In thinking about the real effects of regulation, it is important to understand that the special resource of the government—which private entities do not possess—is the power to coerce. Interest groups that can convince the government to use its coercive power to their benefit can profit at the expense of others. The motivation for each of these activities is to maximize economic returns, but the unintended consequences of profit-seeking and rent-seeking differ dramatically.
Ultimately, consumers receive the gains in the form of lower prices and better products. Such rent-seeking to achieve favorable regulatory treatment is a rational response to the opportunity presented by regulation, and generates concentrated gains for the successful rent seekers at the expense of everyone else.
But rather than creating new opportunities and value for consumers, such behavior leads to socially wasteful uses of resources. When regulations can provide competitive advantage, it is often in the self-interest of regulated parties to support them, 17 often hiding behind public interest arguments 18 even while other interests oppose them. Thus, talent and energy get channeled into lobbying for favorable government treatment a zero sum game at best , rather than into entrepreneurial experimentation and innovation that leads to growth and prosperity.
This leads to regulatory agencies advancing the commercial or political concerns of the most well-organized special interests which may be, but are not necessarily, regulated parties. And even where regulations are well intended, they can produce unintended negative consequences. For example, drug regulation may delay the introduction of new, life-saving pharmaceuticals. The well-connected—those who can hire lobbyists and know the right people in Washington—can gain at the expense of ordinary citizens.
For example, large, established interest groups, such as large companies and trade associations, environmental groups, trial lawyers, unions, and state, local, and tribal governments, generally have much better access to legislators and regulatory officials, and can influence how regulations are designed and enforced.
They often have Washington offices dedicated to ensuring their interests are reflected in regulations. This can disadvantage everyone else—ordinary consumers, taxpayers, workers, small businesses, the middle class, and the poor. Businesses who ignore Washington, and just concentrate on competing for customers in the marketplace, can quickly find themselves on the losing side of trade policy, or tax policy, or some other regulatory tilt of the playing field.
Large businesses also have advantages over smaller entities in that they have systems in place to handle the burdens of regulatory compliance, and can spread those costs over more employees and products. In heavily regulated industries like medical care or consumer finance, it becomes difficult, if not impossible to be successful by attending only to the needs of consumers.
Catering to the whims of the regulators can dominate other considerations. The real costs of regulation are passed on to all Americans, who are generally unaware of these costs because they are hidden in lower wages, higher prices for consumer goods and services, and fewer products and opportunities made available.
Often, those least able to represent themselves shoulder the greatest burdens. For example, many regulations lead to higher energy and transportation costs, raising product prices on almost everything we buy.
These regulations may lead to some benefits, but is it really fair to ask low-income families to pay a larger share of their income for these benefits than wealthier families? Products standards that may make sense for many may also price low income consumers out of the market entirely. Higher prices for new cars to incorporate backup cameras, for example, make them less affordable to lower income consumers who end up driving older, less safe cars longer.
Regulations in the workplace may keep the workplace safer, but they limit worker flexibility, and can dampen wages, or discourage employers from hiring less-experienced or lower-skilled workers. Lengthy drug approval processes not only increase the cost of new drugs but discourage investment in potentially life-improving products.
Consumers may face absurdly high drug prices, not because the drug is new or expensive to produce, but because it enjoys a monopoly protected by regulatory barriers. And, patients are prevented from getting access to promising products during the bureaucratic delay, even those with terminal illnesses.
Small, pioneering companies cannot afford the costs and time required to get approval of innovative new products, and often sell out to larger companies with the expertise and resources to obtain government approvals. It is then up to the larger company whether to market the new product or crush it. This reduces competition and innovation, and ultimately increases prices. There is a growing concern that the U. Like pebbles tossed in a stream, each individual regulation may not have a significant impact, but cumulatively, they can hinder the flow of innovation and economic growth.
Thus, regulators typically proceed from one regulation to the next without focusing on understanding the results of their work. Insofar as regulators are concerned about results, the yardstick tends to be whether they are criticized by elected officials, interest groups, or judges. This is a weak feedback loop since, when citizens experience good or bad outcomes in their daily lives such as safer products or higher prices , they rarely know whether those outcomes relate to regulation or other causes.
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. As a result, they have done little to constrain regulations or ensure they are serving broad public goals.
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. First, in deciding whether to regulate, agencies should determine whether there is a material failure of private markets.
Calibrating regulations to address market failures can ensure that government interventions achieve the intended goals while minimizing adverse consequences. 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.
As the Clinton Administration put it:. 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.
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 Court 31 —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. 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 , to , 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.
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. The feedback loop between businesses and customers is an essential element of an economic ecosystem that regulations often disrupt.
We live in a diverse society made up of individuals in varied circumstances and with different preferences. 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.
Alternatively, one could assemble micro analogies to the policy under consideration and then collect evidence on the plausibility of the scale of these effects by performing a thought experiment based on the OECD index. Hassett and Shapiro also stress that regulatory policies often negatively impact economic activity, particularly investment, not so much because of the level of stringency of the rules per se, but because of uncertainty about the nature and scope of the rules as they are anticipated to be finally written, implemented, and enforced.
They explain that:. Between the initial regulatory decision and the final resolution, firms may radically reduce their affected investments. All of this suggests that although U. In theory, we may know a lot about what makes for good regulations, but in practice, we are not optimizing.
Our regulations could be better designed and maintained to promote a more vibrant, innovative, and productive economy. Many researchers and research organizations U.
Those 12 recommendations are quoting, with emphasis added :. Commit at the highest political level to an explicit whole-of-government policy for regulatory quality. The policy should have clear objectives and frameworks for implementation to ensure that, if regulation is used, the economic, social and environmental benefits justify the costs, distributional effects are considered and the net benefits are maximised.
Adhere to principles of open government, including transparency and participation in the regulatory process to ensure that regulation serves the public interest and is informed by the legitimate needs of those interested in and affected by regulation. This includes providing meaningful opportunities including online for the public to contribute to the process of preparing draft regulatory proposals and to the quality of the supporting analysis.
Governments should ensure that regulations are comprehensible and clear and that parties can easily understand their rights and obligations. Establish mechanisms and institutions to actively provide oversight of regulatory policy procedures and goals, support and implement regulatory policy, and thereby foster regulatory quality. Integrate Regulatory Impact Assessment RIA into the early stages of the policy process for the formulation of new regulatory proposals.
Clearly identify policy goals, and evaluate if regulation is necessary and how it can be most effective and efficient in achieving those goals. Consider means other than regulation and identify the tradeoffs of the different approaches analysed to identify the best approach.
Conduct systematic programme reviews of the stock of significant regulation against clearly defined policy goals , including consideration of costs and benefits, to ensure that regulations remain up to date, cost-justified, cost-effective and consistent and [deliver] the intended policy objectives.
Regularly publish reports on the performance of regulatory policy and reform programmes and the public authorities applying the regulations. Such reports should also include information on how regulatory tools such as Regulatory Impact Assessment RIA , public consultation practices and reviews of existing regulations are functioning in practice. Develop a consistent policy covering the role and functions of regulatory agencies in order to provide greater confidence that regulatory decisions are made on an objective, impartial and consistent basis, without conflict of interest, bias or improper influence.
Ensure the effectiveness of systems for the review of the legality and procedural fairness of regulations, and of decisions made by bodies empowered to issue regulatory sanctions. Ensure that citizens and businesses have access to these systems of review at reasonable cost and receive decisions in a timely manner. As appropriate apply risk assessment, risk management, and risk communication strategies to the design and implementation of regulations to ensure that regulation is targeted and effective.
Regulators should assess how regulations will be given effect and should design responsive implementation and enforcement strategies. Where appropriate promote regulatory coherence through co-ordination mechanisms between the supra national, the national and sub-national levels of government. Identify cross cutting regulatory issues at all levels of government, to promote coherence between regulatory approaches and avoid duplication or conflict of regulations.
Foster the development of regulatory management capacity and performance at sub national levels of government. In developing regulatory measures, give consideration to all relevant international standards and frameworks for co-operation in the same field and, where appropriate, their likely effects on parties outside the jurisdiction. In their most recent October reports on regulatory policy Regulatory Policy in Perspective55 and OECD Regulatory Policy Outlook , the OECD catalogs the knowledge to date on best regulatory practices and continued challenges, with special focus on the use of regulatory impact assessment, stakeholder engagement, and ex-post or retrospective evaluation.
They conclude that the ex-ante evaluation of regulatory costs and benefits is well developed in the United States, with the degree of evaluation efforts proportional to the anticipated impacts of the regulatory proposals. The scope of current U. The federal government guidance on U. For the current fiscal year , each agency recommending a new regulation must identify at least two to be repealed. Furthermore, the total incremental cost of all new regulations for this fiscal year must be no more than zero including the reduction of cost from regulations that are repealed , as determined by guidance issued by the Director of OMB.
The Executive Order makes no reference to the benefits that accrue from any regulations, including those that are recommended for imposition or repeal. Logically, if only costs are considered, then every existing regulation should be eliminated, and no new regulations should be imposed. Presumably, this logical inconsistency will somehow be dealt with in the guidance issued by the OMB Director. Because such a resolution would be subject to a presidential veto, and with a presumption that a president would support his own regulation with a veto, the CRA garnered little attention.
However, the CRA also requires each agency issuing a regulation to submit a report to the Congress, and the deadline for a resolution of disapproval occurs after the report is filed. Because the requirement for a report may have been ignored in some instances, a new administration hostile to such a regulation could file a report on a regulation issued at any time after the CRA was enacted, and thereby empower the Congress to pass a resolution of disapproval.
The Omnibus Consolidated and Emergency Supplemental Appropriations Act of section a requires OMB to report to Congress yearly on the costs and benefits of regulations and to provide recommendations for reform. The Truth in Regulating Act of gives Congress authority to request that the GAO conduct an independent evaluation of economically significant rules at the proposed or final stages.
The Information Quality Act of requires OMB to develop government-wide standards for ensuring and maximizing the quality of information disseminated by federal agencies.
On the former:. The legislation:. Revises provisions relating to congressional review of agency rulemaking to require a federal agency promulgating a rule to publish information about the rule in the Federal Register and include in its report to Congress and to the Government Accountability Office GAO a classification of the rule as a major or non-major rule and a complete copy of the cost-benefit analysis of the rule, including an analysis of any jobs added or lost, differentiating between public and private sector jobs.
But we conclude that there has been disproportionate emphasis on greater scrutiny of new regulations based on the common presumption that there is too much regulation overall , at perhaps the price of too little effort toward expanding the practice of retrospective review and too little recognition that regulations may be suboptimal in a variety of ways in the variety of cases that evolve over time.
As the world changes including, but not limited to, advances in technology , regulations, even those based on principles rather than narrow, specific rules, can become obsolete and even counterproductive. It is not surprising that scholars of regulation around the world have cited retrospective review as one of the areas where other nations have made advances, and the United States, while still a world leader, has lost some of its comparative edge.
We believe that our nation must invest more in continuing review of its stock of regulations, and in the data and other resources to support it. That does not determine precisely what organization should perform such review. We are skeptical that an analytical body of a sufficient size and strength could be created within the Congress. Retrospective review must rely heavily on the street-level body of knowledge and information already resident within the executive agencies, and with the associated leadership resources in OIRA.
However, we also are concerned that the instincts of self-justification within those agencies—the reflex to defend the judgments taken by those same executive offices in the past—could prevent objective retrospective review. One way to circumvent any tendencies of agencies to be closed-mindedly defensive about their own regulations in any review process would be either to expand the resources of OIRA so that it could have a separate shop that focuses of retrospective review.
Alternatively, a new and independent office could take on that responsibility. What would not work is requiring existing staff at OIRA or the agencies, already required to assure the quality of new regulations, also to take on the responsibility for retrospective review.
Both functions would suffer, beyond any self-protective instinct in the retrospective review function. The office charged with retrospective review could select existing regulations for the earliest review, guided by priorities set by the Congress. The Congress must play a stronger role in regulation. There is always the potential for a costly Catch dilemma for the executive, should a less-than-fully-informed Congress mandate the creation of a new regulation that must pass a cost-benefit test, while imposing conditions such that the creation of such a regulation is impossible.
The Congress does need more expertise to ensure that the legal foundations that it builds for future regulations are sound. So, better creation and ex-post review of regulation will cost money.
It is important that the nation not swallow whole the fallacy that more resources for regulators mean more regulation. It must be made to mean better regulation. It can mean better data to facilitate stronger and more-frequent review, and therefore the cleaning-out or improvement of obsolete or deficient regulations that otherwise would evade scrutiny.
All that is needed is the leadership and the understanding to make that happen. It is imperative for a dynamic, prosperous economy. We largely agree with the recent conclusions of the Council on Foreign Relations: proposals for regulatory reform should continue to emphasize better ongoing evaluation and oversight of regulatory policy that might be directed, guided, and even conducted outside the executive-branch regulatory agencies themselves. A deeper discussion of regulatory governance is included in Appendix 3.
Who in the executive branch and who in the legislative branch would best be given the responsibility for unbiased evaluations of regulations, and how can we best keep cronyism and special interests away from regulatory analyses and decision-making? At the same time, policymakers will need to devote adequate resources to whichever entities are charged with conducting these impartial analyses, to make sure that such evaluations can be done in a comprehensive, systematic, effective, and yet timely and cost-efficient manner.
We find some of the ideas in the literature highly promising, others less so. At the headline level, we have already noted that approval of any regulation is at least an implicit assertion that its benefits exceed its costs.
We believe that to the greatest possible degree, comparison of costs and benefits should be explicit. We recognize that cost-benefit analysis can be extraordinarily challenging and believe that sound cost-benefit analysis in a world of uncertainty should make all of its assumptions explicit and should provide alternative upper- and lower-bound estimates of its key components. We also believe that our proposed retrospective review should allow reconsideration on the basis of those sensitivity analyses.
We believe that such cost-benefit analysis is the gold standard of the regulatory process. We fear that some alternative decision rules, however well meaning, might yield inferior outcomes. For example, an aggregate regulatory budget or regulatory cost cap could yield perverse results.
A new regulation with benefits exceeding costs could be rejected by an aggregate regulatory cost cap or budget. But at the same time, old regulations whose costs exceeded their benefits would be protected against a cost cap or budget solely because of their incumbency.
We fear that a well-meaning mandatory sunset requirement would soak up considerable resources to reimpose justified and uncontroversial regulations—resources that would better be devoted to the difficult and more important issues. If we were assured that those basics were unattainable, we would consider falling back on the second-best alternatives. But we see no reason to declare pre-emptive surrender on the most-sound options available to our regulatory system. There are other recommendations that we find highly appealing.
We believe that even statutorily independent regulatory agencies should be subject to the same process and review requirements as the line executive regulatory agencies. We also align ourselves with the governance principles in the OECD report. This CED review of U. The problem of biased, inefficient, and outdated regulations could be better avoided if policymakers would pursue an overarching strategy of favoring principles-based over rules-based regulation which would be more immune to special interest hijacking and manipulation.
Measurement challenges and resource constraints continue to prevent adequate levels and quality of both ex-ante and ex-post retrospective evaluation of regulations to ensure that policies are beneficial and optimal. The United States is doing better at ex-ante justification but could and should strive to do more monitoring and evaluation of regulations after they are put in place.
Some other countries have surpassed the United States in regulatory management in this regard. The independent body in charge of reevaluation of regulations could be charged with criteria to order the existing stock of regulations for review. But we believe this to be a permanent function of looking for regulations that have fallen behind the changing times—not a once-for-all housecleaning. Toward the goal of more regular scrutiny of regulations, a reinvigoration of the congressional reauthorization process is needed.
Legislators need more resources so that they can develop realistic standards for new regulations, and can pay better attention to the function and performance of regulations after they are put in place, too. More and better data on the effects of regulatory policies are needed. This has been recommended for decades, but we really should be doing better now that the costs of collecting, maintaining, and analyzing data in real time have come down and will continue to decline rapidly.
At the same time, funding for the statistical agencies should be preserved and enhanced to take advantage of the increasing productivity of investments in data. More sharing and disclosure of information with stakeholders and the public—more transparency—is needed. Regulatory policy making should involve other parts and levels of government and the public, not just the federal executive agencies. Increased stakeholder participation will shed light on and help avoid inefficient regulations that benefit special interests over the public interest.
These recommendations continue the spirit of our recommendations. Unlike our recommendations in , however, we now put less emphasis on Congress doing the heavy lifting. We also conclude that no matter who is in charge of developing and maintaining regulations, the regulations will be more supportive of the economy and the public interest—as well as more sustainable over time—if based on broadly defined, commonly agreed-upon economic principles rather than narrowly defined technical rules.
If we are to improve the regulatory policymaking process and the ultimate quality and effectiveness of the regulations themselves, we will need to determine which entities are best able to consider, construct, administer, and review regulations in ways that help businesses, the economy, and our society.
See a more detailed discussion of issues of stakeholder involvement in Appendix 4. Reorienting our approach to regulation in this way will help to achieve our goal of regulations that are better justified and regularly monitored, reevaluated, and scrutinized to be economically smarter, not just administratively simpler.
Following are some valuable contributions from the recent literature. Frantz and Instefjord 72 present an academic, theoretical paper on rules- versus principles-based financial regulation. We study the relative strengths and weaknesses of principles based and rules based systems of regulation.
In the principles based systems there is clarity about the regulatory objectives but the process of reverse-engineer[ing] these objectives into meaningful compliance at the firm level is ambiguous, whereas in the rules based systems there is clarity about the compliance process but the process of forward-engineer this into regulatory objectives is also ambiguous.
The ambiguity leads to social costs, the level of which is influenced by regulatory competition. Regulatory competition leads to a race to the bottom effect which is more harmful under the principles based systems.
Regulators applying principles based systems make dramatic changes in the way they regulate faced with regulatory competition, whereas regulators applying rules based systems make less dramatic changes, making principles based regulation less robust than rules based regulation. Firms prefer a rules based system where the cost of ambiguity is borne by society rather than the firms, however, when faced with regulatory competition they are better off in principles based systems if the direct costs to firms is sufficiently small.
We discuss these effects in the light of recent observations. When we think of regulation, we think of specific rules that spell out the boundaries between what is approved and what is forbidden. I call this bright-line regulation BLR. What I want to propose is an alternative approach, called principles-based regulation PBR. With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow.
Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying those principles, and they would punish weaknesses by imposing fines.
Finally, the Department of Justice would prosecute corporate leaders who flagrantly violate principles or who are negligent in ensuring compliance with those principles. In the same vein, some states also provide a tax credit or subsidy for buying an electric or hybrid vehicle.
This helps the renewable energy industry by allowing more consumers to purchase the products associated with that industry, without having to absorb the entire cost. Government subsidies can help an industry on both the supplier side and the consumer side, no matter on which end they are implemented.
To implement subsidies, governments need to raise taxes or reallocate taxes from existing budgets. There is also an argument that incentives in the form of subsidies actually reduce the incentives of firms to cut costs. However, whether it's by increasing supply through supplier-side subsidies, or helping consumers with high costs of adoption through tax credits, it's clear that government intervention in market economics has real-life impacts on both parties alike.
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