Streamlining the State

Building a nimble and effective government

Risk & Progress| A hub for essays that explore risk, human progress, and your potential. My mission is to educate, inspire, and invest in concepts that promote a better future. Subscriptions are free, paid subscribers gain access to the full archive, including the Pathways of Progress and Realize essay series.

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In 19th century Britain, shortly after the introduction of some of the first “automobiles,” its Parliament passed the Red Flag Act. This law required a crew of three to operate all autos; one person for fueling, another to drive, and one more walking ahead of the vehicle waving a red flag to warn others as it plodded forward at 2 mph. Ostensibly a safety regulation in the public’s interest, in reality, the “The Red Flag Act” resulted from intense lobbying from the stagecoach industry, which was threatened by the invention. The Act stifled Britain's nascent auto industry; ideas only flower when allowed room to grow.

As we learned at the outset of our study of human progress, we are biologically predisposed to risk aversion. We have great difficulty weighing risk through the lens of our innate “reality distortion field.” Thus, we tend to give great deference to rules and regulations created under claims of “safety” and “security.” Often, as we have seen, this “precautionary principle” causes more harm than benefit. I previously noted a few examples, including environmental regulations that are so draconian they block the installation of green energy and drug qualifications procedures so onerous that many die while awaiting approval.

Many acknowledge the harms of over-regulation, but like the mythical Hydra, every time we attempt reform by cutting off a head, two others grow in its place. If allowed to continue unchecked, the accumulation of non-functional regulations and expansion of the state threatens human progress by putting a ceiling on our potential future. Indeed, I have already made the case that overregulation of energy, particularly nuclear power, may have contributed to the apparent slowdown in innovation after 1970, what I call our “lost future.” When every three-letter department becomes a gatekeeper, we all become prisoners. When there are more refs than players, the game is not playable.

Streamlining the State

If, as I have held, we must view the economy and society as one huge “social supercomputer,” then the laws and regulations created by the government are functionally its “operating system.” As with your home computer, bloated software leads to poor performance, no matter how good the underlying hardware is. We need government because we need structure to solve collective action problems, but it doesn’t need to be expansive and oppressive to effectively serve this purpose. Famed economist Milton Friedman held that government serves three core functions:

1. To prevent people from preying on or harming each other: This includes establishing an army for defense, police at home, and courts for dispute resolution.

2. To foster competitive and open markets: Establishing and enforcing property rights and writing the “rules of the game.”

3. Address “neighborhood” effects: This means dealing with negative externalities, what I called the “pricing input” data into the social supercomputer.

I believe, however, that a pro-progress government has two more functions:

1. To promote idea creation and the accumulation/diffusion of knowledge: This entails building an effective education and IP system. It may also include pro-natal policies to establish more “nodes” for the supercomputer,

2. To establish a basic social insurance system: These would be basic “safety nets,” including health, disability, unemployment, and retirement insurance.

The government should also adhere to two basic principles:

1. Minimal Intrusion: Execute the above at the lowest cost and using the least coercion possible.

2. Subsidiarity: All decisions should be made at most local levels of government as reasonably possible.

The devil, of course, is in the details. In the coming essays, we will address these core government functions. We will discuss, for example, the merits of Pigouvian taxation on sugar-sweetened beverages and fossil fuels, to correct the data inputs that feed into our '“social supercomputer.” We will discuss ways to enhance idea creation and knowledge dissemination. I suggest, for example, using vouchers to fund general education and equity (as opposed to debt) for higher education. We will also review a more limited Intellectual Property system that balances investment incentives with allocative efficiency for optimal knowledge creation and dissemination. We will also take on entitlements, exploring pathways to reform healthcare and pensions. The goal is to return these programs to their core “social insurance” functions. I will also visit ways to streamline the tax code, paring back 10 million words to a few pages of simple text.

Minimal Intrusion

This essay, however, focuses on the principle of minimal intrusion and regulation. Despite attempts to curb the excess, the regulatory thicket has grown ever more suffocating. President Reagan was the first to attempt to stymie regulatory bloat, signing an executive order that allowed new regulations only if “the potential benefits to society for the regulation outweigh the potential costs….” This was the first time cost/benefit analysis became a prerequisite for implementing new rules. Reagan’s order, however, applied only to newly created regulations, not existing ones. The Obama administration took this further by requiring government agencies to routinely review rules and “determine whether any such regulations should be modified, streamlined, expanded, or repealed.”

These reforms have failed. Since Reagan’s Presidency, the Code of Federal Regulations, seen above, has swelled from 100,000 to 190,000 pages. In 1950, it was just 10,000 pages. Similarly, the US tax code has become an order of magnitude more complex, rising from a length of 1.4 million words in 1955, to over 10 million by 2010. The pessimist would agree that every new layer of complexity adds opportunities for graft and rent-seeking, but even the optimist would acknowledge that growing complexity requires the wasteful expense of billions of human hours and dollars complying with the law. This is human and financial capital that would be better spent doing other things.

The challenge is one of asymmetry: While governments can create rules and regulations, they lack a robust mechanism to review, modify, or delete them after they go into effect. These rules accumulate, one upon the other, until inertia and stagnation become the norm, like free radicals slowly damaging the body. Experience from President Obama’s executive order suggests that we need an independent body to identify, delete, or correct existing regulations. The agencies that draft the rules cannot do this themselves because they lack the proper incentives and objectivity.

This body, perhaps authorized by Congress, would review all existing regulations. Those deemed “functional” would be maintained and those deemed “non-functional” would be modified or deleted. How do we differentiate between “functional” and “nonfunctional” regulations? To answer this, I look to the definition proposed by Patrick McLaughlin, a senior research fellow at the Mercatus Center at George Mason University. He defines functional rules as those that address current, significant risks, mitigate those risks, and do not have significant unintended effects or excessive compliance costs relative to their benefits.

This review board should also be bequeathed with the ability to review occupational licensing rules. As we have seen, occupational licensing is often an instrument of rent-seeking masquerading as health and safety protection. As with any regulation, we should judge their effectiveness on their merits and de-license occupations that pose no material health or safety risks to the public. Remember, for occupations with moderate risk, there is an alternative to licensing: certification. Certification reduces opportunities for rent-seeking because it’s conducted by non-profits, and unlike licensure, the uncertified are not barred from the market. Only occupations deemed too great a risk to delicense would remain so. Even then, however, licensure requirements should be harmonized across borders. An individual’s skills and knowledge do not evaporate when he/she moves from California to Texas. Yet, many licenses are not currently portable or transferable in this way.

To make these reviews easier in the future, all new laws and regulations should come with a clear statement of purpose that specifies what the rule intends to achieve (e.g. lower crime rates, reduced asthma deaths…etc.), so the review terms are known in advance. All new rules should also have an automatic sunset provision after five years. This reorients the burden; shifting the default stance from rule accumulation to deletion, forcing regulators to justify rule continuation and providing an opportunity to delete or improve those that fail to achieve their stated purpose. The goal is minimal intrusion; to keep laws and regulations simple and their numbers as low as reasonably possible. Additionally, as I will explore later, we could design government such that it’s possible to challenge any law or regulation on its merits at any time.

Our overarching goal is to strike a delicate balance. We must ensure that our rules and regulations are robust enough to create and sustain modern civilization, but not overbearing such that they stifle human progress or imperil economic growth. To date, we have strayed too close to the latter. We must build a streamlined state that readily adapts, able to modify or delete the very rules it created based on evidence and data. This protopian model of governance would be a game-changer; accelerating growth and stoking the full potential of humanity.

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