At the Skeptics Society conference on “The Environmental Wars," Jonathan Adler gave a talk on “Fables of Federal Environmental Regulation." Adler’s talk made several points, the main ones among them being:
* Federal regulations tend to come late to the game, after state and local regulations or private actions have already begun addressing the problems. The recurring pattern is that there is an initial recognition of a problem, there’s state and local regulation and private action to address it, and then there’s federalization. I can add to Adler’s examples the development of the cellular telephone industry, where private actors stepped in to allocate licenses through the “Big Monopoly Game” (a story told in the book Wireless Nation) when the FCC proved incompetent to do so itself; federal anti-spam legislation, which came only after many states passed anti-spam laws; and federal law to require notification of customers whose personal information has been exposed by system compromise (which still doesn’t exist, though almost half the states now have some kind of hacking notification law). (In a related point, industries regularly develop products that completely sidestep federal regulations, such as the SUV, interstate banking, credit cards, money market accounts, and discount brokerages. The development of the latter financial products is a story told in Joseph Nocera’s A Piece of the Action: How the Middle Class Joined the Money Class.)
* The causes of federal regulations are not necessarily the problems themselves, but are often rent-seeking by involved entities, which can create a barrier to other alternative solutions. Adler listed four causes of federal environmental regulations: increased environmental awareness (by the voters and the feds), increasingly nationalized politics (political action at a national level), distrust of states and federalism, and rent-seeking. He gave examples to illustrate.
* We don’t see (I’d say “we tend not to see”) environmental problems where we have well-defined property rights; the environmental problems occur in the commons (cf. Garrett Hardin’s “The Tragedy of the Commons”). I disagree with making this an absolute statement since there are bad actors who disregard even well-established property rights (or liability rules).
Adler’s intent was to raise skepticism about federal regulation on environmental matters on the basis of several points:
* History shows the problem already being addressed effectively in a more decentralized manner.
* Federal regulation tends to preempt state regulation, creating a uniform approach that doesn’t allow us the benefits of seeing how different approaches might work–we can miss out on better ways of dealing with the issue.
* The rent-seeking behavior can produce unintended consequences that can make things worse or impose other costs.
While I’m not sure I agree with the implied conclusion that federal regulation is never helpful, I agree that these are good reasons to be skeptical.
The preemption issue in particular is a big one. The federal anti-spam law, CAN-SPAM, was pushed through after years of failure to pass federal regulations against spam after California passed a tough mandatory opt-in law. The federal law was passed largely through efforts by Microsoft and AOL (whose lawyers helped write it) and preempted state laws which mandated opt-in or any requirements contrary to the federal law. I don’t think it’s cynical to believe that preventing the California law from taking effect–which would potentially have affected online marketing efforts by Microsoft and AOL–was a major cause of the federal legislation passing.
The benefit of preemption is that it creates a level playing field across the entire nation, which reduces the costs of compliance for those who operate across multiple states. But it also reduces the likelihood of innovation in law through experimentation with different approaches, and reduces the advantages of local entities in competition with multi-state entities. It also prevents a state with more stringent requirements from affecting the behavior of a multi-state provider operating in that state, when the requirements get dropped to a federal lowest common denominator. As regulation almost always has unintended consequences, a diversity of approaches provides a way to discover those consequences and make more informed choices.
Another issue is that many federal regulations provide little in the way of enforcement, and the more federal regulations are created, the less likely that any particular one will have enforcement resources devoted to it. If you look at the FCC’s enforcement of laws against illegal telemarketing activity (such as the prohibition on prerecorded solicitations to residential telephones, and the prohibition on telemarketing to cell phones), it’s virtually nonexistent. They occasionally issue a citation, and very rarely issue fines to telemarketers who are blatantly violating the law on a daily basis. In this particular case, the law creates a private right of action so that the recipient of such an illegal call can file a civil case, and this model is one I’d like to endorse. I’ve personally had far more effect on most of the specific telemarketers who have made illegal calls to my residence than the FCC has. Federal laws and regulations can be effective when they are applicable to a small number of large players who can be adequately policed by a federal agency (but in such cases those large players tend to also be large players in Washington, D.C., and have huge influence over what rules get set) or when the enforcement is pushed down to state, local, or even private levels (e.g., using property or liability rules rather than agency-based regulation). Otherwise, they tend to be largely symbolic, with enforcement actions only occurring against major offenders while most violations are left unpunished.
The most effective solutions are those which place the incentives on involved parties to voluntarily come to agreements that address the issues, and I think these are possible in most circumstances with the appropriate set of property and liability rules. A good discussion of this subject may be found in David Friedman’s book, Law’s Order: What Economics Has to Do With Law and Why It Matters.
There seems to be a widespread illusion on the part of many people that many problems can be solved merely by passing the federal legislation, without regard for the actual empirical consequences of such legislation (or the actual process of how it’s determined what gets put into such legislation!). From intellectual property law, to environmental law, to telecommunications law (e.g., net neutrality), good intentions can easily lead to bad consequences by those who don’t concern themselves with such details. Friedman’s book is a good start as an antidote to such thinking.