In this article, I want to tell you about some important developments there have been in recent years in the way that policymaking is conducted in Britain and at the EU level, in particular concerning the devising and fine-tuning of regulation. Aside from this helping you to understand some useful things, including some issues relating to John Redwood and Alan Duncan's proposals for regulatory budgets, I want to point out to you a few areas in which there could be scope for politically-oriented policy-wonk thinking. Thus this article is an invitation to you to participate in a political research programme. It is also intended to suggest some matters than an incoming Conservative administration - e.g. at UK government level, but also at London level, would need to reflect upon.
Most policies, at UK government and regulator level and at EU level are subject to what are called "regulatory impact assessments", or just "impact assessments" (sometimes also called "cost benefit analyses"). I helped develop the training guidelines for the European Commission's impact assessment programme, as well as the training and better regulation guidelines used by Ofcom and Ofgem in the UK, and have led teams carrying out impact assessments (or parts thereof) on many significant regulatory measures, including for example MiFID, HIPs, the Toys Safety Directive, and many others.
What is an impact assessment?
As I conceive of it, and teach others to think of it, an impact assessment is a framework for introducing economic reasoning into the process of policy-making. Specifically, an impact assessment is the set of answers to five questions (for the European Commission, six, but let's ignore that for now):
- What is the rationale for state involvement in this area? (Some regulatory guidelines say "What is The Problem?") Is there market failure of some kind - monopoly power, asymmetric information problems not addressed by market processes, public goods issues? Is there regulatory failure - e.g. inadequately defined property rights?
- What are the objectives of your regulatory intervention on this occasion? If there is a rationale for state involvement, that is unlikely to be addressed totally with one intervention. So what (achievable) goal do you have in mind on this occasion?
- What policy options are there for trying to achieve your goal? This should always include a "do nothing" option, and at some stage in the process a deregulatory or liberalising option (or, if the main measures to be considered are deregulatory, there should be one increased-regulation option). Typically the "do nothing" option should be treated as a "counterfactual" versus which the effects of the other options should be measured.
- What are the impacts of each option? This might include impacts upon different regions, different stakeholders (e.g. consumers, producers, the old, members of ethnic minorities), impacts upon different goals (perhaps there might be environmental, social, and prosperity goals). These impacts should be developed from models reflecting the analysis in the original rationale (answer to Question 1). Weightings of impacts should reflect or guide policy priorities (so, for example, a pound lost by a poor person might have a greater weight than a pound lost by a rich person).
- Which is the best policy? Bearing in mind the objectives of intervention, the impacts of the different options, and the risks and uncertainties concerning those impacts, which policy option should be chosen?
Weaknesses in the current process, and how a new Conservative administration should adapt
There is a great deal of cynicism concerning impact assessments. In my view most of this arises from confusion and misinformation. For example, many politicians and mid-ranking policymakers are very suspicious of impact assessments, and treat them as an irritating encumbrance, intended to constrain action by subcontracting policy judgement to number-obsessed technocrats. Technocrats often think of them in the same way. As a consequence the technocrat does not believe that the policymaker is going to pay any attention and indeed the policymaker treats the impact assessment as either there to endorse what he believes anyway or, at best, as part of a challenge function forcing the policymaker to justify his policy in "non-economic" terms.
But the guidance I urge is that an impact assessment is intended to assist policy judgement, not replace it. It is for the policymaker to set the weightings of objectives, risks, and impacts on different groups of stakeholder, not for the technocrat, and it is for the policymaker to adjudge the appropriate rationale (the appropriate economic model to use), not for the technocrat.
Thus if Conservatives come into power, among the key things that we will need to do will be develop
- our own sense of what are the set of appropriate rationales, appropriate analyses of how markets work, when they fail and when they do not;
- our own sense of the appropriate weightings to give to different stakeholders, different objectives and different policy risks.
Without having sufficiently concrete ideas on these matters (or without developing them in coordination with relevant experts), on entering government our teams will find it very difficult to make use of the tools of government - of the expert analysis offered - and there is the danger of an extended period of learning, in which either policy becomes captured by bureaucrats or serious mistakes are made because policymakers dogmatically assert their preferred policy wonk ideas without knowing how to make use of the (highly skilled and potentially extremely useful) detailed analysis available.
As well as the need, in office, for us to learn how best to employ economic reasoning (how best to make use of impact assessments), as currently practiced there are a number of important weaknesses to the impact assessment framework. The most significant of these relates to the rationale, the identification of The Problem. Rationale analysis is almost always very weak, and it is very rare for rationale analysis to lead to the conclusion that, because we can identify no satisfactory rationale for government involvement, we therefore conclude that our previous involvement was a mistake and therefore withdraw.
This is not to say that such things never happen. The FSA, for example, not so long ago published an excellent document concerning (its analogue of) rationale analysis. In other settings, some regulators have decided to remove price controls. But overall, one could certainly imagine a Conservative Government adopting a significantly different attitude to the rationale question, giving it a much higher weighting than it has had thus far. There should also be scope for systematic review of the rationale question for existing regulation, as a mechanism for cutting away what will presumably be much dead wood after thirteen (?) years of a government that for obvious reasons will find it hard to renounce and reverse its own measures.
The other significant weakness in the current process is that benefits are extremely difficult to quantify in practice, and benefits estimates are other either purely illustrative or frankly fanciful. Only a very small number of specialist firms have, at this stage, the necessary skills to provide anything useful in the way of benefits estimation. As a consequence the vast majority of regulation is enacted without serious benefits analysis. Indeed, UK government guidelines in a number of areas now require only that the benefits felt to justify the costs of regulation be spelt out, rather than any evidence being offered that these benefits (even when appropriately weighted by stakeholders, objectives and risks) outweigh the costs. This is surely an area in which there is scope for further policy wonk thinking.
Regulatory budgets
John Redwood (and then Alan Duncan at the 2007 Conference) proposed the introduction of regulatory budgets. Setting New Zealand aside for now, the most relevant European example is perhaps the Netherlands, in which commitments to reduce the administrative burden of regulation (as measured by something called the Standard Cost Model) have been made. The Labour government here has made moves down a similar path.
Reducing the administrative burden of regulation is, doubtless, in its own way a valuable task. But we should understand that the "administrative burden" relates specifically to the resources taken in form-filling and the like. Thus controlling the administrative burden will not address the substance of misguided regulation provided only that that regulation is enacted in a bureaucratically-efficient manner (with the minimum necessary form-filling).
An alternative thought might be to have budgets for the total cost of regulation, as estimated in theimpact assessments. A problem with that, of course, is that there is the chance that some very useful regulation might be excluded whilst very inefficient regulations already enacted survive. Nonetheless, one could imagine such budgets providing a useful discipline if bureaucratic tendencies to over-regulate are thought sufficiently severe.
Another way to go, combining with the issue of the uncertainty concerning benefits, might be to have budgets for "unsupported costs", by which I mean costs for which explicit benefits have not been calculated. So, it might be perfectly legitimate, in considering any one measure, not to demonstrate that (appropriately weighted) benefits outweigh the costs before enacting a regulation. But we might feel that only a certain amount of such woolly justification for regulation should be permitted. One could imagine requiring always that costs be explicitly quantified, and then saying that only a certain aggregate amount of regulatory cost can be imposed without corresponding explicit benefit calculation.
Summing up
I've sketched for you one of the key tools of current policymaking that has largely come in since the Conservatives were last in power, and about which many readers might be unaware, "impact assessment". It is a tool that can be made to serve whatever political preferences you have, and should drive you to need to be more explicit in your thinking. But there is considerable scope and need for Conservative thinking to be developed, between now and 2010, on how we would make use of impact assessments if and when we come to power. Our incoming administration in London also needs to have answers. In particular:
- What rationales for government intervention in markets do we think most relevant? How are our views different on this matter from those of the Labour Party and its appointees in Regulatory Authorities?
- If rationales for past measures appear inadequate, do we consider that a good reason for removing these regulations?
- Would we consider reviewing the rationales of existing measures with a view to deleting a number of them?
- What weightings do we consider it appropriate to give to different policy objectives? How do green objectives rate against crime-reduction, educational attainment, competition promotion, prosperity? Do we want to have a Conservative government-wide set of such weightings? or department-wide? or is it best left to the judgement of each junior minister in each specific case?
- What is our attitude to impacts on different stakeholders? Is a pound to a poor person more important than a pound to a rich person? Is so, how much? Twice? Ten times? One hundred times? Is a pound to a woman more important than a pound to a man? A pound to a pensioner more or less important than a pound to a child? When we come into office, our views on these matters will make an important difference to the policies we enact through the impact assessment process, so would it not be good to debate what a Conservative attitude to such matters should be in advance?
- What is to be our attitude to the benefits of regulation? Are we to be more sceptical than Labour? Are we to insist on more explicit quantification?
- If we are to have regulatory budgets, in what dimension are these budgets to apply? Is it merely to the administrative burden, or is it to the total cost of regulation? Or would it be better if there were, instead, just budgets in respect of the costs of regulation that were not explicitly supported by quantitative (weighted) estimates of benefits?
Over to you...
