Regulation and Trust
Chris Arnade has a good piece out entitled “Why American Cities Are Squalid” in which he refers to the high regulation-low trust environment in the United States:
“If regulations massively limit both bottom up and top-down solutions, and if those solutions are expected to protect against all sorts of bad behavior, you end up building the least to mitigate the worst – building things the majority doesn’t want, or doesn’t find useful.
“The high regulation part of the US is usually couched in the language of safety, but it’s really about not allowing organic growth, which is messy – even though, people being people, it tends to result in things the majority really wants.”
There’s a lot to unpack there, but it certainly seems familiar.
At the level of the macroeconomic, our macroprudential approach targets the elimination of the business cycle.
Antitrust enforcement appears to be veering in the direction of punishing organic growth seen in companies, most often technology firms, that obtain scale by giving lots of people things they want to consume, even as it also signals its disdain for any kind of inorganic combination that may lead to efficiencies of scale.
Ipsos reports that businesses globally operate under a greater regulatory yolk than they did five years ago, before the Pandemic.
As a society, our appetite for the tradeoff between risk and reward seems to be diminishing. Or perhaps, we’re just focused on the risk. We operate in fear. We assume that the upside will take care of itself, unaffected by our defensive crouch.
Arnade is correct, of course. There is a relationship between regulation and trust. In a utopia in which we could trust everyone else with perfect certainty to abide by a set of uncodified norms evolved over history to avoid the worst outcomes, we wouldn’t need regulations that end up capping the upside in the process, rules that distort behavior.
Perhaps the pickup in regulation is a function of the growth in the distrust of authority that developed over the past five years.
We were told that a US President was a Russian collaborator or agent, despite little evidence of pro-Russia policy and at least one datapoint suggesting his willingness to take down Russian hostility in the field.
We were told that the Federal Government’s top advisors had recommended locking down the country after a deliberate process only to now see revelations of contemporary wholesale ad hockery and politicized suppression of scientific debate from the likes of credible, credentialed, and knowledgeable experts including the authors of the Great Barrington Declaration. The Wall Street Journal’s Allysia Finley describes Dr. Anthony Fauci’s legacy:
“His high-handedness and lack of candor with the public sowed distrust in health officials and vaccines. No matter how he pleads to the contrary, that will be his legacy.”
Faith in the public health establishment is now riven along partisan lines. Heaven help us when the next Pandemic hits if the passage of time has not been able to dilute the bitterness.
We were told during a Presidential election that a laptop containing evidence of depravity, criminal activity, and potential corruption did not belong to the son of one of the candidates but rather bore all the “Classic earmarks of a Russian disinformation operation,” only to find out after the election that it was the prodigal’s property after all.
In Western countries, there have been reports of foreigners interfering in electoral campaigns.
“… a public inquiry that will look into Beijing’s meddling in Canada, especially its alleged efforts to sway the country’s last two federal elections by backing certain candidates.”
Or, in the US:
“The United States on Friday released a U.S. intelligence assessment sent to more than 100 countries that found Moscow is using spies, social media and Russian state run media to erode public faith in the integrity of democratic elections worldwide.”
Crime has spiked since the Pandemic.
“Homicide and most other violent crimes declined in American cities in the first half of 2023, but they remain above levels seen before the onset of the coronavirus pandemic and nationwide protests that followed the killing of George Floyd, according to a new study of crime trends in 37 cities released today by the Council on Criminal Justice.”
Is it any wonder that trust in our fellow man and faith in our institutions have plummeted in the past five years, even as experts, the media, and increased regulations have failed us?
Which comes first, the stick or the misgiving? Do we lose trust because regulation increases, or do we increase regulation because trust drops?
Here’s a paper from noted economists Philippe Aghion, Andrei Schleifer and two colleagues that discusses the problem:
“We document that, in a cross section of countries, government regulation is strongly negatively correlated with measures of trust. In a simple model explaining this correlation, distrust creates public demand for regulation, whereas regulation in turn discourages formation of trust, leading to multiple equilibria. A key implication of the model is that individuals in low-trust countries want more government intervention even though they know the government is corrupt.”
The authors write “We think of trust as beliefs resulting from decisions about civicness made in families.”
The collapse in trust then is an attenuation of civic virtues: how to behave in a correct way when one is living in a society of likeminded peers. Trust leads to a conscious effort to minimize the negative impact of one’s conduct on other people. The opposite of civic-minded individuals would be those who seek to exploit or hurt others for their own personal gain, people like criminals, polluters, or businessmen who treat their employees like wage slaves.
If I think I’m living in a civic community, I will be civic-minded. If I think I’m living in the State of Nature, I’m going to look out for number one. If everyone is acting solely in their self-interest, regulation is one way to prevent a descent into the tenth level of hell.
There are two stable equilibria in the Aghion, Schleifer, et al. stylized model: perfect civicness, and perfect distrust.
“As the society reduces its investment in civicness, distrust in others and institutions rises over time. Unless trust is exogenously built up … the economy moves towards the bad equilibrium with zero civicness … an economy starting from a large share of civic individuals will implement no regulation and the share of civic individuals will grow over time. In contrast, when the society starts from a low level of civicness, regulation emerges and the share of uncivic individuals rises over time, as does corruption.”
The breakdown of civic virtue leads to more regulation and the demand for more regulation, culminating in a zero trust environment. There is a tax on our welfare from the decline in civic virtue that results from the truncation of the upside as society feels the imperative to protect against the downside. Of course, if you wanted to create a society in which regulation and bureaucracy were dominant, then you would create the conditions over time for the degradation of civic cohesion. Family structure would break down. Schools would not teach that virtue was real; moral relativism would be the rule. In fact, you would strip words of all meaning, leaving the interpretation of text to the eye of the beholder, having abandoned the possibility of eternal or universal truth. The underlying principle seeding this new world order is the belief that human nature is dynamic, evolving with the times, not fixed and context-independent.
It is a wondrous tribute to the strength of the West that we can enjoy our contemporary standard of living and fruits of innovation even as we suffer the distrust-regulatory spiral ever lower. If this is what a capped upside, imagine what life would be like without the governor plate.
Or perhaps societal decline is a phenomenon that operates at a lag, with uncouth behavior building on itself exponentially. If this is case, we have only begun to suffer. The West may be beyond the point of no return already, barring the serendipity of some future external disruption.