Intermediate positions include a variety of mechanisms that affect economic incentives through the price system, such as in the case of environmental policy through pollution taxes or tradable permits. Economists of all political persuasions tend to favor regulation via market-based adjustment of prices to account for differences between social costs or benefits and private costs or benefits over regulation based on requiring changes to quantities of specific inputs or outputs which would override, rather than simply adjust, the natural market-based price incentives.
Such market-based forms of regulatory policy are also more in keeping with a principles-based as opposed to a rules-based approach. Randall Lutter writes that the permit trading approach to environmental regulation has several advantages. To widen the market and to narrow the competition, is always the interest of the dealers The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. Approximately years ago, Adam Smith cautioned the readers of his Wealth of Nations that policy actions touted by businesses and politicians as being in the public interest might actually be positions promoting their own, particular and very special interests.
Fast forward to modern times and crony capitalism: the pursuit of private gain through influence in the public sector, which is a frequent topic of discussion and debate among the citizenry. Influence over the regulatory process could be used to stifle competition, allowing existing businesses to charge higher prices.
To a degree perhaps beyond even what Adam Smith appreciated, regulations could be used to preclude innovation that would challenge incumbent businesses. Stifling innovation could, in the longer run, slow U. For that reason, building regulatory governance structures that maintain a level playing field and encourage competition is essential.
Such an attempted manipulation of the regulatory process could be a quite straightforward one-on-one struggle between a particular private interest and the relevant governmental authorities. However, there have been occasional alliances between seemingly unlikely private collaborators in attempts to compound their political influence on regulation.
He first introduced the concept in a short paper in Regulation magazine in 27 and revisited it in The [Bootleggers and Baptists] theory takes its name from the classic example of laws requiring liquor stores to close on Sundays, which were supported by both alcohol bootleggers and anti-alcohol Baptists—with both groups willing to spend valuable resources in pursuit of such laws.
The happy bootleggers eliminated competition one day a week, and the devoted Baptists could feel better knowing that demon rum would not be sold openly on their Sabbath day. Of course, no one will ever see bootleggers carrying signs in front of a state house seeking political support when closing laws are up for reauthorization.
For success to occur, according to the theory, a respectable public-spirited group seeking the same result must wrap a self-interested lobbying effort in a cloak of respectability.
Both members of the politicking coalition are necessary to win. The bootleggers laugh all the way to the bank—and may occasionally share their gains with helpful politicians. Instead of the partnership allowing policymakers to better account for a broad and diverse set of viewpoints in their making of government regulations as good public policy, this collaboration between Bootlegger- and Baptist-types produces economic outcomes that are, ironically, bad for society and the public interest.
Capitalism has taken lots of hits recently. Everything from bailed-out banks and auto companies to subsidized solar product firms that fail spectacularly leaves the public with the feeling that the marketplace is seriously flawed. Anti-capitalism messages seem ubiquitous. In both cases we can see Bootlegger-type special interests trying to pass off their positions as protecting Baptist-type public interests. Traditional taxi companies already subject to regulations naturally find it unfair that companies such as Uber do not have to play by the same rules.
Ironically, as Kevin Hassett and Robert Shapiro have explained in a recent paper , the imposition of a single price whereby ISP companies are prohibited from charging higher prices for higher quality services will lower investment, reduce supply, and hence raise average costs charged to consumers. In general it seems that cronyism and capture of regulatory policy by special interests is easier when regulations are narrow special, tailor-made and complex difficult for new business to qualify or comply.
From their report:. Research on the economic effects of regulation is underdeveloped, though available evidence suggests most regulations have brought benefits that are worth the economic costs.
The United States used to be the trailblazer in regulatory reform. But the rest of the rich world has caught up.
Doing Business Going Beyond Efficiency , a World Bank Group flagship publication, is the 12th in a series of annual reports measuring the regulations that enhance business activity and those that constrain it.
Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across economies—from Afghanistan to Zimbabwe—and over time. Doing Business measures regulations affecting 11 areas of the life of a business. Data in Doing Business are current as of June 1, The indicators are used to analyze economic outcomes and identify what reforms of business regulation have worked, where and why.
As the report explains page 3, emphasis added :. The 20 economies at the top of the ease of doing business ranking perform well not only on the Doing Business indicators but also in other international data sets capturing dimensions of competitiveness.
The economies performing best in the Doing Business rankings therefore are not those with no regulation but those whose governments have managed to create rules that facilitate interactions in the marketplace without needlessly hindering the development of the private sector.
They cite a paper by Alesina et al. It is our view that since the analysis of regulatory policy necessarily will require that an analyst draw from a large set of empirical analogies, these macro-econometric estimates can help researchers infer the likely direction and scale of a change in regulation. In an ideal setting, one could estimate how a given change in policy would change the index and then infer the likely impact on investment by drawing on the empirical literature.
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. Information technology is having an immensely uneven economic impact on the world, creating huge wealth for some while leaving others behind, as it displaces jobs and fails to reach communities that lack broadband connectivity.
As artificial intelligence continues to advance, all these developments will accelerate. People argue about immigration, trade, and tax rates for wealthy individuals and corporations, but we seldom see politicians consider, or the tech sector acknowledge, the role that technology is playing in creating these challenges.
Tech companies and the tech sector as a whole need to step up and do more to address these issues responsibly and proactively. But in the three centuries since the dawn of the Industrial Revolution, no major industry has successfully regulated every aspect of its operations completely by itself. It would be naive to think the first success case will emerge now. That would be as shortsighted and unsuccessful as asking governments to do nothing at all.
Individual companies need to step up, and work more collaboratively across the tech sector. When Microsoft was in the hot seat with antitrust issues around the world two decades ago, we recognized that we needed to change. I took from our battles three lessons that we continue to learn from and apply. They seem as relevant to the entire tech sector today as they did to our company in the past.
Read: The strange politics of facial recognition. First, we needed to accept the heightened expectations that those in government, the industry, our customers, and society at large had for us.
We had to assume more responsibility, whether it was required by law or not. We were no longer an upstart. We needed to strive to set an example rather than argue that we could do whatever we wanted. Second, we needed to get out and listen to what other people had to say, and do more to help solve the technology problems that needed to be solved.
That meant building constructive working relationships with more people. But that was just the start. We had to understand perceptions and concerns. We needed to do a better job of solving small problems before they grew out of control. We sat down more frequently with governments and even our competitors to find common ground.
There were days when some engineers argued that we should instead keep on fighting. At times, I almost felt that they were calling my courage into question. While occasionally we needed to stand our ground, there were many moments when it took more bravery to compromise than it did to keep fighting.
And it took persistence as well. The quest for common ground often led to negotiations that ended in impasse and failure before we could come back together and reach an agreement. We needed to develop the ability to fail gracefully, complimenting the other side even when things fell apart so we could preserve the ability to work through the hard problems again when the right moment arrived. It almost always did.
And finally, we needed to develop a more principled approach to our work. We needed to maintain an entrepreneurial culture, while also integrating it with principles that we could talk about both internally and externally. We began to develop such principles, first for antitrust issues and later for interoperability and human-rights questions. Among its other virtues, this approach both helps and forces us to think about the responsibilities we bear and the best ways to address them. Spreading these approaches across the tech sector will require a cultural change.
For a lot of good reasons, tech companies have traditionally focused first on developing a product or service that is exciting, and then on attracting as many users as possible as quickly as possible. Often, little time or attention is devoted to issues beyond this. Even when companies achieve this type of leadership position, they retain an ongoing need to move quickly. These concerns are important. Companies can still succeed while doing more to address their societal responsibilities. While we need to move fast, we also need to put some guardrails on our technology.
An ability to anticipate issues and define a principled approach to address them is more likely to keep the car on the road as it gains speed. It helps avoid at least some of the public controversies and potential reputational damage that can force executives to spend more time on issues other than product development and user growth. But even with the best of intentions, this type of effort does not come easily. The most natural course is to keep expanding a product and sell it to anyone who will buy it.
Discussion about self-restraint almost always provokes internal objections. I speak from experience. But what is really needed is a new oversight architecture that is fit for purpose in the age of the digital economy. Such a digital economy regulatory architecture should bring together and holistically address newly emerging cross-sectoral risks in terms of scope, scale, products and behaviour.
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