THE BLOG
11/01/2011 06:50 pm ET

Streamlining Regulation: How to Reduce Rules without Reducing Competitiveness

Periodically, policy advocates or Members of Congress propose numerical limits on all new federal regulations, outright moratoria for a period, or other variations on this scheme. Last year Senator Mark Warner (D-VA) suggested a policy of eliminating one existing federal rule for every new one that was passed, an idea he called "regulatory pay-go." More recently, Senator Susan Collins (R-ME) proposed a one-year moratorium on any "significant" new rules, with exceptions for criminal justice, public health and safety, the military and foreign affairs.

It is easy to sympathize with businesses small and large, many of whom are barely making ends meet in our tough economic climate. However, I don't think moratoria of this nature will help create any lasting economic growth or jobs. Instead, I fear it would backfire, leading to just as many rules and ever more harmful uncertainty concerning future regulation.

It is this issue of uncertainty that undermines Senator Collins' well-intentioned case for a moratorium. In my experience, delaying rules that are likely to be adopted eventually is worse for businesses, not better. It is hard enough for businesses to make investment and hiring decisions when they have the full text of a new regulation on their desk. It is that much harder if they know a rule is coming out, it has been delayed by a one-year time out, and they are therefore more uncertain as to what form it will ultimately take. The businessmen and women I work with find regulatory uncertainty far more harmful than regulation itself.

Before going any further, it is also important to challenge the often-advanced myth that all regulation reduces the competitiveness of the American economy. In a recent speech, Harvard Business School Professor Michael Porter explains how his work examining the competitiveness of firms and nations long ago convinced him that economies with strong regulation were not less internationally competitive. Porter writes:

"To really understand competitiveness we couldn't look at the nation as a whole. If we really wanted to understand competitiveness we had to look at you know, the specific fields within the nation in which the nation had emerged and become really an innovator and a leader.

And in the course of writing that book I had looked at hundreds of different industries across many, many different countries, and I kept noticing something. I kept noticing that there was often very strict standards and regulations in a particular country in a particular field, but yet that country was competitive in that field. I kept noticing that over and over again.

And so out of that came this notion that we could see not a conflict between environmental regulation, strict environment regulation, and competitiveness. But we could actually see a complimentary. That these things could actually reinforce each other. But what became clear from looking at all this country experience was that there was a critical piece to make that connection work, and that was designing the regulation, that regulatory process and the regulatory standards themselves in the right way."

Porter's insights suggest that it is not the quantity of rules that are in place that matters, or even their severity, but rather the form of the rules and the process by which they are adopted.

This observation squares with my own experience over many decades as a regulatory economist. Nearly all the business executives I work with recognize that regulation is a fact of life. Done well, it often enables a higher quality product and greater consumer satisfaction without jeopardizing their profitability. The aspect of regulation that most disrupts their business is not the ultimate rule itself, but rather the very long time it takes to pass, litigate, and re-litigate many rules and the conflicting demands created by multiple disparate rules.

If Senator Collins or other regulators want to limit the harmful effects of new rules, there are better targets and metrics to reduce the costs of regulation beyond the plain number of rules. In many states, formal regulatory proceedings have been replaced by alternative processes, akin to multiparty mediations or "collaborative" processes. These methods reduce the legal gamesmanship and delays that often accompany formal rules. As the American Bar Association's summary of the Uniform Collaborative Law Act notes:

"The collaborative dispute resolution process (commonly known as "Collaborative Law") is a voluntary, non-adversarial dispute resolution process for parties represented by counsel. As is the case with mediation, collaborative law has its roots in the area of family law, and the process is rapidly expanding for resolving disputes in many areas of civil law. A number of states have enacted statutes of varying length and complexity that recognize collaborative law, and a number of courts have taken similar action through the enactment of court rules. Collaborative Law agreements are crossing state lines as more individuals and businesses are utilizing the collaborative process."

While federal agencies generally do a pretty thorough job listening to stakeholders, there are relatively few collaborative law processes at the national level. As an alternative to a moratorium, why not require that every regulatory agency conduct at least one collaborative law pilot and report back on its results? To reduce the time required for rulemaking, another idea to consider is legislation to allow for expedited appeals, perhaps to a new type of court that is better-versed in economics and the substance of rules as well as the law.

Another useful process innovation appears to be the idea of consolidating rules that apply to affected parties in order to minimize conflicts between rules and compliance investments. As one example, at times the Environmental Protection Agency has tried to use what it calls "sector-specific approaches" to create a single set of rules that incorporate all the environmental requirements that one particular industry will have to comply with. The President's recent Executive Order also promotes this idea. Legislation that required agencies to adopt consolidated, non-conflicting, or common timetable rules might provide much greater benefits to the regulated than a potentially counterproductive rule number freeze.

Rather than impose moratoria on new rules, we should remove or replace sub-standard rules and improve the rulemaking process. American businesspeople are pragmatic and they recognize the reality that they must comply with reasonable rules aimed at public objectives. However, what they need is assurance that regulatory uncertainty over the rules will not hamper their business planning for years on end, and that their compliance with the rules will occur in the most cost effective and least intrusive manner possible.