Making government simpler is complicated

October 26, 2013

Here’s something a politician would never say: “I’m in favor of complex regulations.” But what would the opposite mean? What would it mean to have “simple” regulations?

Senate Minority Leader Mitch McConnell points to a stack of papers representing what he claimed to be the regulations associated with President Obama's health-care law as he speaks at the Conservative Political Action Conference (CPAC) on March 15. (NICHOLAS KAMM/AFP/GETTY IMAGES)
Senate Minority Leader Mitch McConnell points to a stack of papers representing what he claimed to be the regulations associated with President Obama's health-care law as he speaks at the Conservative Political Action Conference (CPAC) on March 15. (NICHOLAS KAMM/AFP/GETTY IMAGES)

There are two definitions of "simple" that have come to dominate liberal conversations about government. One is the idea that we should make use of "nudges" in regulation. The other is the idea that we should avoid "kludges." As it turns out, however, these two definitions conflict with each other —and the battle between them will dominate conversations about the state in the years ahead.

The case for "nudges"

The first definition of a "simple" regulation is one emphasized in Cass Sunstein’s recent book titled Simpler: The Future of Government (also see here). A simple policy is one that simply "nudges" people into one choice or another using a variety of default rules, disclosure requirements, and other market structures. Think, for instance, of rules that require fast-food restaurants to post calories on their menus, or a mortgage that has certain terms clearly marked in disclosures.

These sorts of regulations are deemed “choice preserving.” Consumers are still allowed to buy unhealthy fast-food meals or sign up for mortgages they can’t reasonably afford. The regulations are just there to inform people about their choices. These rules are designed to keep the market “free,” where all possibilities are ultimately possible, although there are rules to encourage certain outcomes.

In his book, however, Sunstein adds that there’s another very different way to understand the term "simple." What most people mean when they think of simple regulations is a rule that is “simple to follow.” Usually a rule is simple to follow because it outright excludes certain possibilities and thus ensures others. Which means, by definition, it limits certain choices.

The case against "kludges"

This second definition of simple plays a key role in political scientist Steve Teles' excellent recent essay, "Kludgeocracy in America." For Teles, a "kludge" is a “clumsy but temporarily effective" fix for a policy problem. (The term comes from computer science.) These kludges tend to pile up over time, making government cumbersome and inefficient overall.

Teles focuses on several ways that kludges are introduced into policy, with a particularly sharp focus on overlapping jurisdictions and the related mess of federal and state overlap in programs. But, without specifically invoking it, he also suggests that a reliance on "nudge" regulations can lead to more kludges.

After all, non-kludge policy proposal is one that will be simple to follow and will clearly cause a certain outcome, with an obvious causality chain. This is in contrast to a web of "nudges" and incentives designed to try and guide certain outcomes.

Why "nudges" aren't always simpler

The distinction between the two is clear if we take a specific example core to both definitions: retirement security.

For Teles, “one of the often overlooked benefits of the Social Security program... is that recipients automatically have taxes taken out of their paychecks, and, then without much effort on their part, checks begin to appear upon retirement. It's simple and direct. By contrast, 401(k) retirement accounts... require enormous investments of time, effort, and stress to manage responsibly.”

Yet 401(k)s are the ultimately fantasy laboratory for nudge enthusiasts. A whole cottage industry has grown up around figuring out ways to default people into certain contributions, on designing the architecture of choices of investments, and trying to effortlessly and painlessly guide people into certain savings.

Each approach emphasizes different things. If you want to focus your energy on making people better consumers and market participations, expanding our government’s resources and energy into 401(k)s is a good choice. If you want to focus on providing retirement security directly, expanding Social Security is a better choice.

The first is "simple" in that it doesn’t exclude any possibility but encourages market choices. The second is "simple" in that it is easy to follow, and the result is simple as well: a certain amount of security in old age is provided directly. This second approach understands the government as playing a role in stopping certain outcomes, and providing for the opposite of those outcomes, directly.

Or take financial regulations.The liberals on the Senate Banking Committee are pushing for rules like breaking up the banks, requiring high capital and returning to Glass-Steagall. These regulations are “simple” in the sense that they are simple to enforce. A bank with more than 3 percent of GDP in nondeposit liabilities will be broken up. Period. If you are a commercial bank, you can’t be an investment bank. Good or bad ideas, they are simple to execute.

Other policymakers, however, thought that "nudges" were a better way to conduct financial regulation. According to Jared Bernstein, Larry Summers' position on financial regulation while he was at the White House was: “We should pursue simple rules like ample capital and liquidity cushions, rigorous clearing house rules for transparency in derivative trades.”

As you might guess, creating clearing-house rules for all derivatives isn’t exactly a simple task. But it’s simple in the sense that it isn't mean to exclude any activity that can’t follow some basic rules.

Why it's hard to create "simple" regulations

Like all supposed binaries this is really a continuum. Taxes, for instance, sit somewhere in the middle of the two definitions of "simple." They tend to preserve the market as it is but raise (or lower) the price of certain goods, influencing choices.

And reforms and regulations are often most effective when there’s a combination of these two types of "simple" rules.

Consider an important new paper, "Regulating Consumer Financial Products: Evidence from Credit Cards," by Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney and Johannes Stroebel. The authors analyze the CARD Act of 2009, which regulated credit cards. They found that the nudge-type disclosure rules “increased the number of account holders making the 36-month payment value by 0.5 percentage points.” However, more direct regulations on fees had an even bigger effect, saving U.S. consumers $20.8 billion per year with no notable reduction in credit access.

Or take the low-wage labor market. There the direct regulation of minimum wages (which prevent certain low-wage outcomes absolutely) combined with the nudging of work participation and wage subsidies in the Earned Income Tax Credit can make each other even more effective than they’d be otherwise.

But the two types of regulations sit less easily in the new health care law. The direct way of providing people with health care—directly through Medicaid expansions—appears to be going well. But that's not true for the means-tested subsidies intended to help people purchase private health care. That's more of a "nudge"-type policy. But it turns out that administrating this system isn’t that simple at all.

The balance between these two approaches of making regulations simple will be front and center as liberals debate the future of government, whether they're trying to pull back on the “submerged state” or consider the implications for privacy. The debate over the best way for government to be simple is still far from over.

Mike Konczal is a fellow at the Roosevelt Institute, where he focuses on financial regulation, inequality and unemployment. He writes a weekly column for Wonkblog. Follow him on Twitter here.

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