I have written before about the impossibility of "scientifically" managing the economy, about the mistake of relying upon econometrics, about the inevitable failure of all "technocratic" solutions, and also about the way a government program, once begun, is almost impossible to remove. I also wrote about how those programs tend to grow in size in direct proportion to their failures. And finally, I wrote about how the failures of government programs are inevitably blamed on the "free market" rather than the initial intervention. However, what I have not done, is to put together all of those thoughts to explain how any single government intervention inevitably takes on a life of its own, not just persisting despite all efforts to repeal it, but also growing in scope and expense, distorting the economy through its perverse incentives, and, along the way. spawning countless new interventions.

That is what I hope to do here.

Our first example is the banking industry. I apologize in advance to regular readers, as I am sure they are sick of this example. However, banking provides an almost perfect example of ever increasing scope, as well as the rewarding of failure with increased power. But, as I have used banking so often, I will try to keep that example short. After that, we will look at student loans, unions and other labor laws, and the FDA (especially so-called "orphan drugs" and the regulatory incentives that create them). I will even take a brief look at so-called "natural monopolies", such as utilities and phone service, and examine whether they truly are "natural" monopolies requiring government regulation, and also look at the ways technology is rapidly destroying even the weak arguments in favor of viewing them as special cases. That should eliminate the possibility that, by focusing on banking so often, I am presenting a misleading picture. If my rules apply to that wide a range of government interests, I think it is safe to say that it is a universal rule.

To start, let us look at banking. However, this time, rather than starting with the federal reserve, let us look at the original arguments for any federal involvement in banking, in this case, the creation of the first federal banking rules. Prior to the creating of the state banking system, there existed an era of largely unregulated banking. During this time there were several notorious abuses of the banking system. First, banks would establish themselves in remote locales, issuing huge numbers of notes. Due tot heir remote location, it was unlikely the notes would ever be presented for collection, and so they could create money far out of proportion to their reserves.

However, this problem did not last long. Faced with piles of such notes, many banks formed voluntary groups which would pool all their notes making it worthwhile to present the entire lot for redemption into specie. As this threatened such "wildcat" banks with insolvency, many went under. Others, having pull with local law makers, asked that states pass laws to prevent such "unfair" practices. Either restricting out of state demands for specie. Prohibiting the pooling of notes, or simply declaring a bank holiday to prevent insolvency.

In other words, there was a problem with the free market (wildcat banks), which the free market then began to solve. But, while the market was adapting to this new circumstance, many wildcat bankers turned to their state legislatures to protect them against the consequences of their own misdeeds.

Of course, the public did not see it this way. Instead they saw their "local" banks being bankrupted by greedy cabals of big city bankers and thought there was a problem with the free market. Buying into the arguments of unscrupulous wildcat bankers and federal regulators, they came to believe the free market, driven by heartless greed, needed to be "fixed". And so the state banking system was born.

And once born, the state banking system proved to be an ideal vehicle for inflation. As the system was based upon pyramiding one set of reserves on another, it allowed for easy inflation, with the same reserves being use dot support several times more currency than was feasible under a private banking system. And so, despite all the claims of improved stability, the well known boom-bust cycle was born.

Of course the federal government could not admit the system itself was to blame for the crash. Previous bank problems had been the result of greedy bankers operating under too little regulation. With the new regulations, that should not be a problem. And so the new excuse was born, that there was simply "too little money." The problem was not greed, or inflation, but that there simply was not enough gold for the system to work. This argument appealed to debtors, who knew more money would mean their debts would shrink in value. It also appealed to that greatest of all debtors, the government. Several solutions were proposed, silver (at the time inflationary, as the supply was rising quickly) was quite popular, but in the end, the government came up with an even more self-serving solution, substituting treasury bonds for gold.

Of course with the money supply being based not on gold alone, but on the combination of gold and "monetized" government debt, inflation continued to increase at an accelerating rate. Banks could issue notes to buy bonds, then issue five times as many notes based on the value of those bonds. Were it not for requirements that a percentage of reserves be held in specie, the system would have allowed unlimited inflation, the only check being the amount of debt the government was willing to support.

The rest of the story I have covered again and again, the repeated inflation and recession cycle eventually led to the formation of the Federal Reserve. By centralizing inflation and removing many of the anti-inflationary pressures caused by competing banks capable of issuing notes, the money supply could grow ever grater, leading to the "roaring twenties" and the Great Depression. As a result, FDR cut money loose form gold, freeing the banks to inflate more and more, with the end results we see around us, chronic inflation, repeate4d boom and bust cycles and a general expectation that money will regularly lose purchasing power.

What is forgotten is that the whole system was introduced in order to protect us against bank failures, to ensure economic growth and to make sure money maintained a constant value. Three goals which the current system has notably failed to achieve. In fact, if anything, we are in worse shape than we were in the mid-eighteenth century when the federal government first interfered with banking. Despite claims to the contrary, the gold standard in use at the time provided both a consistent value and prevented any but the most mild inflation. Nor did it lead to more bank failures than a managed currency would, as both the S&L debacle of the eighties and our present financial situation prove. However, as I have argued, the fact that it failed to meet even one of its goals has not impeded the expansion of the original intrusion. In fact, the very fact that it failed has been sued to justify ever granting the state ever greater power, expanding the scope of the original laws, and, in the end, basically turning over the financial realm almost entirely to the federal government.

But I have covered banking enough times that I am sure my regulars are sick of hearing about it. (And for those new to my site, you will be sick once you follow a few dozen of the links in the first two paragraphs.) So let us look at some examples form other fields.

How about the realm of student loans? The original idea was to put college education within reach of those who were smart enough but unable to afford university. However, the original good intentions were not quite successful. First, because universities now knew what amount students could be expected to receive in educational loans, they began to engage in price discrimination, charging each student what they could pay, offsetting the remainder with grants, loans and "scholarships". in other words, the student loans took a fixed price and turned it into the ultimate in pro-seller price discrimination, without noticeably lowering the cost of education.

On the other hand, it did manage to lower the quality. With so much money available, the universities were obviously tempted to lower standards to both admit and graduate as many students as they could while maintaining their original reputation. As a result, bachelor's degrees became the equivalent of high school diplomas in terms of job qualifications, and, as they became the bare minimum for many jobs, many schools sprung up, with lower standards, catering to those who wanted to do the minimum necessary to get that BA. Thus, a program intended to produce a better educated population instead produced a population getting essentially the same education at greater expense, taking four more years.

However, that is not the whole story. As I said, bad programs breed new bad programs, and that is what we are seeing today. As college tuition still remains expensive because of the price discrimination student loans allow, and as the dumbing down of the BA has made it the bare minimum for much employment, we are beginning to hear calls for not just free universal undergraduate education, but even for mandatory undergraduate education. In other words, having gone from free elementary education, to mandatory elementary education, to mandatory high school, we are now moving to mandatory undergraduate education, all without producing a significantly better educated populace.

It has not yet come to pass, but I predict that, were we to move to the free and mandatory baccalaureate degree,  the next step would be increased aid for graduate studies, followed swiftly by an MA/MS becoming the new standard for entry level positions. Eventually, if allowed to run its course, the average American, outside of the military, would not enter the work force until in his late 20's. And while this may do wonders for keeping unemployment numbers low, considering the steady degrading of educational standards, I fail to see what this eternally prolonged adolescence gives us in exchange for all the money it costs.

But let us leave education and look at labor laws.

Unions were ,originally, given little or no recognition by government. Their efforts to disrupt business were treated as riots and they were seen as possessing no more right to incite violence or disrupt trade than any other group of individuals. Throughout the early to mid 20th century unions gradually came to be seen as something different, as special pseudo-governmental entities, granted the legal right to disrupt trade, prevent the hiring of replacements and in other ways violate the rights of employers and non-union employees.

That is, until World War II, when the government came to realize that granting unbridled power to the unions meant the unions could extort massive sums from the government in need of wartime shipping and manufacturing. And so the government created yet another layer of government, the NLRB to enforce union agreements with employers. And thus began the endless see-saw back and forth of labor laws, piling one layer upon another, one pro-union, one pro-employer, forming a confused, byzantine complex of laws, unintelligible even to those who specialize in such matters.

What makes the whole thing so ironic is that it all would be unnecessary had the government not granted special rights to the unions. Had they treated them as just any other voluntary association, not one bit of these laws would have been needed. But, as I have been arguing, once a bad idea is enacted into law, it never goes away, it simply spawns endless new laws trying to "correct" it.

We can see the same in unemployment insurance. Though this is not so much a case of added bad laws, it does embody the philosophy quite well. You see, whenever there is a bad patch, when the economy takes a downturn, there will be calls to extend unemployment insurance. Unfortunately, one outcome of extending unemployment insurance si that it will take people longer to find jobs. And it only makes sense. If your benefits run out in a week, you will take a worse job than you would if you have 17 weeks of benefits left. But, because people remain unemployed longer, the number of unemployed individuals rise. And, because unemployment numbers are rising, we once again hear calls to extend benefits even farther, which will in turn increase the number of unemployed... You see, the perfect embodiment of how bad ideas become self-perpetuating in the area of government.

Now let us turn to regulatory agencies, such as the FDA. The purpose of the FDA is to prevent ineffective or dangerous drugs from coming on to the market. Of course neither of those terms is well defined, and taken literally, there could be no drugs allowed at all, as no drug is without some risk. So, in practice, the agency ends up trying to balance risks against benefits and then allow those drugs whose benefits outweigh the risks. The problem being that, form the point of view of a regulator, there is much more risk to approving a drug than denying it. If you deny a drug, odds are very good no one will ever hear about it. So even if your denial kills billions, no one will know. On the other hand, if you approve a drug which then causes some deaths, even if it saves more than it kills, your career could end from the bad publicity. So the incentives are all toward denying drugs.

And this leads to a problem, as it means very few drugs pass FDA approval processes, making ti very risky for a drug company to propose a new drug. Even if we ignore the tremendous costs of research for a new drug, the approval process itself is costly, so each denial represents a significant cost. So the only drugs which are submitted for approval are those which are likely to have a significant market. As a result, drugs which are perfectly effective, but which treat diseases affecting only a handful of people are not submitted for FDA review. (There is another set of "orphan drugs", those kept off the market by the excesses of liability law, but that is another essay.)

And, as I have been saying, this problem, caused by the original meddling by the FDA, doe snot cause the government to rethink its original position. Instead the government proposes yet more intervention. In this case, subsidizing the manufacturers, or else waiving FDA regulations for certain drugs. (A similar waiver was also suggested for drugs not yet approved, but whose users are suffering from fatal conditions.) However, that solution raises more questions than it answers. After all, if we can safely waive FDA approval in these cases, why do we need it at all? And, if we don't waive it, how do we decide which drugs to subsidize and which ones to let stand on their own?

In the end, either plan will end up becoming grounds of lobbyist warfare, as each manufacturer tries to get as many products as possible included in this exempt category. And, without a doubt, these excesses will eventually lead to yet more regulations. Which is, once more, the pattern I am finding everywhere the government becomes involved. A bad law leads to a badly thought out exception, which, in turn, leads to still more badly conceived regulations, the whole growing ever larger and more complicated, yet never becoming any more effective.

Actually, I was going to go into many more examples, but I think I have made my point. Yes, there are examples form environmentalism, anti-trust law, and other areas, but they all follow a similar pattern. A bad law requires more bad laws to make it work, yet those bad laws themselves fail to fix the problem, and so still more layers of law accumulate. I have yet to see an area of regulation where this is not the case.

There is one area I feel the need to address, a sit is one which is so often mentioned in economic texts, the so-called "natural monopolies". The argument being that, because they are naturally monopolistic, these areas need special regulation. What makes this somewhat ironic is that two areas of "natural monopoly" have now disappeared. Phone service is one of our most competitive sectors, and, while cable TV is still usually brought by a single provider, it now competes with satellite tv and cable services from ISPs and phone companies. So most such "natural monopolies" have been destroyed by the progress of technology.

In fact the only remaining "natural monopoly" is one only because that was how the states treated it. That would be the area of public utilities. From the dawn of gas and electric service, cities treated utilities as quasi-governmental agencies, and so there arose conditions where each city had a single utility. However, there is no logical necessity for such a situation. We could easily have created a collectively owned infrastructure with competing services marketing their water, electricity and gas. In fact, many deregulation schemes have followed just that pattern. (Though many failed from too little deregulation. But that is another essay as well.)

So, though many argue natural monopolies call for special regulation, I would argue that most such natural monopolies are monopolies only because of how the state chose to handle them. And even in those cases where there is something like a natural monopoly, it is often so only because of present technology, and in the near future it will cease to be so. Which makes me think the argument for regulating "natural monopolies" is a rather weak one.

Which brings me to my conclusion, the answer to my implicit question, why? Why does state regulation not just result in negative outcomes, but also result in ever more far reaching and intrusive steps? And the answer is simple. Because, as I have argued, "scientific management' of the economy is impossible, any intervention will, of necessity, result in less satisfaction. As a result, people will be unhappy, and demand a remedy. This will lead to more layers of intervention. However, once again, this intervention will result in far from optimal results, which will lead to still more calls for action. And thus regulatory laws will always grow in number and complexity while never achieving better results.

In honesty, the only way to remedy the problem is to repeal the original law. However, as government regulators do not gain prestige by surrendering power, the institutional pressures work against any such sensible move, so it is almost impossible that bad laws will be repealed. As a result, the expansion of bad regulator rules is almost inevitable.