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Government Regulation: The Good, The Bad, & The Ugly

regproject.org

regproject.org

Government Regulation: The Good, The Bad, & The Ugly | Regulatory Transparency Project

Regulation is an essential tool for achieving broad public goals, but as we have shown, poorly designed regulations can do more harm than good. Recognizing that regulations can impose costs on entrepreneurs, workers, and consumers, the U.S. government has adopted procedural and analytical requirements, such as “notice-and-comment” rulemaking and “benefit-cost analysis” for issuing new regulations. These tend to focus on one problem at a time, however, and too often are based on regulators’ over-confident analysis of what consumers should value. As a result, they have done little to constrain regulations or ensure they are serving broad public goals.125

Thus, regulations accumulate and stifle innovation and economic growth that is beneficial for all Americans. It need not be this way, however. Americans can enjoy the benefits of regulation while reducing the costs.

A. Respect market forces and the beneficial effects of competition.

First, in deciding whether to regulate, agencies should determine whether there is a material failure of private markets.26 This is because competitive markets are not only very efficient at allocating scarce resources to their best use, but in encouraging entrepreneurial activity and innovation. When important effects of a free market transaction (such as environmental pollution) are not captured in the decisions made by buyers and sellers, government should examine the underlying cause of that “market failure” and seek to address it by exploiting, rather than disrupting, the “marvel”27 that is the market-based economic ecosystem.28 For example, are property rights poorly defined, or could economic incentives, such as an emissions tax, internalize those costs without inhibiting innovation? Calibrating regulations to address market failures can ensure that government interventions achieve the intended goals while minimizing adverse consequences.

B. Do more good than harm.

Second, because the goal of regulation is to enhance, not undermine, societal well-being, regulatory agencies should consider important trade-offs and design regulations to do more good than harm. Benefit-cost analysis, despite its limitations, is the best tool for understanding regulatory consequences and ensuring that regulations provide social benefits greater than their social costs.29 There is longstanding bipartisan consensus on this point: every President since Ronald Reagan has required regulatory agencies to use benefit-cost analysis by Executive order. As the Clinton Administration put it:

[R]egulations (like other instruments of government policy) have enormous potential for both good and harm. Well-chosen and carefully crafted regulations can protect consumers from dangerous products and ensure they have information to make informed choices. Such regulations can limit pollution, increase worker safety, discourage unfair business practices, and contribute in many other ways to a safer, healthier, more productive, and more equitable society. Excessive or poorly designed regulations, by contrast, can cause confusion and delay, give rise to unreasonable compliance costs in the form of capital investments, labor and on-going paperwork, retard innovation, reduce productivity, and accidentally distort private incentives.

The only way we know how to distinguish between regulations that do good and those that do harm is through careful assessment and evaluation of their benefits and costs. Such analysis can also often be used to redesign harmful regulations so they produce more good than harm and redesign good regulations so they produce even more net benefits.”30

Although presidential directives have required agencies to balance benefits and costs in designing their regulations for over 36 years, agencies often have interpreted their regulatory statutes to preclude doing so. Fortunately, the courts—including the Supreme Court31—recently have clarified that in the vast majority of cases, agencies may exercise their discretion to balance benefits and costs in implementing regulatory statutes. Accordingly, a president could direct all regulatory agencies to reexamine their statutory interpretations, and unless expressly prohibited by law, implement their regulatory statutes through benefit-cost balancing to do more good than harm.32

Moreover, to date, a significant number of regulatory agencies—so-called “independent” agencies that do not report to the President (such as the Securities and Exchange Commission, the Federal Communications Commission, and the Consumer Products Safety Commission)—are not required to conduct benefit-cost analysis for their major rules at all, but there is a strong consensus that they should be required to do so.33 Therefore, presidents could include the independent regulatory agencies within the requirements for benefit-cost balancing, including the directive to modernize their statutory interpretations to do more good than harm.34

Unfortunately, the office that reviews important regulatory proposals under the presidential directives for benefit-cost balancing—the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget—is grossly underfunded for the task at hand. Since its creation over 36 years ago, OIRA has lost over half its staff (from 97 to about 47), while the staff of the regulatory agencies has almost doubled (from 146,000 to 278,000).35 Increasing OIRA’s resources commensurately could improve agency analysis and regulatory outcomes.

Finally, it is important that the fundamental and eminently rational requirement for regulators to balance benefits and costs to ensure regulations do more good than harm be required by statute, not just through a presidential order. A judicially enforceable benefit-cost test is needed because the status quo is inadequate for many reasons, including the institutional limitations of the agencies and OIRA (such as bureaucratic turf battles, failure to utilize both internal and external expertise, bias, and the mismatch between the vast volume of regulation and OIRA’s shrinking resources), as well as political dysfunctions (including inconsistent support for OIRA by varying administrations, interest group rent-seeking, and presidential electoral politics).36 Scholars have shown that the courts are quite capable of competently reviewing agency use of benefit-cost analysis.37 Indeed, benefit-cost balancing is so fundamental to rational decision making that the courts already have shifted toward requiring agencies to do more good than harm, even in the absence of Congressional action.38

C. Base decisions on the best available information and transparency.

Important regulatory decisions should be based on high quality information and should be transparent to the public. Specifically, regulators should base their regulatory decisions, priorities, and influential information disseminations on the best available scientific and technical information, including an objective and unbiased evaluation of the cost, benefits and risks, and a careful analysis of the weight of the scientific evidence. Influential scientific information and assessments should be peer-reviewed by independent experts before being disseminated.

Agencies also should disclose early to the public the important data, models, and other key information used in major rulemakings and provide a meaningful opportunity for public input. Court settlements between regulators and interest groups to require rulemakings should be published and made available to the public, and reviewed by OIRA, before they are final.39

D. Gather better feedback.

The feedback loop between businesses and customers is an essential element of an economic ecosystem that regulations often disrupt.40 When considering public policies to address perceived problems, regulators must appreciate the value of competition and choice at regulating undesirable behavior. We live in a diverse society made up of individuals in varied circumstances and with different preferences.41 One-size-fits-all regulatory approaches at the national level that reduce competition, choice, and feedback disrupt learning processes, protect favored interests from challenge, and make the economic ecosystem as a whole less able to adapt and innovate.

E. Encourage experimentation and learning.

Regulation should not short-circuit trial and error. No one, in the market or in the government, makes mistakes on purpose, but they are inevitable, particularly in complex, rapidly changing conditions. Mistakes are inevitable when regulators take precautionary approaches to regulation or when they attempt to substitute some products for others. Mistakes in the marketplace generate immediate pressures to make corrections. Mistakes in regulation too often create pressures for even more regulation.

When regulation is necessary, the policies themselves should be designed in ways that encourage competition and allow for experimentation and testing of regulatory hypotheses. These need not be randomized controlled trials in the scientific sense, but rather natural experiments that allow for trial and error and real-world observation of how different policies affect behavior and outcomes.42 To generate natural experiments, whenever possible, policies should be developed at the state and local levels. Global governance structures that reduce competition among regulators will quash healthy differences that permit experimentation and learning.43

F. Regulatory humility.

Regulators should be humble about what they know, and what they do not. Interventions in complex systems that are not completely understood are fraught with risk. Even with the best of intentions, sensible sounding “solutions” can make things worse, and sometimes much worse. For this reason, a foundation of medical ethics is the Hippocratic Oath: First do no harm.

Regulators should follow the same principle. When a problem is not well understood, or the effects of a regulation are uncertain, or rapid technological change means present circumstances are not likely to last, regulation that impedes market adaptation can do more harm than good.

The success of capitalist systems does not depend on markets being efficient, or on people always behaving rationally, but rather their complex, adaptive44 features, like natural ecosystems.45 Both market participants and markets learn from their mistakes and correct them. Static analyses by benevolent regulators willing to substitute their judgment for that of diverse individuals with different circumstances and preferences ignores this insight and unwittingly reduce opportunities, growth, and human flourishing.

Like everyone else, government actors are susceptible to giving more weight to information that supports their position, discounting data, research, values and perspectives that call regulatory action into question. Political demand for costly regulation of highly publicized risks, even when scientists believe that those risks are minimal and not worth addressing, may reinforce bad government policies.

G. Address regulatory accumulation.

Finally, incentives are needed to address the accumulation of regulations already on the books. As noted above, unlike ecosystems and interactions in non-government spheres, where individuals and organizations are constantly learning from past experience and updating their behavior accordingly, the regulatory sphere has no feedback loop. The regulatory framework tends to focus on solving the next big problem (on the assumption that markets fail but regulators are infallible), without ever looking back to see if the rules in place are actually working as anticipated.46 The incentives of the regulatory agency can be perverse, causing it to actively avoid the efficient solution—to prefer a system of rules and enforcement actions, for example, to a self-enforcing system of emissions taxes.

All the incentives in the federal bureaucracy are to create more and more regulations under the vast authority of the administrative state. Thus, both administrative and statutory structures should be created to counterbalance these incentives.

There should be retrospective review to streamline and simplify existing rules and to remove outdated and duplicative rules. The retrospective review process should be the start of a bottom-up analysis of how agencies can best accomplish their statutory missions. This should include a careful analysis of regulatory requirements and their necessity, as well as an estimation of their value to achieve needed outcomes. No significant new rule should be issued without a plan for review.47

A team within agencies (perhaps like the regulatory reform task forces established recently by Executive Order 13777) dedicated to identifying deregulatory opportunities could provide a counter-weight to the natural focus of regulatory agencies on issuing new regulations. But even such structures may at times be defeated by a culture of regulatory zeal within an agency. Thus, as Professor Michael Rappaport of San Diego Law School has suggested, Congress could create an agency that would have express statutory authority to deregulate. The agency should have the authority that all existing agencies have, but only to pass regulations that deregulate. The deregulatory agency would employ the additional time, insulation, and expertise that administrative agencies possess in the service of deregulation.

The agency would also have the right incentives to deregulate: it would likely be filled with people who understand and support deregulation, and the agency’s public reputation and internal incentive structure would be driven by the efficacy of its deregulatory actions.

By raising proposals in the form of proposed rules, the agency would both publicize the case for the deregulation and constrain any hubris from the regulatory agencies.

DMU Timestamp: November 09, 2018 23:10





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