Posts Tagged ‘Regulation’

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Whales and electricity, and sustainability

August 29, 2011

Lynne Kiesling

A few weeks ago I was thrilled to speak at the inaugural Summer Institute on Sustainability and Energy, organized by the University of Illinois-Chicago in partnership with Argonne National Laboratory, Northwestern University, Illinois Institute of Technology, and the University of Chicago. The students were from diverse fields and between them and the other speakers I learned a lot (including some cool vertical farming design!).

My talk focused on the history of the electricity industry, the economics of the industry and of its regulation, and how technological change is changing the economics of the industry and making its regulation maladaptive. When thinking about the history of electricity through the lens of technological change, I like to start with lighting, because better-quality lighting was the primary consumer objective toward which entrepreneurs and innovators were driving electricity technology. Talking about lighting in the 18th-19th century in the US means talking about whale oil, which was the dominant lamp fuel because of the bright clarity of its light. You can think through the rest of the story — demand for whale oil shifts to the right, prices rise, whalers have to go further and harder to catch whales from a declining population, which shifts supply to the left, which increases prices … ultimately the increase in the price of whale oil saved the whales, inducing innovators to create new lighting technologies: first kerosene lamps, and then electric lighting. That’s why when you’re thinking about the confluence of energy, why consumers use energy, technological change, and sustainability, whale oil is a good place to start.

My NU colleague Beth Herbert is the Assistant Director of Science in Society, a really good science outreach effort at NU, and she attended SISE that day and blogged about my presentation (thanks Beth!). She draws out the innovation and sustainability lesson and makes it explicit:

There was a time not too long ago when a significant portion of the American public looked to whale oil as its source of power, and the companies who procured and sold the oil were very powerful. But it was a limited resource, and fortunately we looked to alternatives (unfortunately, not entirely sustainable alternatives) before depleting the entire whale population. So the moral of the story? What you think you “need” today—say, lots of fossil fuels—might not seem so necessary in the future, if we continue to apply our creativity and innovation to finding and developing sustainable energy sources.

She also makes some other great observations, so I encourage you to click through and check out the rest of her post, and of Science and Society.

And a reading recommendation: for the history of the evolution from whale oil to kerosene lighting, and the innovation in the kerosene lamp as a great example of the innovation process, Daniel Yergin’s The Prize has an excellent chapter on the subject. The rest of the book also provides a thorough and well-told history of the global oil industry.

Posted in Economics, Electricity | Tagged , , , | 3 Comments »

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Free the electricity consumer!

August 23, 2011

Lynne Kiesling

In late July I spoke at Cato University, which was great; I met so many interesting and thoughtful people, and learned a lot from my fellow participants and speakers. I’m also happy that Cato has made the presentation notes and recordings of the presentations available on their website, so you can see and hear them too!

One of my talks was called “The Economics of Intervention”, which is a large topic … so I focused on the interplay of technological change and regulation, ranging from Schumpeterian disruptive innovation to the history of the electricity industry and its regulation to current smart grid issues. You can also listen to a recording of my talk. If you are a regular KP reader you will recognize the themes and connections that I drew in the talk — innovation makes monopolies temporary, regulation that purports to “stand in for competition” cannot do so, and unless smart grid includes transactive technology and transactive market options, it’s not smart. The best way to deliver these potential benefits, and to avoid the distrust and Orwellian concerns attached to having such technology at the behest of government-granted monopolies and regulators is to open up retail electricity markets, reduce entry barriers, and enable innovators and entrepreneurs to transition electricity from a commodity product to a service that can be differentiated, bundled with other services, etc.

While I was there I also talked with Caleb Brown about the potential value creation from smart grid technologies and customer-focused business models, and he has posted our conversation as a podcast. I like his framing of the issue: free the electricity consumer!

Posted in Economics, Electricity, Regulation, Technology | Tagged , , , | 1 Comment »

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Lomborg and Haab on light bulbs and technology

August 16, 2011

Lynne Kiesling

Thanks to Tim Haab for pointing us to this excellent observation from Bjorn Lomborg about innovation, regulation, and environmental quality:

Real reductions in carbon emissions will occur only when better technology makes it worthwhile for individuals and businesses to change their behavior. CFLs and other advances can take us part of the way, but there are massive technological hurdles to overcome before fossil fuels generally become less attractive than greener alternatives. …

Limiting access to the ‘wrong’ light bulbs or patio heaters, ultimately, is not the right path. We will only solve global warming by ensuring that alternative technologies are better than our current options. Then, people the world over will choose to use them.

Hear, hear.

Posted in Economics | Tagged , , | 1 Comment »

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Electricity restructuring and the failure to quarantine the monopoly

August 11, 2011

Lynne Kiesling

In 2011, roughly fifteen years after the passage of the first state-level electricity regulation restructuring legislation (in states like California, Pennsylvania, Maine, …), retail competition for residential customers remains anemic in most of the 15 states + DC that have implemented restructuring and allow retail choice.

Lots of possible theories exist for such weak competition — high customer acquisition costs, incumbent default service contracts as an entry barrier, regulation-mandated full depreciation of long-lived incumbent assets as a barrier to innovation, customer indifference, to name a few. Out of this set, the state where retail rivalry for residential customers has been most robust is Texas, with multiple retail firms offering a variety of traditional and green electricity products. At this point they are still competing primarily on price, not on product differentiation (such as dynamic pricing) other than green power, and not through bundling with other services to the home. If consumers value those products I expect them to develop as the distribution wires companies implement their digital meter installations, which will enable more variety and better information flow and customer engagement.

Based on my previous Texas work and on some reading I’ve been doing on the history of telephone regulation for a paper I’m working on, I want to explore another hypothesis: Texas has done a better job than the other 14 states + DC of quarantining the monopoly.

What does “quarantine the monopoly” mean? The phrase arises from the work of William Baxter, now a law professor at Stanford, who in his position as Assistant Attorney General in the U.S. Department of Justice in the 1980s was the primary architect of the settlement of the U.S. vs. AT&T case that led to AT&T’s divestiture in 1982. One of Baxter’s principal concerns regarding the welfare effects of the AT&T monopoly was what came to be known as Baxter’s Law, or the Bell Doctrine — “regulated monopolies have the incentive and opportunity to monopolize related markets in which their monopolized service is an input”, to quote Joskow and Noll’s outstanding 1999 paper on the Bell Doctrine. If there is sufficient rivalry or potential rivalry in that related market, then allowing monopolist participation in that market could reduce or stifle competition, enabling the monopolist to extend its monopoly into the related market, one result of which would be reduced output, higher prices, and deadweight loss arising in that related market.

Baxter’s argument was that the best feasible approach to such a situation, in which a regulated monopolist sits in the middle of a vertical supply chain with competitive or potentially competitive markets on either or both sides, is to quarantine the monopoly by restricting its market participation to its regulated functions. The best way to do this is to separate the ownership and control of the regulated functions from the other vertically-related functions.

Most of the restructured states in the US have failed to quarantine the monopoly in electricity. Regulated wires companies continue to participate in retail markets in states that have granted the default residential service contract to the incumbent, perpetuating the monopolist’s presence in the retail market. While they cannot use that contract to raise retail prices and hence raise their profits, their incumbency still provides an entry barrier in the retail market for residential customers, a market that already has substantial customer acquisition costs and a customer culture that is not yet accustomed to or aware of the potential value creation arising from novel energy-related services and bundles.

Texas, however, quarantined the wires monopoly very clearly in its implementation of restructuring. Incumbents were not permitted to provide default service in their native regulated territories, and they are only permitted to provide wires-related services, which includes metering. Texas has done a better job than the other states of applying the Bell Doctrine in electricity.

 

Posted in Economics, Regulation | Tagged , , , | 2 Comments »

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Risks and regulation

July 15, 2011

Lynne Kiesling

I’ve just returned from a conference on regulation in Bulgaria organized by the Istituto Bruno Leoni, a classical liberal think tank in Italy that does a lot of extremely good work developing and applying classical liberal principles and ideas to public policy issues in Italy and Europe. The topics included financial markets regulation, energy, and telecom/internet.

The organizers asked me to comment on risks and regulation with respect to energy and the environment. The topic prompted me to ask: risk to whom, and risk of what? The parties whose risks I analyze are consumers, the end users.

Risk of what? Historically, at least in the US, risks related to reliability of service and bankruptcy of firms have been the primary focus of regulatory policy. Keep the lights on, no matter the cost, and treat that as a uniform standard (by technological necessity, until the invention of good switches). Use economic regulation (rate of return + monopoly service territory for the vertically integrated firm) to ensure the firm’s financial stability. These two objectives have had the consequence of significant infrastructure redundancy at a substantial cost, and increased incentives to firms to build those redundant electro-mechanical infrastructure systems.

More recently, environmental risk has become more prominent, and increased the combined economic and environmental regulatory policy focus on electricity generation. Initially the concern was the “criteria pollutants” such as SO2, NOx, etc., but the focus has shifted in the past two decades to greenhouse gases and carbon policy. The emission policy options range from

  1. Do nothing while we do more scientific research into the complex and little-understood climate system
  2. Price carbon with a tax … but with this policy one cannot control emission quantity
  3. Constrain GHG emission quantities with emission permit markets … but with this policy one cannot control emission price
  4. Traditional command-and-control regulation: emission quotas, renewable portfolio standards … but this approach has high enforcement costs, with centralized decision-making that’s likely to be inefficient because it cannot reflect, as Hayek said “individual knowledge of time and place”

Other important economic risks to consumers include the effects of wholesale and retail price volatility as fuel prices fluctuate, and the mounting effects of the lack of innovation and new technology adoption in the customer-facing portion of the value chain.

That was the setup part of my remarks, and I’ll post the rest in a follow-up … but for now, tell me: what are some other ways to think about the risks associated with regulation, and the attempts of regulation to mitigate certain risks, that face electricity consumers?

Posted in Economics, Energy markets, Environmental policy, Regulation | Tagged , , | 4 Comments »

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Distortionary effects of three-tier liquor regulation, Wisconsin edition

June 15, 2011

Lynne Kiesling

As Jonathan Adler notes at the Volokh Conspiracy, the Wisconsin legislature is considering a piece of legislation that would change the regulations governing the production, wholesale distribution, and retail sale of beer in Wisconsin. The controversial provision in this legislation is one that prevents brewers from owning wholesale distributors, and the controversy arises primarily because of the possible effects on small craft brewers of a piece of legislation that is intended to blunt the market power of Anheuser-Busch. As described in a recent Milwaukee Journal-Sentinel article:

The legislation, approved Tuesday night by the Legislature’s Joint Finance Committee, is designed to stop Anheuser-Busch from buying wholesale distributors, say its supporters, including a beer wholesalers lobbying group. Opponents say those fears are exaggerated, with craft brewers saying the legislation would hamper their growth prospects.

Most of the nation’s beer is sold by brewers to independent wholesalers, which earn a profit by reselling the beer to supermarkets, taverns and other retailers. That three-tier system has operated since Prohibition’s repeal, and was created to prevent brewers from forming monopolies making, distributing and selling beer – which existed before Prohibition. …

The proposal endorsed by the Joint Finance Committee is needed to avoid a similar court challenge in Wisconsin, and to prevent Anheuser-Busch from buying distributors, says Tim Roby, spokesman for the Wisconsin Beer Distributors Association. The proposal also is supported by MillerCoors LLC, Anheuser-Busch’s chief rival, and groups representing retailers, including the Tavern League of Wisconsin and the Wisconsin Grocers Association.

The legislation prohibits brewers from buying wholesale distributorships, while allowing brewers that produce up to 300,000 barrels annually to do their own wholesale distribution.

Some Wisconsin craft brewers do their own wholesale distribution. Others sell their beer primarily through wholesalers, while also doing limited self-distribution by selling beer at festivals or filling emergency orders from taverns. The state’s largest independent craft brewer, New Glarus Brewing Co., sold about 92,000 barrels in 2010.

MillerCoors, with its deep roots and strong market and employment presence in Wisconsin, supports the bill, while Anheuser Busch argues that the bill stifles competition.

The economics and politics of vertical integration are the issue here. Summarizing from a long post I wrote describing the three-tier system in 2002: before Prohibition, brewers did their own distribution to their own bars, pubs, and taverns, and profited handsomely with this strategy. With the repeal of Prohibition, federal law stipulated that wholesale liquor distribution must not cross state lines (I think of this as the Al Capone rule!), so with the growth of national-market brewers came independent wholesale distributors within each state. Over the past several decades, though, wholesale distribution has seen consolidation to the extent that even large states like Illinois have very few wholesale distributors. Moreover, those distributors are politically powerful, and use their profits and their political connections to maintain their market power, to the frustration and economic detriment of both brewers and retail outlets.

Thus one way to interpret this proposed legislation is as the Wisconsin wholesale distributors acting politically to retain their substantial market power by excluding potential competition from vertical integration of large national brewers.

But the controversial and interesting/disturbing interpretation involves small craft brewers such as New Glarus Brewing (which makes some truly outstanding beer, particularly their Stone Soup). Incidentally, New Glarus used to be distributed in Illinois, but as the political and market power of Illinois distributors grew they increased distribution fees sufficiently that New Glarus pulled out of the Illinois market, so now we have to stock up whenever we’re in Wisconsin. New Glarus currently makes 92,000 barrels/year, so they would be exempt under this bill and allowed to do their own wholesale distribution. However, for small brewers this vertical integration is costly, so, as this OpenMarket.org post suggests,

Brewers of less than 300,000 barrels annually will still be able to self-distribute, but current brewers and new wholesalers would be required to have 25 independent retail customers prior to being granted the right to distribute. According to a MillerCoors spokesperson, these new rules would also prevent small brewers from banding together to form their own distributorship. In addition to all of that, the measure would prevent brewers from owning retail licenses, meaning that they could have a brewpub, but they would only be allowed to sell their own product. Breweries that already own retailing outlets would be allowed to retain one.

I think this is the material issue — not only does this legislation insulate wholesale distributors from vertical integration by large national competitors, it also insulates them from contracting among craft brewers to form their own wholesale distributor to compete with the incumbents. The economic theory underlying this argument comes from the Klein, Crawford, Alchian (1978) article on contracting as a substitute for vertical integration, in situations of low transaction and monitoring costs. As New Glarus owner Deb Carey said in this Madison Cap Times article,

“We are losing assets and we are losing control over our products,” Carey says. “This debate boils down to the fact that the wholesalers do not want a drop of beer going to market in Wisconsin without them making their 30 percent profit from it. That’s it.”

That’s the economic argument supporting the craft brewer’s position in this debate; the proposed legislation is anti-competitive, distorts the market, and hampers the business potential of craft brewers in Wisconsin not by preventing them from self-distributing, but by preventing them from contracting to create a craft wholesale distributor to compete against the politically powerful incumbent wholesale distributors.

Posted in Economics, Regulation | Tagged , , | 1 Comment »

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The rhetoric of regulation: free markets are regulated

June 3, 2011

Lynne Kiesling

Here at KP we study and analyze and talk a lot about government regulation of economic activity. But one thing to which we have not been particularly attentive is the rhetoric of regulation — what meaning, explicit and implicit, do we attach to the word “regulation”?

Into this breach comes an excellent Freeman column from Steve Horwitz that explores the rhetoric of regulation. Steve draws our attention to an important insight that is highly relevant to the cases and industries Mike and I study — the way we use the word “regulation” carries with it an implicit, and incorrect, presumption that in the absence of government administrative rules there would be disorder, manipulation, and chaos. That presumption is incorrect because in the standard sense of our understanding of the word, so-called “unregulated” markets are actually already subject to a set of formal and informal rules that discipline the behavior of all market participants, including both producers and consumers.

In this sense, free markets are indeed highly regulated.  Economic theory demonstrates that free markets operate according to rules that we can recognize and understand.  These rules enable us to make what F. A. Hayek called “pattern predictions” about the behavior of markets.  We know, for example, that when price rises, all else constant, quantity demanded will fall, or that above-normal profits in an industry will bring new sellers into that market — even if we cannot predict either outcome precisely.  Market participants will not act haphazardly, nor will outcomes be chaotic.  People’s behavior is regulated by the laws of economics, which in turn produce orderly patterns.

In other words, rules exist that lead to decentralized coordination in markets, and that decentralized coordination among heterogeneous agents leads to order, even in the absence of administrative “regulation”. Government regulation imposes a set of rules that differs from these organic rules, and may often conflict with those organic rules, with unintended consequences:

However, we could also argue that such intervention reduces the level of regulation in the market because intervention invariably puts a great deal of discretion in the hands of both the “regulators” and those being regulated.  Are “regulated” markets more predictable than “unregulated” ones?  Is it easier for entrepreneurs to anticipate the actions of bureaucrats with discretionary powers or of competitors seeking profits according to the rules of the marketplace?  Is behavior more “regular” when firms are genuinely profit-seeking or when they attempt to manipulate the “regulators” through rent-seeking?

Free markets are regulated, and government regulation that subverts or conflicts with those organic rules often create more distortions than they purportedly resolve. Kudos to Steve for making the rhetoric of regulation more explicit.

Posted in Economics | Tagged , | 6 Comments »

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Using regulation to raise rivals costs

April 26, 2011

Michael Giberson

An NPR Morning Edition story, “Indie Truckers: Keep Big Brother Out Of My Cab,” reports on a change of attitude at the American Trucking Association toward proposals for mandatory electronic logging of long-haul truck movements.

This month, an industry group called the American Trucking Associations, which represents thousands of trucking companies, dropped its longstanding opposition to mandatory electronic logging and came out in favor of the idea.

And some big companies are now actively promoting electronic logging, with five major companies coming together to form a group called the Alliance for Driver Safety and Security. It’s lobbying Congress to pass a law requiring electronic logging, to make sure the proposed DOT rule goes through….

“We don’t want to be defined by the worst in our industry,” says Don Osterberg, senior vice president of safety for Schneider National, one of the companies in that alliance. “We just think we need to elevate the expectations and the performance of all motor carriers.”

But Spencer, from the independent owner-operator drivers’ group, dismisses that argument. “When they talk about leveling the playing field, what they are really saying is we need to get behind efforts that will increase costs of our competitors,” Spencer says. “We don’t find that to be an especially noble effort.”

The costs will hit independent truckers like Button the hardest. And Button says they have objections beyond just the increased cost, saying it’s like having Big Brother come into their cabs to monitor their behavior.

“When I’m away from home, this is my home,” Button says. “Does somebody come in your front door and decide, ‘I want to plug into your computer and see where you’ve been today’?”

Not mentioned in this quote is that most large trucking companies have already installed the electronic logging equipment that the regulation would require.

HT to Peter Klein, who styles the story as a Bootleggers-and-Baptist effort. The ATA would be the “bootleggers” and the “baptists” in this regulatory episode would be highway safety group Road Safe America (see the RSA priorities list).

But in a traditional B-and-B story, the bootleggers support the effort from behind the scenes and let the baptists be the public face. In this case the ATA is proud to publicly support public safety, even if it may have a disproportionate and negative effect on small companies and independent operators (who may happen not to be ATA members).

“We don’t want to be defined by the worst in our industry” is a common sentiment among business people who want to use government to drive competitors out of the market.

Posted in Economics, Regulation | Tagged , , | 1 Comment »

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Regulatory inertia, antitrust edition

April 18, 2011

Lynne Kiesling

This article in the Wall Street Journal last week got less attention than I expected (perhaps because of budget, Libya, etc. news). It’s a very good analysis of bureaucrat v. bureaucrat competition between the DOJ and the FTC on which agency will take the lead in prosecuting antitrust cases:

Both agencies are charged with enforcing antitrust law, a situation that has prevailed for almost a century, and it’s up to them to sort out disputes. Neither will disclose how often they occur, but antitrust lawyers and agency officials say they have been rising in number and intensity, in part because converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility. …

Some methods used to resolve agency disputes belie the stakes involved. In addition to the most recent coin toss—which several people familiar with the matter said the Justice Department won—the agencies have employed the “possession arrow” system borrowed from college basketball, in which they take turns. That prevents either agency from claiming jurisdiction over a company or industry sector in the future. …

The two agencies have different legal procedures for challenging business deals or practices they believe to be anticompetitive. The Justice Department must work through the federal court system and face judges who are often skeptical of antitrust law. The FTC, by contrast, tries cases in its own administrative law system. This, many lawyers believe, provides a significant home-court advantage.

I’ve always classified the FTC’s jurisdiction as being more focused on mergers in consumer retail products and industries.

The article goes on to describe the real costs that this jurisdictional squabbling creates for firms, adding time and expense to an already long and expensive merger process. It concludes with observations from FTC commissioner and former FTC chair William Kovacic, who argues that it’s time to revamp the structure of the federal government’s antitrust prosecution.

I think there’s a crucially important, more general, broader insight to draw from this story: the inevitability of regulatory inertia relative to the underlying dynamism and change in the economy. Note in the quote above what is cited as an impetus for this conflict: “… converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility.”

By its nature regulation (including antitrust enforcement) relies on establishing definitions, guidelines, limits on behavior (of an agency as well as of firms), and legalistic, administrative procedures for carrying them out. In the case of antitrust and the split jurisdiction between the DOJ and the FTC, these strictures also include stipulations of who will concentrate on which industries. One of the hallmarks of economic and technological dynamism is the Schumpeterian creative destruction of industry boundaries — whole new industries exist that could not have been imagined a century ago, in the heyday of establishing regulatory agencies.

Why are regulatory agencies slow to adapt to such organic, evolutionary changes in technology and the economy? Here I think Schumpeter meets Buchanan and Tullock — once established, those working in agencies have an interest in maintaining the status quo jurisdiction and budget of the agency, despite any apparent mismatch of its functions with changes in the underlying economy. Changes in regulation require changes in legal procedures, and may even require changes in enabling legislation, adding yet another layer of inertia to the process. In addition, I think that legal procedures intended to increase agency transparency and accountability, such as the Administrative Procedure Act, exacerbate the legalistic bureaucracy of regulation and reinforce the slow pace of regulatory adaptation to underlying dynamic change.

One unfortunate consequence of such regulatory inertia is the potential for reduced welfare/total surplus, through both reduced consumer surplus and producer surplus. Such regulatory agencies were established primarily to protect consumer surplus, but one consequence of technological change has been how it enhances consumers’ abilities to investigate and protect their own interests, as personally and subjectively defined rather than as bureaucratically defined (which is usually defined as lower prices). But regulatory institutions adapt slowly to such change, as this example illustrates, to the detriment of total welfare.

This observation extends to other forms of regulation, including state-level public utility regulation. One of the things I find most paradoxical in the current approach to smart grid investment is how the technology adoption decision has been incorporated into the regulatory process, which the above analysis suggests is counter-productive.

Posted in Economics, Electricity | Tagged , , | Comments Off

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Is rationalizing regulation even possible through political processes?

January 19, 2011

Lynne Kiesling

Like other economists, I was intrigued by President Obama’s op-ed in Tuesday’s Wall Street Journal about streamlining federal regulation. Like Matthew Kahn, I see the influence of Austan Goolsbee here, as well as Cass Sunstein; like Tim Haab, I think this is a salutary call for more, and more consistent, application of cost-benefit analysis to existing and proposed regulation and legislation. I applaud the sentiments President Obama conveys when he says

But creating a 21st-century regulatory system is about more than which rules to add and which rules to subtract. As the executive order I am signing makes clear, we are seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs. This means writing rules with more input from experts, businesses and ordinary citizens. It means using disclosure as a tool to inform consumers of their choices, rather than restricting those choices. And it means making sure the government does more of its work online, just like companies are doing.

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

Call me a skeptic, though, when I then observe that intentions and rhetoric are not value-creating unless they lead to actual results. Previous executive administrations have promised such regulatory reviews, usually amounting to little more than window dressing, regardless of political party. This administration promised a line-by-line budget review two years ago and has yet to deliver on that promise. Regulatory lag is very likely to undermine a large share of the potential benefit from this executive order; take this example from President Obama’s op-ed:

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.

The EPA listed saccharin as a hazardous chemical in 1980. He’s offering this as an example of the EPA “wisely” eliminating a costly and counterproductive regulation … but note that saccharin was discovered in 1879, the FDA considered banning it in 1977 but did not do so due to Congressional legislation, and the EPA is finally eliminating its contradictory rule in 2011, 31 years after putting saccharin on the hazardous chemicals list! Unless federal executive and administrative staff actually set deadlines and act to meet them in a timely manner, and are held accountable to do so with consequences if they don’t, regulatory lag will consume all of the potential benefit from this proposed regulatory streamlining.

Note also, while we’re on the subject of the EPA, that the EPA is involved in much of the contradictory cross-agency regulation that the Obama administration purports to want to streamline. As Matthew Kahn asked in his post linked above, “How will cross-agency disputes here be arbitrated? If one agency finds the rule helpful while another does not, how will the verdict be decided?” The incentives facing each of the hundreds of federal agencies is not necessarily to streamline their regulations, particularly when doing so might create benefits for others but would reduce their budget or their reach/power. How do the implementers of this order in the Obama administration propose to align those incentives with President Obama’s statement that “Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary.”?

Another complication that will limit the executive and administrative staff in achieving regulatory streamlining will be federalism. Some of the most costly and nonsensical cross-agency contradictory regulations are not just cross-agency; they are cross-jurisdiction, where a federal regulation and a state regulation interact to yield perverse incentives and bad outcomes. One example is the interaction of the EPA’s New Source Review regulations under the Clean Air Act with the cost-based economic regulation of electric utilities at the state level. New Source Review and regulatory approval of cost recovery for investments combine to create risk aversion and caution among state regulators, and thus to stifle technological innovation in electricity, particularly in generation. A streamlining of federal regulations would not address situations such as this one.

Finally, note that President Obama is clinging to the canard that “… we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.” He and his administration refuse to acknowledge the central role that regulation played in creating the incentives leading private actors to make the decisions they did in financial and real estate markets. I refer him and his staff to Russ Roberts for a clear and thorough analysis that will remedy their (possibly willful) ignorance.

Posted in Economics, Regulation | Tagged , | 6 Comments »

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