The modern automobile was invented in Britain. But soon after this new machine’s emergence, England’s Parliament passed the Red Flag Act. The Act required a crew of three to operate an auto. One person to do refueling, one to drive, and one to stand out front waving a red flag warning of the vehicle as it plodded along at 2 mph.
The Red Flag Act was the result of intense lobbying by the stagecoach industry. Needless to say, the regulation stifled the nascent auto industry in Britain, and it was the United States that gained predominance over this industry. While some regulations are necessary to maintain a functional civil society, we must remember that many regulations serve the interests of incumbent industry, and the unchecked accumulation of rules threatens growth and innovation.
(Largely) Unchecked Growth
In the United States, The Code of Federal Regulations, the repository where all Federal rules are codified, has grown in length from roughly 70,000 to 170,000 pages from 1975 to 2010! And this is only Federal regulation. Each of the fifty states pile on their own unique rules, especially in the Occupational Licensing arena, which we addressed in a prior article.
Each new rule imparts an accumulating cost on innovation and economic growth. One study in the Journal of Economic Growth estimated that since 1949, the growing regulatory web in the United States slowed economic growth by some 2 percent per year through 2005. Since growth is cumulative, that meant had the regulatory level stayed frozen in its 1949 state, the US economy would have been three times larger in 2005.
To be fair, GDP growth is far from a perfect measure of wealth or prosperity. Many regulations passed in that time frame are considered socially beneficial, like the Clean Air Act. We do need rules to correct market failures. That said, when we start regulating things like hair braiding or fortune-telling, for example, I think we can all agree that something is amiss. Regulations are the free radicals of society that, if left unchecked, will accelerate societal decline by suffocating innovation.
In the United States, regulatory reform is a bipartisan issue. President Reagan kicked off a new era by allowing new action on rules only if “the potential benefits to society for the regulation outweigh the potential costs to society.” It might seem obvious, but this was the first time that cost/benefit analysis became a prerequisite for implementing new rules.
But Reagan’s Executive order applied only to newly created regulations, not existing ones. It was President Obama’s administration that took this concept a step further by requiring government agencies to routinely review rules and “determine whether any such regulations should be modified, streamlined, expanded, or repealed.”
President Trump went further, forcing retrospective reviews of rules by issuing a “one in, two out” standard. This standard required that, for every new regulation put forth by a government agency, two needed to be deleted. Despite these efforts, the regulatory burden has only continued to grow.
These attempts at reform have largely failed because the current government model is unidirectional. Governments are good at creating legislation and regulation, but they lack robust mechanisms to review, modify, or delete them, after they are put into force.
Dismantling the Regulatory Industrial Complex
Experience from President Obama’s executive order strongly suggests that we need an independent body to identify, delete, or correct existing regulations. The agency that drafts rules them cannot do this themselves because they lack the proper the incentives, resources, and objectivity to do so.
For that reason, we have proposed a new model of governance where the third branch, the “Judicial” branch, would allow plaintiffs to challenge not only the legality of a statute or regulation, but also whether it is functional or not. If deemed non-functional by the court, it could be struck down or sent back for modification.
We envision a circular government that completes the feedback loop. It doesn’t just make rules that continue in static perpetuity. Rather, our system will continue to gather data after a rule is put into place, and will be just as good at modifying and deleting them, as it is writing them.
But how do we differentiate between a “functional” and “nonfunctional” regulation? To answer this, we look to the definition proposed by Patrick McLaughlin, senior research fellow at the Mercatus Center at George Mason University. He defines functional rules as those that address current, significant risks, mitigate some amount of those risks, and do not have significant unintended effects or excessive compliance costs relative to their benefits. Nonfunctional rules are missing one or more of these key features.
To aid this determination, all new regulations (and laws for that matter) should come with a clear statement of purpose that pre-specifies what the rule intends to achieve (e.g. lower crime rates), so that the terms of the review are known in advance. It should also come with a mandatory review provision which triggers an automatic review after five or ten years. This allows for frequent reevaluation of rules and provides an opportunity to delete or improve them if it is not achieving its stated purpose.
The unrestrained growth of regulatory rules is akin to a metastasizing cancerous growth in society. It is a consequence of unidirectional governance that can only create and expand rules, not review or delete them. The continued expansion of this tumor will only stifle growth, suffocate innovation, and lead to societal decline. But the disease is curable, we just need the right medicine.