At the same time, funding for the statistical agencies should be preserved and enhanced to take advantage of the increasing productivity of investments in data. More sharing and disclosure of information with stakeholders and the public—more transparency—is needed.
Regulatory policy making should involve other parts and levels of government and the public, not just the federal executive agencies. Increased stakeholder participation will shed light on and help avoid inefficient regulations that benefit special interests over the public interest.
These recommendations continue the spirit of our recommendations. Unlike our recommendations in , however, we now put less emphasis on Congress doing the heavy lifting.
We also conclude that no matter who is in charge of developing and maintaining regulations, the regulations will be more supportive of the economy and the public interest—as well as more sustainable over time—if based on broadly defined, commonly agreed-upon economic principles rather than narrowly defined technical rules.
If we are to improve the regulatory policymaking process and the ultimate quality and effectiveness of the regulations themselves, we will need to determine which entities are best able to consider, construct, administer, and review regulations in ways that help businesses, the economy, and our society. See a more detailed discussion of issues of stakeholder involvement in Appendix 4. Reorienting our approach to regulation in this way will help to achieve our goal of regulations that are better justified and regularly monitored, reevaluated, and scrutinized to be economically smarter, not just administratively simpler.
Following are some valuable contributions from the recent literature. Frantz and Instefjord 72 present an academic, theoretical paper on rules- versus principles-based financial regulation.
We study the relative strengths and weaknesses of principles based and rules based systems of regulation. In the principles based systems there is clarity about the regulatory objectives but the process of reverse-engineer[ing] these objectives into meaningful compliance at the firm level is ambiguous, whereas in the rules based systems there is clarity about the compliance process but the process of forward-engineer this into regulatory objectives is also ambiguous.
The ambiguity leads to social costs, the level of which is influenced by regulatory competition. Regulatory competition leads to a race to the bottom effect which is more harmful under the principles based systems. Regulators applying principles based systems make dramatic changes in the way they regulate faced with regulatory competition, whereas regulators applying rules based systems make less dramatic changes, making principles based regulation less robust than rules based regulation.
Firms prefer a rules based system where the cost of ambiguity is borne by society rather than the firms, however, when faced with regulatory competition they are better off in principles based systems if the direct costs to firms is sufficiently small.
We discuss these effects in the light of recent observations. When we think of regulation, we think of specific rules that spell out the boundaries between what is approved and what is forbidden.
I call this bright-line regulation BLR. What I want to propose is an alternative approach, called principles-based regulation PBR. With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow. Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying those principles, and they would punish weaknesses by imposing fines.
Finally, the Department of Justice would prosecute corporate leaders who flagrantly violate principles or who are negligent in ensuring compliance with those principles. The banks will always be savvier than the consumers and nimbler than the regulators, so bright-line regulation is bound to fail. As with any regulatory approach, principles-based regulation must be well executed in order to work. A key element is that the principles should have clear meaning. They are just glittering generalities that offer no concrete guidance to a firm.
Businesses often use internal mission statements and lists of principles as a tool to align employees with the goals of top management. However, in many instances, the statements are so general that they have no implications for any particular way of conducting business.
The truly meaningful statements of corporate philosophy are those that provide strong signals of what type of business directions the firm will and will not take. Similarly, for PBR to work, the principles have to clarify rather than obfuscate. Legislative commentary should include specific examples of conduct that falls outside of the principles, in order to provide further guidance Principles-based regulation is not a cure-all.
There are many regulatory problems that are better addressed with bright-line regulation. For example, the algorithm for calculating the Annual Percentage Rate of interest should be standardized and clearly specified by regulators. And any regulatory system will have gaps and flaws. After all, those who design and implement regulations are as human as the people who run the businesses that they regulate.
But in an increasingly complex and fast-paced market environment, there are likely to be many regulatory issues where principles-based regulation will prove to be more robust. Burgemeestre et al. There is an ongoing debate in law and accounting about the relative merits of principle-based versus rule-based regulatory systems. In this paper we characterize what kind of reasoning underlies the two styles of regulation.
We adapt an original account of Verheij et al. The model is validated by a comparison between EU and US customs regulations intended to enhance safety and security in international trade. Black et al. It is proposing a significant shift towards reliance on broadly stated Principles rather than more detailed rules. The implications of a more Principles-based approach for regulators, those regulated by the FSA and those whose interests the regulatory regime is designed to protect are the subject of ongoing dialogue The potential benefits claimed of using Principles are that they provide flexibility, are more likely to produce behavior which fulfils the regulatory objectives, and are easier to comply with.
Detailed rules, it is often claimed, provide certainty, a clear standard of behavior and are easier to apply consistently and without retrospectivity. They explain:. Because most global companies concentrate on making their systems operate as efficiently and functional as possible, they can lack the agility and appropriate mindset to navigate and manage reputational risk and its underlying drivers with alacrity.
Compounding the challenge can be corporate dependence on rules-based compliance systems to manage risk. These are situations in which agents are motivated by incentives that reflect legal, regulatory and political constraints rather than and frequently at the expense of moral and ethical imperatives. Professor Caroline Kaeb at the University Connecticut Business School concludes that rules-based compliance systems possess far greater hidden costs that prevent maximum compliance at a level of economic efficiency.
In addition, rules-based systems often pose design challenges. Their rules are over- or under-inclusive. Therefore, they are unsustainable since global risk has become fragmented and increasingly qualitative, simultaneously Many regulatory policy experts across the political spectrum call for better review of regulations after they are put in place to get rid of stale, outdated, and inefficient regulations.
The findings from ex-post, retrospective reviews could also serve to validate ex-ante assessments. Multiple presidents from both parties and with increasing emphasis over time have pushed for greater retrospective review of regulations via executive orders.
He mentions a detailed reappraisal a quintessential retrospective review of the cost and effectiveness of the rule mandating center high-mounted stop lamps on cars and light trucks, and the original prospective study that had randomly assigned vehicles to have the special stop lamps under consideration.
Orrin Hatch, Republican from Utah would establish a Retrospective Regulatory Review Commission to review and make recommendations to repeal rules or sets of rules that have been in effect more than 15 years.
Congress would approve the full package of recommendations via joint resolution. These proposals are explicitly supported by former OIRA Administrator Susan Dudley and implicitly achieve policy goals laid out by many other regulatory policy experts. Their conception is that:. The [Regulatory Improvement] [C]ommission would consist of eight members appointed by the President and Congress who, after a formal regulatory review, would submit a list of regulatory changes to Congress for an up or down vote.
Congressional approval would be required for the changes to take effect, but Congress would only be able to vote on the package as a whole without making any adjustments. This is illustrated in Figure 6. The GAO report identified the major strategies and barriers that affect agency implementation of retrospective analyses:.
Strategies: i establish a centrally coordinated review process to develop review plans; ii leverage existing regulatory activities to identify needed changes; iii use existing feedback mechanisms to identify and evaluate regulatory reforms; and iv facilitate tracking of reviews and interagency discussion and collaboration on best practices.
Agencies need to be forced to or more strongly encouraged to analyze data at regular intervals and in an impartial manner;. The regulatory system needs to better provide and align resources and incentives to undertake and enforce retrospective review.
Who is responsible for designing and implementing regulations, and can that person or entity be trusted to pursue and enforce economically beneficial regulatory policy? Role clarity: An effective regulator must have clear objectives, with clear and linked functions and the mechanisms to coordinate with other relevant bodies to achieve the desired regulatory outcomes;.
Preventing undue influence and maintaining trust: It is important that regulatory decisions and functions are conducted with the upmost integrity to ensure that there is confidence in the regulatory regime. This is even more important for ensuring the rule of law, encouraging investment and having an enabling environment for inclusive growth built on trust;.
Decision making and governing body structure for independent regulators: Regulators require governance arrangements that ensure their effective functioning, preserve its regulatory integrity and deliver the regulatory objectives of its mandate;.
Accountability and transparency: Businesses and citizens expect the delivery of regulatory outcomes from government and regulatory agencies, and the proper use of public authority and resources to achieve them. Regulators are generally accountable to three groups of stakeholders: i ministers and the legislature; ii regulated entities; and iii the public;. Engagement: Good regulators have established mechanisms for engagement with stakeholders as part of achieving their objectives.
The knowledge of regulated sectors and the businesses and citizens affected by regulatory schemes assists to regulate effectively;. Funding: The amount and source of funding for a regulator will determine its organization and operations. It should not influence the regulatory decisions and the regulator should be enabled to be impartial and efficient to achieve its objectives;.
Performance evaluation: It is important that regulators are aware of the impacts of their regulatory actions and decisions. This helps d rive improvements and enhance systems and processes internally. It also demonstrates the effectiveness of the regulator to whom it is accountable and helps to build confidence in the regulatory system.
Stakeholder engagement is an important ingredient in the good governance of regulators. Steven J. Balla and Susan E. Through this site, you can find, read, and comment on regulatory issues that are important to you. Balla and Dudley also describe how advances in internet technology and access have inspired some non-profit and academic institutions to develop their own innovative approaches to interfacing with stakeholders and the general public regarding regulatory policy.
But despite the recent progress, Balla and Dudley conclude that the current state of stakeholder participation in rulemaking is mostly a one-way street. Descriptions of regulatory policies in the pipeline are provided to the public and comments are solicited, but there is little evidence that feedback collected via public comment is systematically accounted for in actual decision making:.
Our review demonstrates that there are extensive opportunities for stakeholder participation at all stages of the regulatory process.
These opportunities, however, are typically oriented toward facilitating the provision of information on the part of stakeholders.
Susan E. Edward Aiden, Bernard L. Maeve P. Cary Coglianese, Adam M. Philadelphia: University of Pennsylvania Press, New York: Little, Brown and Company, Robert W.
Hahn and Paul C. Kevin A Hassett and Robert J. Joseph S. Manufacturing Declining? Adam Smith, The Wealth of Nations. Washington, DC: Cato Institute, Washington, DC: Cato Institute, , p. Lawrence M. Kevin A. Hassett and Robert J. Ehrlich, Jeffrey A. Eisenach, and Wayne A. Yoo, U. Accessed June 14, Barack Obama. January 18, July 11, May 19, Donald J.
January 30, Michael Mandel and Diana G. Bella and Susan E Dudley. Dudley, Susan E. Privacy regulation: Privacy laws prevent businesses from disclosing private or sensitive information freely. Types of protected information include personally identifiable information PII such as social security numbers, credit card and bank information, as well as health conditions. Even inadvertent violations of privacy regulations in any jurisdiction can result in litigation and heavy penalties from regulatory bodies.
Safety and health regulations: Perhaps the most widely applicable and well-known safety and health regulation is The Occupational Safety and Health Act of U. Does Government Regulation Help Businesses? Learn more about regulations and services for Class Action and Mass Tort.
Filed under:. The loosening of oversight on the savings and loan industry resulted in failure of banks, and left taxpayers to foot the bill for lost account values. In the s, the deregulation of the electricity industry allowed for large-scale gaming of rates for profit-making.
The results collapsed entire markets and created social panic of skyrocketing electricity prices based on market floats. The credit crisis crash of has again signaled a need for more regulation in business, particularly the finance industry.
The fact that a small number of bank units and finance houses could game the real estate and financial investment systems has angered many, enough so that they're calling for new restrictions on such activities. Much of government's tax revenue comes from industries every day. However, this difference of perspective is frequently balanced through hybrids in the form of commissions and boards over a particular industry activity, allowing for both regulation and the relatively free flow of commerce.
Since Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services.
Why Does the Government Regulate Businesses?
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