even the most regulation-minded can see how the accumulation of well-intentioned rules can have a pervasive and negative effect on innovation. One useful analogy is that of a small child idly tossing pebbles in a stream. One or two or even ten pebbles won’t make an obvious difference in the flow of the stream. Yet, accumulating gradually over the years, thousands of pebbles can make an effective dam. Or to put it into technology terms, asking a software developer to add one more feature or requirement to a program may seem like a small and innocuous request. Yet enough such ‘minor’ requests turns a simple task into a bloated, ungainly, and bug-ridden piece of code that may be virtually unusable.
Framing the problem as “bad regulations” misses the real problem with the system: even good regulations are now so expensive, in complexity points, that they are probably not worth passing.
Great minds and all that.
My solution, of course, is principles-based regulation. Instead of hard-and-fast rules promulgated by agencies, which as they multiply become more complex and incoherent, we would have a few clear principles articulated by Congress. Common-law precedent would fill in the specifics, and the evolution of this common law would not necessarily be toward greater complexity and incoherence.
I do not expect to convince doubters of the superiority of principles-based regulation a priori. All I ask is that we try it with some field of regulation. Incidentally, the FTC has in fact done some experimenting along these lines, particularly in the area of truth in advertising, reportedly with some success.
Incidentally, Mandel is with me on the need to do something about the FDA. He writes,
The problem is that the FDA interprets the “safety and efficacy” standard as meaning at least as safe and clinically efficacious as anything on the market currently. That immediately rules out an innovation that is safe, much cheaper, but not as efficacious as best medical practice. So if the FDA had been in charge of the phone or computer markets at the time, early mobile phones and personal computers would have not been approved for sale because they provided inferior quality to existing products.
The thing with principles based regulation is that the FDA already has this, cGMP (current good manufacturing process). While I will say it is probably better than rigid rules, it also leads to over reaction. What is current good manufacturing process? Hire a bunch of former FDA regulators that will tell you and they always increase because if it is the same – well they are out of a job. On top of that the ambiguity causes fear of anything new. Is that cGMP? don’t know, let’s do the same old thing. I have seen 50 year old technology used when many things are safer and better, but the cGMP rules require expensive validation to replace the process, making the old process more cost effective. The affect of this type of regulation on innovation would be minimal, some good, a some bad, but not a solution.
Underwriters Laboratories, I think, is a good example of where principles-based regulation is tried with good results w/o government.
Also, I think the root of the problem is that people — especially those who inhabit agencies — do not understand the power of practice. They think it’s their job to initiate regulation, rather than discover them.
Incidentally, I see this same problem in the innovation process as well. Discovering value proposition is a more effective approach than initiating it.
I’d be curious to read professor Kling’s response to the rejoinder that principles-based regulation was all the rage among financial regulators prior to the financial crisis, especially in the UK and certain specific US regulators.
We all know how that turned out.
In my humble opinion, principles based regulation effectively is a call to turn more authority over to agencies, effectively allowing them wider range to interpret their own regulations.
This would work with good regulators, but so would anything else. Getting good regulators is really the problem. You can’t fix having bad ones with different systems.
Re the FDA and “safety and efficacy”: Congress can always change the words in a law. Legislators can give speeches saying what they think is wrong with previous practice and how the new law should work. They can hold hearings which are one part criticism of the status quo and one part advertisement for the new law. If Republicans are really serious ….
Why are all the examples of principles based regulation in our society prone to complexity and rent seeking? I’m thinking products liability, the law of negligence, anti-trust law (which is guided by a simple legal principle and which can be enforce privately in court, even if there is an agency also devoted to enforcing it), etc.
The law of negligence is a great example. It’s principal based and simple (you can define the tort of negligence in a sentence) and for a long time was developed solely by the common law. Nevertheless, the result has been so unsatisfactory that it’s given rise to the tort reform movement — an attempt to create top down rules that will do a better job of regulating negligence — as well as various complex regulatory agencies and regulatory solutions to negligence (ie, workers comp commissions, replete with administrative law judges, agency-made rules, etc). The tort reform movement and the shift to workers comp were generally supported by the more pro-market and libertarian voices in society and opposed by liberals. Why?
More abstractly, what are the factors you think drive over-complexity at regulatory agencies that don’t exist in court rooms? The only one I can think of is that life-tenure for federal judges make them less prone to regulatory capture. But if that’s true and a good thing, wouldn’t life tenure for heads of regulatory agencies be a good thing? Because it sounds like a terrible idea. Other than that, I think the same public choice problems that hobble regulatory agencies would hobble court rooms. Your just trading out byzantine rules for byzantine case law.
Isn’t “safe and [at least as] effective [as anything currently on the market]” a pretty good example of principles-based regulation? The trouble is, it’s a lousy principle.
If we have a ‘safe and effective’ rule for financial products, we could end up with the same trouble.
But anyway, I’m puzzled by the whole FDA criticism in an era with multinational pharmaceutical companies, a global economy, and plenty of other sovereign medical drug regulators. Why is one country’s regulatory agency so critical to drug innovation, when it seems like it would make sense for companies to deploy what they think are safe drugs as quickly as possible in the easiest, quickest jurisdiction, and use the epidemiological data to bolster their application, and perhaps also leverage public pressure to have treatments that have been available in other countries for a long time brought the the US.
My suspicion is because the US is the only country that pays anything near full-price for drugs (which allows the companies to recoup the enormous fixed R&D costs), while the rest of the world, and especially nationally socialized health care systems, gets to ride our wave as a gift and pay the much smaller marginal cost. Therefore the US / FDA game is really the only game that matters economically to these companies.
If I’m right about that, then it might explain why the FDA is the way it is, because it has a kind of strange global monopoly on the ability to grant a license to recoup those high fixed costs and actually earn a profit on medical innovation.
But the blame for that monopoly rests partially on all those other countries refusing to help pay for innovation that benefits everyone. If they were willing to pay more, and have easier, quicker, more sensible regulators, then they could reap the benefit of earlier access to innovation.
The FDA would then be under some real pressure for reform, by both of the mechanisms I mentioned above: more indisputable data on safety and effectiveness, and more public demand for what other country’s have. Who wants to constantly find themselves in that ‘catch-up’ position? They would then adjust to match their international rivals.
But if those other countries aren’t willing to pay more than the marginal costs (and I’d guess they aren’t), then the FDA maintains its unique position, and is unlikely to feel any pressing need to change.
It is important for agencies to be proactive and not just rule enforcers and to look not just at adding but removing regulations that no longer serve a purpose, but it does require leadership that appointees may be loathe to provide. (I seriously doubt that is the FDAs standard, but it is medicines in that it would be unethical to deny proven treatments to the control group, and monetary concerns are not considerations in this.)