Blog — Op-Ed

Posted 1/25/12 by Common Good

State of the Regulatory Union

The State of the Union address is a long speech that covers many topics. Nevertheless, we were excited when one of the topics President Obama tackled last night was the outgrowth of outdated regulations. The President sketched (albeit briefly) a regulatory philosophy that resonates with Common Good themes—up-to-date, simple rules that serve a clear public benefit:

There is no question that some regulations are outdated, unnecessary, or too costly. In fact, I've approved fewer regulations in the first three years of my presidency than my Republican predecessor did in his. I've ordered every federal agency to eliminate rules that don't make sense. We've already announced over 500 reforms, and just a fraction of them will save business and citizens more than $10 billion over the next five years. We got rid of one rule from 40 years ago that could have forced some dairy farmers to spend $10,000 a year proving that they could contain a spill - because milk was somehow classified as an oil. With a rule like that, I guess it was worth crying over spilled milk.

I'm confident a farmer can contain a milk spill without a federal agency looking over his shoulder. But I will not back down from making sure an oil company can contain the kind of oil spill we saw in the Gulf two years ago. I will not back down from protecting our kids from mercury pollution, or making sure that our food is safe and our water is clean. I will not go back to the days when health insurance companies had unchecked power to cancel your policy, deny you coverage, or charge women differently from men.

Posted 1/20/12 by Benjamin Miller

A Better Model for Dodd-Frank

The basic message Common Good is trying to spread with our Start Over campaign is simple: People, not rules, make things happen.

The regulatory philosophy of the U.S. makes the flawed assumption that more specific rules lead to better results. That’s why our country now has 140 million words of federal law, or thirty thousand words for every word in the Constitution.

In reality, more specificity leads to more loopholes, unintended consequences, and most importantly, the elimination of human judgment. Instead of entrusting individuals with the responsibility to make prudent decisions based on principles established by law, our legal and regulatory system expects bureaucrats to follow the letter of the law without deviation. And lawmakers are likely to step on their own toes by creating inflexible regulatory structures that can’t keep up with changing times.

Eighteen months ago, President Obama signed the Dodd-Frank Act, a statute of some 2,300 pages intended to prevent financial sector abuses of the kind that led to the 2008 crisis. Its core strategy is to empower federal regulators to control the promulgation of risky financial instruments like derivatives. But, as David Skeel wrote last year, “the legislation merely provides a framework for achieving these objectives. It leaves nearly all of the details to financial regulators, who will be required to promulgate more than five hundred new rules.” And New York Times columnist Joe Nocera recently warned against “complexity risk,” arguing that “contradictory regulations, however well meaning, simply don’t make the system safer.”

The Dodd-Frank approach presents an opportunity and a risk. The opportunity is to show that individuals entrusted with regulating the financial sector can work most effectively when the law gives them a broad objective and the proper tools. The risk is that the law expects these regulators to achieve the objective not through careful deliberation and analysis, but by writing hundreds of new, specific rules.

Skeel observes that the new rules will work best if they are “simple and straightforward.” Let’s hope the regulators take note. But it’s hard to imagine a scheme of five hundred new rules being truly simple and adaptable. Contrast that with Britain’s Financial Services Authority, which sets out seven basic principles to guide regulators’ decisions. The principles are succinct, clear, and intuitive, and they establish a basic philosophical approach that regulators and businesses can easily understand and apply. For example, one of the principles, “Proportionality,” reads in its entirety:

The burdens or restrictions we impose on the industry should be proportionate to the benefits that are expected to result from those burdens or restrictions.

In making judgements in this area, we take into account the costs to firms and consumers. One of the main techniques we use is cost-benefit analysis of proposed regulatory requirements. This approach is shown, in particular, in the different regulatory requirements we apply to wholesale and retail markets.

Similarly, the FSA lays out eleven principles of proper business conduct in the financial sector. They include:

• “Integrity: A firm must conduct its business with integrity,”
• “Financial prudence: A firm must maintain adequate financial resources,” and
• “Relations with regulators: A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.”

Sometimes more specific rules are necessary, but for the FSA, maximizing granularity is not the default. Does that make it more difficult for the agency to ensure fairness? Well, as Clive Briault, FSA’s former managing director of retail markets, put it: “Our Principles are rules. We can take enforcement action on the basis of them; we have already done so; and we intend increasingly to do so where it is appropriate to do so.”

It’s hard to imagine those words coming from an American bureaucrat. Yet at a time when Americans are all too accustomed to regulatory failure, surely we ought to think about regulatory approaches that serve individuals and the economy instead of chasing after subsections and clauses.

Posted 1/18/12 by Matt Brown

Summary Judgment: Should Judges Be Gatekeepers?

There’s a tempest brewing in Tennessee, as the state’s judicial and legislative branches battle over the rules governing civil court proceedings. It’s an interesting state constitutional issue that highlights both a flaw in America’s civil justice system and the inability of policymakers to address it.

In 2008 the Tennessee Supreme Court, in a decision captioned Hannan v. Alltel, narrowed the ability of defendants to pursue “summary judgment,” a procedural device allowing judges to dismiss cases at early stages in the proceedings if certain requirements are met. Hannan clarified the previously very confusing standard. In Tennessee, to succeed on a motion for summary judgment, a defendant must now produce some affirmative evidence that contradicts the plaintiff’s claim. One cannot rely on the more defendant-friendly “put up or shut up” system in place in most other jurisdictions (including the federal courts), under which the defendant need only show that the plaintiff does not have any evidence supporting their claim. The difference is stark. For claims in which evidence on both sides is flimsy, this system limits defendants’ ability to avoid significant litigation costs.

Hannan infuriated Tennessee’s business community, which feared that a tightened summary judgment standard would allow more frivolous cases to proceed to costly trials. Tennessee legislators have now attempted to overturn Hannan via legislation, which passed easily, leading to the current showdown over whether this maneuver is even constitutional.

This brouhaha stems from a common refrain in American politics: the need to reform our civil justice system to lower the costs (both monetary and social) of frivolous lawsuits. But it also reveals how no one seems to understand what’s really at stake, or how to improve the system we currently have. In Tennessee and elsewhere, the battle is about the character of the rules: who needs to produce what evidence when, what sorts of caps can be placed on damages. But rules, by their very nature, can never perfectly conform to social expectations. No matter where the summary judgment line is drawn, some meritorious cases will get dismissed and some frivolous cases will proceed to trial—and tort reform only shifts stakes, not costs.

More than rules, what really should be at issue is the effect of civil litigation on American life—and the role judges should play in a free society. For years, Common Good has argued that judges should see their role not as some neutral arbiter between two opposing sides—to simply call balls and strikes, if you will—but rather as a gatekeeper who makes value judgments on behalf of society about whether a particular claim should proceed. As Philip K. Howard has written:

America needs a new judicial philosophy. Instead of focusing on enforcing ‘rights’ and avoiding ‘activism,’ judges should look to the effects of lawsuits on the functioning of society, and see their job as drawing ‘boundaries’ and achieving a ‘balance’ between competing interests of freedom and individual grievances. Judicial rulings that keep claims and defenses reasonable should be encouraged, not avoided. . . . Only by judges continually asserting reasonable community values can citizens enjoy the protection of the rule of law.

Changes in summary judgment rules are meaningless if technically meritorious suits can shut down playgrounds while negligent defendants can hide behind procedural devices. To ensure that the interests and expectations of society at large are served, judges must be empowered to consider and protect them as appropriate. Tennesseans are right to be concerned about the state of their civil courts, but if it’s true justice they want, they’d be better off throwing out the rule book and starting over.

Posted 1/17/12 by Common Good

Today’s Read: Joe Nocera on Financial Regulation

Joe Nocera is not anti-regulation. But in today's New York Times, he recognizes that regulation only works if it's simple enough to be understood and implemented. In the real world, it's impossible to anticipate and write rules for every future scenario and every possible problem. Regulation only works effectively when it empowers individuals to use their discretion, enabling them to address both foreseen and unforeseen challenges. In the financial sector, it's especially important that we keep the rules simple, precisely because the system is so complex:

Why does complexity risk matter? One reason is that the more complex the rules are, the greater the likelihood that smart bankers will find ways to game them. Another is that contradictory regulations, however well meaning, simply don’t make the system safer.

...

[Karen] Petrou [managing partner of Federal Financial Analytics] offers a series of solutions, revolving around simpler regulations, a reliance on market discipline and transparency. She also calls for the regulators themselves to be held accountable, something that is nowhere to be found in Dodd-Frank, despite their obvious shortcomings in the years leading to the financial crisis.

However you feel about banks — and I know that many people harbor enormous, justifiable anger at what they did — our economy can’t function without them. And they needed to be regulated. But three years ago, overly complex securities were one of the root causes of the crisis. So why, then, do we have faith that overly complex regulations will prevent the next crisis? Sad but true: they won’t.

It's good to see writers across the political spectrum recognizing the point Common Good has long made: In order for law and regulation to be effective, it needs to be understood. Read Nocera's full column here.

Posted 1/10/12 by Common Good

David Brooks on Clearing the Legal Thicket

It’s hard to imagine a world where government works efficiently—or where officials work to restore faith in governmental institutions. But in today's New York Times, David Brooks suggests how we might achieve just that:

Life is unfair. Republican venality unintentionally reinforces the conservative argument that government is corrupt. Democratic venality undermines the Democratic argument that Washington can be trusted to do good.

Liberalism has not expanded because it has not had a Martin Luther, a leader committed to stripping away the corruptions, complexities and indulgences that have grown up over the years.

If you’ll forgive some outside advice, President Obama might consider running for re-election as Luther. It’s not enough to pick a series of small squabbles and then win as the least ugly man in the room. He might run as someone who believes in government but sees how much it needs to be cleansed and purified.

Make the tax code simple. Make job training simple. Make Medicare simple. Every week choose a rent-seeker to hold up for ridicule and renunciation. Change the Congressional rules. Simplify the legal thickets that undermine responsibility.

Brooks understands that in order to restore trust in government, reform efforts need to focus on how government operates, not just on what government does. Effective governance depends on restoring responsibility to individuals—but that’s impossible within the complex and convoluted “legal thicket” we’ve created.

Posted 1/4/12 by Benjamin Miller

Today’s Read: Lenore Skenazy on “Overhyped Panics”

Lenore Skenazy, author of FreeRangeKids.com, wants us to ask ourselves: Are we overreacting to life's rare and improbable threats? And in attempting to protect ourselves and our children against remote risks, do we incur greater societal costs?

In an op-ed in last week's Wall Street Journal, Skenazy argues that the answer to both questions is a definite "yes." She describes an incident in April 2011 in which an Applebee's waiter inadvertently served an alcoholic drink to a toddler. Instead of being resolved with a simple apology and recompense, the incident ballooned into a lawsuit, a national retraining of Applebee's staff, and a media frenzy. What's wrong with that? As Skenazy writes:

This collective decision not to distinguish between rare screw-ups and systemic dangers is turning us into neurotic Nellies who worry about, warn against and, finally, outlaw very safe things.

This reactionary instinct is all too visible in the way we treat our children, eliminating monkey bars and dodgeball because they might cause an accident. But the attitude is pervasive across society. We write laws and regulations to address rare or one-time events, instead of defining our principles and objectives and using common sense to resolve specific issues accordingly.

No matter how many rules we think up, accidents will happen. When they do, let's remember to use common sense, not irrational panic, to fix them.

Posted 12/20/11 by Common Good

Howard on Havel

Writing on his blog on TheAtlantic.com, Common Good Chair Philip K. Howard draws from a series of speeches Vaclav Havel gave in the 1990s to relate the former activist and Czech president’s critique of western bureaucratic structures:

Western governments, he said, are organized on a flawed premise not far removed from the Soviet system that had just collapsed. 'The modern era has been dominated by the culminating belief,' he said, 'that the world ... is a wholly knowable system governed by finite number of universal laws that man can grasp and rationally direct ... objectively describing, explaining, and controlling everything.'

These bureaucratic structures are profoundly dehumanizing, Havel believed, striving to control choices that should be left to human judgment and values. This 'era of systems, institutions, mechanisms and statistical averages' is doomed to failure because 'there is too much to know' and it cannot 'be fully grasped.' The drive towards standardization is fatally flawed, Havel believed: 'life is nonstandard.'

…

In a society where authority is embodied in complex bureaucratic systems, no one can take responsibility to do what seems right. Modern societies are suffering what he called a 'profound crisis of authority and resulting general decay of order.' What does that mean? 'Politicians seem to have turned into puppets that only look human and move in a giant, rather inhuman theatre; they appear to have become merely cogs in a huge machine, objects of a major automatism of civilization which has gotten out of control and for which no one is responsible.'

The solution, Havel believed, is to reclaim human control over daily choices. We must 'get to the heart of reality through personal experience ... in short, human uniqueness, human action, and the human spirit must be rehabilitated.' Let communities too be different: 'There is no need at all for different people, religions and cultures to adapt or conform to one another. ... I think we help one another best if we make no pretenses, remain ourselves, and simply respect and honor one another, just as we are.'

Havel’s analysis of western governments, Howard notes, is as relevant today as when it was written—and it also aligns well with the message of Common Good's Start Over campaign. Read Howard’s essay in full and leave your feedback in the comments section below.

Posted 12/19/11 by Common Good

Today’s Read: Jeb Bush Calls for Results-Based Regulation and Sunsets

In an op-ed for the Wall Street Journal, Common Good Advisory Board member and former Florida governor Jeb Bush makes the argument that “results-based regulation” (or “outcome-oriented rules”) and sunsets are necessary for Americans’ economic freedom:

We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions. And we need to let people enjoy the fruits of good decisions, even good luck.

…

The right to rise does not require a libertarian utopia to exist. Rather, it requires fewer, simpler and more outcome-oriented rules. Rules for which an honest cost-benefit analysis is done before their imposition. Rules that sunset so they can be eliminated or adjusted as conditions change. Rules that have disputes resolved faster and less expensively through arbitration than litigation.

In Washington, D.C., rules are going in the opposite direction. They are exploding in reach and complexity. They are created under a cloud of uncertainty, and years after their passage nobody really knows how they will work.

Read Gov. Bush’s op-ed in full (subscription required) and leave your feedback in the comments section below.

Posted 12/14/11 by Benjamin Miller

Interview: Dr. Robert Costrell on Public Employee Unions

Last week, I had the opportunity to speak with Dr. Robert M. Costrell, an expert on teacher pensions and author of two Wall Street Journal op-eds from the last year ("Oh, To Be a Teacher in Wisconsin," February 25, 2011, and "Collective Bargaining Weakens Cities," November 23, 2011). In addition to writing extensively about the challenges posed by union-negotiated public employee benefits, Dr. Costrell has direct experience trying to address these challenges as an economic and education adviser to three governors of Massachusetts. Dr. Costrell kindly agreed to answer some of my questions about public unions, collective bargaining, and the manageability of government. A transcript of our conversation, edited for length and clarity, follows below:

Benjamin Miller: Your recent op-ed draws a distinction between state versus local unions. You argue that local governments are in a much weaker bargaining position relative to state and national public unions.

Robert Costrell: The evidence of it is in the results: more expensive health care benefits in particular. In at least some states, particularly the three I wrote about [Ohio, Wisconsin, and Massachusetts], they were more expensive at the local level than they were for state employees, for a number of reasons.

I’ll give you a clear example that I learned from my seven years at the state house in Massachusetts. In each state you typically have two houses, the Senate and the House of Representatives, and the House obviously has smaller districts. In each of those districts one of the most active groups is the [union for] teachers and other school employees. They’re all under the umbrella of one of the two state teachers’ unions, affiliated with the NEA [National Education Association] or the AFT [American Federation of Teachers]. So they’re very powerful and influence both Democratic and Republican legislators.

State employee unions are very influential as well, and many states will have to sit down and collectively bargain with them. But the state employees are concentrated in or around the state capital. So they do not have the type of influence district by district as the teachers’ unions.

BM: This discrepancy between the state and local influence of these organizations has significant fiscal effects. You say that in Massachusetts, the health insurance benefits on the local level were 37% higher than on the state level?

RC: The estimate by the Massachusetts Municipal Association—which is aligned more closely with the Democrats than the Republicans—was that the new law would save as much as $100 million a year, by allowing the localities to change the design of their health plans. Mostly by setting copayments and deductibles to match those offered in the state plans.

BM: It’s clear that a lot of these contracts with public employee unions on both the local and state level have stood in the way of the governments trying to make necessary fiscal choices, because they precommit large portions of their budgets that then can’t be adjusted when public needs change.

RC: You’re getting close to what I think is a critical distinction to be made between bargaining over wages and bargaining over benefits. When you’re bargaining over wages, you’re bargaining over a known dollar quantity. When you’re bargaining over benefits, you’re bargaining over plan design—co-payments, deductibles, and so on—and you have only limited control over what the actual cost trajectory of those benefits is going to be.

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Posted 12/2/11 by Common Good

Philip Howard on the Need for Results-Based Regulation

In an essay excerpted in Saturday's Wall Street Journal, Common Good Chair Philip K. Howard makes the case for results-based regulation. Read the full, unabridged version below, or download here:

Results-Based Regulation: A Blueprint for Starting Over

By Philip K. Howard

This past summer county officials closed down a children’s lemonade stand near the U.S. Open golf championship in Bethesda, Maryland—because the children didn’t have a vendor’s license. Officials decided not to compel the children to go to court, and issued a summons instead to their parents. Local television crews were soon on the crime scene, interviewing the kids who had organized the enterprise as a way to raise money for pediatric cancer. The incident was too ridiculous not to garner national attention, and the bureaucracy soon backed down. But the retreat was tactical, not a sincere acknowledgment of bureaucratic overkill. The regulations, after all, have no exception for young vendors. Indeed, the incident prompted a wave of sidewalk shutdowns over the summer by diligent officials in Georgia, Massachusetts and several other states.  

Regulation promises to be a central theme in the 2012 election. Americans instinctively know that it’s hard to invigorate a weak economy when almost any activity has regulatory risk. Approvals often require trips and applications to multiple agencies with inconsistent requirements. Farmers and factory foremen spend hours filling out forms that no one will ever read. Small businesses get nicked by inspectors who have no sense of proportion or priorities—for no reason other than that’s what the rule requires. Government looms over the most ordinary activities, a hydra-headed dragon repelling common sense solutions with disgusting bureaucratic breath.

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