Regulatory Reform

For many years I have been arguing, in the OECD and elsewhere, that the post-crash crisis of capitalism has extended into a crisis of legitimacy in the institutional and regulatory settlement underpinning it.

Regulators and other public authorities that were once seen as harnessing the forces of capitalism for the public good are increasingly being cast - by the left and the right - as part of the problem: unaccountable guardians of an economic order that serves the few at the expense of the many. This is far more than mere populism. Much of it is widely held to be justified.

Criticism of regulators is increasing across Western economies. Ineffective and excessive regulations are held to create impediments to productivity and growth, often serving the interests of large corporations and retarding innovation and optimal capital allocation.

Policy makers are neither satisfied with the performance of regulation in encouraging growth, nor in protecting consumers from the harms of market power. They are increasingly concerned by the economic and political costs of substandard regulatory performance; it is now widely accepted that the industries which regulators supervise are responsible for weaknesses of the supply side. Such evidence that exists suggests that markets are becoming more concentrated and less dynamic, despite significant antitrust activity. The rate of entries and exits to markets is declining. Technological advances are now widely held to enable some of the biggest platforms to entrench market power and engage in rent-seeking. Research from the developed world documents the productivity and growth benefits of competition-boosting regulation, and the penalties to growth and investment from regulatory barriers to entry.

Macroeconomic consequences are also of concern to policy makers. Many view declining competition as a cause of inflation and inequality. The IMF and others estimate that excessive profit margins contributed to around half of the recent growth of inflation in several economies. Rent-seeking is also associated with increasing inequality, leading many to believe that global capitalism benefits asset-owning elites at the expense of the rest of the population. This has also been held to inflame populist sentiments and to contribute to political instability.

An important task for those who believe that competitive markets within a framework of regulation are the most effective route to prosperity is to contribute to restoring trust, and by demonstrating that markets can continue to serve the interests of millions of people. This will require improvements in regulatory performance.

Governments have responded to criticisms of regulators by pursuing wholesale deregulation, which poses risks to economies and the public. This is most salient in the United States, where President Trump has pursued action to cull regulations and enforcement capacity in the first months of his second administration (see Appendix 1). The UK and EU also intend to pursue deregulation, with the stated intention of achieving higher growth and innovation. Each of these interventions requires assessment on its merits. Sweeping reforms, such as those on which the US appears to be embarking, carry the risk of unintended consequences. European regulators for example, have raised alarms that the Trump administration’s deregulation of cryptocurrencies could lead to another major global financial crisis.

Addressing fundamental problems in the regulatory framework of Western economies is not - despite appearances - a recondite subject best left to technocrats. Nor can it be achieved simply by reducing the number of regulations. Both the causes of regulatory under-performance, and possible remedies, are varied and often complex. The consequences of under-performance, to both their political communities and their wider publics, will need to be explained over a sustained period, and far better than is currently achieved in many jurisdictions. It is a prerequisite for the restoration of public trust in free enterprise. These problems - widely perceived regulatory under-performance, inadequate public explanation and a lack of trust in decision-making - have been less fully examined, and much less subject to public and parliamentary discourse, than their macroeconomic counterparts, post-2008. But, like them, their main characteristics are shared across many jurisdictions. What follows first illustrates some of those characteristics; part two offers some suggestions for making improvements. many years I have been arguing, in the OECD and elsewhere, that the post-crash crisis of capitalism has extended into a crisis of legitimacy in the institutional and regulatory settlement underpinning it.

Regulators and other public authorities that were once seen as harnessing the forces of capitalism for the public good are increasingly being cast - by the left and the right - as part of the problem: unaccountable guardians of an economic order that serves the few at the expense of the many. This is far more than mere populism. Much of it is widely held to be justified.

Criticism of regulators is increasing across Western economies. Ineffective and excessive regulations are held to create impediments to productivity and growth, often serving the interests of large corporations and retarding innovation and optimal capital allocation.

Policy makers are neither satisfied with the performance of regulation in encouraging growth, nor in protecting consumers from the harms of market power. They are increasingly concerned by the economic and political costs of substandard regulatory performance; it is now widely accepted that the industries which regulators supervise are responsible for weaknesses of the supply side. Such evidence that exists suggests that markets are becoming more concentrated and less dynamic, despite significant antitrust activity. The rate of entries and exits to markets is declining. Technological advances are now widely held to enable some of the biggest platforms to entrench market power and engage in rent-seeking. Research from the developed world documents the productivity and growth benefits of competition-boosting regulation, and the penalties to growth and investment from regulatory barriers to entry.

Macroeconomic consequences are also of concern to policy makers. Many view declining competition as a cause of inflation and inequality. The IMF and others estimate that excessive profit margins contributed to around half of the recent growth of inflation in several economies. Rent-seeking is also associated with increasing inequality, leading many to believe that global capitalism benefits asset-owning elites at the expense of the rest of the population. This has also been held to inflame populist sentiments and to contribute to political instability.

An important task for those who believe that competitive markets within a framework of regulation are the most effective route to prosperity is to contribute to restoring trust, and by demonstrating that markets can continue to serve the interests of millions of people. This will require improvements in regulatory performance.

Governments have responded to criticisms of regulators by pursuing wholesale deregulation, which poses risks to economies and the public. This is most salient in the United States, where President Trump has pursued action to cull regulations and enforcement capacity in the first months of his second administration (see Appendix 1). The UK and EU also intend to pursue deregulation, with the stated intention of achieving higher growth and innovation. Each of these interventions requires assessment on its merits. Sweeping reforms, such as those on which the US appears to be embarking, carry the risk of unintended consequences. European regulators for example, have raised alarms that the Trump administration’s deregulation of cryptocurrencies could lead to another major global financial crisis.

Addressing fundamental problems in the regulatory framework of Western economies is not - despite appearances - a recondite subject best left to technocrats. Nor can it be achieved simply by reducing the number of regulations. Both the causes of regulatory under-performance, and possible remedies, are varied and often complex. The consequences of under-performance, to both their political communities and their wider publics, will need to be explained over a sustained period, and far better than is currently achieved in many jurisdictions. It is a prerequisite for the restoration of public trust in free enterprise. These problems - widely perceived regulatory under-performance, inadequate public explanation and a lack of trust in decision-making - have been less fully examined, and much less subject to public and parliamentary discourse, than their macroeconomic counterparts, post-2008. But, like them, their main characteristics are shared across many jurisdictions. What follows first illustrates some of those characteristics; part two offers some suggestions for making improvements.