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What Is Government Failure? Barak Orbach*

The phrase “government failure” as a term of art originated in the critique of government regulation that emerged in the 1960s. This critique premised that “market failures” were the only legitimate ra-tionale for regulation. Although the phrase is a popular currency in scholarship and politics, people attribute to it different values. As a result, all seem to expect the government to fail, many believe that government inaction cannot constitute a failure, and alleged failures tend to be disputed. This essay seeks to establish a coherent meaning for the term “government failure” and its relatives (e.g., “govern-ment breakdown,” “regulatory failure”).

I. Introduction In Capitalism and Freedom, Milton Friedman explained why

“the scope of the government must be limited.”1 “The existence of a free market,” Friedman wrote, “does not . . . eliminate the need for government. On the contrary, government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and enforce the rules decided on. What the market does is . . . mini-mize the extent to which the government need participate directly in the game.”2 Friedman firmly believed that it was not “an accident that so many . . . government reforms [go] awry.”3 The “central defect” of

* Professor of Law. The University of Arizona College of Law.

www.orbach.org. This is the second essay in the Series “What Is …?” that explores the meaning of basic terms in regulation. See Barak Orbach, What Is Regulation?, 30 YALE J. REG. ONLINE 1 (2012). I thank Paul Connell and Sivan Korn for com-ments and suggestions.

1 MILTON FRIEDMAN, CAPITALISM AND FREEDOM 2 (1962). 2 Id. at 15. 3 Id. at 196.

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regulatory measures, he argued, is that “they seek through govern-ment to force people to act against their own immediate interests in order to promote a supposedly general interest.”4 Under this thesis, the government is likely to fail whenever it interferes with the free-dom of choice. Thus, since “pretty much all law consists in forbid-ding [people] to do some things that they want to do,”5 the failure is inevitable.6

The concept of “government failure” is somewhat peculiar. People and institutions may fail in their actions, but they may also fail by not taking action. The phrase “government failure,” however, as it is commonly used, connotes ineffective government action,7 im-plying that less government action is necessarily better.8 In Milton Friedman’s words: “[T]he government solution to a problem is usual-ly as bad as the problem and very often makes the problem worse.”9

The phrase “government failure” emerged as a term art is in the 1960s with the rise of intellectual and political criticism of regula-

4 Id. 5 Adkins v. Children’s Hospital of the District of Columbia, 261 U.S. 525,

568 (1923) (Holmes, J., dissenting). 6 See also MILTON FRIEDMAN & ROSE FRIEDMAN, FREE TO CHOOSE: A

PERSONAL STATEMENT 5-6 (1980).

In the government sphere, as in the market, there seems to be an invisible hand, but it operates precisely the opposite direction from Adam Smith’s: an individual who intends to serve the pub-lic interest by fostering government intervention is ‘led by an in-visible hand to promote’ private interests, ‘which was no part of his intention.’ 7 See, e.g., CLIFFORD WINSTON, GOVERNMENT FAILURE VERSUS MARKET

FAILURE 2–3 (2006) (“Government failure . . . arises when government has created inefficiencies because it should not have intervened [in the market] in the first place, or when it could have solved a given problem or set of problems more effi-ciently, that is, by generating greater net benefits.”)

8 See generally Peter L. Kahn, The Politics of Unregulation: Public Choice and Limits on Government, 75 CORNELL L. REV. 280 (1990).

9 MILTON FRIEDMAN, AN ECONOMIST’S PROTEST 6 (1975). See also MILTON FRIEDMAN, WHY GOVERNMENT IS THE PROBLEM (1993).

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tion.10 Building on the premise that the only legitimate rationale for government regulation is market failure,11 economists advanced new theories explaining why government interventions in markets are costly and tend to fail. This line of literature supposedly established the theoretical foundations of the phrase “government failure.”

Despite their growing popularity, the phrase “government failure” and its relatives (e.g., “government breakdown,” “regulatory failure”) do not have any clear meaning.12 Some use these phrases to describe government intervention in the private domain that results in undesirable outcomes. For others, these phrases may also mean lack of or inadequate government regulation. Yet, many identify a gov-ernment failure in any perceived societal problem. Thus, people who use the phrase “government failure” often disagree with each other about what a failure means. Neither the prevalence of studies of gov-ernment failures nor the use of the phrase “government failure” nec-essarily says much about the standards of “failure.”

This essay intends to clarify the general meaning of the term “government failure” by focusing on a few properties of failures.

10 See, e.g., Roland N. McKean, The Unseen Hand in Government, 55 AM.

ECON. REV. 496 (1965); Charles Wolf, Jr., A Theory of Nonmarket Failure: Framework for Implementation Analysis, 22 J. L. & ECON. 107 (1979). See also BARRY GOLDWATER, CONSCIENCES OF A CONSERVATIVE (1960) (introducing a general critique of government regulation).

11 See Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. ECON. 351 (1958). Executive Order 12,866 states that “material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people” may establish a “compelling public need” for regulation. Exec. Order No. 12,866 § 1.

12 See generally CARY COGLIANESE ED., REGULATORY BREAKDOWN: THE CRISIS OF CONFIDENCE IN U.S. REGULATION (2012).

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Figure 1

Source: Google Ngram.13

II. Inaction as a Failure

Can government inaction ever be a failure? A byproduct of the controversy over regulation is an artificial distinction between ac-tion and inaction.14 On one side of the controversy, people see over-regulation. On the opposite side, people observe insufficient regulato-ry safeguards―too little regulatory action or frequent inaction.15 These opposite perspectives delineate the approaches to government inaction. Some posit that inaction cannot be scrutinized, let alone considered a failure,16 while others maintain that similar rules should apply to action and inaction.17

13 For the methodology and its limitations, see Jean-Baptiste Michel et al.,

Quantitative Analysis of Culture Using Millions of Digitized Books, 331 SCI. 176 (2011).

14 The analysis of the distinction is of course rather old. For example, Thomas Aquinas distinguished between sins of commission and sins of omission, arguing that the latter are “less grievous” than sins of commission, but stressed that inaction may constitute a sin. THOMAS AQUINAS, 1 THE SUMMA THEOLOGICA 316-20 (Fathers of the English Dominican Province trans., 1981).

15 See generally Nicholas Bagley & Richard L. Revesz, Centralized Over-sight of the Regulatory State, 106 COLUM. L. REV. 1260 (2006).

16 See, e.g., Heckler v. Chaney, 470 U.S. 821, 831-32 (1985):

The reasons for [the general unsuitability for judicial review of agency decisions to refuse enforcement] are many. First, an agency decision not to enforce often involves a complicated bal-ancing of a number of factors which are peculiarly within its ex-pertise. [T]he agency must . . . assess whether a violation has oc-curred, . . . whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it

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Superficially, both positions may appear plausible. Indeed, both positions have strong expressions in the case law of the U.S. Su-preme Court,18 and in the academic literature.19 Several legal stand-ards—such as standing,20 the interpretation of legislative inaction,21

acts, whether the particular enforcement action requested best fits the agency’s overall policies, and [other factors]. . . . In addition[,] . . . when an agency refuses to act it generally does not exercise its coercive power over an individual’s liberty or property rights, and thus does not infringe upon areas that courts often are called upon to protect. . . . 17 See, e.g., Bagley & Revesz, supra note 15. 18 See, e.g., DeShaney v. Winnebago County Dept. of Soc. Servs., 489

U.S. 189 (1989) (holding in a 6-3 decision that a local social service worker’s fail-ure to prevent child abuse did not violate the Due Process Clause although the so-cial worker “had reason to believe” abuse was occurring.); Massachusetts v. EPA, 549 U.S. 497 (2007) (holding in a 5-4 decision that the EPA’s denial of a petition for rule making was “arbitrary, capricious, or otherwise not in accordance with law”); Caperton v. A.T. Massey Coal Co., Inc., 556 U.S. 868 (2009) (holding in a 5-4 decision that a judge’s failure to recuse, when a “probability of actual bias” ex-ists, may make him subject to disqualification).

19 See, e.g., Lisa Schultz Bressman, Judicial Review of Agency Inaction: An Arbitrariness Approach, 79 N.Y.U. L. REV. 1657 (2004); William N. Eskridge, Jr., Interpreting Legislative Inaction, 87 MICH. L. REV. 67 (1988); Judicial; Kahn, supra note 8; Peter H.A. Lehner, Judicial Review of Administrative Inaction, 83 COLUM. L. REV. 627 (1983); Ronald M. Levin, Understanding Unreviewability in Administrative Law, 74 MINN. L. REV. 689 (1990); Glen Stazsewski, The Federal Inaction Commission, 59 EMORY L.J. 369 (2009); David A. Strauss, Due Process, Government Inaction, and Private Wrongs, 1989 SUP. CT. REV. 53 (1989); Cass R. Sunstein, Reviewing Agency Inaction After Heckler v. Chaney, 52 U. CHI. L. REV. 653 (1985).

20 See, e.g., Allen v. Wright, 468 U.S. 737 (1984) (denying standing to pe-titioners who sought to challenge agency inaction, specifically the agency’s failure to adopt standards for denying tax exemptions from racially segregated private schools); Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (denying standing to petitioners that sought to challenge agency inaction—the Secretary of Interior’s re-fusal to enforce certain requirements of the Endangered Species Act); Massachu-setts v. EPA, 549 U.S. 497 (granting standing to petitioners that that sought to chal-lenge agency inaction— The EPA’s refusal to regulate greenhouse gas emissions).

21 See Eskridge, supra note 19. Justice Scalia articulated the strongest op-position against giving any meaning to legislative inaction. See, e.g., Johnson v. Transp. Agency, Santa Clara Cnty., Cal., 480 U.S. 616, 672 (1987) (Scalia, J., dis-senting) (“vindication by congressional inaction is a canard”).

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and the un-reviewability presumption22— frequently serve as tools for dismissing critique of inaction.

But the distinction is artificial and analytically flawed. Values and other preferences often shape views regarding its relevance. For example, consider action and inaction of individuals. Assume an in-dividual can take an action that would prolong her life, but some in-dividuals do not take such action. Should the state require action? In Cruzan v. Missouri, Justice Antonin Scalia was willing to “acknowledge that the distinction between action and inaction has some bearing.”23 “It would not make much sense”, he explained, “to say that one may not kill oneself by walking into the sea, but may sit on the beach until submerged by the incoming tide; or that one may not intentionally lock oneself into a cold storage locker, but may re-frain from coming indoors when the temperature drops below freez-ing.”24 Justice Scalia, therefore, argued that the distinction between action and inaction might be utterly irrelevant.25

In National Federation of Independent Business v. Sebelius (“NFIB”), the Court considered a similar issue: the validity of the so-called “individual mandate,” a minimum coverage of health insur-ance policy. Writing for the Court, Chief Justice John Roberts de-clared that “[t]o an economist, perhaps, there is no difference be-tween activity and inactivity[, but] the distinction between doing something and doing nothing would not have been lost on the Fram-ers, who were ‘practical statesmen,’ not metaphysical philoso-

22 The unreviewability presumption supposedly shields agencies’ inaction

from judicial review. See Heckler v. Chaney, 470 U.S. 821, 832-33 (1985) (holding that an administrative agency’s decision not to take action is “presumptively unre-viewable; the presumption may be rebutted where the substantive statute has pro-vided guidelines for the agency to follow in exercising its enforcement powers.”) In Massachusetts v. EPA, the Court clarified—effectively narrowed—the presump-tion, distinguishing rulemaking denials from decisions not to enforce and holding that the former are subject to judicial review. Massachusetts v. EPA, 549 U.S. 497.

23 Cruzan by Cruzan v. Dir., Missouri Dep't of Health, 497 U.S. 261, 296 (1990).

24 Id. 25 Id. at 296-97.

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phers.”26 In NFIB, Justice Scalia agreed with the Chief Justice on this point.

Moreover, government inaction means, among other things, accommodation of externalities. The underlying logic of exempting government inaction from scrutiny is that “government actions can violate the Constitution, but government failures to act against private wrongdoers cannot.”27 Under this premise, for example, environmen-tal regulation violates polluters’ constitutional rights, while govern-ment inaction on environmental issues does not violate the rights of those affected by pollution. Similarly, gun control measures abridge Second Amendment rights, but government inaction concerning gun control does not abridge victims’ rights. Or, restrictions on tobacco sales infringe constitutional rights of businesses, whereas inaction on tobacco does not infringe the public rights.28 And so on.

In sum, the distinction between action and inaction is often a matter of framing, and cannot be depicted as substantive. When ap-plied to the government, the distinction narrows the government’s fundamental duty to “restrain men from injuring one another.”29 If government inaction cannot constitute a failure, than people are free to harm each other, including by imposing one’s costs on society.

III. Imperfection as a Failure

What degree of imperfection defines a government failure? Thomas Aquinas taught believers that “[t]o sin is to fall short of a

26 National Federation of Independent Business v. Sebelius, 132 S.Ct.

2566, 2589 (2012). 27 David A. Strauss, Due Process, Government Inaction, and Private

Wrongs, 1989 SUP. CT. REV. 53, 53 (1989). See also David A. Strauss, Why Was Lochner Wrong?, 70 U. CHI. L. REV. 373 (2003).

28 See, e.g., Walgreen Co. v. San Francisco, 185 Cal. App. 4th 424 (2010) (addressing San Francisco’s ban on sales of tobacco products in pharmacies).

29 See, e.g., Thomas Jefferson, Inaugural Address, 10 ANNALS OF CONG. 763, 765 (1801) (“[A] wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”)

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perfect action”30 and that “sinning is . . . a deviation from that recti-tude which an act ought to have.”31 Today, people understand that the pursuit of perfection is impractical.32 For example, in corporate law, fiduciary duties and the business judgment rule emphasize that offic-ers and directors can make mistakes.33 Yet, people sometimes per-ceive deviations of public policies from ideal norms or theoretical so-lutions as government failures. Such perceptions, the so-called nirvana fallacy,34 are common among both critics and advocates of regulation. In effect, they reflect unrealistic demands for perfection in the spirit of Thomas Aquinas.35

In this spirit, many critics of regulation focus on ideal norms of liberty and freedom, and believe that most regulatory measures are imperfect and fail society; that is, “government is the problem.”36 Likewise but with different values, many advocates of regulation are troubled by “problems”—imperfections in our world—and believe that society can address such problems with regulations.

The references to the invisible hand and the precautionary principle as plausible guidelines for public policies illustrate these perspectives. Invisible hand arguments ordinarily propose that mar-

30 AQUINAS, supra note 14, at 138. 31 Id. at 312. 32 See, e.g., HERBERT A. SIMON, MODELS OF MAN 198 (1957) (“The ca-

pacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objec-tively rational behavior in the real world.”)

33 See, e.g., In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996); In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106 (Del. Ch. 2009); Stone v. Ritter, 911 A.2d 362 (Del. 2006); In re Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005); Brehm v. Eisner, 906 A.2d 27 (Del. 2006).

34 Harold Demsetz, Information and Inefficiency: Another Viewpoint, 12 J. L. & ECON. 1, 1 (1969) (criticizing the “nirvana approach” to public policy).

35 See Barak Orbach, What Is Regulation?, 30 YALE J. REG. ONLINE 1, 6 (2012) (defining “regulation” as “state intervention in the private domain, which is a byproduct of our imperfect reality and human limitations.”)

36 President Ronald Reagan’s Inaugural Address, 127 Cong. Rec. 715, 716 (1981).

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kets are generally efficient and government actions burden and dis-rupt them.37 The precautionary principle prescribes that activities that pose certain risks to the environment or human lives should be banned until safety is established.38 Both concepts offer reliance on simplistic frameworks that never have proved themselves, or more precisely, have proved their ineffectiveness.39 Proponents of these concepts will always identify government failures. Under invisible hand theories, government regulation is unwarranted intervention in markets. Under the precautionary principle, the government is unlike-ly to do enough to prevent all activities that pose risks to lives and the environment.

37 For discussions of several aspects of the invisible hand thesis see Barak

Orbach, Invisible Lawmaking, 79 U. CHI. L. REV. DIALOGUE 1 (2012); BARAK ORBACH, REGULATION: WHY AND HOW THE STATE REGULATES 144-55 (2012); Adrian Vermeule, The Invisible Hand in Legal and Political Theory, 96 VA. L. REV. 1416 (2010).

38 See, e.g., DOUGLAS A. KYSAR, REGULATING FROM NOWHERE: ENVIRONMENTAL LAW AND THE SEARCH FOR OBJECTIVITY (2010). San Francisco supposedly expressly endorsed the Precautionary Principle See San Francisco, Res-olution No. 129–03 (Mar. 13, 2003); San Francisco Environment Code and Precau-tionary Principle Policy, Ordinance No. 171–03 (July 3, 2003). Similarly, the 1957 Delaney Clause effectively adopted this principle. The Delaney Clause banned all food additives having the potential of “induc[ing] cancer in man or animal.” 21 U.S.C. § 348(c)(3). See Less v. Reilly, 968 F.2d 985 (9th Cir. 1992).

39 For the invisible hand see, e.g., The Financial Crisis and the Role of Federal Regulators: Hearing Before the H. Comm. on Gov’t Oversight and Re-form, 110th Cong. 17 (Oct. 23, 2008) (testimony of Alan Greenspan, Former Chairman of the Federal Reserve) (stating that “those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself included) are in a state of shocked disbelief. . . . The whole intellectual edifice . . . col-lapsed.”); Joseph Stiglitz, Regulation and Failure, in NEW PERSPECTIVES ON REGULATION 11, 17-18 (David Moss & John Cisternino eds., 2009) (“the primary reason for the government failure [that led to the Great Recession] was the belief that markets do not fail, that unfettered markets would lead to efficient outcomes, and that government intervention would simply gum up the works.”); Henry T.C. Hu, Efficient Markets and the Law: A Predictable Past and Uncertain Future, 4 ANNU. REV. FIN. ECON. 179 (2012); CARMEN M. REINHART & KENNETH ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (2009); STEVEN G. MEDEMA, THE HESITANT HAND (2009); ROBERT J. SHILLER, IRRATIONAL EXUBERANCE (2d ed. 2005). For the Precautionary principle see generally CASS R. SUNSTEIN, LAWS OF FEAR: BEYOND THE PRECAUTIONARY PRINCIPLE (2005); Cass Sunstein, Irreversibility, 9 LAW PROBABILITY & RISK 227 (2010).

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Imperfection is not all about the degree of government con-duct; it may also be about the form. Two general forms of imperfec-tions are commonly used to define government failures: a deviation from adequate cost-benefit analysis and a mismatch between norma-tive expectations and public policies.40

Cost-benefit analysis as a standard for government failures underscores the inability to define ex ante precise criteria for gov-ernment failures and potential misuse of hindsight.41 When undesira-ble outcomes materialize, we can supposedly employ a Learned-Hand-like formula (or a more sophisticated analysis) to examine whether the government adequately invested in precautions to ad-dress the risk.42 Such inquiries do not account for budgetary con-

40 See, e.g., Bus. Roundtable v. S.E.C., 647 F.3d 1144, 1148-49 (D.C. Cir. 2011):

[The SEC] acted arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; con-tradicted itself; and failed to respond to substantial problems raised by commenters.

Com. v. Wasson, 842 S.W.2d 487, 501 (Ky. 1992):

By 1974 [when Kentucky enacted its anti-sodomy law] there had already been a sea change in societal values insofar as attaching criminal penalties to extramarital sex. The question is whether a society that no longer criminalizes adultery, fornication, or devi-ate sexual intercourse between heterosexuals, has a rational basis to single out homosexual acts for different treatment. 41 See, e.g., John F. Morrall III, A Review of the Record, 10(4)

REGULATION 25 (1986); John Morrall III, Saving Lives: A Review of the Record, 27 J. RISK & UNCERTAINTY 221 (2003). For a discussion of the controversy over cost-benefit analysis, see ORBACH, REGULATION, supra note 37, at 113-18. For the hind-sight bias see Scott A. Hawkins & Reid Hastie, Hindsight: Biased Judgments of Past Events after the Outcomes Are Known, 107 PSYCH. BULL. 331 (1990); Kim A. Kamin & Jeffrey J. Rachlinski, Ex-Post ≠ Ex Ante, 19 L. & HUMAN BEHAVIOR 89 (1995); Jeffrey J. Rachlinski, A Positive Psychological Theory of Judging in Hind-sight, 65 U. CHI. L. REV. 571 (1998).

42 United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947) (Hand, J.). See generally Mark Grady, Untaken Precautions, 18 J. L. STUD. 139

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straints, ex ante knowledge of risks, and available precautions. There-fore, such inquiries may be reasonable for certain domains but not for others.

Mismatches between normative expectations and public poli-cies may also establish perceptions of government failures. Examples of such perceptions may include the inability of the federal govern-ment to address child labor until 1938,43 the endorsement of eugenics and the maintenance of eugenics programs until 1974,44 and the choice to ignore irrational exuberance during the housing bubble of 2000s.45 The existence of a mismatch implies that the underlying normative expectation is not in consensus. For some portion of the public there is no mismatch.46 But those, whose normative views

(1989); Allan M. Feldman & Jeonghyun Kim, The Hand Rule and United States v. Carroll Towing Reconsidered, 7 AM. L. & ECON. REV. 523 (2005).

43 The 1938 Fair Labor Standards Act was the first federal legislation that set limit on child labor that survived scrutiny of the Supreme Court. Hammer v. Dagenhart, 247 U.S. 251 (1918) (holding that the Keating-Owen Child Labor Act of 1916 that restricted child labor was unconstitutional); The Child Labor Tax Case, 259 U.S. 20 (1922) (invalidating a federal tax imposed on goods produced with child labor); United States v. Darby, 312 v. 100 (1941) (upholding the consti-tutionality of the Fair Labor Act). For the history of the child labor debate, see HUGH D. HINDMAN, CHILD LABOR: AN AMERICAN HISTORY (2002); KRISTE LINDENMEYER, A RIGHT TO CHILDHOOD: THE U.S. CHILDREN’S BUREAU AND CHILD WELFARE, 1912–1946 (1997).

44 North Carolina, the last state to engage in eugenics, sterilized people “for the best interest of the[ir] mental, moral or physical improvement” until 1974. N.C. Ch. 1281 § 35-36 (1973). See THE GOVERNOR’S TASK FORCE TO DETERMINE THE METHOD OF COMPENSATION FOR VICTIMS OF NORTH CAROLINA’S EUGENICS BOARD: FINAL REPORT (Jan. 2012); Kim Severson, Thousands Sterilized, a State Weighs Restitution, NY TIMES, Dec. 10, 2011, at A1. See also Buck v. Bell, 274 U.S. 200 (1927) (Holmes, J.) (“It is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind.”).

45 See NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, THE FINANCIAL CRISIS: INQUIRY REPORT (final report, Jan. 2011).

46 Lawrence v. Texas stands for the potential normative mismatch that the majority may have to tolerate. Lawrence v. Texas, 539 U.S. 558, 577 (2003) (“[T]he fact that the governing majority in a State has traditionally viewed a partic-ular practice as immoral is not a sufficient reason for upholding a law prohibiting the practice.”).

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clash with existing public policies, may perceive the contrast as a government failure. Normative contrasts of this type begin with the general controversy over regulation: For some a government failure is a consequence of too much regulation, while for others it is a result of too little regulation.47

In sum, every government failure represents some imperfec-tion in government performance, but not every imperfection in gov-ernment performance is a failure. Although we often “see” govern-ment failures, threshold standards that separate tolerable imperfections from government failures do not exist. In corporate law, only extreme situations of improper intent, conflict of interest, carelessness, and inattention or a failure to be informed of all facts material to a decision may result in liability for decisions made or not made.48 By contrast, under some theories, the government fails whenever it acts because of the inevitable imperfections. Such theo-ries are impractical.

IV. Defining Failure

What government’s actions and inaction ought be considered government failures? When “bad things” happen, such as a natural disaster hits a major city, a financial bubble bursts, or a Ponzi scheme unravels, a government failure is often declared.49 The reasoning for such public verdicts is that “the public stewards . . . ignored warnings and failed to question, understand, and manage evolving risks . . . to

47 See supra Section I; Orbach, What Is Regulation?, supra note 35. 48 See supra note 33. 49 See, e.g., HURRICANE KATRINA LESSONS LEARNED, STAFF, THE

FEDERAL RESPONSE TO HURRICANE KATRINA: LESSONS LEARNED (Feb. 2006); NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, THE FINANCIAL CRISIS: INQUIRY REPORT (final report, Jan. 2011) (hereinafter, INQUIRY REPORT); U.S. SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATION, COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS, WALL STREET AND THE FINANCIAL CRISIS: ANATOMY OF A FINANCIAL COLLAPSE (Apr. 13, 2011); U.S. S.E.C. OFFICE OF INVESTIGATIONS, INVESTIGATION OF FAILURE OF THE SEC TO UNCOVER BERNARD MADOFF’S PONZI SCHEME (Aug. 2009).

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the well-being of the American public.”50 Such failures supposedly refer to substantial imperfections in government performance.

Designed by humans for a complex reality, regulations tend to be imperfect. Government failures, including a lack of, or inadequate regulation, merely reflect the imperfect nature of regulation. Indeed, the phrase “government failure” as a term of art was born in critique of regulation.

“Government failure” as a concept in regulation refers to substantial imperfection in government performance. Such imper-fections are comprised of inadequate actions and unreasonable inac-tions. The scope of the imperfection is related to the level of a disre-garded risk, inadequacy of cost-benefit analysis, deviation from popular normative expectations, and magnitude of misallocated re-sources. In essence, government failures are accidents that cannot be eliminated, but their costs can be reduced.

50 INQUIRY REPORT, at xvii.