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Principles For Regulatory Rationality

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Principles For Regulatory Rationality

May 15, 2013

[This is the third in a multi-part series on streamlining government services. See part 1 here. See part 2 here.]

The progressives and muckrakers undoubtedly had it right at the turn of the 20th century. Corrupt government and unregulated business foisted high costs and dangerous conditions on urban American. Forced by the muckrakers’ exposes, government adopted rules and procedures that led to tougher enforcement.

But a century later these well intentioned regulatory reforms have morphed into rule bound, job killing, expensive and cumbersome processes, or even worse, systems captured by the few to erect barriers to entry for prospective competitors. Government conducts inspections, issues permits and licenses, and decides the requisite paperwork and private actions that must accompany each. Regulation itself is not an inherently bad thing. Having rules establishes a clear set of standards for how business is to be conducted in the city. Rules ensure consistency, a minimum threshold of verified safety and proper functionality. However, sometimes rules and the mechanism chosen to accomplish a goal become onerous and counterproductive.

Each new expose on bad behavior by some business produces a rash of new enforcement procedures against all, including those entities that operate with the highest standards. For every aspiring entrepreneur hoping to capture an opportunity in a regulated trade the enforcement procedures can translate into another obstacle. As time goes on new regulation often ceases to serve its original purpose and suffocates citizens and law-abiding businesses without producing the intended benefits. The regulation itself, the need to treat every applicant identically no matter the complexity of his request or his qualifications, and the enforcement of incomprehensible rules all stifle citizens’ freedoms and the growth of small business. All too often, regulatory processes elevate a narrow definition of professionalism over common sense. Obsolete processes, the products of a bureaucratic insensitivity to others’ time or the time value of money, unnecessarily increase the cost of government and the costs it imposes on others.

Origination

Regulatory torment reaches a crescendo at the local level where federal and state rules cascade downhill to be augmented and enforced. Bureaucrats in various agencies apply rules without much attention to their underlying purpose and without much regard to oversight by other agencies over the same business or activity. With thousands of pages of regulation to process, monitor and report on, public officials focus on administering the regulation, instead of its purpose.

Regulatory rationality—an approach that combines both the need to insure safety and allow economic expansion—would begin with elected officials developing a set of principles that frames their approach and then utilizing a transparent process that involves feedback about how to accomplish the goal in the most efficient manner possible.

Desired outcomes can be skewed by the ways in which regulations interact with each other. This intricate network of competing interests and rules in a complex economy can easily alter outcomes in unintended ways. Agencies with one mission may create unforeseeable consequences in another; e.g. regulations designed to encourage low-income home ownership create risks for financial regulators. We continue to underwrite risks and promulgate regulations vertically when life and business operate horizontally.

Regulatory review commissions, which look for more efficient procedures, should extend to the initial rationale for red tape. For instance, New Jersey Governor Chris Christie recently created a “State of New Jersey Red Tape Review Commission” that has helped lead a number of changes that truly leverage digital government to produce more efficient processes. Assisted by New Jersey’s Executive Order 2, which directs state agencies to leverage information systems and other technologies to increase efficiency, the Commission reported out in February 2012 that six digital advances have been implemented: migrating occupational licensure online, an electronic system to accept reimbursement claim submissions, an urban enterprise zone program, an electronic procurement and bidding system, an online system for posting required notices, and new technologies utilized by the Motor Vehicle Commission and the Juvenile Justice Commission.

Colorado Governor John Hickenlooper’s “Pits and Peeves” Roundtables initiative brings together business organizations, advocacy and public policy groups, local government officials, members of academia and non-profit organizations to speak with senior state government executives about red tape and government efficiencies. One issue identified by the roundtable was the need to make better use of technology to improve communications and interactions with the public. Including senior staff like the secretary of technology and chief innovation officer, along with other state executives and external stakeholders, the roundtable identified the need for electronic filing systems, centralized databases, and online tracking of permits. The initiative also identified the need for webinars and online chat systems, where the public could learn more about the regulatory process and have direct access to government agencies.

An early predecessor of these efforts occurred in the 1990s in the then-nationally recognized Indianapolis effort called the Regulatory Study Commission (RSC), which started by challenging the very purpose of each rule, then asked whether it accomplished its purpose effectively or at all. That effort was based on fairly simple principles:

  • Regulations should only be used as a tool to achieve a policy objective as a last resort. The use of regulations indicates failure of other means to achieve the objective.
  • The cost of regulation should be no greater than the benefit it creates for the community. 
  • Regulations must be simple, fair, and enforceable.
  • Regulations must be written to insure imposition of the minimum constraints necessary to accomplish public purposes of safety and accurate information to facilitate market transactions.
  • Regulations must only exceed existing federal or state standards when there is a compelling and uniquely local reason to do so.
  • The regulation should clearly benefit the consumer/public.
  • The regulation should complement other laws and rules.

These principles should be considered at the point of origination because once legislation is fully implemented, special interests, bureaucracy, and legislative procedures make changes much harder to execute, even if the change itself is not particularly controversial. At the local and state level, streamlining business regulation can produce results; indeed the regulatory review process in Indianapolis during the 1990s eliminated 40 percent of the regulations and an equal portion of fees.

A threshold question for regulation should be whether a permit or license is necessary at all or whether stronger enforcement of existing rules would suffice. For example, many states require dog licenses to prove that dogs have received rabies shots. Why not just require the shots and that the dog wears a vet-issued evidence that they’ve been given?

During his current term, Mayor Michael Bloomberg is taking action to improve and rationalize the very complex regulatory climate for New York City residents and businesses. A review panel identified a first set of specific permits so onerous that they needed immediate attention. These included Place of Assembly, Certificate of Occupancy, sidewalk café, street-tree work, range hoods, grease interceptors, food service establishments and gas authorization permits. Some of these required complicated annual applications that took even more time and expense.

Perhaps even more importantly, the public now has a dynamic, one-stop platform called NYC Rules through which to participate in the rule-making process. New Yorkers who visit NYC Rules can learn how rules are adopted, view a list of proposed rules, and can comment on them both by submitting text comments and by uploading documents such as charts or spreadsheets. Lastly, visitors can sign up to receive a weekly e-newsletter that will keep them up-to-date on rule-making activity and list recently proposed and recently adopted rules.

However review processes cannot be controlled exclusively by the agency doing the Promulgating, as they will always be more likely to rationalize its need than will the public or an official, such as the mayor, who has offsetting responsibilities—such as also promoting economic development. Reducing a risk to zero is never difficult. Just eliminate the function—if developers do not construct buildings, no worker or passerby will ever be injured. If a restaurant does not open, it will produce zero danger to a future consumer. The New York city council recognized the need to look more broadly at tradeoffs of proposed rules when it adopted NY Local Law 46 of 2010, which required the Mayor’s Office of Operations to review agency rules prior to their publication. The law required the Office of Operations to analyze whether the rule is understandable and in plain-language and whether it minimizes compliance costs. As deputy mayor in New York, the operations group reported to me. It seemed they could accomplish their goals better by allowing the “crowd’ of stakeholders to collaboratively address a problem nominated by the agency and offering alternative solutions that would help improve the final rule. A process that requires clarity of purpose, transparency and broad input by stakeholders as a rule is being originated will more likely result in the right regulatory balance.

Processing

The decision to license, permit, register or regulate is only the threshold. Once government decides to act, it should at least license in the most efficient manner possible. In cities today, documents are still bound in symbolic red tape and shuffled from office to office, increasing the administration and compliance costs of regulation. Perhaps in a paper-based world in which employees engage in slow, sequential processes of entering, verifying, and replicating information in scattered files one might excuse such messiness. But in a digital world we can produce higher quality results with much lower transaction cost and fewer job killing delays.

In fact, rethinking these processes does not necessarily require very complicated technology, but it does require a different mindset. I am not sure if it was urban legend or a true story, but shortly after I began as deputy mayor in New York City, a developer told me a story reflecting this very point. A citizen was obtaining a permit to construct a garage, a process that ended up involving over a dozen steps, with each department exercising its judgment independently from the others. He claimed that at one point the Department of Transportation approved the permit with a specified location for the curb cut, yet months later the Parks Department forestry review process approved the permit on the condition that the trees in the right of way not be moved. Of course, the limitation included a tree located in the area specified by Transportation as the only acceptable place for the curb cut.

Similar problems face most small business and retail outlets that must deal with multiple City agencies before being allowed to open their doors. When I was deputy mayor in New York, the city’s information systems did not allow for a fully digital, integrated system, so I asked the city’s capable building commissioner, Bob Limandri, to build an analog facsimile to overcome a substantial backlog. That June we had his examiners work in a different borough each night of the week, joined by an official from every relevant department sitting in the same room. We would all just stay there until permits scheduled that night were resolved in order to avoid the hand offs. The professionals in these departments enjoyed the cooperative problem solving process—well-intentioned bureaucrats would much rather solve problems than enforce red tape if not reduced to mindless and routine activities.

Unfortunately for business owners, government is generally organized for its own benefit, not that of its customers. Restaurant owners face some of the worst headaches. They must work with the Department of Buildings to get a Place of Assembly permit, have their grease traps inspected by the Department of Environmental Protection, and, if they survive these and other steps, nervously await complicated Department of Health inspections.

While some cities have still not implemented electronic solutions, others like San Jose have had automated permitting systems for over a decade, reducing permitting processes from days or weeks to hours. Citizens need not drive to offices, wait in line, and wait weeks for forms to be pushed from one desk to the next. The department has reduced counter traffic to manageable levels, freeing up resources to tackle more complicated cases and solve problems rather than create them. By making the process easier, the city has seen increased compliance. Other cities have more targeted online systems in place. Seattle offers on-street parking permitting online, while Chicago allows contractors and residents access to building e-permits. Los Angeles offers e-permitting services, including a list of express permits, where work does not require any type of plan review or approval to streamline the amount of time and resources required for businesses, residents and city staff to process requests.

In a move to address this issue of multi-department regulation even where computer systems do not allow full integration to help speed the process of setting up restaurants, cafes, and bars, New York City created the New Business Acceleration Team (NBAT) in 2010. NBAT offers a case manager to help a prospective business owner navigate City agencies and meet deadlines. NBAT coordinates required inspections from the Fire Department, the Department of Environmental Protection, the Department of Buildings, and the Department of Health and Mental Hygiene. The effort helps reduce drawn-out gaps between inspections, conflicting requirements, or the emergence of violations and requirements from each department at different times, which requires more costly work and mitigation. NBAT helps new establishments open while meeting code, rather than penalizing them for violations, which stifles economic development. Inspectors are cross-trained so as to help work outside the areas on which their department focuses, so that businesses deal with a single city government that is trying to help them launch, rather than a number of departments pushing their specific mandates. Los Angeles followed suit later in 2010, opening its Case Management Office and Restaurant Express Program, to facilitate permitting processes. Both cities credit their initiatives with helping hundreds of businesses open much more quickly and bringing thousands of jobs to their citizens at a time when employment is scarce.

Meanwhile, New York City was ready for the storm, in the sense that the city’s New Business Acceleration Team discussed earlier was quickly transformed into the Restoration Business Acceleration Team (RBAT), using the same approach of coordinating city departments and eliminating silos to help businesses avoid red-tape pitfalls and enhance their own ability to repair and recover. Applications and queries were expedited significantly to keep companies from going out of business from the one-two punch of storm damage and government’s slow response. Especially in times of disaster, the city’s ability to work with citizens rather than penalizing them paid off – and the achievement begs states and the federal government to follow suit.

Of course the red tape runaround isn’t reserved for those trying to invest in a city. It extends to those in need of assistance, whose attempts to get the help they need are beset by inconsistent and unnecessarily complicated rules and procedures. These rules force someone struggling to get by first to express their needs in terms of a problem that qualifies for help, to correctly fill out a series of forms, and then hope for the best. Even after the State of California undertook a $1 billion consolidation of 35 county eligibility determination systems into three ‘consortiums’ over a decade ago, it still takes nearly $180 million annually to operate and maintain the systems. Despite reforming the system to improve efficiency and resource allocation, it remains expensive due to thousands of pages of regulations that control every aspect of each program it administers.

Enforcement that concentrates disproportionately on penalizing those without licenses, counting fines as a measure of success misses the opportunity to produce better results for consumers and less friction and cost for business hoping to expand. In the next essay we will address better reforms in enforcement and look to emerging options to improve the market and protect the consumers.

Stephen Goldsmith, Daniel Paul Professor of the Practice of Government and Director of the Innovations in American Government Program at Harvard's Kennedy School of Government, is a two-term former Mayor of Indianapolis and former Deputy Mayor of New York City

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