Regulation review: The political economy of minutiae

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.

Index of product market regulatory – 1998-2007
Index of product market regulatory - 1998-2007.
Source: OECD regulatory database
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Stephen Bounds
Stephen Bounds
13 years ago

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.

Per Kurowski
13 years ago

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!

derrida derider
derrida derider
13 years ago

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 :-) .

derrida derider
derrida derider
13 years ago

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).

Stephen Bounds
Stephen Bounds
13 years ago

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!

Stephen Bounds
Stephen Bounds
13 years ago

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.

Stephen Bounds
Stephen Bounds
13 years ago

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?