the corruption that the financial reform bill reveals

I support the pending financial reform bill as about as good a product as our legislative system is likely to produce, but it also illustrates how badly that system is broken.

Congress has negotiated for months to produce a bill that is 2,000 pages long, full of special exemptions and breaks that no individual could even count, let alone understand, prior to passage. The legislative process has offered rich opportunities for professional lobbyists and their clients. Steven Brill estimates that $15 million was spent to lobby on one particular technical provision that reduced corporate tax obligations by $10 billion–an excellent return on investment. Brill observes:

    Complexity is the modern lobbyist’s greatest ally. Three lobbyists showed me three different proposals for rewording what may be the bill’s biggest-money section: a provision in the Senate version that would force the five major banks that do most of the country’s trillions of dollars of trading in derivatives–and make nearly $23 billion a year doing so–to spin off those operations. Even holding the dueling paragraphs side by side by side, I found it difficult on first read to appreciate the differences. But with some pointers from the lobbyists, it was clear that billions in profits depended on the variations in this nearly impenetrable language.

The passage of the bill will by no means end the process of negotiation. Binyamin Appelbaum writes in The New York Times:

    Well before Congress reached agreement on the details of its financial overhaul legislation, industry lobbyists and consumer advocates started preparing for the next battle: influencing the creation of several hundred new rules and regulations. The bill … is basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact–and giving partisans on both sides a second chance to influence the outcome.”

Part of the problem is campaign finance: firms that are regulated by the federal government also fund elections, in a scandalous conflict of interest. Another contributing factor is the fillibuster, which gives individual Senators far too much leverage. But I would like to draw attention to a different problem that will persist even if (unlikely as that may be) we remedy the other two flaws.

Law-making has been substantially replaced with rulemaking and administration. In a republic, “law” classically means consistent, durable, binding principles that are enacted after public deliberation. Laws should not change arbitrarily–without substantial changes in the outside world–nor be subject to exceptions and negotiations after passage. The Constitution (article 1, section 1) vests “all legislative powers” in Congress, although the presidential veto power gives the White House a role in lawmaking as well. Under our system, Congress and the president are supposed to make laws that are as durable and coherent as possible. Interest groups and party blocs will inevitably negotiate before a law is passed, although there is also supposed to be a public deliberation about matters of principle and philosophy. Once the president signs the bill, it is supposed to be fixed until significant changes in the world require reform.

But meeting those standards would be hard for elected politicians. They could be held accountable for their own momentous decisions, and they would have nothing to offer interest groups once they had passed any important law. They are tempted to act in quite a different way. First, instead of deliberating and passing coherent, durable statutes, they issue voluminous and constantly amended statutes–too long for anyone to read before the vote. That may be inevitable in a complex modern society, but Congress compounds the problem by delegating its lawmaking role–not so much to the president and the cabinet as to administrative agencies, civil servants, and special courts within the executive branch.

They do this by passing statutes that empower regulatory agencies to make policy within very broad outlines. In 2004, federal agencies generated 78,851 pages of proposed rules, filling 69 volumes of the annual Federal Register. The number of pages has crept almost steadily up, from one volume of 2,620 pages in 1936 (when the government was more powerful and activist, but also more coherent, than it is today).

This process has several advantages for legislators. It defers decisions and makes them provisional and negotiable, so that no interest group ever loses a fight definitively. It allows elected officials to take credit for general principles, even if they conflict, and then blame bureaucrats who actually make choices. A classic but not atypical example is the “dual mandate” that Congress gave to the Federal Reserve: to maximize employment and control inflation. Those goals often conflict in practice, but Congress claims to have mandated both and can critically question any Federal Reserve Board Chairman who fails to achieve both. Finally, a process of continuous negotiations favors organized interest groups, the very ones that give campaign contributions and physically appear on Capitol Hill.

James Madison explained why such “mutable” policymaking is disastrous, using words that now seem prophetic:

    To trace the mischievous effects of a mutable government would fill a volume. … It poisons the blessings of liberty itself. It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed? Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uninformed mass of the people. Every new regulation concerning commerce of revenue, or in any way, affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the FEW, not for the MANY (The Federalist, number 62).