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21st Century Regulation: Discovering Better Solutions for Enduring Problems Why now? Bruce Yandle Distinguished Adjunct Professor of Economics [email protected] Federal Register Pages: 1940-2007 Federal Register Pages per $Billion Real GDP 1940-2007 Federal Register Pages per $Billion Real GDP 1940-2007 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. Where are we? 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? 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. Totem of Human Talents Human Connectivity Creativity Analytical Reasoning Formulaic Intelligence Manual Dexterity Brute Force Source: Michael Cox. Federal Reserve Bank of Dallas 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 Group 1970-2006 The Changing Industrial Scene From 1970s Smokestacks to U.S. Industrial Production Index 1919-6/2008 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 Employment Percentage Change in Manufacturing Employment 1992-2003 1992-2003 5 Japan Australia Germany China U.K. U.S. Belgium Netherlands Rate -10 Korea France Sweden Italy Taiwan Norway -5 Canada 0 -15 -20 -25 -30 Data for The Netherlands and China are for 1990-2002. 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, Source: W.A. Ward, Manufacturing Productivity and the Shifting U.S., China, and Global Job Scenes, 1990-2005. Clemson University, Clemson, SC. 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 16 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 GDP Share 18 U.S. Exports & Imports, Share of GDP 14 12 10 8 6 4 2 0 Import Share Export Share Racing to the Top but Struggling with the Bottom So what? Ambient Pollution Concentration 0 Average Income Environmental Kuznets Curve: The General Case Ambient Pollution Concentration Race to the top. 0 Average Income Environmental Kuznets Curve: The General Case 40 60 80 (No evidence of EKC) 20 Over the period 19601980: emissions increased with income. No evidence of EKC. CO2-GDP Relationship 1960-1980 0 The same set of countries was examined over the period 1960-1980. Carbon Dioxide Emissions Per Capita 0 20000 co2pc 40000 GDP Fitted values Over the period 19842002: evidence of EKC. Source: Kuheli Dutt, doctoral student, Northeastern University, Boston, MA 60000 CO2-GDP Relationship 1984-2002 0 10 20 30 40 (Clear evidence of the EKC) 0 10000 20000 Gross Domestic Product CO2pc 30000 Fitted values 40000 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 Plan There 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 Yandle Distinguished Adjunct Professor of Economics [email protected]