One of the under-discussed elements of financial regulation is the question of personnel. To have an effective regulatory regime, you need to not only have good rules on the books you need effective personnel. There are a few aspects to this. One you need a sufficient quantity of people to actually keep up with what’s happening. Two, the people need to be sufficiently smart and well-informed to figure out what’s happening. Three, the job has to be worth doing for some reason other than to gain experience before cashing in and flipping to the other side—nobody’s going to do a good job if the incentives are to do a bad job. Last, the people running the agency need to be prestigious enough to win political battles. Everyone understands that it’s politically problematic to be seen as ignoring advice from generals; it’s not clear that anyone fears paying a price for not listening to career staff at the Office of the Comptroller of the Currency.
Felix Salmon describes Joe Stiglitz describing Poland’s efforts to grapple with some of these issues. They employ
a screen-door submarine innovative compensation model:
Stiglitz is a fan of the Polish framework. Poland, he says, has one overall regulator, which then has separate commissions with solid institutional knowledge for each of the areas, like insurance and banking, which need to be regulated. He also like the way that the Poles index the salary of the regulator to salaries in the financial sector. Financial-sector salaries are taxed at a set percentage to fund the regulator’s salary, ensuring that the regulator’s salary keeps up with financial-sector wage inflation.
There’s some logic to this. At the same time, it seems a bit perverse to give regulators such a direct incentive to see the regulatees’ salaries get up as high as possible. We probably do need higher salaries for select elements of the civil service. But I would emphasize that fundamentally public sector careers are rarely made attractive primarily through financial methods. Military officers in the United States don’t make a ton of money, but they’re very well-respected. And since they’re well-respected, it’s an attractive career for a lot of people. And since it’s an attractive career for a lot of people, it attracts people worthy of respect. You see a similar virtuous circle with teachers in Finland.