March 12, 2015

"Regulatory Appendicitis" and the Dangers of Vestigial Regulations

Patrick McLaughlin

Director of Policy Analytics
Summary

With the Supreme Court's ruling in Perez v. Mortgage Bankers Association ruling, agencies are free to continue repurposing old regulations without any sort of public input or analytical demonstration of the likely effects of the action. This power of reinterpretation converts old regulations into a stockpile of ammunition that can be reused instead of designing a regulation that's customized for the issue at hand. The recycling of old regulations that were designed for a different era and different purpose should serve as a warning signal about our regulatory system.

On March 9, the Supreme Court ruled that federal regulators do not have to go through the normal notice-and-comment process when reinterpreting an existing regulation. Perez v. Mortgage Bankers Association concerned the Department of Labor's (DOL) changing interpretation of how to treat mortgage loan officers. In 2006, the DOL published an opinion letter that stated that mortgage loan officers were exempt from overtime wage requirements because they fell into an exempt category, like executives and professionals. In 2010, the DOL changed course and issued an interpretation that mortgage loan officers, in fact, are not exempt from the overtime wage requirements.

With this ruling, agencies are free to continue repurposing old regulations without any sort of public input or analytical demonstration of the likely effects of the action. This power of reinterpretation converts old regulations into a stockpile of ammunition that can be reused instead of designing a regulation that's customized for the issue at hand. The recycling of old regulations that were designed for a different era and different purpose should serve as a warning signal about our regulatory system.

Regulations often stay on the books long after the expiration of their purpose, much like how vestigial organs — like the appendix — can remain long after evolution has removed their function. Unlike vestigial organs, vestigial rules can be reconstituted for novel purposes. From a regulatory agency's perspective, recycling old rules makes sense: Old rules have withstood legal challenges and offer a relatively safe legal route. However, the rules are unlikely to optimally fit the new context for which they are employed. The use of rules that aren't optimized for the task at hand can significantly hamper innovation and the development of technology. Even worse, due to poor design, they may not actually accomplish the new objective.

Some recent examples come to mind. A few weeks ago, the Federal Communications Commission (FCC) announced it would attempt to create "net neutrality" by employing a dated regulatory approach devised in 1934. Under this approach, the Internet would be treated as a public utility similar to how gas, electric, sewage and water companies are treated. Instead of designing regulations tailored to modern technology and the rapid innovations arising in the delivery of Internet service, the government reached back to New Deal-era policies.

As the usage of this old approach stoked worries about potential price regulation, the FCC promised "forbearance" with respect to issuing actual price controls. Unfortunately, that forbearance is subject to easy reinterpretation. The fact is, we don't know how far the FCC will take things now that the agency has claimed the power to regulate broadband providers. The FCC will review other portions of the Internet, such as interconnection agreements, that have so far worked very well. Prices and other contractual arrangements will be permitted so long as the FCC decides they are "just and reasonable." As a society that values innovation and technology, we should be wary of this application of old rules to new technologies — especially when the use of old rules is coupled with a broad power to reinterpret them without any sort of public input. Apparently, companies such as Netflix that led the lobbying charge in support of net neutrality are already experiencing the lobbyist's version of buyer's remorse, as they realize the extent to which the FCC could easily change the rules again going forward.

In another example, the Federal Aviation Administrations (FAA) has defined drones as toy planes, thereby preventing any use of drones for commercial activity because toy planes are not permitted to fly beyond the sight of their operators. Toy planes have hardly any of the same characteristics or purpose as unmanned drones for commercial use, yet they are regulated by the same rules. Amazon wishes to launch its Prime Air service to deliver goods by drone in less than 30 minutes and likely without operators. Unless the FAA changes its rules, the use of drones for commercial purposes will be stillborn. The upside here may be that the FAA could always reinterpret the meaning of "in sight of operators" to include radar or other electronic means of keeping a drone “in sight.” But the preferable approach would be to construct an entirely new approach rather than recycle rules designed for toy planes.

While it may be understandable for agencies to rely on old rules in new scenarios, the practice should be avoided. If new technologies are shown to create new problems, then rules should be specifically designed to solve those problems. When rules stick around for dozens of years, agencies may be choosing the easy route: Recycling the old rules. Unfortunately, the easy route for agencies is not the best route for society. The solution: Cut away the vestigial rules before they turn into "regulatory appendicitis."