Tag Archives: Regulation

Crisis of Complexity

[W]e have these big agencies, some of which are outdated, some of which are not designed properly . . . . The White House is just a tiny part of what is a huge, widespread organization with increasingly complex tasks in a complex world.

That was President Obama, last week, explaining Obamacare’s failed launch. We couldn’t have said it better ourselves.

Where Washington thinks this is a reason to give itself more to do, with more resources, however, we see it as a blaring signal of overreach.

The Administration now says Healthcare.gov is operating with “private sector velocity and effectiveness.” But why seek to further governmentalize one-seventh of the economy if the private sector is faster and more effective than government?

Meanwhile, the New York Times notes that

The technology troubles that plagued the HealthCare.gov website rollout, may not have come as a shock to people who work for certain agencies of the government — especially those who still use floppy disks, the cutting-edge technology of the 1980s.

Every day, The Federal Register, the daily journal of the United States government, publishes on its website and in a thick booklet around 100 executive orders, proclamations, proposed rule changes and other government notices that federal agencies are mandated to submit for public inspection.

So far, so good.

It turns out, however, that the Federal Register employees who take in the information for publication from across the government still receive some of it on the 3.5-inch plastic storage squares that have become all but obsolete in the United States.

Floppy disks make us chuckle. But the costs of complexity are all too real.

A Bloomberg study found the six largest U.S. banks, between 2008 and August of this year, spent $103 billion on lawyers and related legal expenses. These costs pale compared to the far larger economic distortions imposed by metastasizing financial regulation. Even Barney Frank is questioning whether his signature law, Dodd-Frank, is a good idea. The bureaucracy’s decision to push regulations intended for big banks onto money managers and mutual funds seems to have tipped his thinking.

This is not an aberration. This is what happens with vast, complex, ambiguous laws, which ask “huge, widespread” bureaucracies to implement them.

It is the norm of today’s sprawling Administrative State and of Congress’s penchant for 2,000-page wish lists, which ineluctably empower that Administrative State.

We resist, however, the idea that the problem is merely “outdated” or “inefficient” bureaucracy.

We do not need better people to administer these “laws.” With laws and regulations this extensive and ambiguous, they are inherently political. The best managers would seek efficient and effective outcomes based on common-sense readings and would resist political tampering. Effective implementation of conflicting and economically irrational rules would still yield big problems. Regardless, the goal is not effective management — it is political control.

Agency “reform” is not the answer, although in most cases reform is preferable to no reform. Even reformed agencies do not possess the information to manage a “complex world.” Anyway, “competent” management is not what the political branches want. Agencies routinely evade existing controls — such as procurement rules — when convenient. The largest Healthcare.gov contractor, for example, reportedly got the work without any contesting bids. That is not an oversight, it is a decision.

The laws and rules are uninterpretable by the courts. Depending on which judges hear the cases, we get dramatically and unpredictably divergent analyses, or the type of baby splitting Chief Justice Roberts gave us on Obamacare. Judges thus end up either making their own law or throwing the question back into the political arena.

Infinite complexity of law means there is no law.

“With great power,” Peter Parker’s (aka Spiderman’s) uncle told us, “comes great responsibility.” For Washington, however, ambiguity and complexity are features, not bugs. Ambiguity and complexity promote control without accountability, power without responsibility.

The only solution to this crisis of complexity is to reform the very laws, rules, scope, and aims of government itself.

In a paper last spring called “Keep It Simple,” we highlighted two instances — one from the labor markets and one from the capital markets — where even the most well-intended rules yielded catastrophic results. We showed how the interactions among these rules and the supporting bureaucracies produced unintended consequences. And we outlined a basic framework for assessing “good rules and bad rules.”

As our motto and objective, we adopted Richard Epstein’s aspiration of “simple rules for a complex world.” Which, you will notice, is the just opposite of the problem so incisively outlined by the President — Washington’s failed attempts to perform “complex tasks in a complex world.”

As we wrote elsewhere,

The private sector is good at mastering complexity and turning it into apparent simplicity — it’s the essence of wealth creation. At its best, the government is a neutral arbiter of basic rules. The Administration says it is ‘discovering’ how these ‘complicated’ things can blow up. We’ll see if government is capable of learning.

Regulatory Complexity Gone Wild

The complexities of the Affordable Care Act (aka Obamacare) are multiple, metastasizing, and increasingly well-known. Less known is an additional layer of health care regulation slated for implementation next year: the system by which doctors and hospitals code for conditions, injuries, and treatments. By way of illustration, in the old system, a broken arm might get the code 156; pneumonia might be 397. The new system is much more advanced. As Ben Domenech notes:

In all, the new system, known as ICD-10, will boast 140,000 codes, a near-eight-fold rise over the mere 18,000 codes in ICD-9. It is a good example of the way bureaucracies grow in size and complexity in an attempt to match the complexity of society and the economy. This temptation, however, is usually perverse.

Complexity in the economy means new technologies, more specialized goods and services, and more consumer and vocational choice. Economic complexity, however, is built upon a foundation of simplicity – clear, basic rules and institutions. Simple rules encourage experimentation, promote long-term investments and entrepreneurial ventures, and allow the flexibility to drive and accommodate diversity.

Complex rules, on the other hand, often lead to just the opposite: less experimentation, investment, entrepreneurship, diversity, and choice.

It is difficult to quantify the effects of the metastasizing Administrative State. It is impossible to calculate, say, the cost of regulations that prohibit, discourage, or delay innovation. Likewise, what is the cost of the regulations that, arguably, helped cause the Financial Panic of 2008 and its policy fallout? No one can say with precision. For twenty years, though, the Competitive Enterprise Institute has catalogued regulatory complexity as well as anyone, and its latest report is astonishing.

Federal regulation, CEI’s latest “10,000 Commandments” survey finds, costs the U.S. economy some $1.8 trillion annually. That’s more than 10% of GDP, or nearly $15,000 per citizen. These estimates largely predate the implementation of the ACA, Dodd-Frank, and new rounds of EPA intervention. In other words, it’s only getting worse.

The legal scholar Richard Epstein argues that

The dismal performance of the IRS is but a symptom of a much larger disease which has taken root in the charters of many of the major administrative agencies in the United States today: the permit power. Private individuals are not allowed to engage in certain activities or to claim certain benefits without the approval of some major government agency. The standards for approval are nebulous at best, which makes it hard for any outside reviewer to overturn the agency’s decision on a particular application.

That power also gives the agency discretion to drag out its review, since few individuals or groups are foolhardy enough to jump the gun and set up shop without obtaining the necessary approvals first. It takes literally a few minutes for a skilled government administrator to demand information that costs millions of dollars to collect and that can tie up a project for years. That delay becomes even longer for projects that need approval from multiple agencies at the federal or state level, or both.

The beauty of all of this (for the government) is that there is no effective legal remedy. Any lawsuit that protests the improper government delay only delays the matter more. Worse still, it also invites that agency (and other agencies with which it has good relations) to slow down the clock on any other applications that the same party brings to the table. Faced with this unappetizing scenario, most sophisticated applicants prefer quiet diplomacy to frontal assault, especially if their solid connections or campaign contributions might expedite the application process. Every eager applicant may also be stymied by astute competitors intent on slowing the approval process down, in order to protect their own financial profits. So more quiet diplomacy leads to further social waste.

Epstein argues the FDA, EPA, FCC, and other agencies all use this permit power to control firms, industries, and people beyond any reasonable belief they are providing a net benefit to society.

The agencies are guilty of overreach and promoting their own metastasis. Yet without Congress and the President, they would have little or no power. Congresses and Presidents increasingly pass thousand-page laws that ask agencies to produce tens of thousands of pages of attendant rules and regulations. Complexity grows. Accountability is lost. The economy suffers. And the corrective paths, which fix mistakes and promote renewal in the rest of the economy and society, are blocked. We then pile on tomorrow’s complexity to “fix” the flaws created by yesterday’s complexity.

The hyper-regulation of the economy is not merely an annoyance, not merely about inefficient paperwork. It is damaging our innovative and productive capacity — and thus employment, the budget, and our standard of living.

The McKinsey Global Institute helps us understand why this matters from a macro perspective. McKinsey chose a dozen existing and emerging technologies and estimated their potential economic impact in the year 2025. It found industries like the mobile Internet, cloud computing, self-driving cars, and genomics could produce economic benefits of up to $33 trillion worldwide. The operative word, however, is “might.” Innovation is all about what’s new. And regulation is often about disallowing or discouraging what’s new. The growing complexity of the regulatory state, therefore, can only block some number of these innovations and is thus likely to leave us with a simpler, and thus poorer, world.

— Bret Swanson

The Regulatory Threat to Web Video

See our commentary at Forbes.com, responding to Revision3 CEO Jim Louderback’s calls for Internet regulation.

What we have here is “mission creep.” First, Net Neutrality was about an “open Internet” where no websites were blocked or degraded. But as soon as the whole industry agreed to these perfectly reasonable Open Web principles, Net Neutrality became an exercise in micromanagement of network technologies and broadband business plans. Now, Louderback wants to go even further and regulate prices. But there’s still more! He also wants to regulate the products that broadband providers can offer.

Net Neutrality forever! Wait, never mind…

When you’ve written as much as I have about the weird Web topic known as “network neutrality,” this is big news indeed.

The celebrated openness of the Internet — network providers are not supposed to give preferential treatment to any traffic — is quietly losing powerful defenders.

Google Inc. has approached major cable and phone companies that carry Internet traffic with a proposal to create a fast lane for its own content, according to documents reviewed by The Wall Street Journal. Google has traditionally been one of the loudest advocates of equal network access for all content providers.

What some innocuously call “equal network access,” others call meddlesome regulation. Net neutrality could potentially provide a platform for Congress and the FCC to micromanage everything on the Net, from wires and switches to applications and services to the bits and bytes themselves. It is a potentially monstrous threat to dynamic innovation on the fast-growing Net, where experimentation still reigns. 

But now Google, a newly powerful force in Washington and Obamaland, may be reversing course 180-degrees. The regulatory threat level may have just dropped from orange to yellow.

Update: Richard Bennett expertly comments here.

“Googlephobia”: An Unholy Alliance

My colleague Adam Thierer with an excellent post warning of the coming war on Google:

So, here we have Wu raising the specter of search engine bias and Lessig raising the specter of Google-as-panopticon. And this comes on top of groups like EPIC and CDT calling for more regulation of the online advertising marketplace in the name of protecting privacy.  Alarm bells must be going off at the Googleplex. But we all have reason to be concerned because greater regulation of Google would mean greater regulation of the entire code / application layer of the Net.  It’s bad enough that we likely have greater regulation of the infrastructure layer on the way thanks to Net neutrality mandates. We need to work hard to contain the damage of increased calls for government to get it’s hands all over every other layer of the Net.