December 7, 2016

Regulatory Reform 101: A Guide for the States

Summary

Regulatory process reforms come in two basic forms, depending on whether the intent of reformers is to design better regulations before rules are implemented, or whether their intent is to assess the success of regulations after they are finalized. Overall, the aim is to make policy more evidence-based and efficient, as well as to encourage regulators to be more responsive to the public.

Key materials

All states have administrative procedures in place for the purpose of ensuring that regulations achieve goals, are informed by factual evidence, and are not overly burdensome. Unfortunately, these procedures sometimes break down and need reforming. Broken regulatory procedures result in rules that address nonexistent problems, that impose costs out of proportion to the benefits produced, or that overlook simpler, lower-cost solutions that would achieve similar outcomes. Poor procedures also create incentives for the regulatory code to grow without limit, which can impede innovation and slow economic growth.

Policymakers who are concerned about slow economic growth in their state, who worry about the tendency for policies and programs to consume more and more resources and become ever more complex over time, or who believe that regulations too often waste scarce taxpayer resources without solving pressing societal problems should consider the potential benefits of reforming regulatory procedures in their states. Regulatory reforms may be relatively easy to achieve politically as well, making them low-hanging fruit compared with tax or spending changes that can require making difficult budgetary choices or facing angry constituent groups. This essay outlines some reform options for state policymakers. Future research from the Mercatus Center will expand on this essay by going into more detail about state-specific regulatory procedures and opportunities to reform those procedures.

Regulatory process reforms come in two basic forms, depending on whether the intent of reformers is to design better regulations before rules are implemented, or whether their intent is to assess the success of regulations after they are finalized. Reforms related to reviewing regulations already in place are known as regulatory look-back reforms, and they encourage regulators to periodically review and update existing regulations. The goal is to identify and modify or repeal rules that are obsolete, inefficient, or otherwise ineffective, and to identify, learn from, and improve upon successful rules. 

Changes to the process of creating regulations are known as ex ante regulatory process reforms. Here, the aim is to make policy more evidence-based and efficient, as well as to encourage regulators to be more responsive to the public. This essay will avoid any discussion of the legislative process that initially authorizes regulation, but it is important to remember that the process by which authorizing statutes (which delegate lawmaking powers to regulators) are written and enforced also shapes the administrative rulemaking process in important ways. 

Regulatory Look-Back

Periodic reviews of the regulatory code address two kinds of problems: nonfunctional rules and regulatory accumulation. Nonfunctional rules are regulations that do not work as intended because they are obsolete, inefficient, or otherwise ineffective. Regulatory accumulation refers to problems arising from a growing regulatory code. A growing code is problematic when rules interact with one another in unexpected and harmful ways. A large code can also become too complex, and regulatory complexity can overwhelm the public, creating confusion and uncertainty for citizens, discouraging desirable economic activity like new business start-ups, and ultimately slowing economic growth.

Periodic review of the regulatory code is simply a matter of good housekeeping. Review may or may not be accompanied by a commitment to reduce the size of the overall body of law. The key with any look-back effort is to properly align the incentives of the actors involved in the review process so that information about the effectiveness of rules is gathered, problematic rules are identified, and policymakers respond to this information in a timely manner.

A. Red Tape Reduction

When the regulatory code grows too large, policymakers might decide to reduce the level of regulation by a certain amount. These efforts target “red tape,” which refers to “rules, policies, and poor government services that do little or nothing to serve the public interest while creating financial cost or frustration to producers and consumers alike.” 

Red tape reduction efforts have been successful in reducing regulatory burdens in many countries. In 2001, the province of British Columbia, Canada, committed to reducing regulatory requirements by one-third, while the Netherlands set a goal of reducing the cost of regulatory burdens on businesses by 25 percent within four years of an effort that also began in the early 2000s. These efforts show how red tape reduction can come in the form of a cut in the number of individual requirements in the code or instead as a cut in the total compliance burden. Such efforts also often coincide with other reforms, such as regulatory pay-go schemes (discussed in the next section). British Columbia accompanied its red tape reduction effort with a one-in-one-out rule, for example.

Perhaps the greatest challenge with efforts to reduce red tape is deciding what the appropriate level of regulation should be. Benefit-cost analysis helps analysts determine the efficiency of individual rules or programs in isolation, but this analytic tool has difficulty determining the efficient level of regulation for the system as a whole. As a result, the appropriate level of regulation is largely a political decision made by representatives of the public. Common sense can also be useful here. When the regulatory code becomes so large and complex that even experts in regulation have difficulty reading and comprehending the code’s effects, it is probably time to start cutting.

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