Last week Mark Green, director of Ralph Nader's Congress Watch, attacked the growing disenchantment with federal regulation, and particularly the cost-benefit studies often used to support anti-regulation views. This week Peter Schuck, a former deputy assistant secretary of HEW now at the American Enterprise Institute, challenges many of Green's arguments. Schuck, once an aide to Nader and later Washington director of Consumers Union, will teach law at Yale next fall.
LIKE MARK GREEN, I have had nightmares about regulation. But mine are different. In his, you will recall, big business and its minions gang up on Congress to defeat a regulation to end polio. In one of mine, a government agency mandates that children's sleepwear be flame-retardant only to learn -- many millions of dollars and perhaps many cancers later -- that the chemical that the agency knew would be used to comply was carcinogenic and the sleepwear could not be used.
In another, a government agency mandates that each new vehicle be armed with a costly system that prevents ignition until seat belts are fastened, only to find that consumers are disarming the systems in frustration. In another, a new government agency is created to increase the security of pensions, only to learn that its efforts have succeeded in discouraging the creation of pension plans and in helping to drive many small ones out of business.
In each of my nightmares, the regulatory scheme is preceded by analyses by academic economists, consulting firms, business organizations and the Council on Wage and Price Stability, all warning that the regulations will be costly, inequitable and produce fewer benifits than expected. Each, however, is implemented on a groundswell of righteous indignation fueled by congressional investigations, media exposes and Ralph Nader denunciations of cowardly politicians, passive bureaucrats and greedy corporations locked in unholy aliance against the public interest. And just before I awaken, as the predictions of the economists come true, proponents of the regulations propose not that they be repealed but that the economists be killed.
The difference between Green's nightmare and mine, of course, is that while his is fanciful, as he admits, mine all actually occurred. (In fairness, he does not recommend death for economists, only that nobody listen to them -- which to them amounts to much the same thing.)
GREEN PROPERLY points out that some particular regulatory schemes have been effective, that cost-benefit analysis is still a rudimentary decision-making tool, that opponents of particular regulations often abuse it, that costs are often easier to measure than benefits, and that many of society's most cherished values are not well suited to this sort of analysis.
If his ambitions had been limited to these points, his article would merit applause rather than rebuttal. In fact, however, he has set himself a larger task: to build a case for regulation in general .
Like a lawyer representing a defendant already convicted many times in the same court for the same offense, he attempts to discredit some of the witnesses for the prosecution, hoping that the presumption of innocence alone will be enough to get his client off.
In our political-economic system, however, government regulation in general should not enjoy a presumption of innocence or effectiveness , however justified a particular regulatory program may be. Indeed, this is a lesson which Green and Ralph Nader, in their numerous documentations of regulatory failure, have been at pains to teach us.
From reading Green's article, one would think that regulatory poliy is shaped, indeed dominated, by persons who believe that all regulation is bad. Yet the fact is that virtually all participants in these debates -- and certainly all those who are taken seroiously -- agree that regulation is approprate under conditions of significant market failure (such as public utility monopolies or environmental pollution) or inadequate legal remedies to prevent significant harm (such as occupational health).
Nevertheless, the questions remain: How should government regulate? What are the likely benefits and costs of regulations? Can the regulations be enforced ? Green suggests throughout that those who are critical of the way in which these questions have been asked and answered in the past are "trying to make citizens hate their government" or are seeking to "abolish" regulation. This inference is as logical as concluding that one who criticizes a proposed merger between two giant corporations is therefore hostile to the free enterprise system, a conclusion that Green would surely resist.
Closely related to the straw man that Green creates is the false choice that he poses: "The choice is between the president as a cost-benefit econometrician or as a tribune for the victims of marketplace abuse." Or, as Green characterizes the issue elsewhere: "Should health and safety regulation be sacrificed to the anti-inflation campaign?"
This reflects a view of the world as one of blacks and whites, either-ors, and goals which do not conflict. Neither the president nor any other policy maker, however, can afford the luxury of seeing the world in that utterly distorted way, but must find some acceptable balance between health goals, anti-inflationary goals, employment goals, capital formation goals and other goals, each of which conflict to some degree. To suggest that such an accommodation is a betrayal of trust, rather than constituting the essence of leadership, is truly to "make citizens hate their government."
Flawed but Necessary
IN HIS discussion of cost-benefit analysis, Green begins with two fundamentally sound premises: Cost-benefit studies are usually flawed, often seriously, and they are often used by political actors for political ends. Much like a rookie cop who encounters sin on his new beat, however, Gerrn finds this reality profoundly disturbing and draws the conclusion that cost-benefit analysis is essentially a sham, disigned to serve predetermined. corporate, anti-regulatory ends.
In truth, however, analysis is an effort to engage in rational decisionmaking, an effort that will always fall short to some extent. Green's critique confuses a process with the products of that process. It is rather like opposing democracy because it permitted Watergate to occur, or opposing sex because it sometimes leads to prostitution, veneral disease and unwanted babies.
If cost-benefit analysis is at best imperfect, which it is, what is the alternative? Green provides confusing signals on this question: He says that "obviously" officials devising regulations should do what sounds suspiciously like cost-benefit analysis (he calls it "impact review"). Yet the entire thrust of his article is that such analysis is pernicious.
In any event, let me offer a few modest suggestions. First, cost-benefit analysis, as a way of addressing complex problems, is inescapable. Although we do not often call it that, we all use it, with varying degrees of sophistication and rigor: The driver trying to decide how fast to drive and what route to take; the worker puzzling about whether to change jobs; the student figuring out whether to go to work or to graduate school; the Congress agonizing over whether to spend more money on jobs programs; the regulator trying to set safety standards, and lobbying groups like Public Citizen deciding on which bills to focus their limited resources. In short, we are stuck with cost-benefit analysis, and the only questions are how well it is done (analysis, after all, is not costless) and how honestly and openly its inevitable limitations are acknowledged.
Second, even when the analysis cannot help us to evaluate regulatory objectives, it can often help us identify the most cost-effective alternative for attaining a given objective (for example, reducing pollution through effluent charges rather than emissions standards).
Third, it is simply not true that the biases in benefit-cost analysis work only in an anti-regulation direction. Proponents of regulation routinely predict large benefits while downplaying costs in an effort to persuade others, and those predictions often turn out to be exaggerated. In short, numbers games are played by all sides -- and, to judge by the outpouring of regulations in recent years, the deck can hardly be said to have been stacked against those of Green's persuasion.
Finally, his attack on the notion that "business-dominated cost-benefit studies should control regulatory decisions" is mere wrestling with phantoms. The political process constitutes an important safeguard against the inevitable shoddy and distorted analyses, a safeguard which Green ignores. Regulatory policy is made in an intensely competitive environment in which adversaries have every incentive -- and many forums -- to pinpoint and publicize the limitations and imperfections of any particular piece of analysis. His own article is replete with examples of this adversary process successfully at work.
Decision makers in the real world do not make decisions primarily on the basis of cost-benefit analyses (although they may haul them out as protective coloration once the decision is made); the limits of such analyses are too wellknown to them -- though not always to the general public -- to permit them to be decisive except in a few extreme cases on which almost everybody would agree, anyhow.
MOST STUDENTS of regulation, including those often critical of its particular manifestations, agree that regulation often yields important social benefits. Since Green catalogues them at great length, I can limit myself to pointing out some of the deficiencies in his analysis of benefits.
Regulation does often encourage innovation, as Green points out, but only in a restricted sense of the word. To be sure, a firm can be expected to find the least costly way of meeting a given regulatory standard, but that is innovation only in the sense that a driver presented by a detour sign from taking his accustomed route is engaged in innovation when he takes a different road. The regulation may well elicit a fresh response, but that does not tell us whether the standard itself, the detour, was the best road to have taken.
Moreover, many regulations actually prohibit innovation by prescribing a specific manner in which a standard must be met. In fact, most studies of the subject have concluded that regulation usually inhibits innovation or channels it into frivolous areas (such as the color of airplane fuselages).
Regulation, as Green's example indicates, both creates jobs and destroys jobs; in fact, it usually does both simultaneously. But the jobs which regulation "creates" in one sector (say, manufacture of pollution control equipment) will probably occur at the expense of jobs which existed (or, absent regulation, would have existed) in other sectors (say, in the regulated industry itself or in industries to which the capital used to produce the pollution control equipment would otherwide have flowed). And even a regulation that produces a net gain in jobs in undesirable unless it is the least expensive way to achieve the regulatory objective (a question, by the way, that cost-benefit analysis can help to answer).
Green asserts that regulation often has a beneficial redistributive effect, postulating a regulation that shifts costs "from hard-pressed workers to relatively well-off stockholders." If the world were that simple -- if redistricutive effects were so easily identified and socioeconomic groups were so easily categorized -- social policy making would be almost as easy as Green seems to think it is.In fact, however, a regulation often benefits certain "hard-pressed workers" at the expense of other workers (now even more hard-pressed because unemployed) and equally hard-pressed consumers and small business people.
By the same token, the "relatively well-off stockholder" often turns out to be that same hard-pressed worker; indeed, he and his co-workers now own through their pension plans close to half of the stock in American corporations (according to Peter drucker), and the percentage is steadily growing. Again, the point is not that regulation does not sometimes have redistributive effects of which Green and I might approve, but only that these effects are very difficult to predict and probably occur (when they do) as much by accident as by regulatory design. If we really wish to redistribute income, there are far better ways to do it than through regulation.
Chiken Little Regulation
FINALLY, there can be little doubt that some regulations do enhance health and safety. In each case, however, the important questions will be: How much health and safety? For whom? At what cost? To whom? Could the money be more effectively spent in other ways? These difficult questions do not vanish just because Green invokes grisly images of children disfigured by fire and workers suffering from cancer, nor is our effort to answer them aided by reminding us that human life is priceless. Society measures the value of life many times every day, either explicitly (as when a jury must award amages or a person purchases life insurance) or implicitly (as when Congress, regulators or citizens make tradeoffs between safety goals and other goals, as in our refusal to set 30-mile-an-hour speed limits on interstate highways). The logical implication of Green's life-is-priceless litany is that we should spend the entire federal budget on health and safety, yet no one -- least of all, the public -- seems to think that makes sense.
Green properly warns us against what he calls "the Chicken Little School of Economic Analysis." An equal, if not greater, danger, however, is the Chicken Little School of Regulation, founded on the principle that one need only consult one's ethical precepts in order to know when and how to regulate in areas of complex human and institutional interaction, and that those who believe otherwise lack ethical precepts, are dupes (witting or unwitting) of business propaganda, or both. His article is a primer for this school. Fortunately, the administration and the public appear increasingly disposed to reject its false teaching.