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It has become fashionable for the political intelligentsia to debate whether and how America should try to achieve a variety of foreign policy objectives. But there is also an enormous opportunity staring us in the face on the domestic front�that of improving our regulatory agencies. In doing so, we will be protecting the real virtues of capitalism. A litany of corporate miscreants, aided and abetted by their outside advisors, has engaged in an unprecedented display of fraud and market manipulation. Government has been the only institution able to protect us. The Federal Communications Commission (FCC) makes sure WorldCom Inc. doesn’t cut off its customers, the California Public Utilities Commission prevents price gouging, the Securities and Exchange Commission (SEC) stops investment banks from peddling bogus “research,” the Department of Energy tries to ensure electricity transmission-network reliability, and the list goes on. Suddenly, government agencies aren’t looking so bad. We’ll take bureaucracies over crooks any day. Strangely enough, the corporate scandals and electricity debacles have created an unprecedented opportunity to reshape the administrative state. For a precious sliver of time, the realization has dawned among lawmakers of every political stripe that government is necessary to protect the freedom of the market itself. Let’s now take the next step to make our agencies better. What to do? To begin with, providing more resources is central. Better-equipped investigators at the SEC might have saved our retirement accounts; additional inspectors at the U.S. Department of Agriculture might have protected our children from tainted hamburger meat. More important than budgets, however, the biggest collective challenge is to channel our outrage into productive dialogue. The administrative bureaucracy will not disappear overnight to be replaced by a utopian participative democracy. But addressing three areas should begin to improve our lot. The first is to give greater teeth to the mandate that agencies must protect the “public interest.” This seductive term is pervasive in regulatory law; unfortunately, though, it has sometimes been used as an excuse to limit new entrants and entrench incumbents, such as in the cable and local telephone markets. Rather, a key to reform is to reinforce the notion that “public interest” means protecting the welfare of consumers. Since competition is good for consumers, regulatory agencies must move from being simple rate-setters and rule enforcers governing industry entry and exit, toward becoming catalysts for greater protection, lower prices and more innovation. Second, agencies must pay increasing attention to defining the boundaries of state and federal authority. It is no coincidence, for example, that every case brought to the U.S. Supreme Court under the Telecommunications Act of 1996 somehow involved issues of federalism, or that in the aftermath of the recent blackout in the Northeast and Midwest and the California electricity debacle, the big debate shaping up is whether the Federal Energy Regulatory Commission should federalize, or at least regionalize, control of the power grid. The recent exchanges between the SEC and New York Attorney General Elliot Spitzer as to who should prosecute executives in the wake of the corporate corruption scandals is another case in point. More dialogue, including state-federal conferences, would be a start. If state and federal regulators forget that they are fighting the same battle, everyone loses. Third, agencies should begin supplanting economic theory with real-world experiments to see how participants actually behave. What is unsur- prising is that people and companies are not always rational actors functioning in a world of perfect competition and complete information; what is shocking is how few regulations actually take this reality into account. It is no wonder that many good intentions fail. Perhaps the recent award of the Nobel Prize in economic sciences to Daniel Kahneman and Vernon Smith for their pioneering work in behavioral and experimental economics will change perspectives of many who shape public policy. Both scholars supplemented traditional economic analysis with insights on how people actually behave. Kahneman’s path-breaking psychological research showed that economists cannot simply assume that humans are rational decision-makers. Smith designed novel and insightful laboratory experiments that can simulate, and even predict, how markets will actually behave. Their approach has the added benefit of being able to test and tweak a regulatory scheme before it’s implemented. Imagine if we had done that prior to rolling out electricity deregulation in California. Eventually, the issues regulatory agencies face will come into sharper focus and be mapped against the tools government has available. For instance, do we need greater judicial or legislative oversight? Does it make sense to abolish certain unnecessary administrative functions and refocus resources? How can we blend a progressive belief in the need for regulatory law to protect citizens and markets with the desire to chip away at bureaucracy? Thorny questions abound: Do we need multiple federal agencies in charge of food safety? What about the taboo issue of how an agency could provide health insurance to millions? The stakes are too high to squander this opportunity. If we don’t take action, before we know it, the luminaries will be back to talking about abolishing the FCC, privatizing the national forests or discussing whether some invisible hand will magically remove listeria from our turkey. The cycle will restart, and we’ll all suffer-again. Reza Dibadj is an assistant professor at the University of Miami. His research focuses on law and economics and administrative law.

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