Many of the agendas associated with economic reform have been big successes. Deregulation of things that shouldn’t have been regulated, like trade, shopping hours, airlines, you name it has worked well. Financial regulation . . . ehem not so well. Indeed, in terms of the wellbeing of your average Joe, it wouldn’t be that surprising if the depredations of finance had managed not just to offset but to outweigh the benefits of all the other reform put together, at least for a lot of those on and below average earnings and at least in the US.
There’s been one area of reform that hasn’t so much been a failure as more or less a non-starter. Regulation reform. One reason is that it gets down to minutiae. I recall the BCA put out a document on which states were doing better and which worse on regulation in the term of the last Parliament. It was a ‘scorecard’. Who wouldn’t like a scorecard? But they really had no idea. How do you decide the quality of one state’s 30,000 pages of regulation compared to anothers’? Well you don’t really, but you wave your arms around a lot and . . . well you issue your scorecard.
On searching for it here’s (pdf) it is in all it’s glory. A scorecard from a few years ago. How did they score the scorecard? Well against benchmarks silly! Benchmarks – why didn’t you think of that?
Principles of regulation making:
a comprehensive framework for regulation
making that includes: the need to consider
alternatives to regulation; clear policy objectives;
cost–bene? t analysis; consultation with business;
effective and proportional responses; and review.
+ Accountability: mechanisms to ensure that the
principles of regulation making are implemented
properly and that regulators are held to account
for their performance.
+ Transparency: mechanisms to ensure that
decisions are conducted in a transparent manner
and those potentially affected can provide input
into the process.
+ Review: mechanisms so that regulations are
subject to review to ensure they remain relevant
and ef?cient over time.By evaluating the performance of states to date
against these four clear benchmarks, the BCA
can highlight to business, government and other
interested parties where jurisdictions are doing
well or why they are falling short in ensuring
commitments to reform red tape making are
undertaken and the burden of red tape is reduced.
Does that help? Do you really think these principles will enable you to be confident that you can rank different performances, and tradeoff a good performance in one area against a lacklustre one elsewhere? How does one hold to account the regulators at ASIC, or the RBA or anywhere else when you can’t even be confident you know what’s causing what or whether some other human(s) in their position would have done a better or worse job?
There’s a more recent scorecard here (pdf). In that scorecard the Commonwealth is said to have gone backwards. On a quick reading that’s because the Office of Best Practice Regulation is less independent than it was under the PC. In a formal sense that’s true. But in fact the OBPR, at least under Lindsay Tanner was instructed to make public any non-compliance with regulation making guidelines at the time of regulation making, a much stronger sanction than the sanction which was to publish it in the Annual Report. So there’s form and there’s substance. Also it’s hard to know if the distance from day to day government one gets from independence is worth it, or whether having someone closer to the action in a central agency is better. No-one really knows, though I do think it’s a pity that the PC didn’t make more of the OBPR’s independence when it had it.
Why am I writing all this? Well as notes for the record in case I want to come back to them, and because I was reminded of it by this paper
The Use of International Standards in Technical Regulation by Barbara Fliess, Frédéric Gonzales, Jeonghoi Kim and Raymond Schonfeld
To what extent are governments drawing on relevant international standards in their technical regulations, as mandated by the WTO TBT Agreement? A number of sources of data exist, including electronic databases maintained by governments, but they cannot be used to obtain systematic, international perspective, because there is no harmonised international format and they are incomplete. This study develops an analytical frame for collecting and presenting data on the use of standards in regulation in any sector, as a basis for effective monitoring of the actual extent of use of international standards in regulation and for empirical analysis of the trade effects. This template is then applied to collect and report for five OECD countries detailed factual information on technical regulations, their objectives and standards use in three sectors – electrical household appliances, equipment for natural gas and telephony. The research finds that core government policies confirm the receptiveness of policy and regulation to the use of international standards. It illustrates the difficulty of identifying, for a given sector, which standards are used, for which regulatory objectives, and with which links – direct or indirect – to standards used internationally. The data collected in the harmonised format of the template show how transparency of data on standards use could be improved. Improved transparency can facilitate efforts to improve harmonisation where this can help to remove barriers to trade. Explicit identification of regulatory objectives can ensure that attempts to promote wider harmonisation take account of those objectives. Also, the range of non-national standards actually used as a basis for technical regulation is greater than sometimes acknowledged, and wider knowledge of their availability and use could be helpful to regulators. Another benefit of transparency is that factual presentations of the use of standards in technical regulations provide a source of rich and accurate data for use in empirical work on how regulatory use of standards influences international trade.
In other words, these authors had the same trouble the BCA had. One can’t get to the bottom of these things in the kind of way that gets you a coherent paper either in academia or in industry advocacy without making all sorts of simplifying assumptions. And that suggests that top down driven processes can’t generate better regulation, because ‘the top’ gets lost in the detail. That’s one reason why I’ve argued that one needs to try to think about the regulatory system in the way that Toyota thinks about making cars, by trying to build a system which motivates and empowers those on the ground to do a good job. Alas, that’s easier said than done!
Postscript: I just came upon this diagram ranking the flexibility of all product market regulation across all OECD countries – a time series no less!! And quoted in all seriousness by the New Zealand Treasury. I wonder whether the assumptions necessary to generate the series leave anything useful in their wake.
Hi Nicholas,
Your comments about Toyota caught my eye, but I don’t think the comparison can hold up. Toyota is trying to maximise quality and repeatability in a tightly-controlled environment within a very limited set of parameters.
By comparison, regulators have to try and optimise outcomes across wildly varying sets of inputs and desired outputs in an often diverse environment. A really good regulator will try and maximise the utility of the inevitable tradeoffs.
So there’s no possibility of the “one right way” being identified — a key component of the Toyota approach (albeit one where improvements on the current best practice are always being sought). The best we can hope for is a judicial-style regulatory system where discretion can be employed in individual scenarios alongside a “common law” set of precedents.
The big problem is that politically it is far easier and more rewarding to create extra regulations than to accept risk of occasional undesirable outcomes (which is essentially what happens when you choose not to regulate). The regulator ends up with such a battery of possible “sticks” that consistency in their use becomes difficult, with a corresponding loss of direction in policy objectives.
Thanks for your comment Stephen,
As with all analogies, my Toyota one is inadequate. Then again if it wasn’t inadequate it would be useless because the point of an analogy is to point out similarities, not identicalities if you get my meaning.
I don’t know about ‘one true way’. Is there one true way to fix some inefficiency that someone has noticed on the line? They’re always experimenting to find better ways in Toyota, always encouraging the underlings, whether they’re employers or suppliers to come up with improvements to the way they do things. An important difference between Toyota and regulators, and one which also limits the scope of my analogy is that Toyota does a great deal of its optimisation with data and this will be hard with regulation (though regulators should take much more interest in measuring what they do).
But I’m really speaking to something simpler than this. I’m not suggesting taking up the Toyota production model holus bolus. I’m using it as an analogy, not a blueprint. Take this example. When we regulated that people had to provide their banks with their TFN it was a sensible bit of regulation but badly implemented. It’s now quite a barrier to competition as you run around proving your ID whenever you change banks, making appointments and all the rest. Yet it’s pretty obvious that if you’ve done it once that’s enough. So banks sd simply send on your ID documentation when you switch banks.
But the system hasn’t developed this in twenty years! It’s the kind of thing a Toyota system would have done, the kind of thing any high morale system which empowered people who came up with better ways to do things, whether or not there was ‘one true way’ of doing it.
You cannot regulate anything without defining the purpose of your regulations. In all the current bank regulatory body that has emanated from the Basel Committee there is not a single word about what the purpose of the banks should be… which leaves us to conclude that all regulators want to achieve with banks is that they do not fail… as if that is a worthwhile purpose… as if a world without bank failures would not be a very scary thing.
This post, as almost all other similar, makes the mistake of speaking about de-regulation in conjunction with banks though in fact, by imposing capital requirements for banks based on perceived risks, it can be shown that never ever before did the regulators so intrusively try to micromanage the banks… in fact the regulators took over the role of risk-managers relinquishing their role as skeptics that do not believe that risks can be managed and therefore go for stubbornly prudential rules.
Currently the regulators, who failed as risk-managers handling some simple risks of defaults … are set to tackle even much more God-like events like pro-cyclicality. God help us! http://bit.ly/c66DLp
It’s true that reducing paperwork, or more broadly compliance costs, is something that bureaucracies, public and private, never place enough weight on. As usual it’s the incentives that explain behaviour – the bureaucrats get all the benefits but others bear the costs.
But it’s also true that seriously reducing such things is often a lot harder than it looks, both practically and politically. Bank TFNs are a good example. Short of an Australia Card, this transferability would be quite hard to do securely. And an Australia Card is both expensive and – rightly – likely to be resisted by the populace (perhaps we can just microchip everyone instead? Or maybe tattoo their serial number on their wrist?).
I well remember sitting on a committee some years ago responsible for reducing the taxation paperwork for small businesses. We surveyed such businesses, and it soon become clear that the grumbling about the ATO’s paperwork was motivated rather less by the time taken to comply with it and rather more by the ghastly possibility that it might result in tax being paid :-) .
DD, on your last point, yes, but then business had a very valid concern with the BAS, in fact it still asks for too much info. There’s usually gold in the dross if you’re not cursing too hard about having to wade your way through. My experience is that Canberra is full of routines in which line agencies grizzle about central agencies and visa versa, and it really helps them not listen to each other. There’s too much consciousness raising and not enough getting on with it. The fact that people have different perspectives and are self interested should be taken as read, and not constantly remarked upon. Doing so tends to conceal just how self interested the speaker is.
Was at a meeting not so long ago where I was hearing what a self-interested pack of bastards a whole lot of interested parties were. Of course the people grizzling about it didn’t conceded that they were self-interested too. It’s when you can find some common ground that you’re actually starting to be useful (though I’m not suggesting that that means rolling over to tax avoidance fantasies of small business.)
Not much I’d disagree with in those comments, Nic, except maybe that “just getting on with it” is pretty hard if you don’t reach agreement on what “it” is. Certainly the way self-interest shapes perspective, often unwittingly and including their own, is something thoughtful policy people are familiar with and do take as read.
But it remains generally true that “cutting paperwork” is harder than it looks if you don’t want to sacrifice other important goals (such as an equitable and efficient tax system, or evidence-based policies). It’s the price of modernism (if you haven’t already read it, I’d strongly recommend Seeing Like A State – a very fine book).
Hi Nicholas,
Just a couple of points … I quite deliberately said the “one right way” rather than the “one true way” because the implications are quite different. “Right” just means the currently endorsed procedure — no need to work out whether it is the “true” solution or not. That’s why Toyota can always experiment to find a better approach.
Your TFN example is a really good one, and illustrates a particularly troublesome scenario. I can actually see why it hasn’t happened — even though the overall system would benefit from a coordinated approach, for each party the effort in participating is greater than not participating. It’s a particularly nasty variant of the prisoner’s dilemma.
Here’s why:
– If I go to a bank with my ID, it’s a relatively small impost on my and the bank’s time. Critically, this time can be determined with a small level of uncertainty once process optimisation is completed.
– If every bank sent on ID details reliably, this time to provide and process ID verification would be saved.
– But if even, say 10% of these ID tranferrence processes was slow or unreliable, then we might spend 10x or 20x the effort resolving the problems.
The combination of uncertainty and greater effort handling exceptions means there is little incentive to be the “first movers” in trying to implement a better system. So we just keep schlepping around our ID and nothing changes!
I don’t really follow your example. You impose the regulation on banks to do what is cost minimising – the way we do with getting them to deduct PAYE tax. If they screw it up, they are in breach and face a penalty. The error firms make in getting your PAYE tax payments wrong is way way below 10%, and if they make it, it’s at their own risk.
Then again perhaps I’m missing your point.
I was actually referring to the ID transfer process rather than the TFN deduction bit…
I see what you’re driving at in terms of penalty enforcement, but two-party transactions are much trickier to regulate than single party transactions.
With tax deducations (whether PAYE or non-supply of TFN), the bank is in control of the entire transaction chain. But with ID transfers:
– what if the source bank’s system is down?
– what if the source bank loses my records?
– what if the receiving bank’s system is down?
– what if my ID is no longer valid (eg name change, passport expiry)?
– if electronic transfer, what if data is corrupted along the way?
– if physical post, what if the mail gets lost?
Not to mention that you would have to get banks to agree to a common format for data exchange. In other words, multi-party regulation becomes too easy to blame-shift and therefore never gets enforced.
You think the government wouldn’t love to regulate the secure electronic exchange of health care data? But these kinds of systemic changes suffer from chronic bootstrapping issues — early adopters get zero or negative benefit from adopting the system, which means the incentive is always to delay getting on board indefinitely.
I still don’t follow this Stephen.
The bank is the least cost conveyor of the information and regulation could require it to provide that information. And each of the issues you raise can be dealt with on their merits.
Eg “What if the mail gets lost” – well it’s the same as firms paying tax for you – if things get lost, responsibilities that the regulation imputes come into play to fix the problem.
On standards – pdf is the operating standard for most of the documents I would imagine, but the regulation and the regulator can propose a default standard which the banks can deviate from by mutual consent.
But perhaps I’m not understanding your points.
Mmmm. In essence I’m arguing on the basis of empirical evidence (I have seen this kind of thing fail many times in the past) versus theory (because I agree that it should be a no-brainer to work).
But I suspect we could talk at each other all day on this one and not resolve it — seems like we have a classic case of mutual misunderstanding!
Buy you a cup of coffee next time we’re in the same area and we can thrash the issues out?
Hi Stephen,
My last comment was a bit slapdash. I knew I’d written a detailed response to your comments – but it was in a plane since I couldn’t post directly and I couldn’t find it. Now I have. It is as follows.
Sorry Stephen, but I just don’t understand what you’re getting at. Couldn’t one raise these objections to just about anything. There are practical answers to all of your questions. Still they seem so straightforward that I suspect I’m missing something.