January 28, 2015

What Australia Can Teach Us About Regulatory Hoarding

Hester Peirce

Former Senior Research Fellow
Summary

Monday was Australia Day. To celebrate, the United States ought to take a page from Australia's regulatory reform book. Australia is in the midst of a red-tape cutting initiative, which includes discarding unnecessary regulations and taking greater care in adopting new ones. The United States would greatly benefit from a similar regulatory reform effort.

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Monday was Australia Day. To celebrate, the United States ought to take a page from Australia's regulatory reform book. Australia is in the midst of a red-tape cutting initiative, which includes discarding unnecessary regulations and taking greater care in adopting new ones. The United States would greatly benefit from a similar regulatory reform effort.

Australia's prime minister, in announcing the round of regulatory reforms, noted that "Red tape is what officials wrap people in when they think that government knows best." To loosen that overly constrictive regulatory wrapping, on two "repeal days" during 2014, the government identified thousands of pages of regulation and legislation fit for the trash pile. The government promised that repeal days would become a semi-annual tradition.

To prevent the replacement of the bad old regulations with bad new regulations, the government published a guide "intended to be read by every member of the Australian Public Service involved in policy making-from the most junior member of the policy team to the departmental secretary." The guide emphasizes that regulation is "a means of last resort," not the "default option." The guide reminds policymakers that "regulation cannot eliminate risk entirely," and should not seek to do so. If a contemplated regulation will impose greater costs on people and businesses than the benefits it offers, it may be better to do nothing at all. In assessing a potential regulation, rule writers should take the time and trouble to "walk in the shoes of the people, business decision makers and community groups affected by [their] policy proposal." To do this, regulators need to employ transparent and inclusive processes in crafting regulation.

The United States, like Australia, is knee-deep in regulations. Rather than cutting rules that have outlived (or never manifested) their worth, the United States is adding more rules at a terrifying clip thanks to massive new statutory mandates like Dodd-Frank. Politically driven efforts to repel any changes to regulations once they are in place mean that rulebooks will only keep growing.

To make matters worse, American policymakers are not taking the careful, deliberative approach laid out in the new Australian guidelines to prevent the rules from doing unnecessary harm. Financial regulators, insisting optimistically that the new rules' benefits surely outweigh their costs, rarely deign to engage in serious economic analysis. Their optimism is consistent with the Australian guidance's observation that "many studies have shown that humans habitually over-estimate potential benefits and under-estimate potential costs."

Procedural protections to ensure that public input is received and considered are also falling by the wayside. The Securities and Exchange Commission's Daniel Gallagher pointed out several instances of procedural laxity earlier this month in connection with Dodd-Frank rulemakings related to derivatives data reporting. Commissioner Gallagher called his agency out for failing to propose certain regulatory provisions before adopting them. The commissioner also faulted the SEC for asking for information on forms without first considering whether the benefits of obtaining the information outweigh the costs of providing it. Gallagher's colleague, Michael Piwowar, also objected to the rules because they incorporated last-minute changes without consideration for their "real-world implications." The SEC's procedural shortcuts mean people will have to comply with requirements about which they did not have an opportunity to comment.

The SEC is not the only agency taking shortcuts that deprive it of critical input about the consequences of its rulemaking. Commissioner Christopher Giancarlo of the Commodity Futures Trading Commission called his agency out in a speech earlier this week for failing adequately to consider the effect of its rules on farmers, non-financial companies, and ultimately the general public. Mark McWatters, a member of the National Credit Union Administration board, in a dissent earlier this month from a proposed change to the credit union net worth rule, took issue with the agency's lack of legal authority, flawed rulemaking process, and inadequate endeavor to understand the costs of its proposal.

It is time that we follow Australia's example and recognize that we have a serious regulatory hoarding problem. We cannot bear to let go of the regulations we already have for fear of adverse consequences. And we cannot resist the impulse to indiscriminately add new regulations to our already over-stuffed rulebooks. The resulting regulatory clutter hampers our economy's ability to grow and adapt to meet the needs of everyday Americans.