Nice Regulator, Mean Regulator

I of course endorse Natalie Avery's case for making the liquor license approval process more collaborative and less adversarial. There are some cases where adversarial regulation is really appropriate. Something like Spencer Bachus' view "that Washington and the regulators are there to serve the banks" is totally inappropriate for that sector.

But local government should want to see businesses grow and prosper. Where the need for regulation arises, the goal should be help firms comply with the regulations not be super-adversarial about it.

In general, I think we don't spend enough time thinking about when the "nice regulator" model is appropriate and when the "mean regulator" is what you want. But I think the main question to ask yourself is "would deliberately violating this rule on a consistent basis be a smart business strategy?" Think about restaurant kitchen sanitation. All else being equal, if you own a restaurant it's in your interest not to make your customers sick. Thanks to information asymmetries, I don't think we can trust this entirely to the market. Regulatory inspections are a fine idea. But we don't need to worry about restauranteurs willfully trying to run unsanitary kitchens. The regulatory agency here should be a "nice regulatory" model that tries to help businesses understand what they need to do to get up to code.

Banking's not like that. It makes a ton of sense for bankers to invest lots of time and energy in deliberately locating and exploiting loopholes and the like. Here you need a "mean regulator" who's suspicious of the motives of regulated entities and always on the lookout for problems.