Why Trump Is Deregulating In The Wrong Way, with Sam Peltzman

Episode Summary

Executive Summary: The episode examines deregulation through the lens of economist Sam Peltzman, who argues that regulation is shaped by politics, organized interests, and unintended consequences—not simple good-versus-bad choices. He favors targeted reforms over blanket abolition, supports some agencies while criticizing others, and stresses that regulation often shifts behavior rather than eliminating risk, with major implications for finance, drugs, the environment, and crypto.

Main Topics: The politics of regulation and political equilibrium (Priority: 5/5): Peltzman explains regulation as the product of competing political interests, where politicians balance gains from one group against costs from alienating another. Regulation is therefore not purely consumer-protective or industry-captured, but a negotiated outcome shaped by organization and power. Trump-era deregulation and performative bureaucracy cuts (Priority: 5/5): The hosts frame the current moment as a new age of deregulation, but Peltzman argues that firing low-level bureaucrats is mostly symbolic. He says meaningful reform must start at the top and that cutting staff without redesigning policy may simply worsen enforcement. Industry adaptation and regulatory capture over time (Priority: 4/5): Peltzman argues that industries initially oppose regulation but later adapt, learn the rules, and often use regulation as a barrier to entry. This adaptation creates long-term incumbency advantages and changes how regulation functions. Financial regulation, CFPB, FDIC, and the post-2008 system (Priority: 5/5): Peltzman is highly critical of the CFPB, viewing it as a misdiagnosis of the financial crisis and questioning its constitutional basis. He is more supportive of the FDIC but says its design and incentives merit reform, not blind defense. The Peltzman effect and unintended behavioral responses (Priority: 4/5): The discussion revisits Peltzman’s famous finding that safety regulation can change behavior in offsetting ways, such as drivers taking more risks when cars are safer. The broader lesson is that regulation often displaces risk rather than eliminating it. FDA approval, opportunity costs, and drug access (Priority: 5/5): Peltzman argues the FDA’s approval process imposes large delays and opportunity costs, potentially preventing life-saving drugs from reaching patients quickly. He says regulation should be rethought, especially where efficacy review and prescription requirements slow access. Crypto, fraud, and the question of implicit government guarantees (Priority: 4/5): Peltzman sees the main public-policy issue in crypto as not just fraud, but whether regulation creates a de facto government put that socializes losses. He suggests regulation can either reduce fraud or encourage moral hazard depending on how it shapes expectations.

Key Arguments: Regulation is best understood as a political equilibrium, not a pure social-welfare optimization; lawmakers respond to votes, organized pressure, and coalitions. George Stigler’s capture theory is too extreme in saying regulation is always industry-driven; many regulations are initially opposed by producers and later adapted to. The main predictable consequence of regulation is that industries move from opposition to adaptation, learning how to work within the system and sometimes using it to protect incumbents. Blanket deregulation efforts that begin with firing bureaucrats are performative and often miss the real source of policy design and enforcement. The CFPB should be abolished because the 2008 crisis was misdiagnosed as a consumer-protection failure rather than a bank-capital problem, and the agency lacks a convincing record. Consumer-protection arguments can overstate victimization; in finance, both institutions and consumers respond to incentives, and some risky products exist because both sides find them attractive. The FDIC is not simply bad or good; it has protected depositors, but its structure and the incentives it creates, including expectations of rescue, should be reevaluated. The FDA’s approval process creates major opportunity costs by delaying beneficial drugs, and the net public-health cost may exceed the benefits in many cases. Regulation often shifts risk rather than removing it, as with safer cars leading to riskier driving or tighter banking rules pushing activity into private credit or other channels. For crypto, the key policy question is whether regulation prevents fraud without creating an implicit government guarantee that encourages risk-taking and bailout expectations.

Data Points: Regulatory period: 1965-1975 - Peltzman describes this decade as an especially intense era of U.S. regulation, with major laws passed almost every year. Peltzman effect year: 1975 - He cites his empirical paper showing risk compensation in auto safety regulation. Driver response: Safer cars can lead to riskier driving - Used as the classic example of behavioral offset to regulation. FDIC-insured / uninsured deposits: Almost all deposits at Silicon Valley Bank were uninsured - Cited as evidence that deposit guarantees and expectations of rescue are more complex than simple regulation narratives. FDA approval lag: About a decade - Peltzman says new drugs can take roughly ten years from process start to market under standard FDA procedures. Wegovy timing: A couple of years after submission of data - He cites Wegovy as an example of a beneficial drug delayed by FDA processes. COVID vaccine approval route: Emergency use exception - He notes COVID vaccines did not go through the standard full FDA approval path before deployment. Age mentioned: 85 - The episode notes Peltzman’s age and continued research activity. Marriage and happiness gap: As large as anything else measured - Peltzman says the happiness difference between married and unmarried people is comparable to major income-based differences. Income comparison: Bottom 10% married ≈ top 10% unmarried in self-reported happiness - He gives this as an illustrative comparison from his happiness research. Top-income happiness effect: Top 1% much happier than bottom income group with same marital status - Used to show income matters strongly, but marriage can offset some of the gap.

Pivotal Quotes: "If you were serious about changing regulation, you wouldn't start by firing bureaucrats." — Bethany McLean: Opening critique of Trump-style deregulation and agency downsizing. "We have socialism for the very rich, rugged individualism for the poor." — Lucia Zingales: Introductory framing of the show’s theme about capitalism and unequal rules. "The current system for new drug approvals has been one of the great public health disasters of recorded history." — Sam Peltzman: His strongest critique of FDA regulation and drug-delivery delays.

Implications: Listeners are left with a warning against simplistic deregulatory slogans: effective reform requires understanding incentives, unintended consequences, and who bears costs. The episode argues for targeted, case-by-case policy rather than sweeping cuts or blind faith in regulation.