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What this seems to suggest is that bureaucratic hurdles are also downstream from the threat of legal costs, much like the explosion of US medical expenses (mediated by insurance and certification costs). Could one put a lid on "dentist caused cosmetic damage, courts awarded more in damages than the patient will earn in a lifetime" scenarios that the US is famous for? Should one, given the tension with the other apparent failure mode being like "courts fine megacorp the statutory maximum of $1m for illegal practice that earns them >$1m per interval between successful court cases in profit"?

How do you reconcile the goal of having credible threats with which to make institutions follow the law with the goal of not incentivising institutions to realign themselves around the goal of mitigating that threat? It seems that the fundamental problem is that regulation rarely changes the topography of the incentive landscape per se - it just places spike pits into certain attractive valleys in it, making the incentive-followers strive to get as close as possible to the edge of the legal sanctions pit while not crossing the line. To make sure they actually don't cross it, they introduce ever more procedural requirements - the more you have, the closer to the pit you can venture while still feeling safe. The optimal institution is just barely on the safe and legal side, and has a mile-long paper trail to prove it.

Maybe this suggests replacing "sharp-edged" bans with "terraforming" taxes. Only, how do you sell that to the voting masses? In the FDA example, this would have to look something like "instead of making the FDA/its employees subject to legal penalty if they pass some threshold of neglect in approving a drug that passes some threshold of side effects, tie their funding/salary to the volume of side effects", and, yes, accepting that some whistleblower will report a decision was made that looks like "yes, we figured some patients would get birth defects, but in expectation the funding cuts looked better than the amount of people we would need to divert to shepherd additional tests".

Should one, given the tension with the other apparent failure mode being like "courts fine megacorp the statutory maximum of $1m for illegal practice that earns them >$1m per interval between successful court cases in profit"?

The general solution is contempt of court - i.e. the first time you do it, you get "illegal practice, $1m and you're ordered not to do this again", and if you do it a second time, you get "contempt of court, penalty is whatever the hell we want". Contempt of court has very few hard limits because the whole point is to patch this loophole by allowing unlimited escalation in case of defiance; I know the statutory maximum in the USA for individuals is life imprisonment, and for corps it's probably something equally dire.