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Wanted: A New Approach to Regulations

Wanted: A New Approach to Regulations

Photograph by Andrew Moore/Gallery Stock

If you’ve read my blog posts and columns in the past, you know I’m concerned that Washington over-regulates the economy, distorting the market and making it more difficult for U.S. companies to compete globally.

At the end of 2011 the Code of Federal Regulations was more than 169,000 pages long. In 2011 the number of pages of new and proposed rules published in the Federal Register increased 18.8 percent from 2010; in 2010 it increased 19.3 percent from 2009.

More is not necessarily better. Instead of adding regulations, what’s needed is a good housecleaning. With help from experts, one of government’s top priorities should be to review all existing regulations and eliminate those that are outdated, redundant, ineffective, or yield the fewest benefits at the highest cost.

Unfortunately, Washington’s ability to accomplish such an undertaking has been undermined by politics. Political scientists see the problem as an “Iron Triangle,” referring to the cozy relationship between the congressional committees that draft our laws and supposedly provide oversight, the federal agencies that write and enforce the regulations implementing the laws, and the special interests that manipulate the process.

The result of this politicization is regulatory excess in some areas and under-regulation in others.

The banking industry is a good example. It was not just greed —though that was a factor—that caused banks to take the kinds of imprudent risks that resulted in the U.S. financial crisis. Banks also faced pressure to fight discriminatory lending practices; to assure compliance with such laws as the Community Reinvestment Act of 1977, at times loans were given to unqualified buyers.

The lack of serious government oversight, meanwhile, made it easy for banks to bundle subprime and other risky loans and pass the risk along to others. Why not—especially when it was widely understood that government would bail everybody out if things went south?

Missing was any meaningful adult supervision: somebody, to borrow the words of the late William F. Buckley Jr., with the good sense and courage to “stand … athwart history, yelling Stop.”

Or consider the recent massive loss from a “too big to fail” U.S. bank—possibly costing investors as much as $7 billion—because of a faulty transaction. When the CEO appeared before Congress, he faced mostly softball questions. Why? Could it be because the company, like many others, makes campaign contributions to both sides?

Without harsh penalties for illegal or negligent behavior, some will always cut corners and take unnecessary chances with other people’s money.

What’s needed is a new approach to regulation: fewer rules, but rules with real teeth, accompanied by serious oversight and accountability.

As any parent knows, if there are no serious consequences to improper action, you’re only rewarding and legitimizing bad behavior. Unfortunately, the Iron Triangle likes it that way.

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).

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