Announcer: Washington Debates for the ’70s,
a series of debates designed to bring together for an open exchange of views and opinions
outstanding authorities on vital issues facing the world of the ’70s. The topic: Can regulatory agencies protect
the consumer? Here is the moderator, Peter Lisagor. Peter Lisagor: Welcome to another in a series
of rational debate seminars sponsored by the American Enterprise Institute. Our question is: Can regulatory agencies protect
the consumer? The federal regulatory commissions have been
controversial from their creation. They prompt an old question about the extent
of the government’s role in a competitive system. With the rise of consumer consciousness, the
question remains astute and topical. The American Enterprise Institute, a nonprofit,
nonpartisan research and educational organization, has brought together two qualified authorities
to debate and illuminate our question. They are Manuel F. Cohen, a former member
of the Securities and Exchange Commission from 1961 to 1969 and its chairman from 1964
to 1969. A distinguished lawyer who is now a partner
in the Washington firm of Wilmer, Cutler, and Pickering. And Dr. George J. Stigler, a member of the
Chicago School of Economics, Walgreen Professor of American Institutions at the University
of Chicago, and eminent author and lecturer. We also have a panel of experts, a select
group of those engaged in making, teaching, influencing, and writing about public policy
to comment and challenge our debaters. We’ll hear from Dr. Stigler first. George Stigler: I should say that since I’ve
prepared my paper I have become, to my infinite surprise, a member of a regulatory commission. That commission is meeting for the first time
tomorrow, so I think it would be premature to say that what I am saying represents the
official credo of that agency. In fact, I’m a little worried by the agency
because it’s filed a security investor protection corporation, and I somehow associate the word
“protection” with the mafia. So we shall see. Let me first say that, although I am in general
hostile to the use of regulation as an instrument for protecting the individual, whether as
a consumer or as a laborer or as an investor or what, I don’t want to carry that too
far. I am a former college student, not a contemporary
college student. I’m not an anarchist. I believe that the requirement of a stable
social framework is essential for any efficient economic system, and so, of course, I’m
only in favor of a regime in which contracting for stability and copyright assignments and
things like that take place in an orderly, socially determined way. I would, in general, argue that those policies
work best and perform their function most effectively when the main enforcement of those
rights and rules is left to the parties of the transaction, rather than to a group of
gentlemen regarding in the city. But let me turn now to what are the three
main theses of my paper. My first main thesis is that the individual
consumer, if he is not hampered, is in general capable of a large measure of self-defense
against frauds, mishaps, bad luck, and the like in economic and social life. Not all consumers are intellectually competent
and well-informed, but most consumers know how to build up defenses against the many
vicissitudes that lie in real life, and it is primarily because we have socially so often
hampered his effect that we have injured the consumer. Let me give an example from the field that
has nothing to do with the subject which is apparently going to be our main interest tonight,
the securities market. Although I have not and most of you do not
have the qualifications to judge a disposition, I have no doubt that if we were allowed the
choice of hospitals which hired physicians, we would eventually find those hospitals which
had established by long experience the credentials of being very good in selecting physicians
and supervising their work and discharging them when they did not do well. The American Medical Association, however,
has made it an absolute element of its creed that the corporate practice of medicine not
be allowed. In other words, they would deprive the consumer
of the main method by which he could, without public supervision, achieve competence in
the selection of medical service. The second main point I would emphasize, after
I say I think we have a tendency greatly to underestimate the skill of the consumer in
meeting the difficulties of our society, is that competition is an enormously powerful
protector. That wherever somebody is doing something
that is not satisfactory for consumers, there is an offering of profit for those who do
a better job. One of the less significant and I think almost
foolish laws of recent times was a food container law. There were people who were concerned over
the fact that if you’ve got a box of cornflakes this high that there’s two inches of space
in the top. And they argued that competition will gradually
lead another company to bring out a box in which there’s three inches of space in the
top, and another company, by competition, will bring it so that there’s four inches
in the top. And finally, we will get cornflakes boxes
which are empty. I have no objection to that as an argument
as to what would happen if that’s what consumers want. All I want to say is that then boxes of cornflakes
would sell for the cost of the cardboard, and if consumers do want empty cardboard boxes,
the market will provide them. And if they want full boxes, the market will
provide them. The third and most interesting problem is:
What is the low of the industry regulatory bond? Now, here my thesis is that the industry body,
in the long run, must act by and for the industry it is regulating and not as a matter of venality,
not as a matter of lack of integrity or a lack of competence. But the clinical realities of life dictate
that the regulatory body become affiliated with and help in what it believes to be the
necessary conditions for the survival of its industry. I itemize in my paper a series of what I think
are clearly bad practices in the financial community and particularly in the stock exchange
in the United States. One, I don’t mean for it to be controversial,
is the resale price maintenance provision with respect to mutual funds, which says that
no one can sell for less than the offering price of the product. Which is enforced by the federal government,
an unusual case of perversity in the protection of the consumer. Now what impresses me is that this statute,
which I won’t say that the Securities and Exchange Commission desired, it probably is opposed
to just in quiet rooms by themselves, has been on the books for 30 years in the very
sustained program of changing the law, which was requested a year or two ago, at which
time Manuel Cohen was still chairman of the commission. There were serious misgivings expressed with
respect to the statute, but even at that time, the SEC was unwilling to come out in front
of me and say, “This is an institution that should be abolished and should have been abolished
a day before it was put into practice.” Others can be cited. I think the collapse of the fixed commission
structure, which is full of economic absurdities such as the absence of quantity discounts,
the uneconomic relationship between commission rates and share prices, and the unwillingness
to share brokerage fees with non-exchange brokers, are — the daily collapse of this
system is before our eyes. Mr. Hector a month or two ago denied — yesterday,
the committee of the New York Stock Exchange recommended that perhaps Mr. Dreyfus be allowed
into the board. And that’s too bad because it would have
been a wonderful parallel to French history because it would add another Dreyfus case. But what I want to emphasize is that collapse
and that move toward the partial adaption of a competitive commission structure is not
coming because of the urgent endeavors of the Securities and Exchange Commission. This is coming because of a powerful competitive
pressure, such as the appearance of the third market. Now, my real complaint is then that the regulatory
bodies are not going to protect the consumer. What’s worse, they make it very hard for
them to protect themselves. They are essentially immune to criticism. I must say that when The New York Times on
November 24 ran an editorial saying that the SEC chairman was resigning, that I was duly
impressed. They said that at a time like this — this
is under “announced resignation of Chairman Budge.” “At a time like this, it would be a serious
mistake for the president to name as SEC chairman anyone who required on-the-job training. What’s needed now is a man who knows the
securities industry firmly, who can lead us through the kind of change and reforms necessary
to restore health and safety. This is not only an urgent need in the securities
industry but tin he national economy.” And they forgot to add the sentence, “What
we need, in short, is a man of the type who carefully led us to the situation we were
in at the present time.” The industry is immune to criticism. The — what’s most important is it’s
immune to criticism by the individual investor. If I as an individual investor want to find
another method of conducting transactions in security, I basically have to change the
law of the land. I basically have to get my congressman, Honest
Ed Derwinski, to introduce statutes which compel the SEC to compel the New York Stock
Exchange to open up freely negotiated commission rates. Well, if I carried that through and if I lowered
my commissions by $5 a year, that would be a very low reward both for Mr. Derwinski and
for me. The enormous effort involved in changing a
regulatory body means that, essentially, once you have regulation, the consumer no longer
has any defenses. The regulatory body becomes our sole source
of defense, and if it fails us in any respect, there are no methods by which the individual
citizen can do anything about them. Now, until we can find methods by which we
can remedy that, I don’t see what our escape is. I’m immensely impressed by the fact that
when Mr. Nader’s groups, ranging from third-year law students down to seniors in grade school,
have completed their study of each of the fields that they find lacking in probity and
elegance and denounce the regulatory body in violent terms, their infallible remedy
is to appoint a new regulatory body, which we compose of better men than the present
one. Well, I don’t think the ones in the present
ones are bad men. I think we have a system which by itself cannot
be changed until we change the intent and the sanctions of public regulation. As low, for example, as an ICC commissioner
will not get reappointed, or appointed in the first place, if he becomes known as a
severe critic of, let’s say, the regulation of motor trucking. And as long as the primary parties that appear
at the annual appropriations of the ICC are the informed, concerned members of that industry,
we are not going to have that regulatory body or other regulatory bodies like that acting
in any other than the obvious method dictated by self-survival. So thank you. Peter Lisagor: Thank you. Hearing now Mr. Cohen. Manuel Cohen: I am not an economist, and my
remarks made, yes, too much a legal distinction. We lawyers have a nasty tendency to be concerned
with the rights of individuals, whether the individuals are a person or institution. Economists, even microeconomists, tend to
give priority and emphasis to the aggregate effects of economic activity and to derived
principles from such activity. But, and I must make this point, I’m also
burdened by another view, which colors everything I may say. And that is, that in my view, it’s as impossible
to prove whether or the extent to which regulation affects the consumer as it is to prove whether
or an extent to which criminal law and law enforcement agencies can protect society. In consequence, I won’t try, and I will
devote myself, the extent that I refer to my paper, to the relationship between competition
and regulation. I should say about my paper that the one that
was circulated to you, unfortunately, was written on a plane coming back from Mexico
City between drinks. I have a final version here, which is somewhat
more literate and understandable, and I would refer you to it. Now, fair competition is often spoken of as
the most effective and the efficient means for allocating economic resources, and the
stock market, on occasion, particularly refers to it as the most perfect model of a free,
competitive market. And I propose, in my simple economics, it’s
a market in which fluctuation is directly related to the free interaction of supply
and demand. Also, markets are referred to as auction markets. The unfortunate fact in my experience that
all those words do not describe markets as they exist. The stock exchange is not free from said government
regulations and, indeed, it couldn’t exist, at least not as an open and competitive market,
if it may be so described fairly, without government regulation. And certainly not an auction market. It is rapidly becoming less of an auction
market. Now, the institutionalization of our society,
which has been proceeding at a dramatic rate in recent years, has brought with it a number
of problems. It’s brought with it not only the personalization
and economic fear of life but in all areas of our institutional life — and it is institutional,
whether it’s the universities, whether it’s large corporations, whether it’s the securities
market, or what have you. An individual choice, whether it’s investments
or other forms of activity, regrettably. Fortunately, it doesn’t apply to sex. It’s
giving a way to accumulative efforts in the form of institutions in these security fields,
pension funds, mutual funds, insurance annuities, and the like. Now, my thesis can be very simply summarized. In my view, there really is no conflict between
regulation of the kind that we are discussing and competition. My view is that regulation is essential to
preserve and enforce competition and to ensure that the marketplace operates in the public
interest. It’s this delicate balancing of the various
and sometimes seemingly inconsistent or competing public policy considerations that is the principal
object of regulation. I’m not talking about regulation how the
SEC runs it, the ICC, the CAV, IV. I’m talking about regulation as a matter
of principle. But if we talk about markets, liquidity is
often referred to as essential to a strong market, and that it is a fact of competition. Indeed it is, I think. It’s essential to competition on the one
hand, and on the other, I think it’s a result of fair competition. And this is where I get to be a lawyer again. Liquidity, in my view, in the last analysis
depends upon investor confidence that savings committed to the securities market will be
dealt with fairly according to established rules. The law of the jungle, which did exist before
there was regulation, where only the biggest, the most sophisticated, or the most unscrupulous
could survive, is inconsistent with our democratic effort for equality before the law and in
our daily tasks and efforts. And while I don’t think that a reference
to the period of 1928, ’29 through 1933 necessarily proves the case, it was a period
when the securities market, at least, were free of regulation, and look what a mess it
made. But we have a more recent indication of what
goes on. The offshore funds burgeon in marina almost
completely free of any regulation in Europe. Some few years ago, scholars associated with
the international organization raise very strongly that some form of regulation be brought
to bear on these. I don’t think it’s necessary to emphasize
too much that the events of the last year have proved the wisdom of their recommendation. But more important in the point of view of
our discussion, it has led one country after another in Western Europe and all around the
world — North and South America, as well — to enact law and regulation which has
the effect of curbing competition, a concept which I believe is inconsistent with the basic
idea of regulation, which is to preserve and to make it fair. And when I say fair, I mean competition within
and among markets best assures the healthy allocation of savings resources for the various
areas of our economy. Back in 1937 — this was a fairly early period
in the commission’s history — the commission first expressed itself on the question of
competition. And forgive me for reading it, but this is
the best way I can get it to you. And I’m speaking about the commission, not
about a personal view. But the SEC said in 1937 — and I’ll skip
some of it — “an exchange” — and they’re talking about a regional exchange, and this
was in the context of relationship of legal exchanges and the so-called central markets
in New York. “If an exchange maintains a bona fide independent
secondary market in security, supported by adequate distribution and adequate public
trading activity in the vicinity of such exchange, the round-lot trading thereon will determine
the price on such exchange” — and now I get to the fourth part — “and through
the force of competition and the mechanism of arbitrage, will have a bearing on the price
of the primary exchange.” Now, many people have accused the commission
of not understanding the most elementary rules of economics, and I’m afraid to admit, although
I must, that on occasion, we have not been at the commission, I know I’m associating
myself with the commission, as bright in this area as we might have been. But in 1941, the commission had a frontal
opportunity for dealing with this problem, and it did. But in this case, it was the New York Stock
Exchange, which would have precluded its members from engaging in security transactions — I
won’t go into any details — on another exchange. The New York Stock Exchange said no, and they
passed a rule to that effect. The commission dealt with that problem and
found — and I’ll read just briefly a couple of remarks the commission made. The commission struck down the rule. The commission found that enforcing the rule
was not necessary or appropriate to protect investors and to ensure fair administration
exchange, and it was designed to choke off competition among exchanges. Indeed, the proposed law probably would have
eliminated regional exchange entirely. But to go on, to get right down to the numbers,
the commission said that the statutes under which it operates contemplated fair competition
among exchanges and between exchanges in the over-the-counter market. Quote, “The purpose which is closely related
to the public policy regarding unreasonable restraints and maintenance of fair competition
is declared by the Congress and the Sherman Act.” It’s interesting to note that in that case,
the stock exchange urged that its proposal was necessary to deal with unfair competition. Now, I have to add, in all candor, having
been brought up under the full disclosure, that in some 30 years we’ve had opinions
ripped, and there are still restraints that exist that the commission has not abrogated. But again, we’re not talking about the particular
triumphs or the particular lapses of an agency. We’re talking about regulation and what
regulation is supposed to be. Indeed, what I just read in 1968 reflected
the opinion of the Supreme Court in a non-SEC case in which the court said, “All administrative
agencies must consider antitrust policies, among other statutory policies, when applying
general public standards.” There have been a series of cases that deal
with this problem, and I brief that sometime this year, you’ll have another pronouncement
from the Supreme Court which will deal with this particular problem. Professor Stigler made a number of points
on page five of his statement. The first point was the New York Stock Exchange
has imposed and enforced a minimum commission of structure, and everybody knows that it’s
kind of silly. I might add, the commission knows it’s kind
of silly, too. The commission, perhaps, is burdened by the
fact that it has to consider the consequences of rapid change. But I think it’s only fair to point out
that the commission just recently — and while I wasn’t there — recommended competitive
rates at a certain point. Since then, a great many things have happened,
and yesterday’s newspaper has been the latest of that effect, but all of this, I believe,
is the result of activities initiated by the commission some years ago: a special study
of hearings initiated in 1968 looking towards a restructuring of the commission structure. And that is going on. The fact is that, despite what Professor Stigler
said, maybe a great many things went on because the commission did not object to certain things,
although it has, as I’ve indicated in some areas. But it certainly hasn’t been explicit approval. Nevertheless, that’s no excuse. Now then, Professor Stigler moved on to mutual
fund shares, and he quite rightly — well, first, he had two points on it. He talks about the front-end loading thing. I should say that he takes issue with the
suggestion made by the commission to forbid front-end loading, and he uses as an argument
— and it’s a typical Stigler [inaudible] suggestion — that if it’s effective, the
cost is going to be borne by the other investors. Unfortunately, that’s not the case because
the sales charge never becomes part of the investments of the investors. That’s separate, insulated, and if there
needs to be any return on those funds, they do not come from the funds belonging to any
other investor. Therefore, the fellow who is prudent, who
suggests — to use his words — will not subsidize the impetulant. Even under the proposal as adopted by the
Congress. Now, then Professor Stigler talks about the
commission fixing sales charges and presumes [inaudible] at 5 percent. Well, that bill has passed, of course, provides another method for dealing
with this problem, but the point I want to make is that the argument for 22B, which was
designed to support a fledgling industry, now supports a giant industry about which
I hope we’ll soon hear more from the SEC. But the argument made in 1940, at the time
we adopted this strategy, by representing the industry was as the industry grew, competition
would force the price down. Fact of the matter is there has been competition,
which I have referred to elsewhere as perverse perverse competition, and the prices have gone up. Partly because of the [inaudible] and partly
because of the intimate relationship of the closed situation in the stock exchange and this 22B. Now, I guess that touches on the point that
Professor Stigler made. And maybe — I’ve probably exceeded my
10 minutes, so I’ll subside at this point. And I have two minutes left I’m told. Peter Lisagor: The issue has been joined. Dr. Stigler believes that those policies work
best which are left to the parties engaged in a free market economy and not dictated
from Washington. The regulatory bodies do not and will not
protect the consumer in his judgment and should, in fact, concentrate on the survival of the
industries they regulate. The skill of the consumer in dealing with
his own problems is underestimated in Dr. Stigler’s opinion. Mr. Cohen, of course, differs with this view,
contending that regulation is not a substitute for competition but a coup for preserving
and enforcing competition in the public interest. While it may be hard to prove the extent that
regulation protects the consumer, Mr. Cohen has no doubt that on balance it has achieved
its purpose by promoting fair competition in the marketplace. All right, we’re ready for the questions,
I’m told. Who will be first? Louis Dombrowski: Dr. Stigler, under what
conditions do you feel that regulation is necessary to provide consumer protection? George Stigler: I think that’s too broad
a question to discuss usefully. That covers a whole landscape. I think that there may be a demonstrated market
failure that calls for regulation tomorrow. We’ve changed our standards of, let’s
say, the permissible amount of pollution we’re going to allow in the atmosphere, and it may
require changes in public policy to affect the change in what we desire. So I really can’t effectively answer the
question should regulation be zero or should it be 100 percent in a large number of industries
with some conceivable effects that we dislike are taking place. Since I believe that in general, regulation
of specific industries — and remember I’m emphasizing that aspect of this discussion
— to protect consumers or investors or laborers seldom ends up doing other than harm to those
people. I want to look at the particular proposal
in each case and see whether I can find offsetting gains to the substantial loss of competition
and substantial access to the individual to improve his own lot by shopping around, which
would normally be lost by the regulatory process. And so I’d much prefer to have you ask me
about some favorite form of your regulation if you want to pursue this line. Louis Dombrowski: Well, coming back to the
point that you made earlier. You said that the regulator invariably becomes
an advocate of the industry in which it regulates. Can the consumer develop a lobby that will
be as effective as an industry lobby? George Stigler: No. The arithmetic of life does not allow it. Lobbies are made up of people who are willing
to devote time and resources and votes to activities. Now, an industry can afford to devote those
things because — let us just take a very striking example of an industry that’s regulated,
the American petroleum industry. At $5 billion in an ordinary year, for them,
turns on [inaudible], and that’s a lot per worker, per stockholder, maybe stockholder,
per customer. They can afford to take the time to learn
the facts, to proselyte votes, to campaign for congressmen, and so forth. You and I, who are injured a little by higher
gasoline and fuel oil prices and the like, cannot afford to devote the resources even
to find out how much we’re losing. You can’t afford to find out that a law
is hurting you for $25. It would cost hundreds of dollars to find
out. You can’t afford to spend many nights sensibly
going out and campaigning against a statute that does you harm, as the import oil system
clearly does I think. That would be destroying your home life. You’d come home at night, 5:00, and say,
“Honey, what things are we being injured by regulators today?” And then she’d tell you. You’d say, “I’ll see you next Monday.” And most Americans have higher goals in life
than that. So we can’t construct — and I know of
no historical example about viable, continuing, broad-based consumer political lobby. Announcer: Washington Debates for the ’70s
is created and supplied to this station as a public service by the American Enterprise
Institute, Washington, DC. Produced in the nation’s capital by Broadcast
News Washington.

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