Beyond Bubble Economics/Responsive Regulation: Transcending the Deregulation Debate

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Responsive Regulation: Transcending the Deregulation Debate

Ian Ayres and John Braithwaite

Oxford University Press (1992)

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This book is about the need to transcend the intellectual stalemate between those who favor strong state regulation of business and those who advocate deregulation. It is a debate that has been rerun so many times that to open it up in an audience of regulatory policy makers today is to put them immediately to sleep. The practitioners yawn because they know that in reality regulation occurs in "many rooms". A free market can mean that private regulation by cartels will defeat competition; detailed state regulation can be a symbolic exercise that is readily side-stepped by minor realignment of the market.

Practical people who are concerned with outcomes seek to understand the intricacies of interplays between state regulation and private orderings. The empirical foundation for their analysis of what is good regulatory policy is acceptance of the inevitability of some sort of symbiosis between state regulation and self-regulation. This is true of the most basic commercial legal forms:

The drafting of the Uniform Commercial Code was a self-conscious attempt (by Karl Llewellyn) to synthesize formal law and commercial usage: the formal law would incorporate the best commercial practice and would in turn serve as a model for the refinement and development of that practice. The Code's broadly drafted rules would be accessible to businessmen and would provide a framework for self-regulation which would in turn furnish attentive courts with content for the Code's categories. Thus the Code would serve as a vehicle for business communities to evolve law for themselves in dialogue with the courts, operating not as interpreters of imposed law but as articulators and critics of business usage.

Good policy analysis is not about choosing between the free market and government regulation. Nor is it simply deciding what the law should proscribe. If we accept that sound policy analysis is about understanding private regulation - by industry associations, by firms, by peers, and by individual consciences - and how it is interdependent with state regulation, then interesting possibilities open up to steer the mix of private and public regulation. It is this mix, this interplay, that works to assist or impede solution of the policy problem. Participants on both sides frame the deregulation debate as a kind of "Live Free or Die" policy choice. Even lovers of liberty might reasonably ask whether third alternatives do not exist. This book is about proposing such alternatives. We argue that by working more creatively with the interplay between private and public regulation, government and citizens can design better policy solutions.

In this chapter we have three objectives. In the first section, we sketch the notion of responsive regulation. We introduce the specific policy proposals of the following chapters and connect these policies to the thrust of our metaregulatory theory. The second section argues for the book's contemporary relevance. Far from the perception that we live in an era of vast deregulation, we argue that administrative and regulatory practice is in a state of flux in which responsive regulatory innovations are politically feasible. Finally, in the third section, we place our theories of responsive regulation within a republican tradition that is distinct from political theories of (neo-) corporatism, liberalism, or pluralism.

The Idea of Responsive Regulation

Responsive regulation is distinguished (from other strategies of market governance) both in what triggers a regulatory response and what the regulatory response will be. We suggest that regulation be responsive to industry structure in that different structures will be conducive to different degrees and forms of regulation. Government should also be attuned to the differing motivations of regulated actors. Efficacious regulation should speak to the diverse objectives of regulated firms, industry associations, and individuals within them. Regulations themselves can affect structure (e.g., the number of forms in the industry) and can affect motivations of the regulated.

We also conceive that regulation should respond to industry conduct, to how effectively industry is making private regulation work. The very behavior of an industry or the firms therein should channel the regulatory strategy to greater or lesser degrees of government intervention.

Most distinctively, responsiveness implies not only a new view of what triggers regulatory intervention, but leads us to innovative notions of what the response should be. Public regulation can promote private market governance through enlightened delegations of regulatory functions. In the next three chapters, we argue in a broad variety of contexts that public policy can effectively delegate government regulation of the marketplace to public interest groups (Chapter 3), to unregulated competitors of the regulated firms (Chapter 5), and even to the regulated firms themselves (Chapter 4).

Such delegation should be neither wholesale nor unconditional. Moreover, one of the things that can be delegated is the monitoring of other delegations. Central to our notion of responsiveness is the idea that escalating forms of government intervention will reinforce and help constitute less intrusive and delegated forms of market regulation. In Chapter 2 we introduce the concept of an enforcement pyramid that we argue can be implemented in multiple ways to the same effect. By credibly asserting a willingness to regulate more intrusively, responsive regulation can channel marketplace transactions to less intrusive and less centralized forms of government intervention. Escalating forms of responsive regulation can thereby retain many of the benefits of laissez-faire governance without abdicating government's responsibility to correct market failure.

Responsive regulation is not a clearly defined program or a set of prescriptions concerning the best way to regulate. On the contrary, the best strategy is shown to depend on context, regulatory culture, and history. Responsiveness is rather an attitude that enables the blossoming of a wide variety of regulatory approaches, only some of which are canvased here. Although our ideas for responsive regulation bear many of the marks of Nonet and Selznick's (1978) "responsive law" concept - flexibility, a purposive focus on competence, participatory citizenship, negotiation - we are skeptical about repressive, autonomous, and responsive law being evolutionary stages in legal development. Indeed Nonet and Selznick themselves are careful to limit their claims that responsive law is a developmental response to the stresses inherent in the functioning of autonomous law. Our attempt to sensitize readers to innovative regulatory possibilities thrown up by thinking responsively is devoid of any grand theoretical aspirations.

The attitude of responsiveness is very similar to the attitude of interactiveness that Sigler and Murphy advocate in Interactive Corporate Compliance, although there are important difference in the models we develop from those of Sigler and Murphy. Responsiveness, like interactiveness, is not one of those notions such that if two people know what responsiveness is, they will come up with the same solution for the responsive regulator to implement in a particular situation. An attitude of responsiveness does generate different policy ideas that do transcend the divide between regulatory and deregulatory solutions. But for the responsive regulator, there are no optimal or best regulatory solutions, just solutions that respond better than others to the plural configurations of support and opposition that exist at a particular moment in history.

With this as an introduction, let us review more specifically the key policy ideas of this book. Chapters 2 to 4 develop four separate and rather different ideas for making regulation responsive. They are designed as self-contained chapters so readers can approach the book by dipping into just one of them. However, the reader who takes in the whole book will find that some of the problems left unsolved by the idea in one chapter will be addressed by the idea in another. Although some reference is made to these connections within each chapter, they are more fully drawn together in Chapter 6. Each chapter represents a different exemplification of how to think responsively. None represents an idea that is conceived as universally applicable; responsiveness, after all, implies that there are no universal solutions.

Chapter 2 seeks to solve the policy problem that regulatory styles which are cooperative on the one hand or punitive on the other "may operate at cross-purposes because the strategies fit uneasily with each other as a result of conflicting imperatives." It is contended that both an economic analysis converge on the need to avoid policies of consistent reliance on either punishment or persuasion as the means of securing regulatory objectives. From both analytical viewpoints, tit-for-tat is the strategy of mixing punishment and persuasion that is most likely to be effective. Tit-for-tat is a regulatory strategy that is provokable but forgiving.

Furthermore, it is contended that the achievement of regulatory objectives is more likely when agencies display both a hierarchy of sanctions and a hierarchy of regulatory strategies of varying degrees of interventionism. The regulatory design requirement we describe is for agencies to display two enforcement pyramids with a range of interventions of every-increasing intrusiveness (matched by ever-decreasing frequency of use). Regulators will do best by indicating a willingness to escalate intervention up those pyramids or to deregulate down the pyramids in response to the industry's performance in securing regulatory objectives.

Finally, it is argued that the greater the heights of tough enforcement to which the agency can escalate (at the apex of its enforcement pyramid), the more effective the agency will be at securing compliance and the less likely that it will have to resort to tough enforcement. Regulatory agencies will be able to speak more softly when they are perceived as carrying big sticks.

Chapter 3 addresses the problem that policies that secure the advantages of an evolution of cooperation between regulatory agencies and industry are policies that also run the risk of an evolution of capture and corruption. Tripartism - empowering citizen associations - is advanced as a way of solving this dilemma. We develop a game-theoretic model of regulatory capture in which firms lobby to win the hearts and minds of agencies. We distinguish between three different forms of capture that have sharply different welfare consequences. In some circumstances, tripartism can foster a form of welfare-enhancing capture without forfeiting the agency's role in protecting the public interest. Again, there is convergence between an economic analysis of capture and a social analysis concerned with citizen empowerment. A case is made that a republican regulatory tripartism may facilitate the attainment of regulatory goals, prevent corruption, prevent harmful capture, encourage certain forms of capture that we find to be beneficial, and nurture democracy.

Chapter 4 illustrates one of the creative options available to escalate the interventionism of regulatory strategy to a middle path between self-regulation and command and control government regulation. This option is enforced self-regulation. It means that firms are required to write their own set of corporate rules, which are then publicly ratified. And when there is a failure of private enforcement of these privately written (and publicly ratified) rules, the rules are then publicly enforced.

The thesis of Chapter 5 is that in some regulatory settings, regulating only an individual firm (or a subset of the firms) in an industry can promote efficiency by avoiding the costs associated with industry-wide intervention or laissez-faire. The existence of a single (or a few) competitive firm can have a dramatic effect on the competitive conduct and performance of an entire industry. Indeed, the willingness of concentrated private consumers to subsidize second sources of competition among their suppliers provides strong empirical support for government intervention on behalf of more diffuse consumers.

Far from denying the powerful effect of competition, partial-industry regulation uses the spur of competition to affect the unregulated portion of the market. But unlike across-the-board industry regulation, if government decisions go awry, the mistakes do not need to affect adversely the unregulated firms. Instead of completely displacing the market, partial-industry regulation creates a system of "checks and balances" between the two regulatory extremes. The regulated portion of the industry mitigates the prospect of private collusion. And the unregulated portion of the industry mitigates the risk that captured or benighted regulation will harm the public.

In advancing these ideas we rely heavily on illustrative material from the United States, Australia, and to a lesser extent Britain. Yet, we advance them as ideas that might b given life in any country, although of course, the institutional embodiment of the ideas would be radically different in other cultures. Indeed, one of our fondest hopes for this book is that some might read it in the Soviet Union and Eastern Europe. As these nations address their problems of paralyzing overregulation, it seems to us they do not fall prey to a jingoistic libertarianism that seeks to sweep away all regulation as automatically bad. Although Eastern Europe and the Soviet Republics need a large dose of deregulation, they also need to create new regulatory orders almost from the ground up if their new market economies are to work and survive - securities regulation, antitrust, environmental, and consumer protection enforcement. It seems to us an important task to persuade the newly emerging consumer and environmental movements of Eastern Europe to press for responsive processes of deregulation and regulation.

In the next section, we argue that in today's environment of regulatory flux responsive regulatory strategies are politically feasible. We show that a number of the responsive strategies that we propose have already been put in place in a variety of contexts. To that extent we provide the beginnings of a theoretical justification for these nascent applications of responsive regulation and normatively argue for their proliferation.

http://islandia.law.yale.edu/ayres/respons.htm

MARCH 18, 2014

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Countercyclical Systems, Conservation, and Cooperation

Beyond Bubble Economics

by JOHN K. WHITE

Many argue that our increasingly globalized economy cannot keep up with the speed at which financial systems are changing – because of differing national laws, unregulated financial practices, or the still-preval‎ent unequal living and labor standards throughout the world – which simply postpones asking the hard questions about whether greed and the demand for more should be at the root of economic practice. And whether it’s time to put Bubble Economics into the trash can of history.

As Ben Selwyn noted in Development By the Elites, For the Elites(March 7), “total global wealth was $241 trillion in 2013 and is expected to rise to $334 trillion by 2018. Yet the majority of people live in poverty.” That’s an almost 40 percent increase in 5 years, for a system still reeling from crisis, austerity, and unemployment. Not very human, enlightened, or even practical. While Paul Krugman noted with equal outrage in the New York Times (“Liberty, equality, efficiency,” March 9) that “Almost 40 percent of American children live in poverty or near poverty.” That’s forty as in four zero.

But why do we want a system so detached from what makes us human? In The Post-American World, Fareed Zakaria wrote that “no system – capitalism, socialism, whatever – can work without a sense of ethics and values at its core.” He also likened the world economy to a race car, faster and more complex than ever – alas, one that still regularly crashes. Do we really need to live at breakneck speed with ever-increasing financial growth? Excessive speed is not good for cars, nor is excessive growth good for economies. If an economy continues growing, it must by definition reach an end – like a balloon stretched beyond limits.

Nouriel Roubini – the so-called Dr. Doom, who prefers Dr. Realist – said it best when he stated that we need to take away the punch bowl once a party gets going, a countercyclical or negative feedback system. Not to dampen the fun, but in fact to keep the system going. But no one does – ever – not the Federal Reserve, not the American government, not corporations that seek growth at all costs. In fact, they relentlessly encourage more. About the Fed at the start of the last crisis, Roubini noted that they were “adding vodka and whiskey and even more toxic stuff to the punch bowl and making everyone drunk with irrational exuberance.” No wonder, the system didn’t stand a chance.

In times of prosperity, the economy is expanded, fueled in part by easy credit and increased debt, what is least needed, whereas in more frugal times, spending is decreased, again the opposite of what is needed. It is one thing to stimulate an economy in bad times as intended by Keynesian monetarist policies, but quite another to do so in good. We may see temporary gain, but it never lasts. Indeed, by the end of one crisis, the next is already beginning.

Alas, the seeds are being sown again, where governments ramp up the rhetoric on the latest economic miracles, stoking the fires once more. Former U.S. Secretary of Labor Robert Reich calls it Supercapitalism, where shareholders’ rights are more important than civic rights, the basic everyday ones on which our modern enlightened society was founded. We are again becoming slaves to the almighty stock ticker.

To be sure, the American Dream is over, as personified not by the likes of Andrew Carnegie, Bill Gates, or Mark Zuckerberg, but by a vast unnamed citizenry. We simply cannot all be rich, and it is time to recognize that cooperative strategies and not growth-based competition are needed. Our futures depend on it.

There is, of course, much to do. Anatole Kaletsky believes “we are where astronomy was when Copernicus realized that the earth revolves around the sun” – pretty depressing given how wrong and complicated the geocentric system was. With the likes of CDSs, which Soros called a “toxic market” and Warren Buffet “weapons of mass destruction,” we really are in the economic Dark Ages. Or the Wild West, not the lawless frontier aberration of overly romanticized westerns, but the apparent norm of might is right and money makes the rules.

Kaletsky noted in The Times (Sep 15, 2010) that things are not improving, sadly still true today:

Not only have the banks escaped any wide-ranging regulation, but politics, at least in Britain and America, has reverted to the language of the Thatcher-Reagan period. Genuine jobs can only be created by the private sector. There must be minimal interference with market forces, whether in managing trade and exchange rates, subsidising science or culture or in shifting incentives to encourage a transition from fossil fuels.

In Prosperity Without Growth: Economics for a Finite Planet, Tim Jackson asked “whether economic growth is still a legitimate goal for rich countries, when huge disparities in income and well-being persist across the globe and when the global economy is constrained by finite ecological limits,” further noting that “progress towards sustainability remains painfully slow.” He was updating E. F. Shumacher, whose groundbreaking 1971 book Small Is Beautiful: A Study of Economics as if People Mattered helped wake up our wasteful world.

Schumacher warned that we were using up fossil fuels (what he called “natural capital”) at an alarming rate. Natural capital is not limitless, doled out forever like collecting $200 every time one passes “Go” in Monopoly. Fossil fuels cannot be replenished, and, thus, the question is not will we run out of resources – which of course we will – but whenand what damage will be done in the process?

Reduce, reuse, recycle are the three Rs that matter most for all our futures – to take away the drugs that feed our relentless appetites for more. To help understand that how we do something is as important aswhat we do. For example, to cycle or to take public transport to work, to engage not perpetually subjugate my world with my needs.

Of course, the challenges are great and more pressing as we reach the limits to our previously thought inexhaustible resources. One hopes we have not reached the limits to our imagination or inventiveness.

So what to do? In The Evolution of Cooperation, Robert Axelrod noted that “mutual cooperation can emerge in a world of egoists without central control by starting with a cluster of individuals who rely on reciprocity.” Yes, think globally, but act locally. Axelrod showed also that religious prescriptions work, such as “do unto others as you would have them do unto you.” Forgiveness helps to deescalate conflict, and cooperation turns one-off, zero-sum interactions – where people care little about meeting each other again – into ongoing, non-zero-sum interactions, which serve to stabilize mutually beneficial futures – in short, good community relations. As Axelrod wrote, “This continuing interaction is what makes it possible for cooperation based on reciprocity to be stable.”

Trust and reciprocity are at the core of the microfinancing projects such as Graneem Bank, started amid the poverty of Bangladesh in response to uncaring banks whose excessive usury gives little thought to community. Faceless interactions create faceless communities, but as Axelrod noted, “Frequent interactions help promote stable cooperation.” In reality, without people there can be no profits, a simple maxim forgotten by today’s profit-first megabanks.

We must also say no to the seductive power of “More.” No to viral wants, mass consumerism, the obsessive attempts by finance-oriented governments and faceless corporations who think only in terms of numbers. I am not a number. But I am not an island either.

Will the coming revolution remove the individual from the center and recognize our collective interests? The former Federal Reserve chairman Alan Greenspan once stated that future crises will always happen unless we change human nature, but given that we have been taught and in fact legislated how to behave since the beginning of civic society, blaming human nature seems an unfair cop-out. What we need are real representatives, useful regulation, and a proper accounting of misdeeds for those who misbehave with impunity.

It is time to put people back into economics, and back into our world.

JOHN K. WHITE, an adjunct lecturer in the School of Physics, University College Dublin, and author of Do The Math!: On Growth, Greed, and Strategic Thinking (Sage, 2013). Do The Math! is also available in a Kindle edition. He can be reached at: john.white@ucd.ie.

http://www.counterpunch.org/2014/03/18/beyond-bubble-economics/

THE TEN THINGS YOU (REALLY) NEED TO KNOW ABOUT (SMART) REGULATION

April 7, 2013

In a recent post I referred to Valerie Braithwaite’s paper Ten things you need to know about regulation. Many of you commented that her paper did not deal with a number of regulatory issues, such as how to constitute a regulatory body, and that it does not address the basic nature of regulation. I imagine that she did not set out to cover the whole spectrum of regulation in just the one paper, and it is also worth noting that the paper was written a number of years ago. But it did get me thinking about what I would have on my own list of principles for smart regulation.

Better Regulation (BR) and Smart Regulation (SR) are part of a wider movement for more efficient government, looking at improving the quality of public services and reducing the “footprint” of government. So what makes regulation “better”, or better yet, “smart”?

Here, then, is my version of the 10 things you (really) need to know about (smart) regulation:

1. Smart regulation first looks at whether there is a truly pressing need for government action.Only intervene where there is a clear case for protection, and aim to leave as light a footprint as possible. What is the problem we need to solve? How big is the problem and how severe are its consequences? What are the broad impacts of the problem and who is affected? What will happen if we do nothing? Are we looking at root causes or symptoms? What do we need to do to really understand the context?
2. Smart regulation assesses the potential impact first through a Regulatory Impact Assessment (RIA).  Is the level and detail of the assessment of costs and benefits proportionate to the size of the problem and the potential impacts of options? Have we identified all groups affected by proposed options? Have we identified all the financial, economic, social and environmental impacts? Have we considered distributional impacts, cumulative regulatory burden, and risk and uncertainty? Have we identified and justified any competition restrictions resulting from options? Have we assessed compliance costs to business? What is the recommended option that will meet our objectives and achieve the greatest net benefit or least cost to the community?
3. Smart regulation is inclusive and consultative. Smart regulators consult their communities throughout the various stages of the regulatory development process, to properly identify (perceived) problems and determine viable regulatory or non-regulatory options to deal with it. Consultation can help us fully understand all the risks and impacts of regulatory proposals and help identify any unintended consequences of those proposals. Consultation does not always lead to consensus, as we often need to balance competing considerations, but that does not make consultation any less valuable.
4. Smart regulation focuses on constantly reducing the compliance burden. 
   1. Make it easy to comply. In every regulatory activity find a way of reducing the administrative and substantive compliance burden, and concomitant compliance costs. Provide authoritative, accessible advice.
   2. Reduce the number of regulations: Introduce a “one in, two out” rule – for every new regulation, aim to remove or modify two other obsolete ones. Introduce a time-limited freeze on new regulations (for instance to protect small business).
   3. Consider alternatives to regulation: Co-regulation? Self-regulation? Quasi-regulation? Performance-based regulation? Education? Better enforcement?
5. Smart regulation is reviewed and revisited from time to time:  Many regulations are unnecessary, overcomplicated or outdated – they waste time and money, and damage economic growth.
   1. Build review clauses or sunset clauses into regulations. A longer review period may be warranted for example, where the impact of the regulation is minor and the policy is well settled or where an extended period of certainty is required. Reviews may be useful after shorter periods where a regulatory scheme is contentious, has a potentially significant impact or cost, or where there is considerable uncertainty about how it will operate in practice. Reviews should consider whether the policy objectives of the regulatory scheme remain valid, whether the terms of the regulatory scheme remain the most efficient way to achieve those objectives with the least impact, and whether the regulatory scheme is being implemented and enforced in the most efficient manner with the least administrative burden and cost impacts necessary.
   2. Introduce a systemic “Red Tape Challenge” – ask businesses and the public to tell us which regulations should be improved or abolished, and assume that regulation should go, unless there is a strong justification for it to stay. Where regulation stays, find ways to reduce its burden.
6. Smart regulation leverages the role of enforcement.  Ensure that enforcement places the minimum necessary burden on those we regulate. Reduce the number of inspections where the risk is low. Apply tougher, more consistent and meaningful sanctions to businesses who consistently break the rules. And above all else – if it will be difficult to enforce, acknowledge that perhaps regulation is not the answer.
7. Smart regulators look at the bigger picture. To what extent is regulatory reform encouraged and co-ordinated at all levels of government? Does the new proposal make other regulatory requirements obsolete? Does the new proposal fit with existing regulatory requirements of other regulators? Can our objectives be achieved by ‘piggy-backing’ on an existing regulatory instrument? Could we consolidate the requirements in a number of instruments – even from other regulators – into a single regulation? Can reporting requirements imposed under existing approvals, licences or regulatory instruments be simplified or repealed? Is existing regulation still valid? Eliminate duplicate requirements – Although it’s not required to consult with other levels of government or other jurisdictions, it is a growing area of focus for the provincial government – requirements, forms and paperwork can appear to be duplicated or create excessive requirements when you consider the cumulative effect.
8. Smart regulators have a clear implementation strategy before they start. Do we have an implementation strategy that clearly sets out how the proposal would be implemented and enforced? If not, develop one.
9. Smart regulators measure and track compliance burdens and regulatory reforms.  Introduce a cost of compliance index, compliance burden index or better regulation index, to track progress.
10. Smart regulators apply the 5 principles of good regulation:
    1. Proportionality;
    2. Accountability;
    3. Consistency;
    4. Transparency;
    5. Targeted to where the risk lies.

(but add you own principles if you need to – maybe certainty? Flexibility? Durability? Supportive of growth?)

Want to read more? Here are some links I found useful:

• EU: Better regulation – Simply explained 
• EU – Smart regulation programme
• UK Government: Reducing the impact of regulation on business
• UK Hampton Review 
• Australia: Guide to better regulation
• Canada: Better regulation initiative 
• New Zealand: Government statement on regulation 
• New Zealand: Best practice regulation model 
• OECD EU15 project on effective regulatory management 
• OECD Recommendation of the Council on Regulatory Policy and Governance 
• OECD Guiding principles for regulatory quality 
• OECD APEC Integrated checklist of regulatory reform 
• OECD National strategies for administrative simplification
• Accaglobal – Imaginative regulation
• US EC High-Level Regulatory Cooperation Forum Common Understanding on Regulatory Principles and Best Practices 

Now THAT is smart regulation!

(To see how this relates to a broader compliance strategy, have a look at Compliance Strategy For Regulators – the book is now available on Kindle, in the iPad iBooks store, and also as a print publication through Amazon).

http://complianceforregulators.com/2013/04/07/the-ten-secret-principles-of-smart-regulation-you-can-use-today/