February 24th, 2015
Of all the false dichotomies that plague our political debate, perhaps the biggest is the insistence that we must choose between stringent regulation to protect the public on one hand, or economic growth, business profits and job creation on the other.
This needn’t be the case, however. A next generation of regulatory theory and practice began to emerge two decades ago, providing the benefits that advocates of regulation want in ways that impose less drag on business, and sometimes even produce positive economic benefits. The key insight: Governments should focus on compliance, not enforcement. The goal is achieving desired outcomes – cleaner air, safer workplaces, better housing – not enforcing rules or writing citations.
Emphasizing outcomes and compliance rather than regulations and enforcement produces new ways of structuring and accomplishing public goals – ways that turn out to be both more effective and, for most, less burdensome.
Perhaps the most fruitful area for regulatory reform at the federal level is the environmental field – where there has been the most activity both in other countries and at the state level here. Both the Environmental Protection Agency and Congress showed interest in such Next Generation approaches two decades ago – and demonstrated what these might look like.
In 1992, a joint study by the EPA, Amoco Corporation and local community leaders of an Amoco refinery in Yorktown, Virginia, concluded that there were far cheaper ways to control pollution at the refinery than those required by EPA. Existing regulations required additional emission controls at the refinery’s waste treatment plant, even though the plant was a minor source of the Yorktown facility’s emissions of volatile organic compounds (VOCs).
At the same time, few controls were required at the refinery’s barge unloading facility, the second largest source of VOCs at the refinery. The joint study discovered that controls on the barge equipment, coupled with a few other minor modifications, could achieve 97 percent of Amoco’s VOC reduction requirements at one-fourth the cost of the waste treatment plant controls. This was, obviously, a better outcome.
EPA designed its 1994 “Common Sense Initiative” (CSI) in large part to allow for such “cleaner, cheaper, smarter” environmental approaches across industry sectors. Building on CSI, in 1995 EPA announced “Project XL” (because it aspired to empower companies to exceed environmental requirements).
By 1999, a bi-partisan coalition in the House of Representatives gave EPA statutory authority to “enter into innovative strategy agreements” with any entity with “a good overall record of meeting statutory environmental standards.” Such legislative change was never enacted, however, and the Next Generation movement – along with bipartisanship in modernizing government, more generally – died out under the Bush and Obama Administrations.
As public sector resources at all levels face increasing strains, it is time to revive this rare area of potential agreement across the political spectrum – achieving better public outcomes through a lighter governmental touch.
This new paradigm originally built off insights from the field of policing called for less reliance on responding to incidents of law breaking, and more attention, instead, to detecting and deterring violations before they occurred.
The lessons in an environment of constrained resources were that regulators must:
- Target enforcement resources effectively on the worst offenders.
- Encourage compliance among the rest through cooperative means, including incentives for going beyond minimal compliance, proactive education and outreach, labor-management cooperation, and other creative strategies.
Governments routinely expect all those subject to regulation of one sort or another to file frequent reports and undergo regular inspections. Reimagining regulation proceeds from the premise that most people or businesses want to comply with the law – whether out of real commitment to legal norms or out of fear of punishment or financial consequences. Some fall short, whether out of genuine ignorance, laziness, or incompetence, or from a desire to avoid the burden of compliance if possible. A small minority are willful and flagrant offenders.
As public coffers face increasing strains, it’s time to achieve better public outcomes through a lighter governmental touch.
Each of these circumstances requires a different compliance strategy by the government: Good citizens should be incentivized and rewarded; most businesses and individuals should be helped to comply more easily; the ignorant or incompetent should be educated, provided opportunities to comply, and reminded of the consequences if they don’t; and truly bad apples should be prosecuted.
This requires leveraging the cooperation of private actors, including those regulating themselves. All regulatory schemes, whether criminal or civil, must rely upon the willingness of the vast majority of the population to comply without direct governmental intervention and to carry out much of the enforcement through informal community mechanisms such as norm setting, peer pressure and even whistleblowing.
Name and Shame the Violators
Good business citizens often have an interest in reporting and seeking enforcement against lesser compliers who thereby achieve an unfair competitive advantage — regulators can enlist competitors in achieving regulatory aims by providing rewards for firms that report other violators, and offering reduced sanctions for non-compliant firms that report worse violators.
The “No Sweat” campaign instituted by former US Labor Secretary Robert Reich utilized consumer choices as an enforcement mechanism for labor standards – and applied them to downstream marketers of garments in order to coerce them into enforcing labor standards among garment manufacturers. Both aspects of the strategy brought to bear pressures to comply and penalties for non-compliance that government itself could not muster.
This needn’t all be punitive in nature – naming and shaming – but can simply involve provision of good consumer information.
For example, the Centers for Medicare and Medicaid Services’ on-line Nursing Home Compare Report Card posts survey reports of all nursing homes throughout the nation in an easy-to-understand format, explains deficiencies, and benchmarks nursing homes against state and national findings. Informed consumer choice provides regulatory pressure on providers from there.
What about the ever-popular self-regulation? This is effective but requires the backup of public enforcement in order to be effective. For instance, governments rely heavily in tax collection on voluntary compliance and self-enforcement; – but voluntary self-reporting and payment depends, at least in part, upon the existence and judicious but well-publicized application of potentially severe governmental sanctions.
Can the Fox Police the Hen House?
However, while reduction of penalties is a necessary component of working cooperatively and openly with potentially offending firms, absolution can’t be offered in ways that allow or encourage businesses to game the system by shirking their responsibilities and then simply fessing up. For twenty years, EPA has had a “Voluntary Environmental Self-Policing and Self-Disclosure” policy offering dramatic incentives for companies that voluntarily disclose and correct violations. While the punitive component of the penalty might be reduced, EPA continued to recover any economic advantage gained from noncompliance.
The point of all these less formal regulatory structures is two-fold. First, it adapts regulation to the challenges of those regulated rather than treating all as criminals while achieving better compliance. Second, in doing so, it conserves limited public resources that can be more effectively used to go after those who truly deserve it.
At the same time, many individuals and firms meet, and sometimes even exceed, the law’s expectations, either out of moral commitment or simply because they find it to be good business. Governments can in fact further regulatory objectives by rewarding those firms that habitually comply or even go further than the law requires.
Such efforts have been implemented through “green tier” programs in many states – but two decades ago, the Netherlands went even further: Companies are encouraged to go beyond the requirements of the law. In return, the government rewards them with public recognition, promotion, consumer “branding,” and, most importantly, with regulatory simplification and oversight reduction.
Modern regulatory systems can provide less government interference – but at a price: better private performance. Less burdensome, more market-oriented or responsive forms of regulation can vastly improve attainment of public objectives. But they need to be tailored to specific contexts and actors, – and they won’t work for everyone.
Regulatory regimes will need to allow individuals and businesses to choose lower levels of government intrusion in return for achieving higher levels of compliance. The results will be both higher attainment of public policy goals and less-costly government.