The knowledge problem: Congress doesn’t have any, even its own bailiwick

posted at 12:50 pm on April 5, 2010 by Ed Morrissey

Frederick Hayek wrote that central economic planning was inevitably doomed to failure, because the planners could not possibly have all of the expertise necessary to predict and manage an economy of any size — let alone a national economy for hundreds of millions of people.  Glenn Reynolds follows up Hayek’s Nobel Prize-winning analysis by speculating that Congress may have a “knowledge problem” not just with the economy, but with the very regulatory state that it runs.  Henry Waxman’s temper tantrum over the announced writedowns by publicly-traded companies shows that Congress didn’t consider the fiscal impact of its tax-policy changes in ObamaCare, revealing a deeper incompetence:

Hayek’s insight into economics and regulation is often called “The Knowledge Problem,” and it is a very powerful notion. But recent events suggest that it’s not just the economy that regulators don’t understand well enough — it’s also their own regulations.

This became apparent when various large businesses responded to the enactment of Obamacare by taking accounting steps to reflect tax changes brought about by the new health care legislation. The additional costs created by Obamacare, conveniently enough, weren’t going to strike until later, after the November elections.

But both Generally Accepted Accounting Principles and Securities and Exchange Commission regulations require companies to account for these changes as soon as they learn about them. …

Waxman and his colleagues in Congress can’t possibly understand the health care market well enough to fix it. But what’s more striking is that Waxman’s outraged reaction revealed that they don’t even understand their own area of responsibility – regulation — well enough to predict the effect of changes in legislation.

In drafting the Obamacare bill they tried to time things for maximum political advantage, only to be tripped up by the complexities of the regulatory environment they had already created. It’s like a second-order Knowledge Problem.

Actually, the SEC and these companies are merely complying with the Sarbanes-Oxley regulations imposed by Congress just a few years ago.  The act required CEOs to release information as though under oath in order to hold them criminally responsible for misleading financial statements, which turned out to be a difficulty encountered in the Enron collapse.  Sarbanes-Oxley requires scrupulous release of negative information and a cautious approach to accounting.  If these companies know that they will lose the money from the tax credits Democrats canceled, they have to inform their shareholders immediately, not in 2014, thanks to the rules Congress imposed on them.

Hayek’s construction can reasonably be applied to any organization with an overgrown mandate.  There comes a point where an organization loses competence out of the sheer complexity of their environment.  Hayek applied this thinking to economic planning, but it applies to almost any effort.  The regulatory scheme in the US has grown so complex that no one and no organization can understand the entirety of the impact of any new additions or changes.  That’s an argument for reducing mandates, not expanding organizations to somehow retain competency, because as Hayek argues, it becomes impossible to predict and resolve problems.  Instead, the organization creates problems and then has to fix them, creating even more unforeseen problems that require even more interventions, and so on.

It’s obvious that this is exactly what happened with ObamaCare, and it’s almost as obvious that Democrats really didn’t care much about avoiding this kind of damage.  Instead, they’ve simply act surprised when it begins to occur, and accuse the organizations that they deliberately chose to victimize for making their incompetence so obvious.  Even if one ascribes to them the best of intentions, though, one would do well to remember the words of Alexander Pope in An Essay on Criticism:

A little learning is a dangerous thing,

Drink deep, or taste not the Pierian spring.

There, shallow draughts intoxicate the brain,

and drinking largely sobers us again.

In other words, the danger comes from learning just a little and acting as though one has complete knowledge.  Either one should gain complete knowledge or withhold action altogether (“drink deep, or taste not”).  Only drinking more can “largely sober us again,” according to Pope.  Unfortunately, the regulatory regime in the US has grown so large that Congress can’t possibly drink enough to get sober.  Just as unfortunately, Congress will continue taking shallow draughts, if any draughts at all, while either tinkering on the edges of the regulatory problem or adding to it.


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Comment pages: 1 2

Thanks, Ed. Brilliant essay.

n0doz on April 5, 2010 at 7:45 PM

There is no non-immoral person alive who doesn’t condemn Waxman.

proconstitution on April 5, 2010 at 9:01 PM

Can’t drink enough to get sober?

Can we extend the analogy? The Democrats, having tried to spend their way to wealth and failed, are now going on a regulatory bender as a hair of the dog.

In the immortal Yoda-ish: Screwed we are.

nerdbert on April 6, 2010 at 2:28 AM

Comment pages: 1 2