Regulatory Reform

This third discussion of a prospective Trump economic policy agenda takes up the matter of regulatory relief.  This issue has two aspects: 1) the rollback of the heavy regulatory agenda pursued by the previous administration and 2) a more ambitious and difficult effort to alter the regulatory culture in Washington.

The first of these is much more straightforward.  Trump has criticized the Obama administration roundly for its heavy regulatory agenda.  The rules it imposed, he claims reasonably, interfere with business or daily life, slowing the pace of economic growth and unreasonably infringing on private decisions.  To the extent that he does so judiciously, he will improve the country’s economic prospects and remove some major irritants among large groups in society.  And the effort should be reasonably straightforward.  Few regulatory changes demand a vote by Congress.  Trump can change matters with executive orders and the direction of his political appointees at the heads of agencies and bureaus.

He could, however.  Trump could have a more lasted impact by altering the culture of U.S. regulatory bodies or at least beginning to do so.  Much of the economic harm done by regulators in this country stems from their legalistic and adversarial approach.  These, if they serve public interests at all, do so inefficiently and in a way that creates considerable animosity toward government and distrust as well.  There is an alternative approach open to this administration.  It could follow the manner used in Canada and Australia, where regulators see themselves less as the adversaries of those they regulate and more as partners who bring to decision making the needs of stakeholders otherwise neglected by markets and common practice.

Since Washington is the land of lawyers, the country’s regulatory approach should hardly come as a surprise.  The people who created it have grown up in the law’s adversarial culture.  They can hardly think in other ways.  In their scheme, regulators write reams of rules that aim at the impossible job of covering every eventuality.  They approach those they regulate with and eye to discovering their evasions so that they can then prosecute.  Those regulated naturally become wary of their would-be prosecutors, stick strictly to the letter of the law, and withhold as much information as they can, worried that the regulators will somehow use it against them.  Meanwhile, those who would uncover wrongdoing are loath to expose their objectives lest the regulated use that knowledge to conceal their evasions.  This hid-and-seek approach creates considerable unnecessary expense.  It can cause regulators, eager to punish wrongdoing, to lose sight of the original purpose of their oversight and sometimes lead them to destroy or downsize industries, needlessly throwing people out of work, and do so even though managements might willingly have cooperated with a more cost-effective means to accommodate public interests.

Because few firms and people actually seek to break laws, a more cooperative approach should work.  Take, for example, the matter of pollution.  Since the market charges the polluter nothing, the public interest in clean air and water would seem to demand a government presence.  Firms have long since reconciled themselves to this need.  Understandably, they would prefer to comply at the lowest possible cost.  But they have little means to work with regulators on such solutions.  Instead they have reams of explicit rules.  These seldom consider cost and anyway cannot take every possible situation into account.  A more cooperative interaction, however, could do both.  Similarly, those who would protect minority rights, such as the LGBT community, might do better at lower cost and with less animosity to work with schools, parks, and the like to protect the safety and dignity of that community while also considering the needs and dignity of others.  Such efforts multiplied across business and daily life would save money and ease tension.

Glimmers of such desired arrangements have appeared.  The Consumer Financial Protection Bureau (CFPB) for one, has come to recognize that rules have stifled desirable technological innovation in the financial industry.  Firms simply will not take the risk of spending millions on systems and practices that the CFPB or some other regulator will not only summarily disallow but also penalize them for even trying to implement.  In an uncharacteristically cooperative move, CFPB regulators have promised to issue what they call a “no-action letter” that will allow firms to experiment with new practices without risk of regulatory retaliation.  It does not save them from possibly squandering resources on business models that fail in the marketplace.  That is a risk any business takes with any new approach.  Nor does a no-action letter offer a guarantee of regulatory approval.  It does, however, save firms from incurring penalties just for making the effort.  It is a small step.  But it does show a willingness to set aside the adversarial culture, albeit in a very narrow way.

There is no reason that the CFPB or other agencies could not build on such gestures to work with the regulated.  Business then could proceed aware at each step what public objectives are and offer ways to accomplish them at minimum cost to all involved.  Such a system would, of course, have dispense with today’s legalistic reliance on rules and trust regulators’ judgments of what best serves public needs.  There is, admittedly, a risk here of regulatory capture in such an approach in which regulators, instead of focusing on public interest, become the allies of those they otherwise oversee.  If that remains a risk, it is not as if the present adversarial approach has stopped regulatory capture.  Indeed, the reliance on regulator judgments and objectives instead of voluminous rules might do a better job of guarding against regulatory capture than today’s system where the regulated are often the only people with detailed enough knowledge to write the rules to which the regulatory lawyers will then hold them.

No doubt such an approach would require a way to review regulatory judgments.  That review would inevitably have a political aspect.  The entire effort to develop an effective review process and alter the culture among the regulatory bodies in this country would take a long time.  Initial efforts by the Trump administration could at most start this long process.  But it would pay handsome dividends, in lower costs, both in the regulatory process and to the economy, and by disarming hostility to government, in business certainly but also with the general public.  It would certainly make Washington look less ridiculous than it does with rules demanding, for instance, wheelchair access to the fire brigade’s sleeping quarters.  Combined with tax and entitlements reform, the entire effort would create a more responsive and responsible policy environment that would promote economic growth and relieve much of the bitterness between the public and the government as well as political tensions generally.


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