The Ministry of Cutting Red Tape
Believe it or not, there is a precedent for successful regulatory reform.
Governments don’t create jobs. However, they can mold the conditions that the private sector faces, making it easier or more difficult for them to grow. This growth is what creates the demand for new talent. The easy solution is to think that we can just throw money at people and it will translate into sustainable, long-term jobs. Even if that were true, the cost of doing this is prohibitive. It can far outweigh the salaries paid.
Here, for example is CEPR talking about Buy American policy that directed government agencies to favor US suppliers in procurement of goods and services.
‘We show that, while current Buy American provisions on final goods purchase have created up to 100,000 jobs at a cost of between $111,500 and $137,700 per job, the recently announced tightening of the policy on the use of foreign inputs will create fewer jobs at a higher cost of $154,000 to $237,800 per job. We also find scant evidence of the use of Buy American rules as an effective industrial policy.’
Let’s not forget the myriad government boondoggles such as environmentally friendly subsidies. Remember Solyndra? The US government provided a loan guarantee to the manufacturer of thin film solar cells that resulted in a $528 million hickey for the American taxpayer when the company filed for Chapter 11 protection from its creditors a few years later.
So, if subsidies and manipulated spending don’t make sense, is deregulation something that might? Europe’s Mario Draghi seems to think so. He wrote as much in his recommendations on improving EU competitiveness released in September 2024, saying, ‘For priority sectors, the EU should aim as far as possible to be competitively neutral and regulation should be designed to facilitate market entry.’
More broadly, he wrote,
‘There are still other areas where the EU should do less, applying the subsidiarity principle more rigorously and showing more “self-restraint”. It will also be crucial to reduce the regulatory burden on companies. Regulation is seen by more than 60% of EU companies as an obstacle to investment, with 55% of SMEs flagging regulatory obstacles and the administrative burden as their greatest challenge.’
Subsidiarity means decentralizing government as much as possible so that policy lives next to the problem. The agency making the decision is at the lowest level of government that can have an impact. National defense is a federal issue; zoning regulations are local.
Centralization has the ugly tendency to dilute accountability, divorcing the policymaker from owning the consequences of his intervention. When even the EU starts to talk about subsidiarity, we know that conditions are difficult.
Simplifying Draghi’s message here, we can say that the EU needs to cut red tape while preserving regulations that are necessary and sensible.
Our writings to date at Closest Point of Approach have grappled with this distinction as part ofa broader question of definition. What is bureaucracy? We’ve talked about the differences between process engineering and bureaucracy, for example.
Happily, there is a blueprint for deregulation. The Mercatus Center at George Mason University has done a wonderful job in describing one successful case study. Here is the link to the short form summary.
Believe it or not this miracle took place in British Columbia, Canadia’s hippiest and most socialist-friendly province. Arguably, it had to happen there because conditions needed to worsen sufficiently to merit the Big Step Forward. If the people of British California, as they call themselves, can make it happen, there’s hope for us all.
‘Economic growth and employment in British Columbia lagged the rest of the country in the 1990s. As the activist government ran out of money to spend, it sought to regulate more and more sectors of the economy as an alternative means of achieving policy goals. For example, the government regulated the size of televisions in restaurants, the number of par-four holes in golf courses, and the maximum patron capacity of ski hill lounges.
‘These regulations and many others strangled the economy and led to the election of a reformist government. In 2001, the new government appointed a minister of deregulation, and over time, this minister’s goal became eliminating red tape and reforming regulations rather than simply deregulating.’
The BC reform was a success because it promoted regulatory optimization instead of de-regulation. De-regulation is politically fraught. Who wouldn’t want better regulation, though?
Take note. Once fiscal constraints started to bite in the sense that BC hit the ceiling of its tax room and debt servicing costs crowded out stimulative spending, the only tool left in the box for our BC social democrats, the New Democratic Party, was additional regulation.
If we say that the purpose of a modern Western economy is to enable people to come together in a marketplace of ideas, culture, skills, and art to exchange goods and services in a way that maximizes social value by giving individual persons the ability to act freely in seeking to maximize their personal welfare, constrained by a set of rules meant to level the playing field so that it is fair, then excessive regulations are those that distort the decisions people and organizations make in ways that detract from the social optimum.
To extend Draghi’s comments, excessive regulations are those that impede market entry, not facilitate market entry.
Mercatus talks about the distinction between “red tape” and “good regulation.”
‘“Red tape” refers to rules, policies, or government services that do little or nothing to serve the public interest while creating financial cost or frustration for producers and consumers.
Red tape, as the term is used in this paper, is intended to stand in contrast to government regulations, rules, and policies that support an efficient and effective marketplace and provide citizens and businesses with the protections they need. Unlike justified regulation, red tape does not deliver benefits that exceed its costs.
Red tape regulations may have been intentionally designed to burden some businesses over others, or may have been justified at one point but no longer serve their original purpose.
Determining whether a regulation is justified or red tape is difficult. Measuring the costs and benefits of regulation can be challenging, and making the proper distinction is important.’
Distinguishing red tape from good regulation is more difficult than it seems. Politically, there are a people who benefit from regulations just as there are those who pay a cost. It is not enough to identify those cases in which costs exceed benefits. We need to rip the bandage off in a way that embarrasses the seedy lobbying that takes place out of sight. Sunlight truly is the best disinfectant but only if we magnify it and direct it to its best use.
You know red tape when you see it.
The new Liberal government in 2001 actually appointed a minister who was in charge of removing red tape and of reforming regulations. They had a mandate for change. This was no 50/50 contest. The Liberals won 77 of 79 seats in the provincial Parliament in Victoria, with a whopping 57.6% of the popular vote (itself a remarkable achievement in Canada’s first-past-the-post, multi-party Parliamentary system). It’s difficult to overstate the significance of this cri-de-coeur from the electorate.
The government laid out a simple plan. They executed well. The whole document was a grand total of seven pages. It’s not like the multi-hundred pages of legislation we see in the US accompanied by comments from leading politicians saying that we need to pass the bill to see what’s in it.
The plan had several parts:
· Definition of a target: The target we often see bandied in the US is the number of regulations. BC chose to focus on the number of regulatory requirements. This is the true binding effect of the overall regime. One regulation might have one requirement or it might have one thousand. BC expanded to include legislation and policies, in addition to regulation. BC found 382,139 requirements across 2,200 regulations.
· Definition of an objective: BC sought to reduce regulatory requirements by one-third. It was measurable. They could see their progress.
· New requirements test: There was a meta-policy for new requirements. Before adopting new duties, the agency in question itself was required to prove necessity, outcome-orientation, transparency in development, cost-effectiveness, reliance on evidence, and positive impact on the economy and on small business, even as it accompanied the elimination of two or more existing requirements.
· Decentralized enforcement: Each agency had to track, report, and monitor its own progress. The decentralization ministry was a supporting resource.
· Bottoms-up: It solicited proposals from the private sector about which red tape to cut and which existing requirements to improve.
BC cut thirty-seven percent of its regulatory requirements using this approach.
One key thing to note here is that the regulatory tide awaits no man. This kind of reform is like trying to redirect a rushing river. Step number one: slow down the flow of water.
Key to the success of the BC initiative was the change in its culture. Culture, as Seth Rodin tells us, is when we can say, “People like us do things like this.” The culture before the reform was one of regulatory expansion. If you like one requirement, then fifty must be better. The culture after the reform was one of optimization. We need controlled burns otherwise the forest of bureaucracy becomes unhealthy and dysfunctional. The culture also changed from being insular (Father knows best) to interactive (Help me help you). Politically, it was sold as reform not deregulation for its own sake.
Nobody said this was going to be easy. But, at least, we can say it is feasible.