21st Century Regulation:Discovering Better Solutions

for Enduring Problems

Why now?

Bruce YandleDistinguished Adjunct Professor of Economics

yandle@bellsouth.net

Federal Register Pages: 1940-2007

Federal Register Pages per $Billion Real GDP1940-2007

Federal Register Pages per $Billion Real GDP1940-2007

The 1970s’ imprint.

The 1970s

Heydays for major environmental, food, safety, and consumer statutes that called for technology-based, command-and-control regulation

A time when the U.S. economy was characterized by large smokestack industries, young and inexperienced workers, and managements with limited experience in dealing with complex environmental risks

A time when U.S. industry led the world, with significant but still limited international competition in domestic markets

Economic pressures affecting internal growth predicted a “race to the bottom” for U.S. developing regions

Regulation provided opportunities for cartelization while satisfying demand for risk reduction. Centralized, “one suits fits all” regulation was the order of the day

What’s changed?

In 1970, per capita GDP was $18,391 (2000 chained dollars). In 2007, $38,475.

“Race to the top” has replaced “race to the bottom.”

In 1970, 205 million people in the U.S. Now, 305 million.

In 1970, 11% of the over-25 population had a bachelor’s degree. Now, 28.7%. Better informed, higher valued human capital.

30 years of state and corporate experience in dealing with risk management…and deeply engrained regulatory habits.

Intense, global competition.

More of us.

Better educated.

Better connected to information.

Wealthier & Older.

Firms competing in global markets.

How does this affect the demand and supply of regulation?

Where are we?

An Information Revolution Occurred after 1970.

So what?

MICROSOFT in 1978

Wikipedia in 2007

Meet the

Innovators’ Dilemma

Clayton Christensen. The Innovators’ Dilemma. Harvard Business School Press, 1997.

Source: Michael Cox. Federal Reserve Bank of Dallas

Human ConnectivityHuman Connectivity

CreativityCreativity

Analytical Reasoning

Formulaic Intelligence

Manual Dexterity

Brute Force

Totem of Human Talents

Let’s talk about where people work!And how that has changed.

U.S. Sector Employment: 1970

U.S. Sector Employment: 2007

Knowledge-Intensive Manufacturing

So what?

U.S. GDP by Product Group1970-2006

The Changing Industrial Scene

From 1970s Smokestacks to

21st Century Knowledge Economy

U.S. Industrial Production Index1919-6/2008

Production-Based Industry Rankings

1972 1980 1990 2000 2004 2007

Iron/Steel Iron/Steel Printing Comp/Elec Comp/Elec Comp/Elec

Apparel Apparel Apparel Autos Autos Aircraft

Machinery Paper Plast/Rubber Food Food Food

Food Fab. Metal Food Fab. Metal Chemicals Plast/Rubber

Paper Paper Chemicals Machinery Iron/Steel Fab. Metal

Fab. Metal Food Iron/Steel Plast/Rubber Plast/Rubber Elec. Mchry.

Chemicals Chemicals Fab. Metal Chemicals Machinery Printing

Autos Printing Machinery Printing Fab. Metal Chemicals

Printing Autos Plast/Rubber Paper Paper Iron/Steel

Plast/Rubber Plast/Rubber Autos Iron/Steel Printing Nonmetal minerals

Source: Economic Report of the President, 2005, and Federal Reserve Board.

Are all the jobs going to China?

Percentage Change in Manufacturing Employment1992-2003

Data for The Netherlands and China for 1990-2002

Source: W.A. Ward, Manufacturing Productivity and the Shifting U.S., China, and Global Job Scenes, 1990-2005. Center for International Trade, Clemson University, Clemson, SC.

Globalization

So what?

Growth in Global Markets Changes Rent-seeking Behavior & Places U.S. Regulators in Head-to-Head International Competition

Racing to the Topbut

Struggling with the Bottom

So what?

0

Environmental Kuznets Curve: The General Case

Average Income

Ambient Pollution Concentration

Race to the top.

The same set of countries was examined over the period 1960-1980.

Over the period 1960-1980: emissions increased with income. No evidence of EKC.

Over the period 1984-2002: evidence of EKC.

020

4060

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0 20000 40000 60000GDP

co2pc Fitted values

(No evidence of EKC)CO2-GDP Relationship 1960-1980

Source: Kuheli Dutt, doctoral student, Northeastern University, Boston, MA

010

2030

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0 10000 20000 30000 40000Gross Domestic Product

CO2pc Fitted values

(Clear evidence of the EKC)CO2-GDP Relationship 1984-2002

Federal regulatory agencies are mature, experienced, and sophisticated.

States and cities have in place sophisticated regulatory infrastructure.

Huge risk-reduction strides have been made.

The U.S. is generally cleaner and safer. Natural areas are better protected.

We are in a race to the top.

Information and monitoring costs have plummeted.

Interest groups are results oriented.

Industries seek competitiveness and harmonization of standards.

The search is on for more effective, lower cost, outcome-based regulation.

Today’s PlanThere are many ideas in today’s papers.But, alas, we must ration.Five Key Ideas Use performance-based regulation. Require congressional review of significant regulations with

requirement that offsetting saving be found. Set priorities for regulatory instruments. Least restrictive first. Treat risk from new technologies the same as risk from

existing technologies. Encourage private market alternatives before moving to

regulation.

Three Panels

Panel One: Procedural changes that facilitate improved outcomes

Panel Two: Solutions that fall outside traditional regulation

Panel Three: A discussion with journalists led by Tyler Cowen

21st Century Regulation:Discovering Better Solutions

for Enduring Problems

Why now?

Bruce YandleDistinguished Adjunct Professor of Economics

yandle@bellsouth.net