Remaking Regulation

Regulation of the air, the water, and the workplace has made things much better. But wecould achieve even better results by regulating with incentives.

CASS R. SUNSTEIN |

September 21, 1990

The sudden collapse of communism has produced a nearly worldwide outburst of enthusiasm for private property; free markets, and electoraldemocracy. In the United States, and perhaps in the West as a whole, the collapse has also led to an understandable but disquieting degree of self-congratulation and complacency. Understandable, and in a way even justified, because the events of the past year have dispelled any lingeringdoubts about the risks of collectivism to both liberty and prosperity; disquieting, because the failure of communism is hardly a reason for unquestioningsatisfaction with all our own institutions, let alone for a belief in laissez faire.To free-market conservatives, however, communism's failure seems to validate their own arguments for the irredeemable failure of the more limitedgovernment regulation adopted in the West. For the last decade and longer in the United States, they have been particularly critical of the new "social"regulation concerned with health, safety, and the environment, which the consumer and ecology movements of the 1960s and '70s were instrumental increating. This criticism of regulation has come especially from the fields of law and economics and, with recent judicial appointments, enjoys increasinginfluence in the courts. In the critics' view, social regulation is typically inefficient, counterproductive, and indefensible in principle because it amounts tounjustified public meddling in private affairs. Deregulation, therefore, seems to them a blessing in more ways than one.* * *But this view is myopic. There are convincing, principled arguments for regulation that are not paternalistic. And, overall, social regulation has not beena failure. On the contrary, it has helped clean up the air and water, protected endangered species, and saved many lives.Of course, there have been failures, some of them quite serious. The good news is that the failures come in identifiable patterns and can be avoided inthe future. What we learn from the failures should point us in the direction of new regulatory alternatives.Those alternatives often call for use of market-like incentives to minimize adverse side effects, reduce costs, and accomplish regulatory goals. But evenin these cases the framework of market forces will depend on legal and political choices, and as I shall argue, these should properly reflect broaderdemocratic aspirations than the unregulated market ordinarily registers.Why We RegulateNo industrialized democracy can or should do without a substantial regulatory state. Although the private market is usually an engine of individualfreedom and economic welfare, it sometimes breaks down, and then democratic controls are the only real option.Some of the reasons for regulation come under the heading "market failure," as conventionally described by economists. For a variety of reasons, themarket often fails to provide consumers enough information on products or services. Risks posed by carcinogens in the workplace or in food and drugsare a good example. When too little information is provided, some sort of government response is indispensable. Suitably designed, such information-enriching regulation can promote freedom of choice while protecting lives and health, often at low cost.Sometimes private conduct imposes harms on other people, and the costs of those harms, or negative "externalities," are not taken into account by themarketplace. The familiar example is pollution. Environmental harms caused by coal-burning power plants are severe, and they fall on numerous peoplefar from the plants. The people who are harmed (not just living adults but children and future generations as well) lack the organization to bring suit orotherwise to seek redress. A less obvious example of distant harms is the loss of endangered species, which may provide medicinal, agricultural,educational, and recreational benefits to human beings. In these cases, there is ample justification for a regulatory response, forcing those who produceharm to pay for the damage and ultimately to reduce or eliminate it.Somewhat more subtly, government controls can sometimes help facilitate an outcome that people want but cannot obtain without governmentalassistance. The citizens of a community or state may want a recycling program -- provided that everyone participates. But if there is no way to makeeveryone participate, they will not recycle on their own. (People often want to promote the public good, but they don't want to be suckers.) The optionpreferred most by most people -- communities when everyone recycles -- can be obtained only with governmental help. A governmentally mandatedrecycling program of the son enacted in nearly a dozen states can satisfy private wishes far better than a market that fails to make universal recyclingavailable.

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In other words, instead of overriding private choices, government regulation sometimes helps to fulfill them. The point is a broad one, relevant not onlyin the environmental area, but in energy conservation, automobile safety, and elsewhere as well.* * *These arguments involve standard cases of market failure. Even economists and others firmly committed to laissez faire should accept them in principle.But the case for regulation also draws on democratic principles, not just economic ones. In their capacity as citizens, people have political desires thatare different from their preferences as consumers. Some, for example, seek stringent environmental laws even though they do not use the public parks;they support measures protecting endangered species even though they do not give to environmental groups or expect to benefit from those measures.As citizens, these people support government regulation that diverges from their behavior as consumers.Some economists have derided the distinction between political and consumption choice by suggesting that political behavior is a confused reflection of "actual" choice because voters, unlike consumers, do not face the full costs of programs they support. But this explanation is far too crude. As citizens,people may seek to implement their highest aspirations or most altruistic goals through government. Social and cultural norms often press people, ascitizens, in the direction of a concern for others or for the public interest; such concerns should not be disparaged. The collective and deliberativecharacter of democratic politics helps to provide a fairly mundane explanation for this phenomenon. People may not want to satisfy their aspirations, orto be altruistic, unless they are sure that other citizens will be doing so as well. And the very process of public debate may bring out more concern forthe community's longer-run interests than is evident in personal consumption.Politics may also help to overcome resignation. Without the possibility of common action, current practices and conditions often seem intractable to usindividually. We accordingly adapt, not only our actions, but even our desires. Psychologists have long observed that most of us typically adjust whatwe want in life to what we can get. If something bad seems inevitable, we may feel, "That's tough, but that's the way it is."But if we can act in concert and through government, we may come to expect and want more -- and support change. Social movements involving theenvironment and occupational health and safety provide conspicuous examples. Where the air and water have long been filthy, people may seemindifferent to it, accepting the consequences for their health. But when political action and government regulation open up other possibilities, popularpreferences may shift. In other words, regulation may be justified as a means of increasing opportunities and thereby enabling people to express desiresotherwise repressed.All these information-enriching, externality-correcting, opportunity-increasing effects of regulation suggest that there is a sound basis for regulation inliberal democratic principles, despite the frequent objection that regulation is "paternalistic" or insufficiently respectful of private choice. In some cases --inadequate information, harms imposed on third parties, and governmental coordination of private behavior -- regulation facilitates the satisfaction of private desires. But people in a democracy may also have collective aspirations or altruistic goals that override the outcomes of markets. To satisfy suchaspirations should hardly be seen as an objectionable interference with freedom -- even in a system that prizes, as all systems should, private property,freedom of contract, and other voluntary arrangements.What the Record ShowsHow have these considerations worked out in practice? In fact, the record shows many successes. In environmental protection, automobile safety,protection of endangered species, and other areas, regulation has made things much better.The effort to reduce air pollution has produced huge gains. Since the 1970s the United States has seen substantial decreases in both levels and emissionsof all major pollutants, including sulfur dioxide, carbon monoxide, lead, and nitrogen dioxide. Lead reductions have been especially dramatic, showing noless than a 94 percent decrease in ambient concentrations between 1975 and 1988. Transportation emissions have been cut from 122.6 million metrictons in 1975 to merely 3.5 million in 1986. (Further reductions have occurred since, and more are on the way.) The average lead levels in children'sblood decreased by 37 percent between 1976 and 1980. More generally, the vast majority of counties in the United States are now in compliance withnational air quality goals with respect to all of the major pollutants. Though there is substantial room for improvement, air in the United States is muchcleaner and healthier than it would have been without regulatory controls.* * *Significant gains can be found in controlling water pollution as well. The Great Lakes are much cleaner than they were in 1965, when hundreds of lakebeaches had to be closed. Especially dramatic have been the extraordinary reductions in levels of DDT, PCB, and dieldrin contaminants in Great Lakefish. Nationally, mercury in lake sediments is 80 percent lower. Lead and nitrate reductions have produced significant improvements in water quality. Anumber of harmful nutrients have been reduced by nearly 50 percent in national rivers. As a result, many rivers, including the Potomac, the Hudson,and parts of the Mississippi, are cleaner and safer.Environmental regulation has thereby dramatically decreased harmful substances in animals and human beings. The percentage of DDT in body fat hasdeclined by 79 percent; PCBs in body fat have been cut by 75 percent. At the same time, a number of programs have helped protect threatened orendangered species, including the bald eagle. Some protected species have shown large recoveries.Regulatory successes are hardly limited to the environmental arena. Automobile safety regulation in the late 1960s and early 1970s has achievedenormous gains, measured in injuries prevented and lives saved. Automobile fatalities would have been about 40 percent higher in 1983 if not forgovernmental controls. Between 1966 and 1974 about 28,000 lives were saved as a result of occupant safety standards. The annual benefits fromregulation are extremely high; indeed, they have been estimated, in monetary terms, as exceeding $10 billion. Moreover, the ratio of benefits to costs is

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excellent. Some of the regulations pay for themselves in terms of health and related savings. The large number of deaths prevented is purely a bonus.Though the overall record of the Occupational Safety and Health Administration (OSHA) is quite mixed, its regulation of asbestos prevents an estimated396 deaths per year, and it does so at relatively low cost. (Asbestos removal from buildings is another matter.) More generally, studies of the costs andbenefits of regulatory initiatives show that a number of measures have saved lives extremely cheaply Regulation of trihalomethanes by theEnvironmental Protection Agency (EPA) saves a life at only $315,000; the National Highway Traffic Safety Administration's (NHTSA) fuel systemintegrity controls, $300,000; the Consumer Product Safety Commission's mandatory smoke detector rule, between $0 and $85,000; NHTSA's roadsidehazard removal rule, $0.* * *To be sure, there are serious problems with using cost-benefit analysis to evaluate social regulation, especially insofar as we rely on some measure of private "willingness to pay" as the basis for assessing costs and benefits. As I have noted, social regulation is often based on democratically expressedpreferences rather than private consumption choices. If they differ, the use of private willingness to pay to value costs and benefits is perverse, since itmeasures the worth of democratic aspirations by reference to the very consumption choices that citizens may be attempting to override.Moreover, willingness to pay is a function of ability to pay. In a world where income and wealth are unequally distributed, it is decidedly odd to say thatgovernment policy should hinge on how much individuals are able to pay for environmental quality and occupational safety or health. For these reasons,cost-benefit analysis must be approached cautiously. But as a crude effort to assess regulatory strategy, it can be a useful tool. Sometimes it will revealthat the gains of regulation are far greater than the losses; sometimes it will show the opposite. Tradeoffs are inevitable here, and it is striking to see thata comparison of costs and benefits, even so narrowly understood, often favors social regulation.The Limits of Current StrategiesTo point to regulatory successes and to the limits of cost-benefit evaluation is not to deny that regulation has frequently failed. Sometimes it has imposedenormous costs for speculative benefits, however these are measured; sometimes it has aggravated the very problem it was designed to solve; sometimesit has accomplished little or nothing. For example, the United States spent no less than $632 billion for pollution control between 1972 and 1985, andsome studies suggest that alternative strategies could have achieved the same gains at less than one-quarter of the cost. The fuel economy standards fornew cars have led manufacturers to produce smaller, more dangerous cars. Some of OSHA's carcinogen regulations impose enormous costs foruncertain gains. Indeed, the pattern of OSHA regulation of carcinogens is a crazy quilt, with some types of risk unregulated and others regulated at costsup to $40 million per life saved. No matter how we assess social regulation, there can be little doubt that we have far too stringent government controlsin some areas, and far too little in others.Some of OSHA's expensive regulations for design of the workplace have produced no discernible safety improvements for workers. The EPA haspromulgated regulations to control only a few of the many toxic substances in the air. And by delaying the entry of beneficial drugs onto the market, theFood and Drug Administration has sometimes increased risks to life and health -- as the gay community came to recognize early in the AIDS epidemic.Anyone concerned about improving the regulatory system has to ask: How might the failures be prevented? The first step here is to identify the sourcesof failure.A number of factors are at work. The very structure of our government may make it difficult to coordinate different programs covering related aspectsof the same problem, or to deal with complex tradeoffs among competing social goals. Regulatory systems, like the technologies being regulated, faceobsolescence over time. And as political scientists have well documented, private groups sometimes "capture" the regulatory process.Many failures of the regulatory process thus have political foundations. Parts of the 1977 Clean Air Act, for example, reflected the influence of representatives of Eastern states that produce dirty, high-sulfur coal. At the time, the chief spokesmen for those interests, Robert Byrd of West Virginia,was Senate majority leader. Environmentalists joined Byrd and others in an alliance to pass legislation imposing stringent technological requirements onall new pollution sources, even though Western coal is largely free of sulfur and needs little cleaning at all. As a regulatory strategy, this was not sensible.Western coal does not need to be scrubbed, or at least Eastern coal needs more scrubbing; and requirements imposed only on new plants help toperpetuate old and worse sources of pollution. But while this strategy was not good environmental policy, it was a way of protecting Eastern coal againstcompetition from cleaner rivals in the West.Such examples, however, are no reason for fatalism. In the debates over regulation, criticism of irrational provisions has had an impact. As MarthaDerthick and Paul Quirk show in their book

The Politics of Deregulation

, the decision to end much of the price and entry regulation of thetelecommunications, trucking, and airlines industry emerged from a battle of ideas (led originally, as many now forget, by Ralph Nader and SenatorEdward M. Kennedy). No matter what one thinks of those decisions, they do show that Congress can override the power of interest groups for the sakeof what many believe to be good policy This past year, with clean air legislation again before Congress, Senator Byrd lost when he proposedamendments to protect West Virginia coal interests, though it no doubt helped, of course, that the new Senate majority leader hails from Maine.If we cannot always be certain of defeating coalitions that have an interest in regulatory failure, we can try to focus attention on the most importanterrors of policy Those typically he in the creation of poor incentives and a concern more with the symptoms than with the underlying causes of problems. When social regulation relies on strategies that fail to change underlying incentives, it often generates unfortunate systemic consequences.* * *