My colleague Dr. Richard Williams, who serves as the Director of Policy Research at the Mercatus Center, has just released an excellent little primer on “The Impact of Regulation on Investment and the U.S. Economy.” Those who attempt to track and analyze regulation in the communications and high-tech arenas will find the piece of interest since it provides an framework for how to evaluate the sensibility of new rules.
Williams, who is an expert in benefit-cost analysis and risk analysis, opens the piece by noting that:
The total cost of regulation in the United States is difficult to calculate, but one estimate puts the cost at $1.75 trillion in 2008. Total expenditures by the U.S. government were about $2.9 trillion in 2008. Thus, out of a total of $4.6 trillion in resources allocated by the federal government, 38% of the total is for regulations. If regulations always produced goods and services that were valued as highly as market-produced goods and services, then this would not be a cause for alarm. But that is precisely what is not known. In fact, there is evidence to the contrary for many regulations. Where regulations take resources out of the private sector for less valuable uses, overall consumer welfare is diminished. … Regulation also impacts the creation and sustainability of jobs… [which] can have very real consequences for the economy.
He also explains how regulation can affect international competitiveness, especially when burdensome rules limit the ability of companies to attract capital for new innovations and investment.
Of particular interest to students of communications and high-tech policy will be Williams’ discussion of the dangers of uncertainty in markets. He notes:
Two types of uncertainty can affect decisions by firms to invest: (a) uncertainty about demand for their products (demand uncertainty) and (b) uncertainty about factor costs (labor and capital) (factor uncertainty). Major regulations—such as those recently authorized regarding financial services, health care, or greenhouse gas rules—can affect both demand and factor uncertainty.
Such regulatory uncertainty has long plagued tech and telecom markets and it’s one of the reasons many of us are concerned about new, open-ended Net neutrality mandates. The FCC’s new Net neutrality regime leaves so much unbounded discretion to the agency — and opens up the potential for so much litigation and rent-seeking — that one cannot help but believe it will have a deleterious impact on investment and innovation over the long-haul.
Finally, Williams outlines “four questions that will help to identify regulations that may not meet the standards for sound regulations and therefore deserve further scrutiny”:
- Systemic Problem: How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve? If an agency scores poorly on this, there is no evidence that the agency is addressing a real social problem as opposed to regulating for other reasons.
- Alternatives: How well does the analysis assess the effectiveness of alternative approaches? If an agency has not identified and analyzed a number of approaches, it may mean the agency has settled on an approach without ever knowing if there are more effective ways to solve the problem.
- Benefit-cost analysis: How well does the analysis assess costs and benefits? If an agency has done a poor job on this, it may mean that the there is no theory or evidence that the regulation will solve the problem or do so at a reasonable cost.
- Net Benefits: Did the agency maximize net benefits or explain why it chose another option? If an agency cannot or chooses not to explain why it has not chosen the option that maximizes net benefits for society, the agency may have ignored the evidence that its analysis has produced.
I think it’s safe to say that the FCC often falls short in satisfying many of these tests.
Anyway, make sure to read Richard’s entire piece. You can download it here.