As you say this does depend on having regulators with the staff, skills and budgets (no doubt pure coincidence that the CMA is struggling with its budget at the moment) to avoid regulatory capture. As Heseltine - who beefed up the sector divisions in the old DTI and staffed them with the best people - used to say to business in a slightly different context, when I disagree with you I’ll explain why on the basis of evidence. Means paying competitive rates as well.
I think that the way to square this circle is secondments, but that means that you have to do quite a lot institutionally to avoid regulatory capture and build a strong culture. Mixing the universities in as the third element might be a part of the solution IMO
Thanks for this. How do you see this approach, which seems sensible to me, also delivering existing regulatory activity? Organisations can find it difficult to do the day-to-day at the same time as designing the next.
this will be another post which I predict would be much, much less popular, but I think the answer is to get a lot less precious about the "revolving door" and have much more of a culture of secondments and movement back and forth between industry and regulators.
I was a regulator once: Principal Economist in the Market Surveillance Unit of the California Independent System Operator.
I got fired for failure to come up with a price-cap methodology that passed the sniff test and, more importantly, would not constrain supply. That was about 6 months before the wheels came off in November 2000, when we introduced our customers to the experience of "rolling blackouts."
The CAISO market design was based on the UK scheme.
Its failings were its own; California is a pretty distinctive place, with some weird physical and commercial features associated with its bipolar political structure, particularly where North (PG&E, who captured the CA Public Utilities Commission many years ago to the extent of siting it in San Francisco) meets South (Southern California Edison, who like its San DIego neighbor SDG&E, is a cooperative actor in Statewide negotiations). Frankly, after all these years it would still be good to get an outside look at what went wrong. Too bad we don't speak the same language as anybody else. Dude.
The LSE obviously has no role in your schemes, since one of your challenges is to get the regulator-scholars as far from possible from the City, not just down the street.
As we move to full carbon economics (where the unit of measurement is Tonnes Avoided CO2 (TAC) rather than Gulders or Francs or US Dollars or whatever) we're going to need help with a wide range of regulatory issues. I am particularly interested in the single-agent efficiencies (such as in transmission planning and operation) that the new economy will face.
Paywalls are for rentiers. What is the marginal cost of letting a stray impecunious economist read the prose? Ah yes...nobody pays for the fixed cost. Infrastructure is hard.
Are you including financial regulation within your ambit? I wouldn't. Finance is an industry in which "innovation" means a better way to bluff corporate treasurers or evade existing regs.
I've just listened to the Odd Lots podcast series on the development of the Eurodollar market, which seems like a good example of what you're getting at?
tbh it's an example of both, as the Eurodollar market was a genuinely useful thing, but it was born out of a regulatory arbitrage. (Not all reg arbs are bad! some regulations, like Reg Q, deserve to be evaded!).
Faster Payments is another good example (this time with the regulators pushing for it rather than just allowing it) - don't think we were quite first, but pretty early.
I'm a former US SEC mid-level mutual fund regulator. I was around when the first money market fund registrations were given the go-ahead. An example of good regulatory arbitrage (not so good if you were a bank or a bank regulator).
I had thought I already understood the underpinnings of the Eurodollar pretty well, but I learned a lot from that podcast! For example:
1) That the origin of the market was the seizure of Yugoslavia's gold; Russia deemed the counterparty risk of a Eurodollar to be lower than the weaponized finance risk of a US dollar.
2) That the original "regulatory arbitrage" motivation was cross-iron curtain trade, not Reg Q.
3) That the origin of US dollar swap lines was to defend the Bretton Woods arrangement in which the price of gold was fixed in US dollars.
Interesting you should write an article on this as I have been undertaking a project to essentially answer this exact question for every country in the world. Roughly speaking, the UK is the world’s ‘brain’, insofar as this can be pegged down to a single country. In terms of what that means, the ‘specialisms’ I have identified are:
1. Advanced Services - basically all the Old Rectory stuff you talk about. The UK is one of the best in the world at what could be described as ‘integrated services’ - essentially all the advice, processes and other high skilled singular service stuff. Consulting is a big part of this, but not the glorified outsourcing stuff that hacks both of us off - that stuff is ‘Basic Services’ and is the remit of places like Poland and Ukraine. Getting good at this means having really tight transport links between cities and from major cities into the surrounding areas - eg a Greater Manchester and Cardiff as well as Greater London etc. Examples of other countries here include the Netherlands, Kenya, Argentina etc.
2. Innovative Startups - startups and other industry built around new innovations, discoveries etc. This is roughly what you are describing here, and what you are proposing seems an excellent way to optimise around it. What’s worth noting is that it’s less important that stuff scale up entirely here - only that new stuff keeps coming and what stuff they do create doesn’t just disappear when they inevitably head off to the US or wherever. Examples here include California, Australia, Botswana etc
3. Cultural Services - movies, films, art etc, likely with high spillover into areas like graphic design. Improving this means continuing to hoover up international students, as well as generous benefits and incentives to the arts in general. Examples include California (again), Marharashtra, Turkey, Nigeria etc.
4. Coordination Hub - this is perhaps the hardest to explain, and the best I can describe is “what Singapore does for SE Asia, we do for the world”. This essentially involves being at the heart of a network of services hubs that collectively manage finance and informational flows all around the world. The key idea here is to leverage regulatory flexibility to essentially become the ultimate adaptive entrance/exit for services in and out of a region - the EU doesn’t necessarily have to be the most up to date on this stuff so long as Ireland gets it s*** together. Getting good at this means a combination of having an extremely on the ball regulator and also making sure London remains top of the leaderboard. Key examples here are Singapore, Ireland, Hong Kong, Mauritius etc.
5. Wealth Management - I can’t decide if this should be implemented or if we should just leave this to the Swiss, but may as well get people’s thoughts. Where Advanced Services is more additive and Coordination Hubs based around movement of finance etc, this more corresponds to more mid scale and private management of assets for HNW individuals and more obscure financial instruments. Being good at this mainly just involves having an educated population, flexible regulations and being the sort of place rich people like hanging out. Examples include Switzerland, Qatar, Bahamas etc.
6. Incorporation Hub - this is more for the overseas territories but still warrants mentioning. These territories are the other piece in the Coordination Hub network, and essentially involve having specialist regulations that make incorporating or otherwise constructing business entities here more appealing than elsewhere, for similar principles of information attenuation. The main criteria for being good at this is being a microstate and smiling sweetly at larger states and hoping they won’t sanction you. Examples include Delaware, Luxembourg, British Virgin Islands and basically everywhere else with a population under one million.
7. Niche Manufacturing - we are the best in the world at making typewriters and s***. I don’t know enough about global manufacturing of this stuff to know if it is even worth being considered a specialism
Happy to go into more details about this project, but one thing I do find interesting here is pretty much all these things benefit more from Brexit than they lose.
I’m struggling to square point 3 with your later Brexit comment. Working in that sector (which was already world class and now has many headwinds) I don’t see the upsides. We’ve obviously got a different perspective on this-what am I missing?
I’ll admit that’s the weakest, but the capacity to adopt the most flexible possible policy when it comes to both domestic incentives and also partnerships with foreign countries should be enough to at least break even. I’ll also point to the fact that no government since 2016 has really had an actually coherent vision and strategy for any of these things anyway and there were always going to be initial transition costs, so the headwinds in question would probably be expected in the short term.
That being said, of all of them that was probably the one the the EU infringed upon the least and actually provided some benefits - it’s the gain from all the other plus the marginal difference in 3 which makes the argument.
I love this idea - a little nervous that our UK trend over 30 years has been for both legislation and regulation to get worse not better. I don;t see much appetite for addressing this.
Thank you, I never thought about regulation in this way.
I‘m wondering if your way of viewing this is limited to markets that require regulatory approval for entry (like drugs), or if it also applies to things with post-hoc review and enforcement, like data protection? Wouldn’t the „we‘ve got the seal of approval from the UK“-approach be much more limited as a factor in these industries? „We haven’t yet been sued in the UK“ doesn’t quite have the same ring to it.
R squared of GDP per capita vs energy consumption per capita is 0.83, so R is over 0.9. This means that quality of regulation, education, and every other factor that might be advanced is very much an also-ran, except in so far as it frustrates the production and consumption of energy.
I have two boring limiting factors to this excellent basic idea. One is the revolving door issue, which we could be more relaxed about as you say in the comments, but on a human level I just think the promise of money skews perceptions - and why not?! We had great responsive regulators in the early noughts in lots of ways, but between regulators, ratings agencies and the banks, the outcome was lots of stuff we probably should not collectively have allowed to push the boundary quite so much. And the main reason I think that happened is motivated reasoning by humans looking at the promise of personal money.
The second boring limiting factor (at least for finance) is that you need a capital market that is interesting to domestic and foreign investors. I think the uk even post crisis has been good at sandboxes? I don’t know who invented the concept but we’ve been keen to deploy it in lots of ways. And it’s not led to a fintech wonderland because either the leap from sandbox to properly regulated entity is too great or because the UK market is simply not attractive enough in terms of what startups might become and how much investment they might attract to bother.
A reg type gave me a very interesting analogy this week which was writing to the council and demanding a Waitrose in your neighbourhood. The council can do all manner of things to try and create the right environment where a Waitrose might open but there are all manner of other factors that are probably more important in Waitrose deciding they will open a branch there. Regulation can make things easier or harder to do but do they independently create the conditions where something new just happens if the financial and human capital isn’t already there trying to do things?
As you say this does depend on having regulators with the staff, skills and budgets (no doubt pure coincidence that the CMA is struggling with its budget at the moment) to avoid regulatory capture. As Heseltine - who beefed up the sector divisions in the old DTI and staffed them with the best people - used to say to business in a slightly different context, when I disagree with you I’ll explain why on the basis of evidence. Means paying competitive rates as well.
I think that the way to square this circle is secondments, but that means that you have to do quite a lot institutionally to avoid regulatory capture and build a strong culture. Mixing the universities in as the third element might be a part of the solution IMO
Agreed.
Thanks for this. How do you see this approach, which seems sensible to me, also delivering existing regulatory activity? Organisations can find it difficult to do the day-to-day at the same time as designing the next.
this will be another post which I predict would be much, much less popular, but I think the answer is to get a lot less precious about the "revolving door" and have much more of a culture of secondments and movement back and forth between industry and regulators.
For all roles, or only some?
I was a regulator once: Principal Economist in the Market Surveillance Unit of the California Independent System Operator.
I got fired for failure to come up with a price-cap methodology that passed the sniff test and, more importantly, would not constrain supply. That was about 6 months before the wheels came off in November 2000, when we introduced our customers to the experience of "rolling blackouts."
The CAISO market design was based on the UK scheme.
Its failings were its own; California is a pretty distinctive place, with some weird physical and commercial features associated with its bipolar political structure, particularly where North (PG&E, who captured the CA Public Utilities Commission many years ago to the extent of siting it in San Francisco) meets South (Southern California Edison, who like its San DIego neighbor SDG&E, is a cooperative actor in Statewide negotiations). Frankly, after all these years it would still be good to get an outside look at what went wrong. Too bad we don't speak the same language as anybody else. Dude.
The LSE obviously has no role in your schemes, since one of your challenges is to get the regulator-scholars as far from possible from the City, not just down the street.
As we move to full carbon economics (where the unit of measurement is Tonnes Avoided CO2 (TAC) rather than Gulders or Francs or US Dollars or whatever) we're going to need help with a wide range of regulatory issues. I am particularly interested in the single-agent efficiencies (such as in transmission planning and operation) that the new economy will face.
Paywalls are for rentiers. What is the marginal cost of letting a stray impecunious economist read the prose? Ah yes...nobody pays for the fixed cost. Infrastructure is hard.
Are you including financial regulation within your ambit? I wouldn't. Finance is an industry in which "innovation" means a better way to bluff corporate treasurers or evade existing regs.
I don't really agree with this tbh; some of it is, but by no means all. Simply something like Apple Pay needs a bunch of regulatory approvals.
I've just listened to the Odd Lots podcast series on the development of the Eurodollar market, which seems like a good example of what you're getting at?
tbh it's an example of both, as the Eurodollar market was a genuinely useful thing, but it was born out of a regulatory arbitrage. (Not all reg arbs are bad! some regulations, like Reg Q, deserve to be evaded!).
Yes, absolutely!
Faster Payments is another good example (this time with the regulators pushing for it rather than just allowing it) - don't think we were quite first, but pretty early.
I'm a former US SEC mid-level mutual fund regulator. I was around when the first money market fund registrations were given the go-ahead. An example of good regulatory arbitrage (not so good if you were a bank or a bank regulator).
I had thought I already understood the underpinnings of the Eurodollar pretty well, but I learned a lot from that podcast! For example:
1) That the origin of the market was the seizure of Yugoslavia's gold; Russia deemed the counterparty risk of a Eurodollar to be lower than the weaponized finance risk of a US dollar.
2) That the original "regulatory arbitrage" motivation was cross-iron curtain trade, not Reg Q.
3) That the origin of US dollar swap lines was to defend the Bretton Woods arrangement in which the price of gold was fixed in US dollars.
A bunch of native English speakers with regulatory and academic expertise are coming on the market as we speak. No time like the present
I am specifically hoping that Professor Malcolm Sparrow will consider coming back to help out his homeland in its time of need.
Interesting you should write an article on this as I have been undertaking a project to essentially answer this exact question for every country in the world. Roughly speaking, the UK is the world’s ‘brain’, insofar as this can be pegged down to a single country. In terms of what that means, the ‘specialisms’ I have identified are:
1. Advanced Services - basically all the Old Rectory stuff you talk about. The UK is one of the best in the world at what could be described as ‘integrated services’ - essentially all the advice, processes and other high skilled singular service stuff. Consulting is a big part of this, but not the glorified outsourcing stuff that hacks both of us off - that stuff is ‘Basic Services’ and is the remit of places like Poland and Ukraine. Getting good at this means having really tight transport links between cities and from major cities into the surrounding areas - eg a Greater Manchester and Cardiff as well as Greater London etc. Examples of other countries here include the Netherlands, Kenya, Argentina etc.
2. Innovative Startups - startups and other industry built around new innovations, discoveries etc. This is roughly what you are describing here, and what you are proposing seems an excellent way to optimise around it. What’s worth noting is that it’s less important that stuff scale up entirely here - only that new stuff keeps coming and what stuff they do create doesn’t just disappear when they inevitably head off to the US or wherever. Examples here include California, Australia, Botswana etc
3. Cultural Services - movies, films, art etc, likely with high spillover into areas like graphic design. Improving this means continuing to hoover up international students, as well as generous benefits and incentives to the arts in general. Examples include California (again), Marharashtra, Turkey, Nigeria etc.
4. Coordination Hub - this is perhaps the hardest to explain, and the best I can describe is “what Singapore does for SE Asia, we do for the world”. This essentially involves being at the heart of a network of services hubs that collectively manage finance and informational flows all around the world. The key idea here is to leverage regulatory flexibility to essentially become the ultimate adaptive entrance/exit for services in and out of a region - the EU doesn’t necessarily have to be the most up to date on this stuff so long as Ireland gets it s*** together. Getting good at this means a combination of having an extremely on the ball regulator and also making sure London remains top of the leaderboard. Key examples here are Singapore, Ireland, Hong Kong, Mauritius etc.
5. Wealth Management - I can’t decide if this should be implemented or if we should just leave this to the Swiss, but may as well get people’s thoughts. Where Advanced Services is more additive and Coordination Hubs based around movement of finance etc, this more corresponds to more mid scale and private management of assets for HNW individuals and more obscure financial instruments. Being good at this mainly just involves having an educated population, flexible regulations and being the sort of place rich people like hanging out. Examples include Switzerland, Qatar, Bahamas etc.
6. Incorporation Hub - this is more for the overseas territories but still warrants mentioning. These territories are the other piece in the Coordination Hub network, and essentially involve having specialist regulations that make incorporating or otherwise constructing business entities here more appealing than elsewhere, for similar principles of information attenuation. The main criteria for being good at this is being a microstate and smiling sweetly at larger states and hoping they won’t sanction you. Examples include Delaware, Luxembourg, British Virgin Islands and basically everywhere else with a population under one million.
7. Niche Manufacturing - we are the best in the world at making typewriters and s***. I don’t know enough about global manufacturing of this stuff to know if it is even worth being considered a specialism
Happy to go into more details about this project, but one thing I do find interesting here is pretty much all these things benefit more from Brexit than they lose.
I’m struggling to square point 3 with your later Brexit comment. Working in that sector (which was already world class and now has many headwinds) I don’t see the upsides. We’ve obviously got a different perspective on this-what am I missing?
I’ll admit that’s the weakest, but the capacity to adopt the most flexible possible policy when it comes to both domestic incentives and also partnerships with foreign countries should be enough to at least break even. I’ll also point to the fact that no government since 2016 has really had an actually coherent vision and strategy for any of these things anyway and there were always going to be initial transition costs, so the headwinds in question would probably be expected in the short term.
That being said, of all of them that was probably the one the the EU infringed upon the least and actually provided some benefits - it’s the gain from all the other plus the marginal difference in 3 which makes the argument.
I love this idea - a little nervous that our UK trend over 30 years has been for both legislation and regulation to get worse not better. I don;t see much appetite for addressing this.
Thank you, I never thought about regulation in this way.
I‘m wondering if your way of viewing this is limited to markets that require regulatory approval for entry (like drugs), or if it also applies to things with post-hoc review and enforcement, like data protection? Wouldn’t the „we‘ve got the seal of approval from the UK“-approach be much more limited as a factor in these industries? „We haven’t yet been sued in the UK“ doesn’t quite have the same ring to it.
Here's a heretical opinion: above a certain base level, the quality of regulations and their administration do not matter very much for productivity.
Take a look at https://energyforgrowth.org/article/how-does-energy-impact-economic-growth-an-overview-of-the-evidence/ .
R squared of GDP per capita vs energy consumption per capita is 0.83, so R is over 0.9. This means that quality of regulation, education, and every other factor that might be advanced is very much an also-ran, except in so far as it frustrates the production and consumption of energy.
I have two boring limiting factors to this excellent basic idea. One is the revolving door issue, which we could be more relaxed about as you say in the comments, but on a human level I just think the promise of money skews perceptions - and why not?! We had great responsive regulators in the early noughts in lots of ways, but between regulators, ratings agencies and the banks, the outcome was lots of stuff we probably should not collectively have allowed to push the boundary quite so much. And the main reason I think that happened is motivated reasoning by humans looking at the promise of personal money.
The second boring limiting factor (at least for finance) is that you need a capital market that is interesting to domestic and foreign investors. I think the uk even post crisis has been good at sandboxes? I don’t know who invented the concept but we’ve been keen to deploy it in lots of ways. And it’s not led to a fintech wonderland because either the leap from sandbox to properly regulated entity is too great or because the UK market is simply not attractive enough in terms of what startups might become and how much investment they might attract to bother.
A reg type gave me a very interesting analogy this week which was writing to the council and demanding a Waitrose in your neighbourhood. The council can do all manner of things to try and create the right environment where a Waitrose might open but there are all manner of other factors that are probably more important in Waitrose deciding they will open a branch there. Regulation can make things easier or harder to do but do they independently create the conditions where something new just happens if the financial and human capital isn’t already there trying to do things?
Losing the European Medicines Agency was a how-not-to.
Please elucidate