Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study Helps Explain the Current Economic Crisis

04.12.2008
A joint study outlines a new theory - "trustee theory" - to explain the relationship between elected officials and government bureaucracies. The authors explain how this theory can be applied to explaining the current economic crisis.

Politicians have an incentive to act in ways that benefit their re-election possibilities, and this means they may support policies and regulatory practices that are ultimately harmful to the economy.

This observation helps to explain the current economic crisis, according to Jack H. Knott, University of Southern California’s Dean of the School of Policy, Planning, and Development, and Gary J. Miller, Professor of Political Science at Washington University in St. Louis, who have outlined a new theory – “trustee theory” - to explain the relationship between elected officials and government bureaucracies.

Their article “When Ambition Checks Ambition: Bureaucratic Trustees and the Separation of Powers,” appears in the December, 2008, issue of The American Review of Public Administration and it provides a framework for analyzing the role of politics and professional expertise in the regulation of the economy.

“This current economic situation was precipitated by a combination of many complex factors, one of which was the way that governmental regulatory agencies came to reflect the priorities and mandates of elected officials,” said Knott. “The result is that these agencies went along with policies that were ultimately harmful to the economy and the public good, departing from their role as ‘trustees’ of the common good.”

The article argues that politicians are susceptible to what the authors call political moral hazard: the temptation for politicians to collude with private firms, groups, and individuals to benefit each other to the detriment of the broader public good. Political moral hazard can also impact economic regulatory agencies, so Congress addressed this possibility by creating safeguards such as fixed terms for agency commissioners - in addition to ensuring the traditional legislative separation of powers.

In their article, Knott and Miller develop a theory – “trustee theory” - that defines the independent role of federal economic regulatory agencies in American Government.

Under this theory, professional public agencies can act as agents of the politicians. But they also act as trustees, charged with making the tough, expert decisions that benefit the economy, even when these decisions might run counter to the wishes of politicians and interest groups.

"This isn't advocating that bureaucrats should themselves be unchecked, but they can provide a role in providing a system of checks and balances that is more relevant to the modern financial world than the one offered by our Founding Fathers 200 years ago," Miller said.

The theory applies to situations when the credibility of the decision maker – such as the elected official - is weak and subject to political moral hazard, giving opponents the opportunity to exploit this weakness to their advantage. To ensure a successful outcome, authority is delegated to a “trustee” who is able to make the tough decisions, which sometimes may run counter to the principal’s wishes. An example is the decision by parents to entrust the inheritance for their children to a trustee until the children are of a more responsible age.

“Unfortunately, for several reasons, this trustee approach to economic regulation has weakened considerably over the past two decades, and especially since 2000,” said Knott. “A broad political ideology in both parties and between the Congress and the president has held that all deregulation is economically beneficial. This weakened the usual check and balance of the separation of powers system. Over time politicians deregulated several industries, including deregulation of banks, investment firms, and accounting firms.”

There was also a growing belief that federal government officials— bureaucrats—are the main cause of big and inefficient government, according to Knott. Both of the political parties, but especially the Republicans, sought to achieve greater accountability of bureaucrats to politicians as the path to more efficient government, he said.

“Trustee” theory provides an alternative approach to explaining the dynamics between elected officials and regulatory agencies. It stands in contrast to the “principal agent” theory, which assumes that the principals (politicians) act in support of the broad public interest. The “principal agent” theory breaks down, however, if politicians succumb to political moral hazard. When this happens, greater political control of agents (bureaucrats) can harm society, including threats to the safeguards for federal economic regulatory agencies.

An example of the “principal agent” theory’s limitations is when the U.S. Securities and Exchange Commission (SEC) attempted to impose stricter disclosure requirements on accounting and investment firms in the 1990s and early 2000s. Rather than act in support of the public interest, Congressional committees opposed this action, which contributed to the abuses that led to the collapse of the Enron Corporation and WorldCom and the subsequent passage of the Sarbanes-Oxley Act.

“With deregulation of many aspects of the financial industry, the country needed strong, authoritative federal oversight and the ability to impose new regulations as abuses or threats emerged,” said Knott. “Instead, the country got weak, ineffectual oversight and no ability to adapt regulation to the changing risks in the economy.”

This occurred in part because of strong political ties between federal and state politicians and the deregulated firms - a situation that “trustee” theory considers as being potentially harmful to the public good. An example of the damaging consequences of collaboration between elected officials and firms is the very lax regulation of Freddie Mac and Fannie Mae, the two giant mortgage lenders. Both institutions developed close political relations with congressional committees, which prevented oversight agencies from exercising any serious regulatory authority. The president also failed to counter this political moral hazard but rather reinforced it by seeking to politically control the economic regulatory agencies. This weakened professional regulators’ influence on and ability to adapt to the risks of the financial and banking industry, with disastrous consequences.

For additional information:

Jack H. Knott is the Dean of University of Southern California’s School of Policy, Planning, and Development. He can be reached at jhknott@usc.edu or (213) 740-0350. Media groups may also reach Knott through USC media representative Anna Cearley at cearley@usc.edu.

Gary J. Miller, professor of political science at the Washington University in St. Louis, can be reached at gjmiller@artsci.wustl.edu or (314) 935-5874.

“When Ambition Checks Ambition: Bureaucratic Trustees and the Separation of Powers” is available at http://arp.sagepub.com/cgi/reprint/38/4/387

Jack H. Knott | Newswise Science News
Further information:
http://www.usc.edu

More articles from Studies and Analyses:

nachricht Researchers simplify tiny structures' construction drip by drip
12.11.2018 | Princeton University, Engineering School

nachricht Mandibular movement monitoring may help improve oral sleep apnea devices
06.11.2018 | Elsevier

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: A Leap Into Quantum Technology

Faster and secure data communication: This is the goal of a new joint project involving physicists from the University of Würzburg. The German Federal Ministry of Education and Research funds the project with 14.8 million euro.

In our digital world data security and secure communication are becoming more and more important. Quantum communication is a promising approach to achieve...

Im Focus: Research icebreaker Polarstern begins the Antarctic season

What does it look like below the ice shelf of the calved massive iceberg A68?

On Saturday, 10 November 2018, the research icebreaker Polarstern will leave its homeport of Bremerhaven, bound for Cape Town, South Africa.

Im Focus: Penn engineers develop ultrathin, ultralight 'nanocardboard'

When choosing materials to make something, trade-offs need to be made between a host of properties, such as thickness, stiffness and weight. Depending on the application in question, finding just the right balance is the difference between success and failure

Now, a team of Penn Engineers has demonstrated a new material they call "nanocardboard," an ultrathin equivalent of corrugated paper cardboard. A square...

Im Focus: Coping with errors in the quantum age

Physicists at ETH Zurich demonstrate how errors that occur during the manipulation of quantum system can be monitored and corrected on the fly

The field of quantum computation has seen tremendous progress in recent years. Bit by bit, quantum devices start to challenge conventional computers, at least...

Im Focus: Nanorobots propel through the eye

Scientists developed specially coated nanometer-sized vehicles that can be actively moved through dense tissue like the vitreous of the eye. So far, the transport of nano-vehicles has only been demonstrated in model systems or biological fluids, but not in real tissue. The work was published in the journal Science Advances and constitutes one step further towards nanorobots becoming minimally-invasive tools for precisely delivering medicine to where it is needed.

Researchers of the “Micro, Nano and Molecular Systems” Lab at the Max Planck Institute for Intelligent Systems in Stuttgart, together with an international...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

“3rd Conference on Laser Polishing – LaP 2018” Attracts International Experts and Users

09.11.2018 | Event News

On the brain’s ability to find the right direction

06.11.2018 | Event News

European Space Talks: Weltraumschrott – eine Gefahr für die Gesellschaft?

23.10.2018 | Event News

 
Latest News

In focus: Peptides, the “little brothers and sisters” of proteins

12.11.2018 | Life Sciences

Materials scientist creates fabric alternative to batteries for wearable devices

12.11.2018 | Materials Sciences

A two-atom quantum duet

12.11.2018 | Physics and Astronomy

VideoLinks
Science & Research
Overview of more VideoLinks >>>