DRI-322 for week of 4-6-14: How the Dead Hand of Regulation Is Holding Back the Future

An Access Advertising EconBrief:

How the Dead Hand of Regulation Is Holding Back the Future

Self-Driving Cars: What’s the Hurry? 30,000 Annual Deaths are Nothing to Get Excited About

Self-driving cars are automobiles that drive themselves. This is possible because they possess a system of sensors and computer programs that perform the basic driving functions of starting, shifting, steering, navigation, “seeing” obstacles and avoiding them, “observing” (coded) traffic and geographic signage and stopping. Most people are aware that Google has built a fleet of self-driving cars. Many people know that self-driving cars have been extensively tested, not only on private courses but also on public roads in states such as California. Some people know that self-driving cars have had no accidents during these tests.

It would seem that these facts have enormous significance. Currently, deaths due to motor-vehicle accidents constitute the leading cause of accidental death in the United States. In 2012, the most recent year for which complete data are available, over 34,000 people died on U.S. roads from motor-vehicle accidents. (This was an increase from the 2011 total of 32,000+, for which the figure of 1.10 deaths per million vehicle miles travelled was an all-time low since this safety statistic was first measured in 1921.) This does not count an additional 2,000+ pedestrians and motorcyclists who also died due to accidents in which motor vehicles were implicated.

Combine the information in the first paragraph of this section with the information in the second paragraph. This amalgamation is tantamount to saying that a disease epidemic currently kills over 30,000 people yearly, and we have a nearly foolproof cure for the disease. And we are doing virtually nothing to implement that cure.

In this case, the “cure” entails making the necessary changes in infrastructure and law to allow self-driving vehicles (SDVs) to operate in the U.S. Whether SDVs are or are not ready for mass adoption tomorrow or the next day is irrelevant – at the moment, we couldn’t adopt them even if they were ready for prime time. What we should be doing is paving their way (no pun intended) so that when all their bugs have been exterminated, we can put SDVs into use post haste.

The federal government has assumed the role of safety czar for the nation. Superficially, one would expect federal agencies to be making rules, suggesting law changes and beating the drums for the dawning new era in American transportation in the same manner as (say) they have been propagandizing for Obamacare.

Instead, this is how the federal the federal government has reacted to the prospect of self-driving cars:

“The National Highway Traffic Safety Administration (NHTSA) does not recommend that states authorize the operation of self-driving vehicles for purposes other than testing at this time.” The NHTSA, as its name implies, is the agency within the U.S. Department of Transportation whose specific mandate is traffic safety. Yet, incredible as it seems, NHTSA not only is not proceeding full speed ahead with plans for the future of self-driving cars – it recommends that states do not authorize their general use in spite of the fact that states are doing just that.

Uh…what does NHTSA recommend that states do about self-driving cars, then? “NHTSA recommends that states require issue separate driver licenses, or at least special driver-license endorsements, for those who wish to operate autonomous vehicles.” A licensure requirement is a classic example of what economists call a “barrier to entry” into an activity. In other words, the NHTSA is trying to make it harder for people to drive SDVs.

The Secretary of the Department of Transportation, Ray LaHood, had this to say about his department’s policy on SDVs: “…Our top priority is to ensure these vehicles and their occupants are safe.” Picture this hypothetical scenario: We are suffering an epidemic in which tens of thousands of people die every year. Some people step forward and volunteer to test a vaccine that will almost certainly cure the disease that causes the epidemic. Suddenly a Federal Cabinet head steps forward with hand upraised to place controls on the testing process. “Our top priority is to make sure this vaccine and these test volunteers are safe.” No, dummy! Your top priority is to keep the nation safe! Thousands of people are dying every year! If a few people have to endure a slight risk to eliminate those deaths, your job is to get out of the way and let that happen as quickly as possible!

That hypothetical scenario is an excellent analogy to the status of SDVs today.

At this point, the reader must be shaking his head in utter disbelief. Are these people crazy? Are they completely unaware of the progress of SDVs? Oh, no. NHTSA goes on to blandly admit that “self-driving cars are seen as having the potential to save many thousands of lives annually by avoiding deadly crashes caused by human error, the reason for the vast majority of auto accidents.” This means that NHTSA is placing roadblocks in the path of SDVs while knowing full well their lifesaving potential. In other words, the NHTSA will save those thousands of lives when it is good and ready or, as the late Orson Welles might put it, the NHTSA will save no lives before its time.

NHTSA to Americans: Drop dead.

Just in case the full picture isn’t clear by now, the NHTSA currently has power to affect the lives of virtually American and control the activities of all drivers. SDVs have the potential to leave the NHTSA with nobody to regulate, since there would be virtually no safety issues left other than purely mechanical ones that would gradually fall almost to zero. (But you can be sure that the agency will fight tooth and claw to retain safety regulation of SDVs anyway, to justify its existence in downsized form.)

NHTSA wants to set up its own tests for SDVs. In fact, these “tests” will be used to delay the progress of SDVs as long as possible. As precedent for this prediction, we can cite the long-drawn out deregulation and subsequent technological revolution in telecommunications, much delayed in America compared to many other countries.

 

“Someday All Planes Will Be Drones”

Ask the average American what he or she knows about “drones” and chances are the reply will focus on pilotless aircraft controlled by a military operator on the ground and used in Middle Eastern countries to assassinate terrorists. In a way, this is fitting, since drones began as military weapons over half a century ago.

The word “drone” connotes a mindless worker performing rote tasks, in the manner of worker bees. When mechanical, drones are under the control of a human operator. The earliest drones were developed for military-intelligence purposes in the late 1950s. When Francis “Gary” Powers was shot down while piloting a U-2 high-altitude spy plane in 1961, the U.S. military began substituting pilotless craft for U-2s to avoid incurring propaganda setbacks from the capture of live prisoners.

Drone technology was perfected in successive wars from Vietnam to Kuwait to Afghanistan to Iraq. Today drones are anything but an embryonic innovation, full of kinks and bugs. It is long past time for their debut in commerce. Amazon’s Jeff Bezos recently attracted attention with a plan to deliver packages via drones. Speculation about the fate of Malaysian Airlines Flight 370 has raised the possibility of pilotless commercial airliners. After all, the most common cause of airline crash, as with automobiles, is pilot error. The general public is barely aware of the fact that most basic functions of commercial airline flight have already been automated.

Whenever scientific innovation threatens to make the world a better place, government regulators can be relied upon to build barriers to progress. This sounds highly pejorative to most people, yet it is really a perfectly logical state of affairs. Entrepreneurs and business owners use scientific innovations to make our lives better, not necessarily because they long to help us but because the only way they can profit is if we approve of their business decisions. Government regulators cannot earn profits and they do not benefit personally from making our lives better by (say) improving workplace safety or blocking a dangerous drug or process from coming to market. Consequently, they strive to improve their own welfare by maximizing government budgets and payrolls and minimizing risk of public-relations disaster. They do that by strangling innovation and risk-taking by the private sector.

Aren’t government regulators members of the society they regulate? If their decisions rebound to our disadvantage, don’t they lose by that, just as we do? Yes, but for any one regulatory decision there is only a small chance that the regulator’s consumption will be reduced markedly by restrictive regulation. But a too-favorable regulation that turns out wrong – a drug allowed on the market that later causes illness or death, for example – will kill the regulator’s career. And in the case of innovative technologies like self-driving cars, laissez-faire regulation will kill the entire regulatory agency or vastly reduce its scope. The political left has made its bones by insisting that corporations cheerfully kill their customers in pursuit of profits. In reality, it is obvious that government regulators are the ones who will send tens of thousands of Americans to their deaths annually rather than face the prospect of losing their regulated captives when self-driving cars replace human-driven ones.

Any doubts about the cogency of this analysis should be erased by consideration of federal regulatory policy regarding commercial drone use. While American businesses are lining up to use drones for various applications, this is the policy of the Federal Aviation Administration (FAA) on the commercial use of Unmanned Aircraft Systems (UAS):

“The first annual UAS Roadmap addresses future policies, regulations, technologies and procedures that will be required as UAS operations increase in the nation’s airspace.” “Policies, regulations, technologies and procedures” that will be “required?” This sounds as though the FAA plans to micromanage UAS by creating a thicket of bureaucratic rules that will slow the industry to a crawl. And sure enough: “The Joint Planning and Development Office (JPDO) have developed a comprehensive plan to safely accelerate the integration of civil UAS into the national airspace system.” To a professional economist, the words “comprehensive plan” specifically mean complete control by a central authority in the manner of the former Soviet Union’s GOSPLAN. The phrase “safely accelerate” has an Orwellian ring; it means that the government is going to slow down UAS development while pretending to move it forward with all deliberate speed.

We are now observing an excellent example of the FAA’s “safe acceleration” in action. The agency announced earlier this year that it would hold a public meeting on May 28, 2014 to “discuss the agency’s plans to establish a new unmanned aircraft system (UAS) center of excellence (COE).” The FAA considered 24 U.S. cities as candidates for sites to test the safety of UAS. It “considered geography, climate, location of ground infrastructure, research needs, airspace use, safety, aviation experience and risk” in selecting 6 test sites.

Wait a minute – if the military has been using drones for over a half-century, why do we need a civilian agency (presumably lacking the military’s expertise) to test the safety of the technology? Drones have already been interacting within civilian airspace in the course of performing their military duties, both inside the U.S. (in transit) and outside it (accomplishing their mission). The testing sites and center of excellence are a classic regulatory stall. (A bureaucratic rule thumb is that the more seriously a bureaucracy takes itself by employing elevated, obfuscatory rhetoric and lengthy acronyms, the less valid is its mission.)

Superficially, the stakes may seem lower than with SDVs. There are no 30,000 lives to be saved immediately by the commercialization of drone technology. But that is deceptive. If it is possible to deliver Amazon’s goods, it is also possible to deliver vital foods, fuels and medicines, too. Public attention has focused on the possible abuse of privacy by drones, but why not focus on the potential to enhance privacy and security by using drones? History supplies plenty of cases in which the ultimate uses of technology differed dramatically from their initial ones.

In an incisive Wall Street Journal column, Holman Jenkins pointed out that most routine functions of commercial aircraft have been automated already. “Someday all planes will be drones,” Jenkins said. Predictably, his words elicited indignant denials by airline pilots whose jobs were threatened by the prospect of drones. But Jenkins is right. It remains true that airliner accidents are (still) due predominantly to human error – the very thing that drones will eliminate.

The War on HIgh-Frequency and High-Speed Stock Trades

Technology is also in the forefront of the latest regulatory jihad waged against the financial community. This particular war is waged against traders of financial assets, particularly stocks. The erring traders are not buying or selling the wrong stocks; they are trading in the wrong way. At this point, things become confusing. At times, the traders are trading too often; that is, they are engaging in high-frequency trading. Other times, though, the traders are trading too fast, engaging in high-speed trading.

Do the two sound like the same thing? Well, if you think so, you’re in bad company, because regulators apparently think so, too. A little thought will show that this need not be so. Even in the old days of trades penciled on slips of paper and consummated via open outcry, it was possible to trade many times per day, although it was rather uncommon. Of course, high-speed trades were ushered in with computer technology and became dominant during the digital Internet era. But regulators have recently issued overwrought bulletins suggesting that they view these practices as equivalent shady practices.

“The FBI has developed fact patterns of potentially illegal trading,” announced one of these bulletins. This sounds ominous, to say the least. But “because high-speed trades are executed by computer programs, it is often more difficult to detect nefarious activity and to prove that it was executed intentionally.” This astounding qualifier is enough to send a knowledgeable analyst’s eyebrows flying off his forehead. Potentially illegal trading? What on earth could merit this denomination? Why does cybernetic origin cloud the issue of intention? After all, somebody had to program the computer. And why on earth does computer trading make it hard to detect wrongdoing? Was wrongdoing unheard of back in the primitive, pre-computer days? This sounds as if regulators want to demonize high-speed trading but lack evidence of any real wrongdoing – so they have to content themselves with hinting darkly that something funny must be going on.

This impression was reinforced by subsequent comments by an FBI spokesman, who cited “the practice of placing a group of trades… to create the false appearance of market activity.” But this kind of “churning” and allegations of it have been going on for a few centuries, since the days when trades were conducted outdoors under shade trees. The FBI purports to investigate “whether high-speed trading firms are engaging in insider trading by taking advantage of fast-moving market information unavailable to other investors.” Surely the FBI must be kidding. Since time immemorial, the slogan on Wall Street has been “buy on the rumor, sell on the news.” The idea has been precisely to move fast to take advantage of market information before it becomes generally known. If that constitutes insider trading ipso facto, then Wall Street might as well close up shop and go home.

But the FBI is really serious. “There are many people in government who are very focused on this and who are very concerned about it and who think it breaks the law.” The only thing missing seems to be a Ten Most Wanted Financial Traders List.

Grizzled veterans of financial markets feel an overwhelming sense of déjà vu at all this. They remember Richard Ney, for example. Ney was the young actor who starred alongside Greer Garson as her son in the 1941 Oscar-winning film Mrs. Miniver. The next year, Garson and Ney startled the film world by marrying. Ney’s film career fizzled out despite solid work in a few more films. After working in television, Ney became a Wall Street stockbroker and wrote bestselling exposes explaining why the stock market was rigged against the small, non-professional investor and in favor of proprietary trading firms.

Ney’s complaints were focused on the activities of specialists, people hired by the exchanges to insure that a market always existed for any listed stock. The specialist was required to take the other side of any trade for which either buyers or sellers were not soon forthcoming. As compensation for the potential financial inconvenience of playing this role, the specialist was accorded the benefit of a bid-ask spread; e.g., a kind of brokerage fee embodied in the differential between buying price and selling price. This size of this spread serves as a direct index of risk in the trade of the asset.

It is ironic that the advent of computer trading has consigned the specialist, if not quite to the fate of the dodo, at least to relative insignificance. How? Well, the whole purpose of specialists was to guarantee a liquid market, but computer trading has made practically everybody a potential trader. Not only that, but the presence of John Q. Public, Joe Doakes and Joe Sixpack in the stock market has meant that more trades are being done with a lower average size of each trade. And that happens to be the hallmark of high-frequency trading, as pointed out in a recent Wall Street Journal op-ed (“HIgh-Frequency Hyperbole,” WSJ, 4/2/2014) by two veteran money managers who are not themselves high-frequency or high-speed traders (Clifford Asness and Michael Mendelson).

So Ney’s bogeyman, the foe of the small investor, has now been put in his place by high-frequency computer stock trading. This doesn’t exactly sound like high-frequency trading is a threat to the public weal. Asness and Mendelson’s opinion of high-frequency trading is that “we think it helps us. It seems to have reduced our costs [by reducing bid-ask spreads] and …enable[s] us to manage more investment dollars.” In effect, say the pair, high-frequency traders have assumed the liquidity-provision function once provided by specialists and then inherited by the “market-makers” who succeeded them. But they do it cheaper and better and “competition forces them to pass most of the savings on to us investors.”

Of course, whenever interlopers come along to chip away at profits once earned by bigger, less competitive firms or individuals, the latter invariably cry bloody murder. That is what has happened here, and the screamers form the cheering public audience for the immorality play being cast by regulators.

But a receptive audience isn’t motivation enough. Why have the national police force (the FBI) been called out by security regulators to cope with this menace that is benefitting small investors and reducing trading costs for the market at large? Precisely because the success of the market threatens to leave regulators without anybody to regulate. If the market works so smoothly that specialists are unnecessary and bid-ask spreads become tiny, people will begin to wonder why the majestic edifice of securities regulation is required. Brokers are fast going the way of insurance salesmen; prospectuses can be found on the Internet and index funds are becoming a way of life. The SEC is going to have to create a threat to justify suppressing the technology that is making it as obsolete as other artifacts of the old days.

Once again, the pattern is familiar. Technology is steadily improving the lives of Americans across the country and government regulators are frantically trying to hold it back to keep from losing their jobs. And they are being aided by incumbents whose jobs and profits are threatened by the competitive innovations.

The Big Daddy of Regulation

The biggest, longest-lived and most pernicious regulator of them all is the Food and Drug Administration (FDA). The story of this behemoth merits an EconBrief all its own.

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