Regulation reform.

• Author: Vance, David E.
• Position: Essay

The cost of regulation has four elements: (1) compliance costs, (2) opportunity costs, (3) defense costs, and (4) governmental administrative costs. Defense costs are costs to defend against allegations that rules and regulations were violated. The Small Business Administration estimates that the cost of compliance, defense, and government administration in the United States is about $1.75 trillion (Crain and Crain 2010, 12).

Opportunity costs are much harder to estimate and may have a bigger impact on the economy. There are two kinds of opportunity costs: the cost of delay and the benefits forgone in connection with projects not undertaken. Regulation has a chilling effect and discourages people from taking chances on innovative products and services. For example, Goldman Sachs decided it was unable to offer Facebook shares to U.S. investors because of uncertainty over the Security and Exchange Commission's (SEC) interpretation of law and regulations (Macey 2011). Although Facebook will eventually go public, regulatory uncertainty has created a delay of more than eighteen months at this writing. Eighteen months in the fast-moving world of global commerce is almost an eternity.

In theory, democracy is a serf-correcting system, but this mechanism is thwarted by lobbyists who petition legislators in ways the public never sees and cannot match, by regulators who are captured by the industries they regulate, by special interests that concentrate political contributions, and by bureaucracies insulated from public pressure.

Attempts at reform historically have failed to reduce substantially the burden of regulation and have often resulted in increased regulation. Real reform requires a dramatic paradigm shift in the architecture of regulation. Such a shift is possible if Congress has the courage to act.

Normative Regulatory Framework

Economic literature is divided into positive and normative economics. Positive economics seeks to describe how economic forces work in an objective fashion. Normative economics deals with values and what should be (Byrns 2011). A significant published literature describes the costs and burdens of regulation. Little is gained by summarizing this literature, so in this article I provide a normative framework for analysis and a principled model for regulatory reform.

Approvals

The Problem

An old proverb says, "He who wastes time, wastes life." But one of the problems with regulation is that the government has no sense of urgency. In Griffith v. NJDEP, (1) a New Jersey Appellate Court held that a delay of seven years in approving permits was not unreasonable. In Wyatt v. United States, (2) the U.S. Supreme Court held that a delay of seven years in approving mining permits was not unreasonable.

Economics Nobel Prize winner Milton Friedman (1999) claimed that Food and Drug Administration (FDA) delays cost lives because its regulatory system is inherently biased against approval. If a safe and effective drug is not approved, there is little criticism of the FDA besides that of the drug maker. However, if a dangerous drug is approved, the FDA and its staffers will be subjected to intense scrutiny and criticism. The same bias against approval exists at every level of government from town zoning boards to federal agencies. (3) For the government agency, there is little cost to denial and delay, but a potentially a large cost for approval. This regulatory bias can be reversed, and there are several legal precedents for doing so.

Proposed Standards

At one time, the British Crown reserved to itself the power to grant corporate charters. When the colonies split from the British Empire, state legislatures assumed the sovereign's powers and granted corporate charters to those of wealth and influence. But the people grew to believe that granting charters to the privileged was bad policy. As a result, laws were passed in most states to grant corporate charters to anyone who fulfills basic requirements. Approval is virtually automatic (Carey and Eisenberg 1980).

Approval for an initial public offering is virtually automatic as well. A company goes public by filing a registration statement with the SEC. After the registration statement is filed, if the SEC does not object within twenty days, the registration is effective, and the company becomes a public company.

A similar protocol might be established for other approvals. Each activity for which an individual or business must seek government approval must be regulated by statute. Absent a statute, there is generally no requirement that approval be sought. Statutes have specific requirements or require administrative agencies to set specific criteria for approval. Constitutional equal protection requires all similarly situated persons be treated the same way, and constitutional due process forbids the government from acting in an arbitrary, capricious, or unreasonable manner (Reed et al. 2008). In theory, regulations can be reduced to decision rules that can be quickly evaluated by using software.

After completion of an application, the approval process should be automatic, subject to a rejection by the relevant government agency. Elimination of uncertainty and regulatory delay would significantly boost the economy. Improvements based on reduction of delay are documented in several World Bank studies (e.g., World Bank 2008, 2010). The model approval statute shown in table 1 suggests a more efficient way to grant governmental approvals.

Standard for Regulation

Current Standards

Constitutional equal...