Myron’s Law and Romer’s Corollary

This Paul Romer presentation (PDF) for the IMF makes an excellent point. He quotes Myron’s Law: “Asymptotically, any finite tax code collects zero revenue.”

That’s to say that if you write down a tax law, then over time people will get better and better at tax evasion and revenue will slowly but surely drop. Then he offers Romer’s Corollary: “Every decade or so, any finite system of financial regulation will lead to systemic financial crisis.”

That’s exactly why I think it was misguided to criticize Dodd-Frank for relying on regulatory discretion rather than being entirely rule-based. A rule-based system would guarantee you no crisis for a while, but ultimately it presents a fixed target for canny bankers to exploit and undermine. Discretionary systems may well fail, especially if our politics remains dysfunction, but they offer the only hope we have.