Regulations, taxes, and entitlements are places where system gaming is a constant temptation. This is because these are environments where vigilance is difficult. (In this essay I'm lumping laws and regulations together.)
Regulations are enacted specifically to stop some people from doing what they want to do or what they think is the best course of action. This means that from the moment regulations are proposed, many people are busy trying to find ways around them. When these law dodgers succeed they are gaming the system in one fashion or another. For this reason the enactors, those in favor of the regulations, need to be vigilant. If they aren’t, there are going to be unpleasant surprises of all sorts.
One source of the surprises is circumstance. If the enactors are not familiar with the circumstances in the real world they are writing rules for, the rules are going to look wasteful and irrelevant, and gamers will be extra busy looking for loopholes. One example of this happening was Blue Laws. Blue Laws were regulations against stores being open on Sundays. Over time the harsh reality, the circumstance, was that a lot of ordinary people wanted to shop on Sundays, and plenty of store owners and workers were ready to accommodate them.
The system gaming around Blue Laws was to open a drug store because these were allowed to stay open. The result: drug stores started selling lots and lots of products in addition to drugs. They became variety stores because the circumstance was many people wanted to shop on Sundays. In the 1960’s and 70’s the Blue Law enactors finally recognized that these laws had become anachronistic and they were repealed.
Another source of surprises is evangelism. This happens when one group gets excited about their cause and adds prescriptionism to their excitement - “Everyone should be doing things this same way, so let’s make a law.” In the last few decades there has been a lot of evangelism surrounding Save the World causes. An example of this leading to a surprise result was when environmentalists heartily endorsed adding ethanol to gasoline as a way of reducing pollution and getting a renewable resource into the automobile fuel stream. They endorsed it so heartily that they made it a regulation... then walked away while patting themselves on the back. They were hoping that waste cellulose of various sorts could be fermented to make the ethanol. Sadly, that solution hasn't happened, the technology for that isn't ready yet. Instead, the economic ethanol source turned out to be corn. The result: tens of thousands of acres are taken away from food production - corn growing - which raises food costs. And, since those environmentalist have walked away patting their backs - not being vigilant - regulatory capture, a form of system gaming, has become established in this corn ethanol environment. The regulations are now written to favor the corn growing farmers.
Taxes fit into the civilized social structure in many ways. They pay for government administration, they pay for entitlements (farm subsidies, pharmaceutical subsidies, Social Security, health care, food stamps), they pay for many other goods and services that the community thinks are good to have but does’t want to see treated as commercial activities (snow removal, road repairs, maintaining and operating national and state parks, fire and police departments).
Here, as with regulations, the key issues are circumstances and vigilance. An example of circumstance is when taxes are enacted to help with specific social good works. An example of this is legalizing gambling, taxing it, and then using the taxes to pay for education. The problem with this kind of mixing money and social engineering is that it creates a conflict of interest. “If we want more money for education, do we let more casinos open?” And, again, when those who were pushing the social engineering aspects walk away patting their backs, the system gaming by those who are handling the day-to-day operations will commence in earnest.
Entitlements are reverse taxes. This is money being given to people by the government. There are two big issues here: Who should qualify, and is enough vigilance being applied to make this transferring cost-effective? Another way to put it is: how much of this fund flow is going to help people really in need, and how much is going to system gamers?
The reality in the 2010’s is that the US government is supporting many more schemes for handing out money than in the past, and the amount being handed out is huge and growing. It is now about half the total federal budget, about one trillion dollars. We live in a prosperous society so it is no surprise that the amount of money being transferred from rich hands to poor hands is growing. The hard questions concern how much of this transfer is helping to truly relieve distress and how much is ending up in the hands of system gamers? Is the government being vigilant enough about how this money is being handed out, or have many of these programs suffered from regulatory capture or outright fraud? A related question is: is the government the best institution to be handling all this transfer? Would this huge sum of transfer money be better handled if this was taken over by many different private charities and the share of taxes being spent on transfer was eliminated so that citizens could directly pick and choose their charity choices? There is a lot of helping the poor emotion powering these transfer programs. And the amounts being transferred are huge. This calls for a lot of vigilance or a radical change in the system.
One way to help keep regulations from becoming anachronistic - out of touch with the times - is to have each and every law and regulation enacted with a time limit. I suggest twenty years. The goal of this is to make sure that regulations stay relevant. This is not a new suggestion, but is a form of the “sunset provision”, which has been proposed in the past and implemented in some arenas. I think it is a real good idea.
Transparency, simplicity, and a level playing field all make vigilance much easier. If many members of the community understand what is going on, then they can better understand when system gaming is going on.
This means avoiding things such as 1,700 page laws. And it means keeping the government out of micro managing. The government should not be promoting causes de jour. The purpose of laws and regulations should be to set out clear and level playing fields, and stop there. How the fields are played upon should be up to the businesses and citizens of the community.
This 30 Aug 14 Economist article, “Corporate settlements in the United States The criminalisation of American business: Companies must be punished when they do wrong, but the legal system has become an extortion racket” describes just how big in magnitude these regulatory shakedowns can get: The costs go into the hundreds of billions.
From the article, "Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.
The amounts are mind-boggling. So far this year, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and other banks have coughed up close to $50 billion for supposedly misleading investors in mortgage-backed bonds. BNP Paribas is paying $9 billion over breaches of American sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays and others have settled for billions more, over various accusations. And that is just the financial institutions. Add BP’s $13 billion in settlements since the Deepwater Horizon oil spill, Toyota’s $1.2 billion settlement over alleged faults in some cars, and many more."
This is an area that needs a lot more transparency or it will discourage growth by disenfranchising those with the most entrepreneurial spirit.
We need to examine carefully what we want our regulations, taxes, and entitlements to be doing. We should emphasize simplicity, transparency, and building a level playing field in all of the above. When these are not kept paramount, when the government gets into supporting causes de jour, the door opens wide for all sorts of system gaming.