Here is a brief extract from the beginning of a staff discussion paper (pdf) on the regulation of the professions published by the National Competition Council in 2001. I think there’s something missing from it – do you agree and if so what do you think it is?
The challenge of reform, particularly in the context of National Competition Policy reviews of the governing legislation, is to:
- ensure that regulatory restrictions relate directly to the achievement of the public benefit objectives; and
- pursue the objectives of regulation at minimum cost to the public in terms of restrictions on competition or other matters.
Nick,
Maybe they should have included: “To ensure that the regulation has actually been achieving its objectives”. This is potentially somewhat different from the first dot point. Furthermore, the second dot point is only relevant if the regulations actually achieve their objectives!!!
Regards,
Damien.
Nick,
A further addition that should probably be added is something like: “To ensure that the benefits of the regulation outweigh its costs”.
Regards,
Damien.
In my recent AI paper I argued that four questions need to be asked before deciding on the merits of a regulation. They are
– how effective is it in acheiving its own policy goals?
– does the regulation have adverse by-product effects on economic efficiency?
– are there alternative, equally effective, ways of achieving the desired goals more efficiently (e.g. through the budget)?
– if alternatives are not available, what are the relative costs and benefits of lowering or removing the regulation?
What’s missing* is an explicit commitment to regulations which ensure that the public is as far as possible in a position to assess and make choices about the abilities, performance, reputation and ethics of members of all professions (and indeed tradespeople providing services). I guess that is conceptually a subset of economic efficiency, but I think it needs to be made explicit in its own right.
* I should qualify that I didn’t have time to read the paper, and I’m sure it had some things to say about ethics etc (it would be very surprising if it didn’t), but I’d be
I see a ‘grab all’ bit of gobbledeegook in the second objective designed to effectively nobble the the NCC’s ‘regulation of professions’ – the whole being worthy of a ‘Yes Minister’ plot.
To start with the objective states that restrictions on competition will continue but they will be pursued at minimum cost to the public.
Then there is the ‘other matters’ that the professions may be indulging in. Let’s be forensic and suggest that they may also be ‘restrictions’ of some sort which all the NCC are suggesting is that their costs be similarly ‘minimal’. So it is business as usual for the Council (and the professions) and the key word for any cynic like me is the ‘challenge’ that the Council suggest they face. Replace it with ‘problem’ and the whole goes into the ‘too hard’ basket.
What struck me was the imbalance between costs and benefits. Both points were expressed as constraints on regulation – the regulation must “relate directly to the achievement of the public benefit objectives” and it must involve minimum restrictions and minimum cost.
Yet there are two sides to the ledger – the benefits of the regulation and its costs. We should certainly minimise its costs, but shouldn’t we maximise its benefits?
This might seem like a semantic point. Perhaps it is. But the economists policing regulation have not shown themselves very keen on optimising regulatory design other than by maximising its flexibility and minimising its costs.
Now there’s nothing wrong with doing those things, but they’re not the whole story – by any means. I’ve argued for instance that when it comes to regulating for an informed marketplace there are lots of active and not particularly heavy handed things we can do to impprove information flows, but they don’t jump to the top of mind when one is simply trying to constrain the cost of any regulation you look at.
More generally – again using information as an example – Hayek and more recently a bunch of economists in the ‘modernist’ tradition (in which I’d include Arrow and Stigliz) have done work pointing to the importance of information in markets and highlighting various market failures. So have their followers. Hayek used his analysis to argue against ‘statism’ whilst Arrow and Stiglitz argued that an attention to information and information asymmetries showed how existing policies like investment and consumer disclosure regulation, professional regulation and various aspects of the insurance markets (no claim bonuses and excesses for instance) could ‘make sense’ in theory.
Yet none of this has led to much thinking about how to optimise regulation which involves not just the minimisation of costs but the maximisation of benefits.
Isn’t the objective to maximise benefits minus costs? This requires neither maximising benefits nor minimising costs. Fred’s fourth point got it dead right it seems to me. Look at the effect of a marginal reduction (or increase) in both benefits and costs, specifically the difference.
Yes Chris I agree – was trying to keep the expression simple.