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Are We Seeing the Cognitive Limits of the Regulatory State?

Ever since the election in November I’ve been saying that I expected that someone at the White House was going to place a discreet phone call to Lisa Jackson over at the Environmental Protection Agency telling her to go on vacation until after the 2012 election, and to cool it with the whole suite of new regulations that threaten a chokehold on the American economy. (The Wall Street Journal editorial page echoed this perception in today’s lead editorial with the comment that “Maybe the White House should short-circuit all this by dispatching EPA administrator Lisa Jackson to an undisclosed location through November 2012.”) Two in particular stood out: the “boiler MACT rules” that would impose huge costs on any business that uses a boiler of any kind while delivering few if any health benefits, and the greenhouse gas emission rules that have long been scheduled for release next month. I could tell these rules represented a quantum leap beyond anything EPA had done before by the fact that when we held a half-day conference about these proposed rules at AEI back in November, we had a standing-room-only crowd in our conference center. This is very rare for an event on wonky regulatory stuff. Usually we have trouble getting the conference center half-filled. The high turnout suggested to me the intensity of concern about these regulatory advances.
The proposed “boiler MACT rules” were suddenly and unexpectedly yanked last month, with the EPA claiming they needed “more study.” What is most notable about this decision is that the EPA said the rules have been yanked “indefinitely,” despite the fact that they are under court order to produce these rules, and the yanked rules had been finalized and published already in the Federal Register. Then on Monday of this week the EPA announced a two-month delay in releasing its long-awaited proposed rules for curtailing greenhouse gas emissions under the Clean Air Act. This has to worry environmentalists, as the EPA’s regulatory reach is the key fallback position for the climate campaign in the aftermath of the collapse of cap and trade, and as environmentalists had expended so much effort to get the EPA to this position, stretching back to the Massachusetts v. EPA case in 2007.
Then this morning comes the news of a delay in producing new regulations to implement the Dodd-Frank legislation affecting the financial industry, even though the law mandates that it take effect one month from now. From the sound of the news accounts, the regulators are having difficulty figuring out rules that make any sense or that can be implemented without negative untended effects on financial markets. (It is probably the case that the existing regulatory regime not only contributed to the housing meltdown and financial crisis of 2008, but is holding back the recovery today.)
Quite aside from the political pressure being brought against the Obama Administration for the job-killing effects of overregulation, it is likely that the Obamanauts are running up against the basic problem that regulation shares the same epistemological or cognitive defects of socialist central planning. In other words, at some point the regulatory state cannot be made to work for the same reasons socialism cannot be made to work: the planners/regulators simply cannot assimilate enough information and make correct resource allocation decisions. The same problem is going to affect–is already affecting–the implementation of Obamacare; that’s why so many waivers are having to be granted. Hayek called this the “fatal conceit” of our time, and was best explained in his classic 1945 essay in the American Economic Review, “The Use of Knowledge in Society.” It’s worth reading this short classic in its entirety (I assign it to students as the best short statement of why the administrative state cannot be made to work), but here is a brief excerpt that conveys the argument well:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources–if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

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