Showdown at the Deregulatory Corral

Story Highlights:

• Relaxing federal government rules seems to be a popular talking point these days for both parties.
• Some feel deregulation is to blame for 2008’s financial panic, but really, changing regulation played a role.
• Removing unnecessary regulations is a good idea, but moving beyond the low-hanging fruit—and changing the mindset in Washington—would be better.

It seems congressional Republicans and the White House may have discovered some common ground: Both feel US regulatory reform is needed to eliminate cumbersome rules. On specifics, they predictably differ. While Republican plans target mostly pending rules, the White House aims to eliminate dozens of existing rules requiring redundant paperwork or overreaching regulations—like EPA requirements forcing dairy farmers to treat spilled milk (which the old adage says we needn’t cry over) like oil spills. Other planned steps include applying railroad safety rules “only where they are actually needed.” Good talk—and action would be welcome. But most of what’s being discussed strikes us with a resounding “duh.”

It’s unsurprising government would keep rules known to be unnecessary for decades. Somehow, deregulation has obtained a bad name in recent years, with many automatically equating it with the rather ridiculous extreme of a wild west ruled only by the six-shooter. So actually reducing regulation—even in these seemingly obvious circumstances—happens rarely.

Still, some argue an era of mass deregulation contributed to 2008’s financial panic, claiming bankers with billions of bucks lobbied to make government turn a blind eye. Folks, changing regulation is a near constant—and occurred in the run-up to 2008—but it doesn’t necessarily equate to deregulation. The only way to argue mass deregulation occurred in recent decades is to conveniently overlook massive pieces of legislation like 2002’s Sarbanes-Oxley Act (SarbOx) and accounting rules like FAS 157. Which is a selective argument much like arguing the 1860s were peaceful...except for the Civil War.

The US doesn’t have much history of actually deregulating markets—no matter which party is in charge. Just look at the sheer volume of Federal Register pages. (Yes, periodically, regulations for utilities or telephone companies have been liberalized—the exception, not the rule.) The White House admits as much—calling government’s push to eliminate the aforementioned, blatantly obvious regulatory oversteps “unprecedented.” There’s no need to conjure fallacious images of an economic OK Corral when thinking of deregulation. Plenty of room exists between that and 2010’s 82,590-page regulatory environment, providing the opportunity to create even-handed, thoroughly considered rules.

But while government is reviewing rules, we’d suggest they not limit themselves to nonsensical low-hanging fruit. Though the ideas discussed are a fine start, their impact relative to our economy’s size is likely quite small. A more meaningful effort at simplification will likely require politicians to take a critical look at the success or failure of rules, irrespective of how they voted on it, their party’s opinion or the regulations’ original intent. A government review of regulations weighing not only whether they duplicate other existing regulations, but also their effectiveness versus the economic costs, would be beneficial. Consider SarbOx (which received overwhelming bipartisan support): While fine intentions of preventing another Enron scandal underpinned the act, what are the costs of provisions included to thousands of law-abiding public companies? And what are the effects on private companies, who might want to raise capital needed for expansion through an IPO?

The economy and markets having thousands, if not millions, of inputs means there’s little possibility government could ever fully understand the ramifications of regulation. Regulation is not futile. But greater acceptance of regulations’ limitations—and potential side effects—would likely amount to far better governance. However, that constitutes nearly a complete mindset change for politicians used to currying political favor (and we’re not holding our breath). So while we welcome talk of small steps toward simpler regulations in Washington, more desirable would be actions demonstrating this isn’t just political posturing for popularity’s sake.