Getting regs right, getting regs wrong
Nobody doubts that regulations, when properly constructed, can help implement the laws passed by Congress to improve quality of life and promote competitive and free markets. But too many--and too many poorly formulated--regs can have a chilling effect on growth and innovation. U.S. Chamber of Commerce explores where gov't goes wrong.
Well-designed regulations provide greater clarity and certainty about how the law operates in practice and do so in a manner that maximizes innovation and choice while avoiding unduly prescriptive requirements and excessive costs. When not properly constructed, regulations become a form of government micromanagement that eliminates the ability of regulated entities and the marketplace to do what people in free markets do best: innovate.
This lack of innovation and the often excessive costs of government micromanagement hold back economic growth. The cost to the economy is compounded when the rules are constantly being changed. What is permissible or required in one moment may become prohibited or not required in the next. This uncertainty makes it difficult to plan and invest for the future.
One way to think about the costs regulations impose on the economy is to sort them into various categories, such as indirect costs, direct costs and opportunity costs. Consider for example a new regulation that requires businesses to upgrade certain boiler systems to meet specific requirements that are considered more efficient and better for the environment. Here is how that specific regulation might impact the economy.
Indirect Costs
Countless businesses must determine if this new regulation applies to them and if it does, if their existing boiler is out of compliance. This takes time that otherwise would have been spent running other aspects of the business and it may require the business to seek legal advice.
The business must also determine if the regulation is likely to remain in effect. If it is being challenged in court or if a new administration might change the regulation, the business must assess the likelihood of when or if they will have to comply. This all takes time and effort.
Regulators generally do a bad job of estimating these indirect costs.
Direct Costs
If the regulation applies to a business, then they will have the direct cost of replacing the boiler.
Regulators do a much better job of estimating these costs.
Opportunity Costs
The business that spent the money on the new boiler now doesn’t have those funds to spend or invest elsewhere. It is possible the business would have used those funds to expand their operations, buy new equipment that would have made them more efficient or would have improved the safety of their operations, or hire additional employees. These forgone activities are opportunity costs.
In some instances, there are opportunity costs on the innovation side as well. With the government now prescribing specific types of boilers, boilermakers may have less incentive to innovate new technologies that might ultimately be better, but that don’t meet the specific requirements of the regulation.
Regulators often fail to take into account these opportunity costs.
While there may be certain benefits from the wide-spread adoption of modernized boilers, those benefits have to be weighed against these cumulative costs. Well-designed regulations are written such that they minimize overall costs while seeking to achieve the goal of the underlying law. Multiply the boiler regulation in our example across thousands of different topics and you can begin to see the full cumulative weight of regulations on the economy.
The number of regulations business must track and comply with grows each year:
To avoid government micromanagement, agencies should be instructed to, where possible, adopt outcome-based approaches to regulation that state the desired outcome, but are not prescriptive as to how the outcome is achieved. This approach allows for greater private sector innovation. To avoid setting unrealistic outcomes, agencies should be required to evaluate technological feasibility in reaching a specific outcome. This ensures realistic regulations while still preserving opportunities for innovation that reduce costs.
Read the whole thing here.
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