Don’t miss George Mason University law and economics whiz Henry G. Manne‘s brilliant Wall Street Journal ($) op-ed from yesterday in which he criticizes Eliot Spitzer’s latest assault on business. Dean Manne cuts through the fog of Spitzer’s public relations blitz to bear in on the true nature of Spitzer’s campaign against the big insurers:
In an era of general acceptance of deregulation and privatization, Mr. Spitzer has introduced the world to yet a new form of regulation, the use of the criminal law as an in terrorem weapon to force acceptance of industry-wide regulations. These rules are not vetted through normal authoritative channels, are not reviewable by any administrative process, and are not subject to even the minimal due-process requirements our courts require for normal administrative rule making. The whole process bears no resemblance to a rule of law; it is a reign of force. And to make matters worse, the regulatory remedies are usually vastly more costly to the public than the alleged evils.
Professor Manne goes on to point out that Marsh’s contingent commissions were as innocent as payola, which is widely misunderstood with regard to its market effect:
Nobel Laureate Ronald Coase once famously showed (Journal of Law and Economics 1979) how kickbacks in the so-called radio DJ payola scandal were really a legitimate, albeit superficially confusing, competitive device. Payola was essential, Coase explained, to preserving competition between record companies, and its demise was only sought by competitors who were injured by the practice — not by consumers. There are eerie similarities between the two situations.
If the Coasian analysis is correct — and no serious rebuttal has ever appeared — we may witness the demise of specialized insurance-brokerage firms like Marsh & McLennan in favor of more integrated insurance companies who will do their own marketing. This is already rumored to have begun. Or we may see insurance brokerage firms beginning to acquire and operate insurance companies. In either case we would be witnessing a decrease in market specialization with a commensurate loss of economic efficiency. Mr. Spitzer would have succeeded in making the industry less competitive and less efficient, and insurance buyers will eventually pay higher not lower premiums.
With his usual insight, Professor Ribstein succiently points out in this post that governmental regulation of payola is misguided because of the valuable market benefits that it provides:
The problem is that, whenever government interferes with the market, it can create more problems than it solves. When government banned payola . . , it blocked a practice that was, after all, getting more air time for new kinds of music. (In general, regulation hurts the newcomers more than it hurts the established players.) But it didn’t stop payola. . . .“[N]ew payola” (spot buys) arose in response to the banning of the old payola. The new payola, . . . creates a less informed market than the old payola.
Payola’s effect in making the music market less transparent is analogous to the effect of insider trading regulation. Insider trading, like payola, helps disseminate information. Regulation forces the trading underground, making markets less informed.
The criminalization of business practices exemplified by Spitzer’s tactics and most of the Enron-type prosecutions combines the worst elements of business regulation with overt miscarriages of justice. Although the prosecutions play well as superficial morality plays in the mainstream media, I fear that the damage being done to America’s business and justice systems will ultimately exceed even the tragic destruction of individual lives that has, and will continue, to occur.
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