Kim Krawiec’s new empirical work on the degree and nature of “public” input around incorporating the Volcker Rule into the Dodd-Frank Act (which I mentioned in my last post as well) is valuable, eye-opening, and truthfully a bit depressing. It has a lot of resonance with some of the agenda-setting literature that comes out of political science: see, e.g., Anthony Downs, or Frank Baumgartner and Bryan Jones. One of the ideas that comes from this literature is that policy dynamics tend to be characterized by short periods of high public and political attention to issues, surrounded by long periods of “low politics” in which policy fields are left in the hands of semi-closed epistemic communities. During those long periods of “low politics” institutionalized norms and/or taken-for-granted assumptions tend to go unquestioned.
I think Kim and I would agree that over the last twenty or more years, prudential regulation in particular had fallen into a period of "low politics”. I would argue that this was one of the reasons that prudential regulation was insufficiently forward-looking and public-regarding. Notably, other areas of securities regulation – consumer protection in the United Kingdom, for example, or post-Enron legal reform in the United States per Roberta Romano – had spent some time in the realm of “high politics”. Kim’s paper reinforces the notion that during periods of high politics, it may be relatively uninformed public attention that drives the policy agenda forward. The need to be seen to be “doing something” prompted the inclusion of a version of the Volcker Rule in Dodd-Frank.
But Kim’s paper also complicates the story, suggesting that the stark contrast between the careful written submissions of industry and the from-the-hip nature of many written public responses, plus the vastly better in-person access that industry representatives had to federal agency representatives, may be powerful influences even in a high politics moment. In other words, in times of low politics, industry actors are persuasive because they are embedded in the semi-closed epistemic community that makes the rules. In times of high politics, industry actors are still persuasive because they can be more thoughtful, informed interlocutors and because by virtue of their status and contacts, they are in a position to try to influence regulators when opportunities present themselves to help fill gaps and resolve ambiguities in legislation. Given that legislative gaps and ambiguities will be inevitable, and assuming we’re not prepared to do away with consultation or reason-based decision making, what response can there be for those concerned with undue industry influence over financial regulation and policy making?
Kim’s paper suggests that, at least when the subject matter is technical and gap-filling opportunities exist, the fact that an issue captures a high politics moment does not insulate it from the in-group influences that we worry about in moments of low politics. In other words, around technical issues, we always need to be worried about capture at a microsociological level. One, partial, response would be to shrink legislative gaps and ambiguities to the greatest degree possible, for example by drafting highly detailed, prescriptive legislation. By doing this, we would be saying that preventing undue industry influence is more important than rolling industry expertise, or the expertise of frontline regulators, into the rule-making process. We would also be saying that we are less worried about legislators pandering to public opinion than we are about regulators being captured by industry. At least to me, this feels unsatisfactory. As much as I am concerned about undue industry influence, it feels like throwing out the proverbial baby.
Alternatively, could we re-examine the roles that regulators and members of the public play in this story? If we are not confident about the public’s capacity to engage meaningfully with the subject matter, and Kim’s account suggests that we should not be, then it is not clear what we are trying to do with public input. In spite of directing effective letter-writing campaigns, the public interest groups intervening in the debate about the Volcker Rule seemingly had minimal impact. A sheer volume of letters had nothing to contribute to the technical questions that federal agency actors were addressing. Can we support and amplify a meaningful public voice in this process? Another (not mutually exclusive) solution may be to work toward developing a regulator with greater independent-mindedness, capacity, and the ability to itself engage forcefully and intelligently with industry. Financial regulation would benefit from building in, at a structural level, greater attention to these forms of influence. Brett McDonnell and Daniel Schwarcz’s depiction of the “regulatory contrarian” may be part of this picture, as would regulatory architecture that is better set up to systematically track and justify its own decision-making processes. Nor should we underestimate the contributions made by independent observers with the benefit of good access-to-information laws. Kim Krawiec’s empirical work sheds a lot of sunlight on the process she investigates, and demonstrates what a significant role an engaged scholar can play.