This commentary was originally published in the New York Times.
President Trump intends to pare back a vast array of government regulations in fields like environmental protection, food and drug safety, and consumer finance. On January 30 he ordered that for every new regulation it imposes, the government must get rid of two old ones.
It is an interesting idea but a misguided one. Even if government regulations are sometimes a burden, they are clearly critical to the functioning of a modern economy and society.
Yet while Mr. Trump’s approach is wrongheaded, there is logic to it. The concept has backing in some behavioral economics and business circles, and is certainly popular among many of his followers, who are quite hostile to what they see as massive over-regulation. The emotional part of the issue is important, reflecting a long-term societal schism between highly business-oriented people and those of other persuasions.
I can personally attest to the emotional side of the argument, since I see it reflected in my own extended family, where the Trump supporters tend to have strong business connections and seem to take regulation as a personal affront, as if it stands as a barrier to their self-actualization and personal fulfillment. They tend to disparage regulators, while I view these officials as unsung heroes. This division appears to be a core issue in our society, and if not dealt with properly, it could lead to the destruction of our immensely valuable regulatory framework.
Putting emotions aside for a moment, there is indeed a problem—one recognized by both major political parties for decades—involving the need for incentives to get the level and tone of regulation right. Mr. Trump’s executive order builds on a deregulation movement that gained considerable momentum with Milton Friedman’s book Capitalism and Freedom in 1962 and the beginnings of the Thatcher-Reagan revolution in the 1980s.
Mr. Friedman underscored problems of asymmetry in regulation: People who especially benefit from a particular regulation will be inclined to lobby or bribe government officials for it. On the other hand, members of the general public, who might suffer from such regulations, will not be attentive to the many rules that affect them, each in a small way. And once regulations are imposed, government officials may have little interest in deleting those that are mistakes. In short, government regulators may not always be properly incentivized to make sure the accumulated body of rules is actually benefiting the public, not just specific interest groups.
In reaction to a growing clamor for deregulation, Congress passed the Regulatory Flexibility Act, with bipartisan support, more than 30 years ago. Signed into law by President Jimmy Carter in 1980 and still ensconced in the United States Code, it calls on agencies to periodically review, and prune, existing regulations. Critics have charged that regulators have not been giving them thoughtful reviews, have suffered from “willful blindness” and have just allowed the regulations to pile up. There are a number of bills in Congress now that seek to correct the problem.
Mr. Trump’s two-for one executive order might be considered an application of behavioral economics to deal with an intractable dilemma. Tying the culling of old regulations to the imposition of new ones can be seen as a strategy for forcing regulators to overcome their inability to see problems created by past regulations that remain in force. The order might motivate them to divert time and energy away from their presumed enthusiasm for creating new regulations, using it to clean up the errors their predecessors left behind.
But translating this attentional device into good regulatory policy will be difficult if not impossible, because the issues intrinsic to regulation are so subtle.
As I argued with George Akerlof in a 2015 book, Phishing for Phools: The Economics of Manipulation and Deception, regulators must steer around a minefield of complex deceptions and subterfuges set up by special interests, distortions that become accepted as an everyday reality, to the detriment of consumers. Assuming a reflexive pro-business bias—assuming that businessmen can do no wrong and that regulations can be pared back mechanically—is inconsistent with making difficult judgments about subtle deceptions.
The United States has historically wavered in its views of regulation and we are in danger of taking a wild swing once again. In the 19th century, for example, they were minimal. The first major federal regulator, the Interstate Commerce Commission, was created in 1887 to control fares charged by railroads. It was the beginning of the Progressive movement, which favored increasing regulations to protect the interests of the general public, sometimes irking the wealthy elite.
By the Roaring Twenties, during the presidency of Calvin Coolidge, Progressivism was in retreat and regulations were in disfavor. Mr. Coolidge generally opposed government intervention in the economy on libertarian grounds, and some of his policies have a certain resonance in the Trump era: After all, Coolidge cut taxes on high-income people; appointed a very wealthy man, Andrew Mellon, as Treasury secretary; and restricted immigration by region of origin.
In some respects, Coolidge was nothing like President Trump. Coolidge was a bland speaker, for example, who upheld decorum and traditional, even puritanical, values as the nation enjoyed a burst of personal and sexual liberation and extravagance. But he professed a faith in American business similar to that of the current president’s, a tendency to think that not only could business do no wrong, but also that businessmen were the only people who matter.
Coolidge, for example, spoke reassuringly about the burgeoning brokers’ loans that helped to fuel the stock market boom in the 1920s, and said that America’s business outlook was tremendous, building public confidence—until the crash came, and confidence collapsed.
There was a swing back to a much stronger regulatory regime in the 1930s, with far tighter controls over banks and securities firms, and we still benefit from many of those changes. After further zigzags, we are now facing what could be a dangerously anti-regulatory environment.
But we must remember that government needs to step in where private markets cannot function fairly on their own. Regulation is in the public interest in dozens of areas. Of course, we need to listen to aggrieved parties who feel that they are hurt by over-regulation and, when they have a good case, we should do something about it. But we shouldn’t make the mistake of abandoning trust in the good works of regulators.
The real solution to the problems that are the focus of the two-for-one rule is to provide better rewards, making government regulation a more attractive and respected career. The world is far too complex to make it possible to count up regulations meaningfully and impose a two-for-one rule.