George Stigler won the 1982 Nobel Prize in Economics for work that changed forever the way economists look at government regulation of business and industry. Before Mr. Stigler, a colleague of Milton Friedman in the Chicago school of economics, the economists and politicians accepted the argument that government regulatory agencies, established to protect the public from abuse, accomplished exactly that. After Mr. Stigler’s groundbreaking work, that sentiment was shared not so much.
The Stigler effect sprang from an article he published in 1971, demonstrating how regulatory bodies like the old Interstate Commerce Commission, the Food and Drug Administration, the Securities and Exchange Commission, and others failed. Economists realized that such agencies were “captured” by the interests of the very industries they were to regulate.
In recent years, regulatory capture has been obvious in ham-handed attempts of the Securities and Exchange Commission to protect Goldman-Sachs, the way the Food and Drug Administration works in concert with pharmaceutical companies to protect them from competition and even by the municipal taxicab commission in the nation’s capital to protect cabbies from having to compete with Uber. Regulators are always eager to hop in bed with the regulated. Both the regulators and the regulated make themselves mutually comfortable in the mutual assessment that they’re smarter than everybody else, and feel safer working in the dark.
One late example of how this happy scheme works is the attempt by the National Credit Union Administration to help the credit unions it regulates compete with banks in ways that Congress has consistently prohibited. Some of the things they do can make them look like banks, but credit unions are not banks. Credit unions are exempt, for one important example, from some of the taxes banks must pay.
The National Credit Union Administration now proposes to expand the ability of credit unions to make risky large loans by raising limits imposed by Congress to prevent abuse of their special status. The most aggressive credit unions want to compete with community banks, whose practices are not now within the purview of the regulators.
If this attempt succeeds, the credit unions will, like other captured regulatory agencies, be enabled to work not in the interests of the public, but to advance the interests of the credit unions with whom they share that comfortable bed.
The lending restrictions were established by Congress to help the credit unions keep in mind that they were designed to serve customers with the common bond of modest means. Multi-billion-dollar credit unions can operate tax-free. Such institutions are unique among federally insured depositories by their exemption from regulations, such as the Community Reinvestment Act which Congress imposed to protect communities from lending discrimination. The economist George Stigler could have predicted this, and only Congress can stop it if it summons the will to do so.