The regulatory process has been corrupted for decades
The Trump administration has faced many criticisms, but the polarized nature of the mainstream media means that some of the former US president’s more effective policies have not been given adequate coverage.
One of those has been his efforts to deregulate, and president-elect Joe Biden will do well to pick up the baton, for two reasons.
First, deregulation can boost the economy if the regulations being removed were either poorly conceived in the first place, or have become defunct with time. Global indicators such as the World Bank Ease of Doing Business Index try to capture how easy it is to conduct commerce, and they show that many countries -- including the US -- suffer from stifling levels of regulation that impede innovation, restrict job creation, and lower labour force participation, due to poor design or ineffective cost-benefit analysis at the time of implementation.
Second, relying on an authoritative central government to use legislation to regulate economic activity can undermine efforts by local actors to develop more effective solutions that are tailored to their circumstances, and that reflect the unique information that direct stakeholders possess.
Through a series of detailed ethnographic studies, economic Nobel laureate Elinor Ostrom showed that many “commons” problems, such as environmental protection and resource conservation, are handled remarkably well by those directly affected if they work together. If their efforts are nullified or made partially redundant by central government, then social cohesion and enterprise at the local level may retreat over time, in the same way that a child’s capacities will diminish if their parents do everything for them.
In the context of the US, in 2018, Trump gave an indication of how federal regulation has grown uncontrollably during the last 60 years, when he printed out the 1960 and 2018 versions of the Code of Federal Regulations (CFR), which is the document detailing the federal regulations that individuals and organizations must comply with in the US. The visual disparity was stark, and the numbers reflect it: In 1949, The CFR was 20,000 pages long; now, it is around 150,000.
The difficult task of complying with this monstrosity is rendered Herculean when one notes that one also has to adhere to state regulations, which are a separate, sizeable series of documents.
Pre-Trump, Ronald Reagan was the only president to feature deregulation so prominently in his manifesto, but even he couldn’t stop the growth of this legal hydra, merely slowing it down. Trump has had some significant success in that regard, helped by Executive Order 13771, which stipulated that for every new regulation, there had to be at least two new acts of deregulation.
It is tempting to think that regulations are the work of sage technocrats overseen by democratically-elected steward, and they should generally be a good thing. There are indeed many examples of intelligent and effective regulation in the domains of the environment, finance, labour, human rights, and so on. However, there are also many opposing examples, some of which have been exposed by the Covid-19 pandemic.
For example, the Food and Drug Administration (FDA), which is the federal agency overseeing the pharmaceutical sector, has actively stifled many innovative efforts that attempt to tackle the pandemic. This includes a testing project in Seattle that had received the backing of many local actors and had received funding from Bill Gates. Pooled testing, which has been used in many countries to more rapidly test large populations, was banned by the FDA up until the middle of June, long after much of the damage had already been done.
There are two broad solutions to the problem of regulations that are either poorly designed at inception, or become so over time. The first is the establishment and empowerment of an agency assigned the exclusive task of deregulating, which is the method used by Trump. The second is the addition of sunset clauses on new regulations, meaning that they automatically expire after a certain number of years, and legislatures have to vote again on them to ensure their continuation.
Unfortunately, politicians and civil servants across the world, including in the US, are often very resistant to such measures. The reasons lie in the economic analysis of government decision making, known as public choice theory.
First, regulations grant regulators power, and in general, human beings don’t like to surrender power. This need not represent Machiavellian tendencies -- bureaucracies like to expand their power as a way of guaranteeing funding and jobs, not because they want to oppress the general population. But as a general rule, nobody likes to have their authority stripped away, or, equivalently, people love to be granted authority, such as the US security apparatus in the wake of the 9/11 attacks.
Relatedly, public choice theorists have also developed the “toll-road” model of regulation, whereby a corrupt politician creates arbitrary regulations that stifle commercial activity, with the aim of using their right to grant exemptions as a way of securing explicit and tacit bribes. In this sense, those willing to pay the “toll” will be able to circumvent the regulation. While this kind of malevolent activity does not represent the typical regulation, a closer look at the exemptions that Congress grants to many regulations does raise suspicions of quid-pro-quo, and helps explain why deregulatory efforts would be perceived as attempts to upset the gravy train.
Second, the regulatory process is often perverted by small, organized groups that can lobby to advance their special interests at the expense of the general population. One of the reasons why American schools have been so slow to reopen during the pandemic, despite many other forms of economic activity having resumed, is the power of teachers’ unions, which hold heavy sway in the US political system. Whether in education, health, security, or finance, the US political system is littered with examples of corrupt regulation.
Third, many of the benefits of deregulation take time to materialize, and therefore receive little attention from politicians fixated on the election cycle. This is why Raegan had much more success in halting the growth of regulation during his first term compared to his second.
Biden is seeking to unify a polarized population. While deregulation goes against the DNA of many Democrat politicians, the reality is that the regulatory process has been corrupted for decades, and a centrist or centre-left agenda is entirely consistent with wanting to repair the errors of previous administrations. One way of reaching out to disgruntled Trump supporters, both at the grassroots and governmental levels, would be to acknowledge that Trump’s desire to deregulate was commendable.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain. This article previously appeared on Al Arabiya News and has been reprinted by special arrangement.