Lifting the Heavy Hand: The Challenge of Reforming America's Regulatory State

"Regulatory reform." For most Americans the first reaction to these words may well be a yawn. Even inside the Beltway, only the most tireless stakeholders and policy wonks can get themselves worked up over the arcana of rule-making procedures, benefit-cost calculations, risk assessments, peer evaluations, and legislative oversight.

But the conduct and course of American regulatory activities warrant serious and sustained public attention. Regulation, after all, touches the lives of all Americans every day, and its reach keeps widening. In the 1990s, a fiscally constrained federal government has shifted more and more of the nation's social agenda into off-budget mandates. Each year the cost of those unfunded directives far exceeds the total of U.S. personal income taxes collected. If it is fitting and proper to question the quality of the public goods and services this society buys with its tax collections, it is surely no less important to debate vigorously the balance of social gains and losses from the government's other exactions, including those imposed by its voluminous rules and regulations.

Such a debate can lead in multiple directions. First is the matter of accountability. How can institutions be arranged to compel regulators to answer for wasteful decisions but also to reward policymakers when they pursue the best means to cherished ends? All institutional arrangements - including the devolution of regulatory programs to lower levels of government, the privatization of programs, or their outright abolition - entail at least some unintended consequences. The second question then becomes whether any given rearrangement risks creating more problems than it solves. The instability of the status quo but also of some supposed remedies can increase as new technologies come on stream. In a global economy, moreover, national regulatory systems face a host of other novel responsibilities. Increasingly, rules with only a domestic intent reach across borders. Sometimes they may pose undue burdens for trading partners and foreign investors. Under what circumstances should nations adjust or "harmonize" their preferred practices? And when change is imperative, why are some countries more nimble than others?

In the first of our nine articles on the challenges confronting the regulatory state, I explain the growth of U.S. regulatory intervention over the past decade and offer some thoughts on how the increasingly troublesome costs of this trend might be lowered through a more judicious application of checks and balances.

Christopher H. Foreman reports on the limited, but not insignificant, accomplishments of the 104th Congress. He notes that some of the foundation is now in place for a process of systematic regulatory review capable of curbing the use of senseless "zero tolerance, zero risk" standards to safeguard public health and safety. But he also stresses that building on that foundation will be, at best, a slow, incremental process.

Although 1997 was not a year in which a lot of regulatory issues excited passions, at least one certainly did. Litigants, public and private, launched an all-out assault on cigarettes.

W. Kip Viscusi takes a closer look at this reprise of prohibitionism. He finds that some of its rationale, including the central claim that smokers constitute a massive financial liability for state governments, is suspect. A sound policy on smoking, Viscusi concludes, would depart from the proposed legal settlement now pending in Congress.

Another question of regulation that Congress could not duck this past year concerned political campaign donations. Thomas E. Mann casts a skeptical eye on recent proposals to "deregulate and disclose" campaign finance, observing that full disclosure is easier said than done and even if done, offers no assurance that voters will make use of it to punish abuses. Deregulation here might prove as ineffectual at correcting excesses as is today's complex system of rules and rulings.

Whether, or how much, environmental programs should be devolved from federal to state hands has also remained a subject of considerable interest. Mary Graham writes that contrary to conventional wisdom, state administration of environmental protection does not typically degenerate to a "race to the bottom." Instead, she finds the more pertinent concern to be the classic defect of federalism: namely, uneven quality between rich and poor states.

A further complication for regulators presiding over rapidly moving targets such as financial products and services is the pace of technological change. Steven M. H. Wallman shows how rulemaking by traditional command and control is not just impractical in today's electronic financial markets; it is becoming infeasible.

Regulatory actions of governments can also have broad international implications, as evidenced by the recent heated antitrust dispute between the United States and the European Union over the legitimacy of the Boeing-McDonnell Douglas merger. Eleanor M. Fox shows that this important case, often seen as a politicized effort to protect national "champions," actually involved fundamental differences over matters of principle, as reflected in the goals of U.S. and EU merger law.

David Vogel delves into two other trade conflicts springing from idiosyncratic U.S. regulations, one pertaining to energy conservation, the other to the clean fuel requirements of the 1990 Clean Air Act. Alternative policies were available to achieve the same U.S. social objectives. Had they been chosen, Vogel shows, the interests of American consumers as well as those of foreign competitors would have been better served.

Last, Edward J. Lincoln and Robert E. Litan step outside the U.S. context and assess Japan's recent steps toward deregulating financial markets. From the standpoint of comparative politics, the larger lesson in this story is plain enough. The United States continues to experience its share of difficulties shedding the deadweight of too many inefficient laws and lawsuits, but Japan - the world's second largest economy - remains hobbled by an apparent inability to restructure even its most basic economic institutions, such as its malfunctioning banks.

Perhaps the next best-seller about who is likely to be "Number One" in the 21st century will need to focus not on strategic trade and industrial policies, but on which society has cleared its tangles of legal strictures and regulatory red tape.