A Reasoned Approach to Government Regulation: How Can We

2 A Reasoned Approach to Government Regulation: How Can We Separate the Good from the Bad?

Downloaded by UNIV OF MASSACHUSETTS AMHERST on June 3, 2018 | https://pubs.acs.org Publication Date: September 5, 1979 | doi: 10.1021/bk-1979-0109.ch002

DAVID J. NEWBURGER Washington University, St. Louis, MO 63130

If s t a t i s t i c s had been kept, I suspect that we would discover that the national sport gaining most popularity i n this decade i s documenting horror stories to show how awful government regulation has been for business. The sport has even gone professional with the development of research institutes at my university, at another here i n Miami, and others elsewhere that are devoted largely to displaying regulation's f o l l y . Like all other sports, this one would not gain i n popularity without particular attraction to a vast portion of the citizenry. I believe that that attraction stems from a widely held view that government gets away with too much absurdity and well desires to be the subject of b e l i t t l i n g , nitpicking, and guffawing. Entertaining as the sport may be, however, I suggest that a more interesting subject for academic pursuit i s how to eliminate untoward instrusions by government into business in general and into innovative activities i n particular. I choose my words caref u l l y , for at the outset I suggest we must distinguish those government intrusions that are wholly j u s t i f i a b l e crosses that some among us must bear, from the untoward i n t r u s i o n s that impose limitations and requirements without j u s t i f i c a t i o n . Thus, we need to develop some working c r i t e r i a for separating j u s t i f i e d regulations from those that are not. Then, we will be prepared to attempt a brief systematic review of the mechanisms of regulation to see how untoward intrusions might be minimized. The whole point of any regulatory regime i s to get some or all of the populace to conform to standards of conduct that they might not otherwise. Therefore, any regulation intrudes upon the right of individuals to exercise their own free choice. The interesting question i s not whether some i n t r u s i o n s on personal freedoms should be allowed, but which should be. In our own system of government, I define a regulation as justified if i t induces conformity with some standard of conduct that, through deliberations of the democratic process, we have come to prefer. If we can agree that that i s a reasonably noncontroversial d e f i n i tion, we can turn our attention to the questions implicit in it: 0-8412-0511-6/79/47-109-021$05.00/0 © 1979 American Chemical Society

Hill; Federal Regulation and Chemical Innovation ACS Symposium Series; American Chemical Society: Washington, DC, 1979.


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FEDERAL REGULATION AND CHEMICAL INNOVATION

how can we t e l l what conduct a r e g u l a t i o n induces, what conduct we p r e f e r , and whether we a r r i v e d at that preference through s u i t able democratic processes? Determining what conduct an e x i s t i n g r e g u l a t i o n induces i s a r e l a t i v e l y s t r a i g h t f o r w a r d e m p i r i c a l matter, although s e p a r a t i n g r e g u l a t i o n from other f o r c e s that d r i v e conduct may be d i f f i c u l t . C e r t a i n l y , a s c e r t a i n i n g what changes i n conduct a new r e g u l a t i o n will induce, d e c i d i n g what conduct i s p r e f e r r e d , and f i g u r i n g out whether d e c i s i o n s were d e m o c r a t i c a l l y a r r i v e d at are all vexing problems. Inherent Dilemmas of

Regulation

These problems are so d i f f i c u l t because they r e f l e c t dilemmas of r e g u l a t i o n with which we must l i v e . Consider s e v e r a l such dilemmas. F i r s t , r e g u l a t i o n s do not n e c e s s a r i l y induce d e s i r e d conduct. A f t e r all, all that a r e g u l a t i o n does i s to set new c o n s t r a i n t s and, sometimes, o p p o r t u n i t i e s on the d e c i s i o n s of people who operate, i n any event, w i t h i n a wide range of opportun i t i e s and c o n s t r a i n t s . Depending upon the p a r t i c u l a r mix of all these, a person may r e s i s t complying with a r e g u l a t i o n , he or she may comply, or he or she may avoid the imperative to comply by l e a v i n g the area of conduct all together. Thus, we are aware of t r u c k e r s who c h a r a c t e r i s t i c a l l y exceed highway speed l i m i t s because they b e l i e v e t h e i r business r e q u i r e s i t ; we are aware of firms that i n s t a l l waste water management f a c i l i t i e s to meet s p e c i f i e d standards; and we are aware of firms that terminated R&D e f f o r t s i n chemicals that are more l i k e l y to be carcinogenic. Consider the second dilemma. The standards set i n regulations and the devices a v a i l a b l e f o r e n f o r c i n g those standards o f t e n only remotely r e f l e c t the purpose of the r e g u l a t i o n — e s p e c i a l l y where the r i s k s that the r e g u l a t i o n i s to p r o t e c t against are, i n probab i l i s t i c terms, remote. The r e g u l a t i o n o f recominant DNA research f o r i n v e s t i g a t o r s under f e d e r a l contract i s a case i n p o i n t . The NIH G u i d e l i n e s r e q u i r e that c e r t a i n experiments be c a r r i e d on i n l i m i t e d q u a n t i t i e s of m a t e r i a l under high degrees of i s o l a t i o n from the environment. Yet, because of our p r i m i t i v e knowledge of the t h r e a t of new recombinant c r e a t i o n s , we do not understand the degree of r i s k a s s o c i a t e d with research i n l a r g e q u a n t i t i e s of m a t e r i a l s or i n low l e v e l containment f a c i l i t i e s . We do not know whether complying with the G u i d e l i n e s i s u s e f u l i n p r o t e c t i n g p u b l i c h e a l t h , unnecessary because the p e r c e i v e d r i s k of such research g r e a t l y exceeds the r e a l r i s k , or inadequate because p o s s i b l e products of the research will breach the containment f a c i l i t i e s r e q u i r e d even if they are produced i n small q u a n t i t i e s . And, on the enforcement s i d e , we have no assurance that the threat of r e p r i s a l s i n government c o n t r a c t i n g will deter those who are set on v i o l a t i n g the G u i d e l i n e s . Thus, n e i t h e r the standards nor the mechanism a v a i l a b l e f o r t h e i r enforcement assure us that the standards will promote the G u i d e l i n e ' s u l t i m a t e purpose — protec-



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Government Regulation

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t i o n of the p u b l i c h e a l t h and s a f e t y . T h i r d , perceptions about the content of r e g u l a t i o n s — and about how they might change — may induce unintended r e a c t i o n s . For example, most firms depend on a continued growth i n p e r f o r mance to support t h e i r continued p r o f i t a b i l i t y . Interruptions i n the constancy of the flow of business endangers that continued growth; and new r e g u l a t i o n s and new i n t e r p r e t a t i o n s of them threaten such i n t e r r u p t i o n s . Therefore, firms must assess the r i s k that r e g u l a t i o n s may change and consider withdrawing from areas of business a c t i v i t i e s where developing r e g u l a t i o n s threaten u n c e r t a i n t y and i n t e r r u p t i o n : the l e s s s t a b l e a r e g u l a t o r y regime i s , the more i n c e n t i v e firms have to avoid the a c t i v i t i e s that regime might a f f e c t . T h i s suggests that where we introduce new p o l i c i e s — f o r example, c l e a n i n g up a i r , reducing p u b l i c or worker exposure to a wide range of t o x i c chemicals, or l i m i t i n g payments abroad that would be viewed as u n e t h i c a l at home — we n e c e s s a r i l y create i n c e n t i v e s f o r a v o i d i n g a c t i v i t i e s that most l i k e l y will be a f f e c t e d . This i s good to the extent that i t cont r o l s conduct we want to c i r c u m s c r i b e , but i t i s bad to the extent that i t a f f e c t s conduct that will not be i n t e n t i o n a l l y l i m i t e d once the r e g u l a t i o n has c r y s t a l l i z e d i n t o an understandable and s t a b l e regime. Fourth, r e c a l l i n g that we l i v e i n a world of scarce resources, we know that not all s o c i a l goals can be obtained. In time of war, we speak of t h i s as the dilemma of choosing between producing guns or b u t t e r . The problem, we know, pervades all times. I t i s the b a s i c premise of our economic system. And, i t pervades the study of e f f e c t s of r e g u l a t i o n . Thus, any d e c i s i o n to r e g u l a t e a f i r m creates a new cost of production. That, i n t u r n , lowers the firm's p o t e n t i a l s a l e s . The new c o s t , on the other hand, u s u a l l y c o n s t i t u t e s a payment f o r some other resource. Thus, environmental r e g u l a t i o n may reduce i n d u s t r i a l output — and jobs — but may produce more c l e a n a i r and water. The f a c t that we l i v e with scarce resources i m p l i e s t h a t , i n c r e a t i n g a regulation, a u t h o r i t i e s must balance choices among values that are all desirable. And, s i n c e t h i s d e c i s i o n r e q u i r e s accepting l e s s of each of the d e s i r e d r e s u l t s , no choice i s s a t i s f y i n g . Another f e a t u r e of t h i s dilemma exacerbates the problem. While we can d i s c u s s net b e n e f i t / c o s t t r a d e - o f f s of a r e g u l a t i o n f o r s o c i e t y as a whole, we must recognize that the v i c t i m of any cost may not be the b e n e f i c i a r y of the b e n e f i t traded f o r . Thus, i n the jobs and c l e a n a i r or water exchange, the question becomes whether a r e l a t i v e l y few people are r e q u i r e d to f i n d new means of l i v e l i h o o d so that many people may have a s l i g h t l y h e a l t h i e r or a e s t h e t i c a l l y more p l e a s i n g environment. The problem of scarce resources p l a y s out i n other areas. For example, i t i s a matter of p o l i t i c a l f a c t that r e g u l a t o r y a u t h o r i t i e s have scarce resources to enforce standards. I f they devote t h e i r all to one problem, others will s u f f e r . Therefore, they may have to be s a t i s f i e d with l e s s e f f e c t i v e enforcement of


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all r e g u l a t i o n s . Consider the outstanding case o f OSHA. At one time i t s adm i n i s t r a t o r s c a l c u l a t e d that on a random b a s i s a f i r m subject to that r e g u l a t i o n was l i k e l y t o be inspected once every 28 years. No doubt the number continues to be about the same. Without i n s p e c t i o n s OSHA cannot use personal i n t e r a c t i o n between f i r m s managements and OSHA o f f i c i a l s to guide firms t o understand the scope of response the agency expects. T h i s may e x p l a i n why OSHA decided e a r l y to adopt meticulous r e g u l a t i o n s . I t may a l s o exp l a i n why Congress r e q u i r e d OSHA i n s p e c t o r s t o i s s u e c i t a t i o n s f o r every v i o l a t i o n found, even those that are i n c o n s e q u e n t i a l . By making expectations c r y s t a l c l e a r and c r e a t i n g a strong l i k e l i hood that those i n v i o l a t i o n will be punished, Congress and OSHA may have o f f s e t the f a c t that enforcement i s so e p i s o d i c and, t h e r e f o r e , may have secured compliance s i m i l a r t o that that would have been achieved if annual i n s p e c t i o n s were f e a s i b l e . However, doing t h i s i m p l i e s that the p a r t i c u l a r firms that happen to be i n s p e c t e d may f i n d themselves subject to f a r more rigorous enforcement of the r u l e s than reasonable p r o t e c t i o n of worker h e a l t h and s a f e t y r e q u i r e s . The f i f t h and l a s t dilemma of r e g u l a t i o n that I am reviewing here i s one of moral p r o p o r t i o n . We cannot ensure that regulations will be j u s t . To even approach the question o f whether a r e g u l a t i o n i s j u s t , we must recognize that j u s t i c e has many f a c e s . To be j u s t , a d e c i s i o n must s u r e l y have at l e a s t been (1) f a i r f o r the person a f f e c t e d , (2) f a i r from the p o i n t of view of the myriad d i f f e r e n t i n t e r e s t s i n s o c i e t y , (3) p r e d i c t a b l e , (4) made a f t e r adequate d e l i b e r a t i o n , (5) made by a wise, morally upright decisionmaker, and (6) s u b s t a n t i v e l y c o r r e c t . Yet, not all of these elements can be achieved i n a given case, and, indeed, sometimes they are mutually i n c o n s i s t e n t . Consider, f o r example, the T r i s - t r e a t e d sleep wear problem where banning the garments was probably s u b s t a n t i v e l y c o r r e c t from a p u b l i c h e a l t h standpoint but was c e r t a i n l y u n p r e d i c t a b l e and probably u n f a i r from the manufacturers' viewpoint. Where there are competing i n t e r e s t s , i t i s o f t e n impossible t o t r e a t all j u s t l y — King Solomon was lucky.


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Coping With The Dilemmas Recognizing that these dilemmas e x i s t , we can approach regul a t i o n s with a more t o l e r a n t , if s k e p t i c a l , p e r s p e c t i v e . By now, I hope we have learned that r e g u l a t i o n s cannot be " r i g h t . " Assuming we continue t o need some r e g u l a t i o n — and there i s no doubt about that — the question becomes how we will decide what r e g u l a t i o n i s adequate. I suggest that t h i s can only be answered on a case-by-case b a s i s f o r each p a r t i c u l a r s o c i a l problem r e g u l a t i o n i s t o address. And, I suggest t h i s must be done by examining the consequences o f imposing each of the p o s s i b l e forms that r e g u l a t i o n might take with an eye on the p a r t i c u l a r problems of the case


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on the i r r e s o l v a b l e dilemmas of attempting to r e g u l a t e . Time does not permit a d e t a i l e d a n a l y s i s of the d i f f e r e n t p o s s i b l e f e a t u r e s that r e g u l a t i o n s may take, although I would suggest that a b e t t e r understanding o f the subject by those i n both the p r i v a t e and p u b l i c s e c t o r who are i n v o l v e d i n developing r e g u l a t i o n s would be r e f r e s h i n g . In b r i e f e s t o u t l i n e , we should observe that two elements comprise r e g u l a t i o n s — standards f o r conduct and devices to enforce compliance with those standards.


and

A l t e r n a t i v e Methods For Standard S e t t i n g The source o f the standards f o r conduct may be laws, j u d i c i a l d e c i s i o n s , r u l e s o f a d m i n i s t r a t i v e agencies, o r formal o r i n formal d i r e c t i v e s of such agencies. U s u a l l y , the greater the g e n e r a l i t y o f the standard, the l e s s l i k e l y i t i s that we will be able to understand i t s a p p l i c a b i l i t y i n a given case without f u r t h e r e n u n c i a t i o n , but the more l i k e l y i t i s that i t will cover more cases. Thus, a standard that p r o h i b i t s chemical manufact u r e r s from n e g l i g e n t l y producing drugs a p p l i e s to a wide number of cases, but i s l e s s than c l e a r about j u s t e x a c t l y what i s expected o f the manufacturer i n each case. On the other hand, as standards are made more p a r t i c u l a r , i t i s e a s i e r to a s c e r t a i n what i s r e q u i r e d , but what i s r e q u i r e d may s t i f l e i n n o v a t i v e a l t e r n a t i v e s o r serve no u s e f u l purpose. We are all f a m i l i a r with the o l d design standard b u i l d i n g codes that r e q u i r e d , f o r example, c e i l i n g j o i s t s made to some s p e c i f i e d dimensions and o f some s p e c i f i e d type of wood. These stood i n the way o f a r c h i t e c t u r a l innovations i n a l t e r n a t i v e dimensions and with a l t e r n a t i v e m a t e r i a l s , such as s t e e l , g l a s s , concrete, and plastics. Such r e g u l a t i o n s d i d sometimes achieve the standard of conduct sought. C e i l i n g j o i s t requirements i n b u i l d i n g codes probably d i d ensure the s t u r d i n e s s of f l o o r s and c e i l i n g s . But, they a l s o p r o h i b i t e d a l t e r n a t i v e choices that would have been e q u a l l y adequate. These s p e c i f i c standards a l s o run the r i s k o f r e q u i r i n g conduct that i t not even c o n s i s t e n t w i t h the u l t i m a t e goal. F o r example, the purpose of the famous Delaney Amendment to the Food, Drug and Cosmetic A c t i s to p r o t e c t the p u b l i c from cancer and, presumably, to p r o t e c t the p u b l i c h e a l t h . The current debate over a s a c c h a r i n ban suggests that the Amendment may ban a substance even though that substance may not, i n f a c t , cause cancer i n humans and even though i t does have other p u b l i c h e a l t h benefits. Thus, we have the a l t e r n a t i v e of s e t t i n g standards with v a r y ing degrees of g e n e r a l i t y , and none o f the choices are e n t i r e l y satisfactory. Review o f the circumstances i n each p a r t i c u l a r case may suggest which i s best among inadequate a l t e r n a t i v e s . A l t e r n a t i v e Methods For Enforcement S e l e c t i n g means of enforcement i s a l s o d i f f i c u l t .

In the



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United States we use a vast array of devices and procedures. These range from c r i m i n a l p e n a l i t i e s , to the p o s s i b i l i t y of f i n e s and i n j u n c t i o n s , to a d m i n i s t r a t i v e cease and d e s i s t o r d e r s , to l i censing requirements, to systems of tax and other economic i n c e n t i v e s , and beyond. Together, they c o n s t i t u t e a broad range of the p o s s i b l e degree of pressure that government may use to encourage or coerce compliance with s t a t e d standards. G e n e r a l l y , as the pressure becomes g r e a t e r , the l i k e l i h o o d i s that more of those who otherwise might not comply will do so. However, the t r a d e - o f f s along the way are l e g i o n . For example, c r i m i n a l p e n a l t i e s are severe forms of c o e r c i o n . Thus, most r e g u l a t e d firms will comply with standards that are subject to such enforcement. However, because s o c i e t y f i n d s such sanctions to be so severe, a d m i n i s t r a t o r s will be l o a t h e to enforce i s o l a t e d , minor i n f r a c t i o n s by bringing c r i m i n a l p r o s e c u t i o n s . Therefore, if the only enforcement device f o r a given standard i s a c r i m i n a l p e n a l t y , one can expect that some d e v i a t i o n from the standard will be t o l e r a t e d , and, thus, the standard i s not as c o n f i n i n g as i t appears on i t s f a c e . The r e s u l t of these observations i s that we must look at r e g u l a t o r y regimes rather than p a r t i c u l a r r e g u l a t i o n s . Consider, f o r example, a range of f a c t s about OSHA (an example already r e f e r r e d t o ) : the standards are meticulous, enforcement i s r e q u i r e d if a violation i s discovered, and i n s p e c t i o n s are u n l i k e l y unless p a r t i c u l a r problems turn up. Therefore, there i s a low probability of enforcement f o r v i o l a t i o n s , but a high p r o b a b i l i t y that the agency will enforce against a v i o l a t i o n that i t does d i s c o v e r . That i s not the only i n c e n t i v e to comply w i t h OSHA r u l e s , however. Insurance companies r e q u i r e i n s p e c t i o n s of the workplace to underw r i t e insurance, and s e r i o u s noncompliance with OSHA standards would probably r a i s e doubts about the wisdom of i n s u r i n g the facility. F u r t h e r , employers r e l y on insurance i n v e s t i g a t o r s to t e l l them areas i n which they are not complying with OSHA s t a n dards, and one can assume that many employers will v o l u n t a r i l y comply with the standards upon d i s c o v e r i n g they are not. Finally, employees are p r o t e c t e d from d i s c i p l i n a r y sanctions or d i s m i s s a l f o r blowing the w h i s t l e on t h e i r employers to OSHA, thus s t i m u l a t i n g s p e c i a l i n s p e c t i o n s f o r important problems. I t may be that a random i n s p e c t i o n i s l i k e l y f o r o r d i n a r y employers only once i n 28 years, but the whole regime to t h i s r e g u l a t i o n encourages the employer to comply with OSHA s standards r e g a r d l e s s . f

Conclusion Most r e g u l a t i o n s probably have some good i n them. I t i s unl i k e l y that any stay around very long if they serve no p u b l i c purpose. On the other hand, all r e g u l a t i o n s have some bad. They would not be worth having unless they c o n s t r a i n some people who do not want to be constrained. And, they do that i n ways t h a t , i n e v i t a b l y , can be shown to be inadequate. The only s e n s i b l e approach to the problem of i m p r o v i n g r e g u l a t i o n i s to gain a


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comprehension of the inherent inadequacies o f r e g u l a t i o n , to l e a r n the range o f a l t e r n a t i v e methods t o s e t and enforce s t a n dards and the t r a d e - o f f s among a l t e r n a t i v e s , and then t o s e t about an i n d u c t i v e minimizing/maximizing game to search f o r the best a l t e r n a t i v e w i t h i n the l i m i t s of what i s p o s s i b l e .

March

8,

1979.


RECEIVED


A Reasoned Approach to Government Regulation: How Can We

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