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Effective Regulation and Sustainable Economic Growth

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Paul Ryan's selection as Mitt Romney's running mate has focused attention on budget and taxation issues, as other elements of the Republican War on Government are being ignored. No one is talking much about the renewed push to deregulate business. There seems to be no place in the Tea Party ideology for a sophisticated relationship between government and the private sector in pursuit of sustainable economic growth. To these folks, government agents can only be power-grabbing bumbling commie bureaucrats, and regulation is never a good idea.

It's true that regulation costs money, and some short-sighted business leaders seem to have a reflex that causes them to oppose regulation whenever it is proposed. On the other hand, it's also true that lawlessness and an absence of rules can be quite expensive. Although many of the costs of regulation are borne by individual businesses and their customers, the rest of us pay the costs of non-regulation. Blanket opposition to all regulation is not the approach taken by most businesses, but when coupled with the anti-tax and anti-government ideology of the Republican party, anti-regulation creates a powerful and dangerous political dynamic. Maintaining leadership in the modern global economy requires skill, political will, strategy and resources. We need basic research, an educated population, infrastructure, consumers willing to invest in long-term purchases, and businesses that produce and compete without destroying the planet. A growing and sustainable economy requires an aggressive and strategic partnership between government and the private sector.

The danger of the Republican right-wing's zeal against government and regulation is that it inhibits our ability to deal with the complexity and interconnectedness of modern life and the modern economy. The BP oil spill in the Gulf of Mexico, the Fukushima nuclear power plant accident in Japan and the damage to the environment caused by gas hydrofracking in Ohio and Pennsylvania are all examples of inadequate regulation. Not too much government, but too little. The U.S. Department of Interior failed to adequately police deep sea oil drilling in the Gulf of Mexico. The Japanese government did not require the Tokyo Electric Power Company to guard the Fukushima plant against the threat of tsunami. As I noted last year:

"The tsunami was 46 ft. high and breeched the 19 ft. seawall that was meant to protect the Fukushima plant. An earlier design for the plant included a higher seawall that was cut to save costs."

The virtually unregulated mining of natural gas in Pennsylvania and Ohio is an accident that hasn't waited to happen. The chemicals in the fracking fluid are a legally sanctioned toxic trade secret, and the fate of those chemicals once injected in the ground or dumped in the waste stream remain unregulated.

The damage caused by unregulated businesses does not just bring harm to our planet. It damages the economy and communities as well. The lack of adequate regulation of mortgages led to people buying and losing homes they couldn't afford and the lack of regulation on Wall Street led to a financial crash we are still recovering from.

Conservatives say that government is too ignorant of business practices to adequately police them. In their view, regulations destroy initiative and hold businesses back from reaching their true potential. To some degree this is true, but so what? Slower and more cautious economic growth could also be more careful, solid and sustainable growth. It is true that you can regulate an activity to such a degree that you destroy it. You can also deregulate an activity so completely that rule of law is replaced by whatever it was that kept order in the Wild West (a six-shooter, right?). Neither approach makes sense.

Regulations are not inherently anti-business. Rules of the game can also create a level playing field that permits fair competition. The certainty and security of a fair business environment can attract competitors and creativity. Business, sports and nearly every human activity require rules, customs and certainty. LeBron James might do well in a pick up game with no rules or refs, but he also manages to excel in an environment with rules and free throws. Think of how bad traffic backs up when traffic lights lose power and don't work. A world without rules and regulations is one of anarchy and chaos. A totally free market is not a reasonable goal.

The anti-regulation movement is particularly pernicious because it prevents us from doing what we really need to do -- which is to get better at developing and implementing effective regulation. The economic, social and especially technological environment that we live in is changing rapidly. We need to do a better job of understanding this environment and developing reasonable rules to govern economic competition within it.

We also need to do more to ensure that the economy that produces all the goods and services we rely on does not damage or destroy the planet that sustains us. Environmental rules are not silly and stupid ideas designed to kill businesses, any more than traffic lights are a silly and stupid idea designed to destroy the freedom of the open highway. Our planet has over seven billion people living on it. A few rules of the road are needed to make sure we can keep the economy moving without crashing into each other.

We need to use the planet's resources with care and intelligence -- not with a heedless lust for quick profits. Hydraulic fracturing is a current case in point. It seems pretty clear that some of the natural gas contained beneath the Northeast's Marcellus Shale will be extracted and burned to provide energy. While New York State still has a moratorium on fracking, Ohio and Pennsylvania have been going wild.

In any mining operation there are best management practices and there are also quick and dirty short-cuts. The companies that might be willing to act responsibly are penalized by the absence of government rules and enforcement. Careless operators that damage the environment are rewarded by the lack of rules. It costs more to make sure the fracking process is conducted with care, and that the waste fluid is disposed of properly. There are also some places that should not be fracked. Some places that have natural gas deposits also have fragile ecosystems or important aquifers. Only government rules can ensure that hydraulic fracturing is banned in sensitive areas.

I have to admit it is hard to believe that we are reduced to making arguments on the necessity of regulation. It would be a much better use of our time and energy to focus our attention on developing more effective regulations. We need to learn more about the planet's conditions and the impact of our activities on the planet's productive ecosystems.

Effective regulation is not easy to develop and implement. Regulators must understand the business and technology they are regulating. There are two ways to this. The right way: developing an independent knowledge base of the business or technology you are trying to understand. Or the wrong way: allowing business to pay for, control and provide this knowledge. When business provides government with technical expertise, we often see a revolving door of business leaders coming into government to run regulatory agencies and of government regulators going to work for the people they used to regulate. Captured regulatory agencies are virtually useless, but so too are regulations that do not reflect an on-the-ground understanding of the activity being regulated.

In the cut-back environment that government now operates within, the expertise needed to regulate is often too expensive to obtain. If we are to have reasonable and effective regulation we need to invest in the analytic and scientific capacity it requires. In the contemporary anti-tax, starve the beast, ideologically-driven budgetary environment, there is little chance we can develop effective and sophisticated regulations. Instead we will have a private sector running amok and polluting the countryside, and local communities responding by vetoing economic development and arguing "not in my backyard." We need to do better.

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