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Press Release

    Breaking the Regulatory Stranglehold

    11/19/2003

    While tax and trade policy have been in the news lately, Americans businesses face a daunting regulatory burden as well. Although less publicized, regulatory excess can impose real constraints on economic growth. Tax cuts can go far in providing the private sector the resources necessary to boost investment and create new jobs; however, regulations can create a choke point that deters these investments.

    In several industries, regulations are excessive and create uncertainties that make it difficult for producers to offer consumers new products are competitive prices. This is especially true in industries that remain heavily regulated, such as telecommunications and electricity generation. The Federal Communications Commission’s recent Triennial Review has left large regulatory questions unanswered while increasing the regulatory authority of the states. Reforming electricity markets also remains mired in a regulatory standoff between state and federal regulators. Many other businesses suffer under a backlog of regulations that have accumulated over the years without ever attempting to review the value or burden they have imposed

    In a recent discussion of his economic plan, President Bush acknowledged the need for reform, noting, “We must continue to cut useless government regulations that choke job creation.” Elevating the importance of regulatory reform in the debate over economic growth is promising and builds upon efforts of past presidents to rein in unnecessary and costly regulations.

    The regulatory review process was formalized under President Reagan, with the Office of Management and Budget outlining simple guidelines for agencies that promulgate regulations. First, agencies were required to know what they were regulating, which meant that agencies had to do their homework before regulating. Agencies also had to demonstrate that regulations were worthwhile, which meant showing that the benefits provided by regulations exceeded any costs they imposed. In a world of scarcity, agencies were also required to regulate in ways that maximized net benefits to society. This meant establishing priorities to avoid squandering scarce resources on threats or dangers that were not real. And it meant identifying the regulatory option that achieved the agency’s goal at the lowest cost.

    Nowhere does the call for regulatory relief ring truer than in the insurance sector. Because insurance regulation is crafted at the state level, the insurance industry did not benefit from the debate over regulation that began in Washington in the late 1970s. That debate identified the cost of regulation and demonstrated that a great deal of regulation was designed to protect producers at the expense of consumers. Ultimately, the airlines, trucking, railroads, energy markets, and telecommunications services were deregulated, increasing benefits for consumers by over $50 billion.

    Streamlining insurance regulation can also provide benefits to consumers, but the task is more difficult because insurers doing business nationally face 50 sets of regulators. Economists demonstrated long ago insurance markets are competitive, raising important questions about the degree of regulation that exists today. The insurance sector in most states remains bogged down in regulations, limiting the ability of producers to provide new products while restricting the availability of insurance for consumers. Clearly, regulation is not in the “public interest” if consumers are being harmed. The regulatory morass is doing just that in states like New Jersey, Massachusetts, and Texas, where insurers are pulling out of the market or reducing the products available to consumers because the cost of doing business in these states has become debilitating.

    Things have become so bad that discussions have begun on alternatives to the current state regulatory mess. An optional federal charter has been proposed by some insurers, allowing them to abandon state regulation altogether in favor of a federal regulatory regime. Proponents suggest that this will ease the regulatory burden and allow companies to more easily serve customers across the nation. Opponents suggest that regional and state market conditions require state-specific regulation. They also note that federal regulators can be just as burdensome as state regulators, while proponents point to the competitive nature of an optional federal charter, which would introduce a healthy competition between rival regulators. Whether a federal charter is the panacea for a troubled industry is an open question, but the fact that it is being considered at all demonstrates the stifling effects of the current state-based system.

    At any level of government, regulations must be considered in light of the potential benefits they may generate. The federal government has adopted standards of regulatory review that have been implemented with varying degrees of success. Many states lack the experience and resources to effectively assess regulatory costs. There has been an ongoing discussion of regulatory improvement at the state level, but actions to ease the burden of regulation have been slow to materialize. Already, the threat of a federal alternative has hastened efforts at state level insurance regulation reform, which raises the question of how much regulatory improvement would be possible if a competing optional federal charter actually existed.