Regulation's Yoke

Thomas D. Hopkins, who obtained his Ph.D. in economics from Yale University in 1971, is currently dean of the College of Business at the Rochester Institute of Technology. He is also an adjunct fellow at the Center for the Study of American Business, at Washington University in St. Louis. In addition, since 1992, he has taught a course in the MBA program at the U.S. Business School in Prague every October. (Very recently, Hopkins became president of that school, though he will remain at RIT.)

During the Ford, Carter, and Reagan administrations, Hopkins held senior management positions in two White House agencies. In the early 1980s, he served as deputy administrator for the Office of Information and Regulatory Affairs, a division of the Office of Management and Budget.

Hopkins has testified on business regulatory issues before committees of the U.S. Senate and House, and Canada's House of Commons, and his work on the burdens of government regulation has led most recently to consulting assignments with the Organization for Economic Cooperation and Development in Paris and the U.S. Small Business Administration. His research findings have appeared in numerous journals, policy reports, and the press, including the Wall Street Journal and the Economist.

Navigator: What are the key types of regulation in America?

Hopkins: I like to divide regulation into three large categories. One environmental and risk-reduction: These are the normal and well-understood rules on air pollution, water pollution, and worker safety-things of that sort. This also has to do with reducing risks to consumers, through consumer product safety, and that sort of thing. Then a second cluster or category of regulation, in my mind, comprises all of the various controls, some quite explicit and some rather obscure, by which the government constrains or limits the entry of products and services produced abroad, and by which it constrains or controls the prices at which products or services can be sold in this country. Then I have a third, residual category: paperwork regulation. By that I mean the extent to which the government requires businesses and individuals to fill out forms, to provide information unrelated to any particular other regulatory objective. This category is clearly dominated by the Internal Revenue Service.

Navigator: Which of these categories is the most burdensome? And has this changed in recent times?

Hopkins: The numbers I've looked at suggest that these three categories are roughly of equal importance. So, in my way of reckoning, about one-third of the regulatory burden is associated with each of these areas. But that has been changing fairly sharply over the years. Certainly, if you go back to the 1970s we had much less burdensome environmental and risk regulation. We had much more burdensome price and entry controls.

Part of that shift we owe to the successful deregulation efforts of several presidents and parties, starting with Jimmy Carter's transportation and energy deregulation. At the same time, we have increased the extent and pervasiveness of environmental and risk reduction controls. By my way of counting things, they are now of roughly equal stature.

Navigator: Are these categories useful in discussing the freedom of other countries?

Hopkins: The concepts are certainly applicable, but the data tend to be harder to obtain in other countries and so it is tougher to draw any conclusions that are readily supportable. It is my impression that, in Western Europe, there is an even more pervasive use of price and entry controls than there is in the U.S., and roughly comparable reliance on environmental and risk-reduction control. Also, the West European countries' regulation of labor markets is much more obtrusive than it is in the United States. In most Third World countries, regulation of the environment and risk reduction is far less demanding than it is in the United States. Paperwork regulation is probably more extensive in most other countries than it is in the United States.

Navigator: Where does the data on regulation come from, and is it reliable, in this country and abroad?

Hopkins: For this country, the data that I rely on are principally data from the federal government.

Going over it category by category: In the environmental and risk-reduction regulation, the data are the most well-developed. Since the days of Nixon, the government has made fledgling efforts to get the regulators to estimate the compliance costs of new regulations. That has not been done very well, but at least it has been done.

By contrast, in other countries, not even a step was taken in that direction until very recently. What that means is that, over the last twenty-five years, we have had-at least for many new regulatory initiatives-some estimates that have been put together with a bit of care by the regulators themselves and that have been subject to the scrutiny of an overseer or outside commentator. I would not want to claim that those estimates are entirely credible and reliable; if anything, the perpetrators of the regulation have a natural incentive to make sure they are not overstating compliance costs and probably tend to underestimate them. But nonetheless there has been some check and balance going on over a period of time.

Outside of government, when you ask what kind of data exists, there are some academic studies that have been done, but they usually end up relying for their basic input on data from the Commerce Department, and the Environmental Protection Agency, and the Labor Department. So it seems to me that you come back down, one way or another, to having to rely on the government's own data.

And these compliance cost estimates are, at best, estimates of direct spending by the private sector to comply with regulation. As any economist would be quick to note, that's not a very adequate or robust concept of a burden or cost. To illustrate what I mean: One can have a regulation that tells a firm not to produce a particular pesticide because of its hazardous characteristics. In complying with that regulation, the firm may spend close to nothing. But a substantial segment of its business has been destroyed and a substantial segment of consumers (who had been voluntarily making use of that product because it was desirable from their point of view) are denied access to that product. So there is damage done that doesn't show up in compliance spending by the firm. And we don't have that broader based notion of economic cost very well estimated.

Now that's in the area of environment and risk reduction. When you move from that area to the price and entry controls (the cluster is often referred to as economic regulation), the data is thinner and less consistent. Whatever problems and weaknesses there are with the environment and risk data, I think the problems are greater with the price-and-entry controls. There have been some fairly careful and credible academic studies done over the years because of our tariff and quota constraints on imports. I think those have been done with some sophistication and care and are reliable. But when you ask what do they focus on, they focus on areas that are the most visibly affected by these price-and-entry controls: textiles, sugar, and a few other products of that sort. Once you leave textiles and sugar, the burdens and characteristics of our international trade restrictions are far more subtle and far less easy to discern, and they may or may not be as large. But there are good estimates on at least the major trading restrictions.

Lastly, the paperwork burdens, sometimes called transaction costs, or red tape, or procedural costs. This as I say is mostly a matter of the Internal Revenue Service, with its extraordinary array and complexity of forms used in enforcing the tax laws. The federal government has, for a number of years-as a result of the statute called the Paperwork Reduction Act-tried to keep account of the number of hours that a typical complier with these paperwork requirements has to spend filling out the forms. It's not rocket science, and there has been a lot of doubt as to how adequately these estimates are made, but nonetheless they are made on a fairly consistent basis. And at least year by year, one can see ups and downs as we cut out requirements and add new requirements. But there have been more ups than downs.

Since our other cost-of-regulation estimates are usually in dollars, it seems to be quite plausible and credible to pick a number as representing the opportunity cost of one's time and multiply it by the number of hours spent on compliance, to come up with a fairly large dollar figure of the value of time wasted or lost in filling out these forms.

Navigator: Could you please discuss the nature of regulation, as opposed to law?

Hopkins: When I talk about regulation, I am talking about any specification imposed by the federal government that either requires a unit in the private sector to do something or forbids a unit in the private sector from doing something. These regulations are typically issued by agencies of the government, and at last count there were something like sixty-five of these separate federal agencies that issue these requirements. In most state governments, there are corresponding agencies that regulate the life of units within those state boundaries. In New York State, for example, we have roughly the same number of agencies. There are about sixty state regulatory agencies that correspond roughly to the sixty federal agencies. So anyone living in New York State gets the privilege of being regulated by both.

Now, no one of these agencies, in issuing these either prescriptive or postscriptive orders, is acting altogether independently, because the authority under which the agencies issue their regulations has to stem from some law passed by Congress or the state legislature. But sometimes the laws under which these agencies issue regulations are extraordinarily vague and general and open-ended. For example, when it comes to worker safety, the Labor Department, which issues the regulations to reduce risks to workers, operates under the Occupational Safety and Health Act, which is an extraordinarily open-ended law. It simply authorizes the agency to issue whatever regulations are, in the agency's judgment, necessary to improve worker safety and health.

At the other end of the spectrum, you have many of the tax laws that, as passed by the Congress, are extraordinarily specific as to precisely what the IRS, the agency issuing regulations, has to do. Very little discretion is left to the agency as it writes its implementing regulations in interpreting the law.

So there are vast differences across agencies as to whether they are exercising judgment or not exercising judgment in translating an underlying law into a regulation. Another contrast I would make: For any particular objective that is supposed to improve our well being, there are at least two different avenues that can be envisioned. One is that, simply through the common law or through laws passed by a legislative body, certain guidance can be provided. If that guidance is not followed, private parties can go to court to try to protect their rights or try to secure damages from those who violated their rights, thus bypassing any administrative regulatory system. But we in this country have, certainly since the seventies, felt that we needed to supplement that common law and basic congressional law with far more prescriptive administrative regulations by which an agency spells out in regulatory form what it is that should be done to prevent damages and to prevent injuries. So there are two different avenues, and we have used both, but we have been relying more heavily on the administrative, regulatory approach in recent years.

Navigator: Could you sketch for us the constitutional history of regulation in the U.S.? Are there key passages in the Constitution that allowed a lot of regulation?

Hopkins: Well, my own view is one of having enormous respect for the Constitution and enormous skepticism about any efforts to make changes in it. We have had misguided, ineffective, and counterproductive policies adopted by our Congress and the courts and the Executive Branch. But I see them as self-inflicted wounds. So, it is incumbent upon the rest of us to highlight and illustrate and emphasize these, in the effort to get things undone or corrected by the entities that created the problem. Thus, if Congress has been unduly casual in its grant of regulatory authority-and I think the Occupational Safety and Health Act is an example of excessively casual delegation of authority-then that problem, to my mind, should be corrected by the Congress's rewriting the law rather than by the more basic action of trying to reorder the Constitution.

Navigator: Is it possible to measure the amount of anticapitalist regulation, as opposed to that which would have emerged under a laissez faire system?

Hopkins: That is an interesting thought exercise and I don't know. Economists can come up with their estimates of productivity damage and dead weight losses and so forth. But to have a credible "with and without" would take more creativity than I've got.

Navigator: Could you provide our readers with an overview of the institutional history of regulation in the United States.

Hopkins: Just a very sketchy history. I believe the origin of safety regulation had to do with steamship accidents on the rivers. But the major thrust of regulation in this country came from a debate that began at the start of this country and has continued ever since: Whether or not we should have free trade? Whether or not we should restrict imports of various products? That has been with us from day one. Also, the issue of taxation and how taxation should be accomplished, and with what paperwork if any-that has been with us from day one. Of course, they were joined, initially, because most of our revenues at the outset were custom related; we were restricting imports as a way of raising the necessary revenues.

Then in the later 1800s, there came the first of the major price-and-entry agencies. The Interstate Commerce Commissions set up to meet some conflicting objectives of farmers who felt that they were being unfairly dealt with by excessive rates of transportation and some objectives of the transpiration industry, which was seeking to avoid destructive competition and avoid excessive capacity. That rate-and-entry regulation, which began in the late 1800s, continues to this day, even though the Interstate Commerce Commission was abolished a few years back. (Its residual regulatory authority still exists and was just transferred over to the Department of Transportation, though with far less intrusive regulation than we had earlier.)

Very quickly, the regulatory agencies-the Interstate Commerce Commission, the Federal Maritime Commission, the Securities Exchange Commission, and a variety of other independent agencies-came to view themselves partly as protecting customers and partly as protecting those that they were trying to regulate. So, the Interstate Commerce Commission, in regulating the railroads and trucks, shifted gradually from being pro-consumer to being pro- businesses and then got mired down in all sorts of particular problems that almost brought the railroad industry to an end. Only the elimination of that regulation enabled markets to begin to work again and establish some sort of rationality in our transportation network.

Navigator: Some matters that are handled by regulation could be handled by natural-rights law under a laissez faire system: the communications network, for example.

Hopkins: My understanding is that the federal government expanded into very heavy regulation of this area owing to the entreaties of AT&T. They and their possible competitors saw two ways of trying to retain their dominant economic role. One was by buying up their rivals as they came along and by vigorously enforcing the patents that they owned, and they certainly did that. But then gradually they came to feel that we should have the government be regulating the telephone industry as a natural monopoly, ostensibly to protect customers.

Now, when there is only one producer, it is true that customers sometimes are gouged but in fact the regulation was done to prevent the entry of potential rivals. That strangle hold on the telecommunications industry was finally broken by the entry of MCI, which found a way to get a bit of a foothold in the industry despite the restrictions on entry. If we had not allowed our regulatory apparatus to be expanded to protect the self-interest of companies like AT&T, it is very hard to know how things would have evolved.

So that is the historical setting. Today, we have a Federal Communications Commission just floundering around trying to figure out how you get from A to B, giving adequate protection to one group against another. It's a quagmire of efforts to try to anticipate and constrain creative impulses that should be allowed to flourish. I am rather pessimistic about the ability of regulators to do anything better than natural forces would do, given the state of technology as it is today. I think the FCC could close down and let things run in a completely decentralized, libertarian way for a few years, then if we discover some adverse effects happening, we can find some remedies. The market is so creative and so innovative that I think this is one of the areas where Schumpeter's old argument about creative destruction is useful. I don't worry much about a monopoly, because as long as entry is allowed any monopoly that takes advantage of the situation will soon be overtaken by new entrepreneurs.

Navigator: What aspects of American life would you say are currently most regulated? And which regulations are the most insidious?

Hopkins: There is quite extensive regulation of the electromagnetic spectrum and communications, which is simply no longer needed. There is extensive regulation of food products and medical care devices, but I am not sufficiently libertarian to be willing to cast that off. I am of a mind to think that is an area where regulation is useful: regulation of uninformed consumers and single-point decisions. I think we have still substantial restrictions, and there are always calls for more restrictions, on international trade. I think those are all, or almost all, undesirable: We should unilaterally declare free trade and see what happens.

So I guess, in my own mind, the most insidious areas of regulation are in communications and in international trade. The most desirable are in medical and drug areas. The environmental area and the workers' safety area are somewhere in the middle.

Navigator: What do you think will reverse the growth of regulation?

Hopkins: I am a big believer in the power of clear information, communicated to people in ways they can understand, information about the costs and benefits of government policies. Anything groups like yours can do to illustrate, to highlight, either anecdotally or more systematically, the consequences of continuing as we are-sooner or later that message will penetrate and will begin to drive policy. It took a long time for us to persuade ourselves that we should really get the federal government out of airline regulation and out of regulating the price of natural gas. But information that gets communicated to the lay audience and their representatives, information about why things would be in better shape if we had less regulation: in my mind, that is probably the most constructive way to go.

This interview was conducted for Navigator by editorial intern Farsam Shadab.