Obstacles to Optimal Policy

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Abstract
This chapter provides a positive political-economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). It analyzes the impact of private interest groups and political-institutional factors on the voting patterns concerning FDICIA to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. The chapter is organized as follows. Section 7.2 briefly outlines a number of approaches to understanding the political economy of government involvement in the economy. Section 7.3 applies these theories to describe why, after little change since the end of the Great Depression, legislative reform of bank regulation began in the 1980s. This section also reviews the major legislative changes during the last twenty years and provides a more detailed description of the legislative history of FDICIA and its amendments. Section 7.4 outlines hypotheses about the factors that should affect the support for FDICIA and the amendments generated by the positive interest group and political approaches. Section 7.5 describes the empirical voting model and contains the results. It analyzes votes by members of the House of Representatives on three amendments related to FDICIA and its final passage. The concluding section draws tentative lessons from the political economy approaches concerning ways to make welfare-enhancing regulatory change more likely. A commentary and discussion summary are also included at the end of the chapter.

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