What effect do regulations have on economic growth and well-being? Some regulation is necessary for a well-functioning economy. Entrepreneurs need clear rules of the road if they are to have the confidence to invest, enter into contracts, meet untapped consumer needs, and reap rewards of hard work and innovation. However, as the World Bank observes, while the highest ranked countries in its annual Doing Business survey regulate, "they do so in less costly and burdensome ways, and they focus their efforts more on protecting property rights than governments in other countries."
In the United States, there is growing concern that our regulatory system has gone beyond the rules needed for an efficient, competitive market. In 2014, there are over 70 federal regulatory agencies, employing over 300,000 people to write and implement regulation. Every year, they issue thousands of new regulations, which now occupy over 168,000 pages of regulatory code.
New crises, whether real or perceived, inevitably lead to new legislation and new regulations. Since regulations can provide competitive advantage, it is often in the self-interest of regulated parties to support them, (often hiding behind public interest arguments) even while other interests oppose them. Thus, talent and energy gets channeled into lobbying for favorable government treatment (a zero sum game at best) rather than into entrepreneurial activities that lead to growth and prosperity.
Procedural and analytical requirements, such as notice-and-comment rulemaking and benefit-cost analysis, have done little to constrain regulations or ensure they are serving broad public goals.
Thus, fundamental change is needed, and I believe the foundation for that change must be greater humility. At a recent conference on the future of U.S. economic growth, I offered four recommendations:
- When considering public policies to address perceived problems, we must first 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. One-size-fits-all regulatory approaches at the national level that reduce competition or choice should be avoided.
- We should view with extreme skepticism regulatory proposals that are based on the assumption that individuals are irrational and therefore must depend on wise regulators to maximize their private welfare. Behavioral insights must be applied to regulators too. Like everyone else, government actors are susceptible to what behavioral psychologists call "confirmation bias." Regardless of what analytical requirements they face, their single-mission focus will lead them to discount data, research, values and perspectives that do not corroborate their preferred regulatory action.
- When regulation is necessary, policies should be designed in ways that encourage competition and allow for experimentation. These need not be randomized controlled trials in the scientific sense, but rather natural experiments where we can observe the outcomes of different policies and test regulatory hypotheses. To generate natural experiments, whenever possible, policies should be developed at the state and local levels.
- Finally, we need to do something about the accumulation of regulations already on the books. Unlike non-government spheres, where individuals and organizations are constantly learning from past experience and updating their behavior accordingly, 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.
Without a counterfactual, it is impossible to know what a more restrained regulatory environment would have meant for economic growth and well-being, but available evidence suggests that the benefits of a simpler regulatory system that is targeted at problems that cannot be solved by other means could have enormous benefits for us and future generations.
This commentary is based on remarks at Cato conference on the Future of Economic Growth, December 4, 2014