Reimagining Regulations: Ideas from a Non-Policy-Wonk--Part One
Crafting cost-effective, gaming-resistant, outcome-achieving regulations is really hard to do
on Feb 21, 2019
There is a perpetual battle between pro and anti-regulatory advocates. But that tug-of-war misses the point. We need efficient, effective regulation—or alternative mechanisms—that actually work, to ensure a well-functioning, non-abusive society. Here we explore some off-the-beaten-path ideas on how to achieve the (mostly) noble goals of regulation, without the (mostly) inadequate results and high expense of regulation.
Full Article Below -
I am not envious of legislators and regulators. Crafting good, effective laws and regulations is really hard, even for level-headed non-partisans just trying to do the right thing. It is even harder in the intense crucible of hyperbolic partisan politics. This article explores the challenge in two parts:
Part One: The Problem—a discussion of the challenges of too many regulations, their cost, and limited effectiveness.
Part Two: The Ideas—Possible paths to better regulations or alternatives.
The Perpetual Battle Between Pro and Anti-Regulation Forces
On one side, libertarians and traditional pro-business conservatives believe (not without good reason) that government always messes things up—the less government intervention, the better. The argument is that, while regulations may be well-intentioned, they place an enormous burden on businesses and society and are usually ineffective, often with serious unintended side-effects. Bureaucracies become self-perpetuating machines that exist for their own sake, that must be continually fed, and that only strive to get bigger, never to shrink.
On the other side, progressives and anti-corporate activists believe (not without good reason) that unbridled capitalism gives large corporations way too much power; that corporations are amoral and can never be trusted to do the right thing on their own, without some kind of external oversight and meaningful consequences for bad behavior. They would point to past egregious abuses such as those chronicled in The Jungle (leading to the Meat Inspection Act); Silent Spring (leading to creation of the EPA); the Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom scandals (leading to Sarbanes Oxley); and the 2008 global financial crisis (leading to Dodd-Frank).
So, who’s right? From where I stand, it seems both sides are, but it doesn’t matter because …
No Matter Who’s Right … the Mountain of Regulations Keeps Rising (Seemingly Forever)
From The Self-Perpetuating Industry of Bureaucracy: “This is the way the world ends: the self-perpetuating process of hiring bureaucrats to do the work that bureaucrats invent to hire new bureaucrats; the new work those new bureaucrats create to hire new new bureaucrats; and the massive and inexorable rise of the Empire of Paperwork, the sickly and impotent sovereignty of Management. This diminishes the ability of intelligent and committed people to achieve anything.”
While the anti-regulation camp may be encouraged by the recent US administration’s rolling back of regulations, they shouldn’t get too optimistic. If we take the long view, over the centuries and decades, regulatory and legal responsibilities and compliance requirements—along with the rights and protection from abuse they provide—have consistently grown more far-reaching over time (see Figure 1, below). I don’t expect this trend to change over the long-term and predict the current downsizing of regulations will be a relatively short-lived anomaly. In large part, the call for new laws and regulations is driven by public outrage over events such as horrendous factory working conditions in the 1900s, the death of more than 100 patients due to a sulfanilamide medication in the 1930s (leading to creation of the FDA), rampant environmental pollution in the 1960s and 1970s, bribery scandals of the 1970s, corporate malfeasance in the 1990s, the subprime mortgage crisis in the 2000s, and many other events over the years.
Figure 1 - Ever-increasing Rights, Responsibilities, and Regulatory Burdens
Businesses Often Advocate for More, Stricter Regulations
There is a misnomer that businesses always hate regulations. In fact, many incumbent businesses (often powerful oligopolies, with big lobbying budgets) strongly support regulations that give them a competitive advantage, providing significant barriers to entry for upstart competitors. These may include requiring licenses, certifications, inspections, complex reporting/filing, and other regulatory requirements. Businesses who have invested billions of dollars in systems and processes to achieve compliance don’t want others cheating and getting away with lower costs and undermining public confidence.
While much of this is self-serving, there are businesses run by people who, believe it or not, have ideals beyond pure profit. They would like to see their whole industry behave better and held to higher, stricter standards, encouraging and/or enforcing better environmental or social behaviors. They don’t want their industry’s reputation being tainted by bad actors. For example, organic farmers formed organizations such as the CCOF (California Certified Organic Farmers), founded in 1973 for the purpose of defining organic standards and certifying organic growers. They pushed for and achieved strict state and federal organic certification standards, the latter under the USDA’s National Organic Program.
When bad things happen, lawmakers are compelled to make sure “this will never happen again.” To ensure that businesses behave responsibly, legislators create new regulations such as the Meat Inspection Act, the Pure Food and Drug Act, the Foreign Corrupt Practices Act (FCPA), Sarbanes-Oxley (SOX), Dodd-Frank, Food Safety Modernization Act (FSMA), Consumer Financial Protection Bureau (CFPB) rulings, and countless others. In the EU, where public awareness and concern over environmental issues are more pronounced, they have ETS, WEEE, RoHS, and REACH,1 and new regulations on the way, all of which keep getting more comprehensive. The US tax code provides a good example of this continual expansion: over the past 60 years, it has increased from about 1.4 million words to over 10 million words today.2
Automation of Compliance Helps … and Hurts
Computer technology, including AI/machine learning, can help automate and lower the cost of compliance. On the flip side, regulators may figure that businesses are able to absorb a higher regulatory burden, because they have more tools to automate their compliance. In some cases, regulators mandate the use of technology for compliance, such as the mandatory use of electronic logging devices (ELDs) in trucks and buses to track hours of service3 for drivers. The use of these devices has forced truckers to more strictly comply with hours of service limits (with paper records, they could fudge things). This has been cited4 as one of the factors shrinking nationwide truck capacity and resulting in a rise in the cost of shipping by truck during the past year, costing in the neighborhood of tens of billions of dollars per year.5 This is one example of the high cost of regulations. But let’s not forget that those same regulations (in theory) save lives and prevent injury and property damage. A Department of Transportation press release from 2013 estimates that hours-of-service regulations save 19 lives and prevent about 1,400 crashes and 560 injuries per year.
Regulations Have Costs and Benefits
The growth in the complexity and scope of regulations comes at a cost, though estimates of that cost vary. Here are three estimates, among many different ways of looking at those costs:
Impact on GDP: $4 trillion—A 2016 paper6 from George Mason University estimated that the increase in US regulations between 1980 and 2016 dampened economic growth by about 0.8% per year, which translated into about $4 trillion less GDP in 2016.
Cost of compliance: $1.8 trillion—In 2012, the Chamber of Commerce estimated the total cost of compliance with federal regulations was about $1.8 trillion.7
Cost of 48 major regulations: ~$100 billion—Each year since 2004, the White House Office of Management and Budget (OMB) releases a report on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates. The 2017 OMB report estimated that for the set of major federal regulations reviewed by OMB, the estimated annual costs to US taxpayers and businesses were between $78 and $115 billion, while the estimated annual benefits of those regulations were between $287 and $911 billion. It should be noted this report does not cover all regulations and has been criticized for that and other reasons.
So, we know that regulation costs us a lot, but they also have benefits that are supposed to far outweigh the costs. Having built many ROI models, we know benefits can be ‘hard’ or ‘soft.’ Hard benefits can be measured unambiguously, and their value calculated with confidence and wide acceptance. An example in an ROI model is reduction in the amount of labor required to perform a task. Soft benefits are harder to measure and may be subjective in nature. Often soft benefits are much larger, but you get less credit for them because of the difficulty in measuring their value. An example in an ROI model might be employee satisfaction.
Goals for Regulations Are Usually Noble, But Results Frequently Fall Short
Imperfect Information and Imperfect Motivation: Complexity, Lobbyist, and Conflicts of Interest
One reason creating good legislation and regulation is really difficult is the complexity of the issues. Take ‘fixing’ healthcare, for example. Intelligent well-meaning people can disagree on what is the best path forward. What are the right incentives and payment system; single payer, private pay, hybrid? How to implement evidence-based, outcome-based healthcare? What are the roles of advanced healthcare directives, cost-sharing and gain-sharing, right to die, and other measures, some of which have been controversial? It is impossible for a legislator to be an expert in everything. Throw into the mix hyper-partisanship, intense special interest lobbying, and conflicts of interest for law-makers and regulators, and an already formidable task becomes nearly impossible.
Effectiveness, Unintended Consequences, and Loopholes
Even if we had an ideal diverse team of unbiased experts dedicated to the task, economies, societies, and human behavior are confoundingly complex and unpredictable. Unintended consequences are virtually guaranteed. It is extremely difficult to anticipate the impacts on behavior and side effects. Take the problem of trying to eliminate loopholes. A team of say 20 expert regulators and their advisors has a few months to imagine all the various ways different parties may try to game the system. They are pitted against millions of people who have an interest in gaming the system, with armies of lawyers and consultants whose full-time job is to find and exploit the holes. People are incredibly creative, and they have years to develop and exploit the loopholes. It is no contest.
Rolling Back Regulations Must Be Done with Care
In spite of all their imperfections, regulations serve as important checks on abuses, providing critical services and protections. A reckless shotgun approach to rolling back regulations is unwise. Many fear that current rollbacks of environmental regulations will result in dramatic increases in pollution, loss of critical natural resources, increased sickness, and tens of thousands of premature deaths in the US.8 Some analysis points to the repeal of Glass-Steagall Act as one of the key causes of the global financial crisis and resulting ‘great recession,’ though opinion is divided on that and there is broad acknowledgement of other critical casual factors involved as well.
In Part Two of this article, we explore potential innovations that might decrease regulatory burdens while better achieving the societal goals of regulations.