this invariably featured current or former industry members, or at the very least, individuals with contacts in the industry.

Some economists, such as Jon Hanson and his co-authors, argue that the phenomenon extends beyond just political agencies and organizations. Businesses have an incentive to control anything that has power over them, including institutions from the media to academia to popular culture, and thus will try to capture them as well. They call this phenomenon "deep capture."

American examples

Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE)

In the aftermath of the 2010 Deepwater Horizon oil spill, the Minerals Management Service (MMS), which had had regulatory responsibility for offshore oil drilling, was widely cited as an example of regulatory capture. The MMS is now known as the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). The name was changed as part of a re-organization by Ken Salazar, who was sworn into office as the new Secretary of the Interior on the same day the name change was announced. Salazar's appointment was controversial because of his ties to the energy industry. As a senator, Salazar voted against an amendment to repeal tax breaks for ExxonMobil and other major petroleum companies and in 2006, he voted to end protections that limit offshore oil drilling in Florida's Gulf Coast. One of Salazar's immediate tasks was to "[end] the department’s coziness with the industries it regulates" but , a member of the Arizona House of Representatives, said “Salazar has a disturbingly weak conservation record, particularly on energy development, global warming, endangered wildlife and protecting scientific integrity. It’s no surprise oil and gas, mining, agribusiness and other polluting industries that have dominated Interior are supporting rancher Salazar — he’s their friend.” Indeed, a spokesman for the National Mining Association, which lobbies for the mining industry, praised Salazar, saying that he was not doctrinaire about the use of public lands.

MMS had allowed BP and dozens of other companies to drill in the Gulf of Mexico without first attaining permits to assess threats to endangered species, as required by law. BP and other companies were also given a blanket exemption from having to provide environmental impact statements. The National Oceanic and Atmospheric Administration (NOAA) issued strong warnings about the risks posed by such drilling and in a 2009 letter, accused MMS of understating the likelihood and potential consequences of a major spill in the Gulf of Mexico. The letter further accused MMS of highlighting the safety of offshore drilling while understating the risks and impact of spills and playing down the fact that spills had been increasing. Both current and former MMS staff scientists said their reports were overruled and altered if they found high risk of accident or environmental impact. , director of the Center for Biological Diversity, said, "MMS has given up any pretense of regulating the offshore oil industry. The agency seems to think its mission is to help the oil industry evade environmental laws.”

After the Deepwater accident occurred, Salazar said he would delay granting any further drilling permits. Three weeks later, at least five more permits had been issued by the minerals agency. In March 2011, BOEMRE began issuing more offshore drilling permits in the Gulf of Mexico. Michael Bromwich, head of BOEMRE, said he was disturbed by the speed at which some oil and gas companies were shrugging off Deepwater Horizon as "a complete aberration, a perfect storm, one in a million," but would nonetheless soon be granting more permits to drill for oil and gas in the gulf.

Commodity Futures Trading Commission (CFTC)

In October 2010, George H. Painter, one of the two Commodity Futures Trading Commission administrative law judges, retired and in the process, requested that his cases not be assigned to the other judge, . Painter wrote, "On Judge Levine's first week on the job, nearly twenty years ago, he came into my office and stated that he had promised Wendy Gramm, then Chairwoman of the Commission, that we would never rule in a complainant's favor," Painter wrote. "A review of his rulings will confirm that he fulfilled his vow." In further explaining his request, he wrote, "Judge Levine, in the cynical guise of enforcing the rules, forces pro se complainants to run a hostile procedural gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case." Gramm, wife of former Senator Phil Gramm, was accused of helping Goldman Sachs, Enron and other large firms gain influence over the commodity markets. After leaving the CFTC, Gramm joined the board of Enron.

In January and February 2010, independent metals trader Andrew Maguire became a whistleblower was when he contacted the CFTC about manipulation of the silver market. On February 3, 2010, Maguire sent e-mails to the CFTC about an example of market manipulation that would take place two days later, describing the two possible scenarios in detail. Two days later, he sent a follow-up e-mail noting that the event had transpired exactly as he had predicted. The CFTC initially showed some interest in Maguire's information, but then stopped replying to his e-mail. After repeated requests for a response, he was sent a one-line e-mail, thanking him for his observations. Maguire was not invited to the subsequent CFTC hearing to consider regulating the precious metals market and was even barred from participating. Jeffrey Christian, a former Goldman Sachs employee, testified that gold was traded in "multiples of a hundred times the underlying physical", meaning that each ounce of gold is sold 100 times. GATA's Douglas terms the situation "a giant Ponzi scheme". The fraud involved in precious metals markets is in the trillions of dollars, dwarfing all other cases.

The CFTC is currently headed by former Goldman Sachs executive, Gary Gensler. CFTC commissioner Bart Chilton supports regulating the precious metals markets. Regulations have been proposed for the energy and metals markets but waivers have been issued and no penalties have been levied against any of the big traders.

Environmental Protection Agency (EPA)

Natural gas drilling increased in the United States after the Environmental Protection Agency said in 2004 that hydraulic fracturing, "posed little or no threat" to drinking water. Also known as "fracking", the process was invented by Halliburton in the 1940s. Whistleblower says that the EPA's conclusions were "unsupportable" and that five of the seven-member review panel that made the decision had conflicts of interest. A New York Times editorial said the 2004 study "whitewashed the industry and was dismissed by experts as superficial and politically motivated." In 2010, EPA Superfund investigators warned the town of Pavillion, Wyoming not to drink their water after finding benzene, naphthalene, phenols, metals and and noxious chemicals in their water supply. The EPA investigation in Pavillion came after residents complained of discolored water, foul smells and illness in 2008. The EPA recommended that residents use fans while bathing or washing clothes to avoid the risk of explosion. The EPA is currently prohibited by law from regulating fracking, the result of the "Halliburton Loophole," a clause added to the 2005 energy bill at the request of then-vice president Dick Cheney, who was CEO of Halliburton before becoming vice president. Legislation to close the loophole and restore the EPA's authority to regulate hydraulic fracturing has been referred to committee in both the House and the Senate.

Federal Aviation Administration (FAA)

The Federal Aviation Administration has a dual-mandate both to promote aviation and to regulate its safety. A report by the Department of Transportation that found FAA managers had allowed Southwest Airlines to fly 46 airplanes in 2006 and 2007 that were overdue for safety inspections, ignoring concerns raised by inspectors. Audits of other airlines resulted in two airlines grounding hundreds of planes, causing thousands of flight cancellations. The House Transportation and Infrastructure Committee investigated the matter after two FAA whistleblowers, inspectors Charalambe "Bobby" Boutris and Douglas E. Peters, contacted them. Boutris said he attempted to ground Southwest after finding cracks in the fuselage, but was prevented by supervisors he said were friendly with the airline. The committee subsequently held hearings in April 2008. James Oberstar, former chairman of the committee said its investigation uncovered a pattern of regulatory abuse and widespread regulatory lapses, allowing 117 aircraft to be operated commercially although not in compliance with FAA safety rules. Oberstar said there was a "culture of coziness" between senior FAA officials and the airlines and "a systematic breakdown" in the FAA's culture that resulted in "malfeasance, bordering on corruption."

On July 22, 2008, a bill was unanimously approved in the House to tighten regulations concerning airplane maintenance procedures, including the establishment of a whistleblower office and a two-year "cooling off" period that FAA inspectors or supervisors of inspectors must wait before they can work for those they regulated. The bill also required rotation of principal maintenance inspectors and stipulated that the word "customer" properly applies to the flying public, not those entities regulated by the FAA. The FAA was directed to stop calling airlines its "customers". Southwest was eventually fined $10.2 million for failing to inspect older planes for cracks, according to a 2004 FAA directive.

In September 2009, the FAA administrator issued a directive mandating that the agency use the term "customers" only to refer to the flying public. Prior to the deregulation of the US air industry, the Civil Aeronautics Board served to maintain an oligopoly of US airlines.

In a June 2010 article on regulatory capture, the FAA was cited as an example of "old-style" regulatory capture, "in which the airline industry openly dictates to its regulators its governing rules, arranging for not only beneficial regulation but placing key people to head these regulators."

Federal Communications Commission (FCC)

Legal scholars have pointed to the possibility that federal agencies such as the Federal Communications Commission had been captured by media conglomerates. Peter Schuck of Yale University School of Law has argued that the FCC is subject to capture by the media industries’ leaders and therefore reinforce the operation of corporate cartels in a form of “corporate socialism” that serves to “regressively tax consumers, impoverish small firms, inhibit new entry, stifle innovation, and diminish consumer choice”. The FCC selectively granted communications licenses to some radio and television stations in a process that excludes other citizens and little stations from having access to the public.

Michael K. Powell, who served on the FCC for eight years and was chairman for four, was appointed president and chief executive officer of the National Cable & Telecommunications Association, a lobby group. As of April 25, 2011, he will be the chief lobbyist and the industry's liaison with Congress, the White House, the FCC and other federal agencies.

Meredith Attwell Baker was one of the FCC commissioners who approved a controversial merger between NBC Universal and Comcast. Four months later, she announced her resignation from the FCC to join Comcast's Washington, D.C. lobbying office. Legally, she is prevented from lobbying anyone at the FCC for two years and an agreement made by Comcast with the FCC as a condition of approving the merger will ban her from lobbying any executive branch agency for life. Nonetheless, Craig Allen, of Free Press, who opposed the merger, complained that "the complete capture of government by industry barely raises any eyebrows" and said public policy would continue to suffer from the "continuously revolving door at the FCC".

Federal Reserve Bank of New York (New York Fed)

The Federal Reserve Bank of New York is the most influential of the Federal Reserve Banking System. Part of the New York Fed's responsibilities is the regulation of Wall Street, but its president is selected by and reports to a board dominated by the chief executives of some of the banks it oversees. While the New York Fed has always had a closer relationship with Wall Street, during the years that Timothy Geithner was president, he became unusually close with the scions of Wall Street banks, a time when banks and hedge funds were pursuing investment strategies that caused the 2008 financial crisis, which the Fed failed to stop.

In the wake of the financial meltdown, Geithner became the "bailout king" of a recovery plan that benefited Wall Street banks at the expense of U.S. taxpayers. Geithner engineered the New York Fed's purchase of $30 billion of credit default swaps from American International Group (AIG), which it had sold to Goldman Sachs, Merrill Lynch, Deutsche Bank and Société Générale. By purchasing these contracts, the banks received a "back-door bailout" of 100 cents on the dollar for the contracts. Had the New York Fed allowed AIG to fail, the contracts would have been worth much less, resulting in much lower costs for any taxpayer-funded bailout. Geithner defended his use of unprecedented amounts of taxpayer funds to save the banks from their own mistakes, saying the financial system would have been threatened. At the January 2010 congressional hearing into the AIG bailout, the New York Fed initially refused to identify the counterparties that benefited from AIG's bailout, claiming the information would harm AIG. When it became apparent this information would become public, a legal staffer at the New York Fed e-mailed colleagues to warn them, lamenting the difficulty of continuing to keep Congress in the dark. Jim Rickards calls the bailout a crime and says "the regulatory system has become captive to the banks and the non-banks".

Food and Drug Administration (FDA)

The United States Food and Drug Administration has also been accused of acting in the interests of the agricultural, food and pharmaceutical industries (and supporting monopolies) at the expense of consumer health interests. Monsanto's growth hormone, rBGH, which has been linked to cancer in cows and humans, has been banned in numerous countries, but is unlabeled and legal in the United States. Margaret Miller, a former chemical laboratory supervisor at Monsanto, wrote a scientific report that was to be submitted to the FDA to obtain approval of the drug. Shortly before the report was submitted, Miller quit Monsanto to take a job at the FDA, where her first job was to approve the report she had just written while employed at Monsanto. Michael R. Taylor, the FDA's deputy commissioner for policy, and a former staff lawyer at Monsanto, where he worked on rGBH legal issues, wrote the FDA's labeling guidelines for rGBH.

Interstate Commerce Commission (ICC)

Historians, political scientists, and economists have used the Interstate Commerce Commission, a now-defunct federal regulatory body in the United States, as a classic example of regulatory capture. The creation of the ICC was the result of widespread and longstanding anti-railroad agitation. Richard Olney joined the Grover Cleveland administration as attorney general not long after the ICC was established. Olney, formerly a prominent railroad lawyer, was asked if he could do something to get rid of the ICC. He replied, "The Commission… is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things.… The part of wisdom is not to destroy the Commission, but to utilize it." The Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, critics claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.

Nuclear Regulatory Commission (NRC)

According to Frank N. von Hippel, despite the 1979 Three Mile Island accident in Pennsylvania, the Nuclear Regulatory Commission has often been too timid in ensuring that America’s 104 commercial reactors are operated safely:

Office of the Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency has strongly opposed the efforts of the 50 state attorneys general, who have banded together to penalize banks and reform the mortgage modification process, following the subprime mortgage crisis and the financial crisis of 2008. This example was cited in The New York Times as evidence that the OCC is "a captive of the banks it is supposed to regulate".

Securities and Exchange Commission (SEC)

The United States Securities and Exchange Commission has also been accused of acting in the interests of Wall Street banks and hedge funds and of dragging its feet or refusing to investigate cases or bring charges for fraud and insider trading. Financial analyst Harry Markopolos, who spent ten years trying to get the SEC to investigate Bernie Madoff, called the agency "nonfunctional, captive to the industry." The SEC has been found by the U.S. Senate Committee on Finance, the Senate Judiciary Committee and a federal district court to have illegally dismissed an employee in September 2005 who was critical of superiors' refusal to pursue Wall Street titan John Mack. Mack was suspected of giving insider information to Arthur J. Samberg, head of Pequot Capital Management, once one of the world's largest hedge funds. After more than four years, of legal battles, former SEC investigator Gary J. Aguirre filed papers in an Freedom of Information Act (FOIA) case he had against the SEC, seeking an order to force the SEC to turn over Pequot investigation records to him on the grounds that they had not charged anyone. Aguirre had already provided incriminating evidence of Pequot's insider trading involving Microsoft trades to the SEC in a letter on January 2, 2009. The morning after Aguirre's FOIA papers were filed, the SEC announced they had filed charges against Pequot and Pequot had agreed to disgorge $18 million in illegal gains and pay $10 million in penalties. A month later, the SEC settled Aguirre's wrongful termination lawsuit for $755,000.

The list of officials who have left the SEC for highly lucrative jobs in the private sector and who sometimes have returned to the SEC includes Arthur Levitt, Robert Khuzami, Linda Chatman Thomsen, Richard H. Walker, Gary Lynch and Paul R. Berger. The Project on Government Oversight (POGO) released a report on May 13, 2011 which found that between 2006 and 2010, 219 former SEC employees sought to represent clients before the SEC. Former employees filed 789 statements notifying the SEC of their intent to represent outside clients before the commission, some filing within days of leaving the SEC.

Reporter Matt Taibbi calls the SEC a classic case of regulatory capture and the SEC has been described as an agency that was set up to protect the public from Wall Street, but now protects Wall Street from the public. On August 17, 2011, Taibbi reported that in July 2001, a preliminary fraud investigation against Deutsche Bank was stymied by Richard H. Walker, then SEC enforcement director, who began working as general counsel for Deutsche Bank in October 2001. , an SEC lawyer, the whistleblower who exposed this case also revealed that for 20 years, the SEC had been routinely destroying all documents related to thousands of preliminary inquiries that were closed rather than proceeding to formal investigation. The SEC is legally required to keep files for 25 years and destruction is supposed to be done by the National Archives and Records Administration. The lack of files deprives investigators of possible background when investigating cases involving those firms. Documents were destroyed for inquiries into Bernard Madoff, Goldman Sachs, Lehman Brothers, Citigroup, Bank of America and other major Wall Street firms that played key roles in the 2008 financial crisis. The SEC has since changed its policy on destroying those documents and the SEC investigator general is investigating the matter.

Canadian examples

Canadian Radio-television and Telecommunications Commission (CRTC)

In August 2009, the CRTC provisionally granted a request by Bell Canada to impose usage-based billing on Internet wholesalers, igniting protest from both the wholesalers and consumers, who claimed that the CRTC was "kow-towing to Bell".

On February 2, 2011, CRTC chair Konrad von Finckenstein testified before parliament's Standing Committee on Industry, Science and Technology and justified the agency's decision. Critic Steve Anderson said, “The CRTC’s stubbornness in the face of a mass public outcry demonstrates the strength of the Big Telecom lobby’s influence. While government officials have recognized the need to protect citizens’ communications interests, the CRTC has made it clear that their priorities lie elsewhere." Other companies said to have influence over CRTC are Rogers Communications, Telus, Shaw Communications and Videotron.

International examples

World Trade Organization (WTO)

The academic Thomas Alured Faunce has argued the World Trade Organisation non-violation nullification of benefits claims, particularly when inserted in bilateral trade agreements, can facilitate intense lobbying by industry which can result in effective regulatory capture of large areas of governmental policy.

Japanese examples

In Japan, the line may be blurred between the goal of solving a problem and the somewhat different goal of making it look as if the problem is being addressed.

Nuclear and Industrial Safety Agency (NISA)

Despite warnings about its safety, Japanese regulators from the Nuclear and Industrial Safety Agency approved a 10-year extension for the oldest of the six reactors at Fukushima Daiichi just one month before a 9.0 magnitude earthquake and subsequent tsunami damaged reactors and caused a meltdown. Nuclear opponent , governor of Fukushima Prefecture from 1988–2006, said a conflict of interest is responsible for NISA's lack of effectiveness as a watchdog. The agency is under the Ministry of Economy, Trade and Industry, which encourages the development of Japan's nuclear industry. Inadequate inspections are reviewed by expert panels drawn primarily from academia and rarely challenge the agency. Critics say the main weakness in Japan's nuclear industry is weak oversight. Seismologist said, "The regulators just rubber-stamp the utilities' reports."

Both the ministry and the agency have ties with nuclear plant operators, such as Tokyo Electric. Some former ministry officials have been offered lucrative jobs in a practice called amakudari, "descent from heaven". A panel responsible for re-writing Japan's nuclear safety rules was dominated by experts and advisers from utility companies, said seismology professor Katsuhiko Ishibashi who quit the panel in protest, saying it was rigged and "unscientific". The new guidelines, established in 2006, did not set stringent industry-wide earthquake standards, rather nuclear plant operators were left to do their own inspections to ensure their plants were compliant. In 2008, the NISA found all of Japan's reactors to be in compliance with the new earthquake guidelines.

Ministry of Health, Labour and Welfare (MHLW)

In 1996, the Ministry of Health and Welfare (now combined with the Ministry of Labour) came under fire over the scandal of HIV-tainted blood being used to treat hemophiliacs. Although warned about HIV contamination of blood products imported from the U.S., the ministry abruptly changed its position on heated and unheated blood products from the U.S., protecting Green Cross and the Japanese pharmaceutical industry by keeping the Japanese market from being inundated with heat-treated blood from the United States. Because the unheated blood was not taken off the market, 400 people died and over 3,000 people were infected with HIV. No senior officials were indicted and only one lower-level manager was indicted and convicted. Critics say the major task of the ministry is the protection of industry, rather than of the population. In addition, bureaucrats get amakudari jobs at related industries in their field upon retirement, a system which serves to inhibit regulators. Moriyo Kimura, a critic who works at MHLW, says the ministry does not look after the interests of the public.

Quotes

In 1913 Woodrow Wilson wrote, "If the government is to tell big business men how to run their business, then don't you see that big business men have to get closer to the government even than they are now? Don't you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it."

At a January 2010 hearing of the House Committee on Oversight and Government Reform, U.S. Representative Marcy Kaptur told former president of the New York Fed and current Secretary of the Treasury, Timothy Geithner, “A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you.”

In a May 2011 article entitled, "Why CEOs Avoided Getting Busted in Meltdown", former Savings and Loan regulator William K. Black wrote, "The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity and the failure of regulators to do their jobs."

In a June 2011 article by the Associated Press, nuclear engineer Paul Blanch said, "It's a philosophical position that [NRC regulators] take that's driven by the industry and by the economics: What do we need to do to let those plants continue to operate? They somehow sharpen their pencil to either modify their interpretation of the regulations, or they modify their assumptions in the risk assessment."

See also

Footnotes

References

Bibliography

External links


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