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The Case for Collaborative Regulation

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The Case for Collaborative Regulation

Government rule-makers don’t have to assume the worst from industry. Spring 2018
Economy, finance, and budgets
Politics and law

President Trump’s major legislative pushes of the past year, and his controversial move on tariffs, have understandably captured media attention, but his less publicized efforts at regulatory reform may prove more significant to economic growth. The White House has begun clearing away intrusive mandates on environmental matters, work rules, and reporting requirements to Washington’s multiplicity of agencies and bureaus, all of which impose costs and impede growth.

A complex society requires regulations—markets often fail to impose costs on bad environmental actors, for instance. Government can play an effective role in correcting such abuse, but only when it operates in the most efficient, least costly, and least intrusive way. The U.S. regulatory regime hardly meets those standards. According to the Competitive Enterprise Institute and the Cost of Government Center, the U.S. dedicates one-fifth of its gross domestic product—roughly $2 trillion a year—to the bill for complying with regulations and funding the agencies that write and enforce the rules. The National Association of Manufacturers reports that, on average, American businesses spend about $10,000 per employee yearly to comply with Washington’s regulations. For manufacturers, the figure rises to $19,564, and for small manufacturers, which have less ability to spread compliance costs over a wider operation, the annual cost per employee rises to $34,671. These figures suggest that the current regulatory approach is adverse; with greater efficiency of rules, businesses’ regulatory savings could go to expansion or to wage increases. Indeed, when the National Association of Manufacturers polled its members on what they would do with the money saved from regulatory relief, 85 percent identified these two options.

An example from another sector of the economy: a small bank, First Bankshares of Valley City, North Dakota, with a full-time staff of five, serves a community of 220 people. Banking regulations are so numerous and complex that, according to the Federal Reserve Bank of Minneapolis, one of those five employees works exclusively on regulatory compliance. First Bankshares must, for example, submit to Washington a color-coded map of the incomes of the people in its area. This requirement might make sense for large institutions serving a dense population, but to impose it on First Bankshares shows how little consideration regulators take of the burdens that they impose on businesses.

Another example: some years ago, the Department of Labor decided that all government contractors must give their employees one hour of training on affirmative action. As the department saw it, the costs would include the expense of meeting rooms, speakers, and audiovisual equipment—but not the expense of paying people to take an hour out of their workday to attend these sessions. Since the efforts involved 24 million employees earning, on average, $30 an hour, the total overlooked expense for this one imposition came to $720 million.

Across the economy, these weights have slowed the expansion of output and income and have cut 0.8 percentage points a year off the economy’s growth rate over the last decade, according to the Mercatus Center at George Mason University. Had the country held its regulatory structure at 1980 levels, Mercatus calculates, the U.S. would have had an economy 25 percent larger than it was at the end of 2016, amounting to $13,000 more per capita for all Americans. Capturing the revenue lost to red tape would have built a stronger tax base, leaving the nation considerably less in debt than it is today.

The Obama administration had an aggressive regulatory agenda and expanded these entanglements rapidly; the Trump administration has set out to get rid of them almost as quickly. It began its regulatory relief program shortly after Inauguration Day, when the White House issued Executive Order 13771, requiring all agencies to eliminate two regulations for each new rule they make. Further, the administration insisted that all agencies abide strictly with established procedures—in contrast with the Obama administration, which had hastened the promulgation of new regulations by streamlining procedures for proposing new rules and shortening the period allowed for public comment.

The impact already has been profound. According to head of White House Infrastructure and Regulatory Affairs Neomi Rao, administration efforts as of September 30, 2017, had resulted in 67 deregulatory actions and only three new regulatory actions. Some 1,500 planned new rules have been withdrawn or delayed.

Further efforts along those lines will help the economy, especially coupled with tax reform. Already over the past year, business spending on new capital equipment, technology, and productive facilities has jumped in real terms at an annual rate of almost 5 percent, very different from the two previous years, when such spending stagnated. The momentum shows every sign of continuing. New capital-equipment orders rose 11.1 percent for the 12 months ending in February 2018, after declines in the two prior years. This remarkable response will likely build on itself as the administration furthers its program.

Aside from the agenda of Trump’s White House, however, or any White House, what we really need is a fundamental change in the regulatory climate. Much of the harm of regulation stems from the adversarial approach adopted by administrative rule-makers within government. This is hardly surprising: Washington is the land of lawyers, and they administer law through an adversarial approach. But while a combative stance is appropriate for law, it distorts the purpose of regulation, impelling bureaucrats to write reams of rules in an impossible effort to anticipate every eventuality. Worse, they proceed as though business is the enemy. This “gotcha” mind-set creates needless expense and inefficiencies that a more cooperative approach would avoid.

It can be done differently. In Canada, Australia, and other countries, regulatory bodies see themselves less as prosecutors than as partners representing the interests of stakeholders otherwise neglected by markets. Since most firms and individuals tend to operate in good faith, such an approach could work in the U.S., too. Because the market charges polluters nothing, most believe that clean air and water demand a governmental presence—but rather than having agencies develop rules and impose them, regulators could work with industry to achieve their goals at the lowest possible cost.

Glimmers of such desirable arrangements have shown from time to time in the United States. The deservedly much-maligned Consumer Financial Protection Bureau (CFPB), in recognition that its rules have interfered with technological innovations, has tried of late a more cooperative approach. In the past, firms resisted innovation because perceived violations of the rules brought punitive action. To overcome this problem, the CFPB has begun issuing what it calls “no-action letters.” These promise innovative companies freedom from fines and prosecution while the firm tries out new technologies. It does not guarantee approval, much less market success, but it does allow experimentation without fear of prosecution.

The CFPB and other agencies can build on these tentative steps, especially if the White House encourages such behavior. In time—albeit a long time—such measures could change the regulatory culture, making it more effective, less intrusive, and, significantly, a means of fostering business efforts to improve efficiency and expand productive capacities. 

Photo by Carl Court/Getty Images

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