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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.

Americans overwhelmingly dislike it: A recent Clarus Poll found 78% of voters believe there should be “less regulation of how people make daily choices in their lives and jobs.” This is the impetus for the Tea Party attack on government—just kill it before it kills the American spirit. “De-regulation” is the mantra of all Republican candidates. Michelle Bachmann says she would abolish the EPA altogether.

On the other hand, liberals in Congress and the Occupy Wall Street movement demand more regulation. Just as polls show a broad dissatisfaction with regulation, they also show a broad demand for more effective government oversight. A Gallup poll found that 61% of U.S. adults approved of increased government regulation of banks and financial institutions.  

Are Americans schizophrenic? I don’t think so. Regulation is stifling the economy. Government also needs to be more vigilant overseeing business abuses. What’s needed is regulatory system that can focus on bad practices, not control all practices indiscriminately. Regulation needs to focus on results.    

Instead, liberals and conservatives cling to equally unworkable solutions. De-regulation sounds good, but is not a complete thought: Free markets can’t work without government oversight for fair dealing, as we painfully learned with the mortgage bubble. The vast interdependencies of modern society—from lead paint on toys to overfishing of seas—require regulatory traffic cops to keep society moving forward. This is why neither Reagan nor the Bushes succeeded in reducing regulation.

The liberal approach to regulation—to put legal shackles on business activity—is both suffocating and ineffective. Preventing Wall Street from peddling worthless securities is important, but trying to define “abusive practices” with hundreds of pages of rules, as regulators are setting out to do under the Dodd-Frank legislation, is like building a Maginot Line. The next scheme will be different. All those words will just create loopholes that whiz-kids on Wall Street will be driving through in a matter of hours.

Regulation fails not (mainly) because it has the wrong goals. Regulation fails because it is inept—crushing good activities while allowing bad ones. What’s missing is basic: human judgment about right and wrong. Licensing food vendors is a good regulatory goal. But children’s lemonade stands? Stopping risky practices on Wall Street is also important. But that requires regulators who can identify and rein in irrational exuberance, not a financial version of the tax code.    

The core flaw of regulation, shared by both sides, is that it is organized as an all-or-nothing proposition—either deregulation or iron manacles—as if the only available options are central planning or anything goes. Regulation needs the leavening influence of humans focused on results. Nothing works without human judgment. This is as true with regulation as with any other life activity.

To Regulate or Not to Regulate, That Is the Wrong Question

Earlier this year, the Colorado Department of Human Services proposed new rules for day-care centers. Government oversight of day-care seems like a good idea—you wouldn’t want children cooped up in an airless basement—but this proposal went far beyond basic health and safety. The new rules would dictate exactly how to do just about everything: how many block sets (“at least two (2) ... with a minimum of ten (10) blocks per set”), where the children can play with the blocks (on “a flat building surface” that is “not in the main traffic area”) and when caregivers must wash their hands (before “eating food,” “after wiping a child’s nose,” etc.).

This is the way regulation works in America: Regulators try to imagine every possible mistake and then dictate a solution. The complexity is astounding. Under a recent federal directive, the number of health-care reimbursement categories will soon increase from 18,000 to 140,000, including 21 separate categories for “spacecraft accidents” and 12 for bee stings. There are over 140 million words of binding federal statutes and regulations, and states and municipalities add several billion more. There’s hardly any activity in society that isn’t covered by a detailed rule.

Regulation is deliberately designed to avoid human discretion—to create a regulatory code that is self-executing. This is its core assumption—unquestioned even by those who call for regulatory reform. This theory of regulation-as-instruction-manual arose in the 1960s when America woke up to abuses of racism and pollution, among others. By making rules as precise as possible, we hope to avoid bad judgment. The unfortunate side effect has been to preclude good judgment. Modern regulation doesn’t just control undesirable practices—it indiscriminately controls all the work of regulated entities.

Taking responsibility is basically illegal in the modern regulatory state. The president can’t authorize a new power line without a decade of bureaucratic review. A governor comes to office and finds that 80% of the budget is cast in legal concrete—without any ability to cut a little here and there. A teacher can’t maintain order in the classroom without filling out forms and facing a potential legal hearing. Judges sit on their hands, letting people sue for almost anything. An inspector feels that he has no choice but to shut down an unauthorized neighborhood lemonade stand—a rule is a rule.

At this point, after decades of writing laws to be as precise as possible, there is almost no room for decisions aimed at getting to the desired results. Modern democracy is not actually run by the people we elect. Democracy is run by dead people who wrote all this law.

America is suffering from a crisis of authority. No one is in charge. No one is accountable. No one can make choices needed to get out of this mess. Government is beyond anyone’s control. Business is making plenty of choices to adapt to global economic forces, but on a legal platform of unquestioned assumptions. Government and business are just bobbing in a stream, rapidly being swept towards a precipice.  

Regulation by Results

America needs a radical regulatory overhaul. The goal is to re-empower humans to take responsibility to deal with current challenges. But how? Trying to make sense of the bloated bureaucracy would take a thousand lifetimes.

Almost all that bureaucracy would disappear, like air from a punctured balloon, if we abandoned its core assumption: that regulation should be an instruction manual. It is far more effective to give “general instructions about … the ends to be achieved,” economist Friedrich Hayek observed, and “leave it to the different individuals to fill in the details according to the circumstances.”

Between deregulation on one end, and regulatory micromanagement on the other, is a more sensible option: Results-based regulation—simpler rules tied to the results they produce and not the paperwork or bureaucracy they create. Regulatory codes must be rewritten as an open framework of goals and guidelines, built on this guiding principle: Replace bureaucracy with human responsibility to achieve regulatory goals. This is not a radical concept. Until the last 50 years or so, this is how most law was written.

The Constitution is barely 15 pages long. It doesn’t specify the detail of when, for example, government can enter our homes. But we know that its prohibition against “unreasonable searches and seizures”   protects us against unwarranted police intrusions, and that judges see it as their job to maintain those boundaries in accord with prevailing norms of right and wrong. The First Amendment is 45 words (“Congress shall make no law …”) and, in those few words, protects our essential freedoms—religion, speech, press, assembly, petition—the foundation of our democratic system. Without the need for thousands of pages of explanatory rules, these constitutional principles let people generally know where they stand.

A regulatory system focused on results requires four basic changes in approach:  

1. Regulation must be radically simplified. Most bureaucratic detail should be scrapped, replaced with a straightforward set of goals and important principles. Law would become understandable again. The focus would shift from complicated rules to desired outcomes: clean air, safe food, honest business.

The federal worker-safety laws now include some 4,000 rules dictating precisely what equipment can be used and how facilities are built. Some are embarrassingly self-evident, like the rule that stairwells shall be lit by “natural or artificial illumination.”

Most of the detail could be subsumed within a general principle: “Facilities and equipment shall be reasonably suited for the use intended, in accord with industry standards.” When a specific protocol is essential—as in situations where a tiny mistake can lead to disaster—it will no longer be lost in a sea of detail.

In Britain, financial institutions have to answer to such principles as “A firm must conduct its business with integrity” and “treat [customers] fairly.” Applying those principles to Wall Street would provide ample authority for regulators to stop the next bubble without smothering credit transactions under thousands of pages of new rules.

2. Individual accountability should replace bureaucratic micromanagement. The standard objection to such a simplified system—really more like panic—is that people would take advantage of the leeway: Companies would ignore their obligations, and bureaucrats would abuse their powers. The only answer to these fears is accountability. Everyone needs to be at risk for whether they are achieving the regulatory goals. There’s no need to trust business: Give inspectors presumptive authority to decide whether or not a business is meeting its regulatory obligations. Nor do we need to trust officials. The system would need to include ways to overrule regulators who are unreasonable and to fire them if they consistently show bad judgment.

3. Mandatory sunsets should require fresh choices. Every regulatory program has a tendency to take a life of its own. Even good programs can spin out of control.

Consider our federal special-education laws, passed in the mid-1970s to end the shameful neglect of the small percentage of students with special needs. Special ed has now grown to consume 20% of the total K-12 budget in the U.S. Programs for gifted children, by contrast, get less than half of 1%. Is this the correct balance? No one is even asking the question, because the regulations dictate the outcome. If regulations periodically expired, Congress would have to make new findings to ensure that the program aligns with current educational priorities.

4. Small entities should be regulated differently. Small businesses pose a special challenge. Society has a legitimate interest in, say, keeping welding shops from giving off noxious fumes, and preventing run-off from pig farms. But the technical complexities are often beyond the capabilities of normal humans.

One new approach might be to allow independent oversight: Just as most businesses have a CPA who blesses their books, they could have a “certified regulatory expert” who reviews and helps with compliance, and must write an opinion to regulators certifying compliance. Government would oversee CRE’s but not try to inspect millions of businesses.  

A radical makeover of American regulation is daunting. Congress can’t even agree on a debt limit, much less recodify several thousand volumes of law. Recodifications through history have always been designed by small committees—such as the small groups of jurists appointed by Justinian and Napoleon for their historic legal overhauls. The best model for us is probably to create new versions of “base-closing commissions,” area by area, whose proposals have to be accepted or rejected in total by Congress,  without the opportunity for special interest negotiations.

Restoring Human Responsibility to Regulation

No one would design the regulatory system that we have now. No area of it, from environment to education, works as it should. It is unimaginably wasteful, diverting and discouraging legitimate activity of every kind.

But we’ve been fighting the wrong enemy. Government oversight is essential to freedom and fairness in the modern world—for fair markets and shared common resources, among other public needs. But as Tocqueville observed, there is a key difference between “centralized government,” which performs that role while respecting individual discretion, and “centralized administration,” which drives people crazy by telling them how to do everything. The villain today is not government but pointless bureaucracy that is beyond human control.

A simpler code focused on results is not so scary. Creating the world’s largest instruction manual has not safeguarded citizens against abusive officials—an inspector can always find multiple violations of rules for trivial noncompliance. Nor do detailed rules protect the public against greedy practices by Wall Street—just as Enron parsed the complex accounting rules to get away with activities that had no economic substance. Regulation must be tethered to human judgments about right and wrong, not mindless legal compliance.

There is only one cure to our broken regulatory system—restore human responsibility to achieve regulatory results. Real people, not rules, make things happen. That’s the only way America will be able to meet its many challenges. “Nothing that’s any good works by itself,” Thomas Edison remarked. “You’ve got to make the damn thing work.”