Deep Dive Episode 53 – Analyzing the Regulatory Thicket
Listen to the Podcast
Regulation is a pervasive and increasingly a contentious issue in 21st Century America. The propriety of any given regulatory imposition may be debatable; however, in this discussion we address bigger questions about how regulation works as a whole—whether, in the aggregate, regulation at the federal, state and local level is working well, or impacting innovation and economic opportunity. What are the relative benefits of local and state regulation as well the societal costs?
Our co-presenters, Brooks Rainwater (National League of Cities) and Luke Wake (NFIB Small Business Legal Center), will explore whether we should maintain the status quo, seek to scale-back existing regulation, and/or winnow existing regulatory regimes.
Operator: Welcome to Free Lunch, the podcast of The Federalist Society’s Regulatory Transparency Project. All expressions of opinion are those of the speakers.
William Hild: Good afternoon and welcome to The Federalist Society’s Free Lunch Podcast for the Regulatory Transparency Project. My name is William Hild, and I’m the Deputy Director of the Regulatory Transparency Project. As always, please note that all expressions of opinion are those of the guest speakers on today’s call. We’ve been looking forward to this afternoon’s discussion entitled “Exploring the Regulatory Thicket.” Regulation is a pervasive and increasingly contentious issue in 21st Century America. The propriety of any given regulatory imposition may be debatable.
However, in this discussion, we address the bigger questions about how regulation works as a whole – whether, in the aggregate, regulation at the federal, state, and local level is working well, or impacting innovation and economic opportunity. What are the relative benefits of local and state regulation, as well as the societal costs? Today, we will explore whether we should maintain the status quo, seek to scale back existing regulations, and/or winnow existing regulatory regimes. Our first guest is Luke Wake, Staff Attorney at the NFIB Small Business Legal Center. Luke is also the chair of the Regulatory Transparency Project’s working group on state and local regulation.
We are also excited and pleased to have with us Brooks Rainwater, who is a Senior Executive and Director of the National League of Cities Center for City Solutions. If you would like to learn more about Luke or Brooks and their interesting work, please visit regproject.org, where we have listed their full bios. I will turn it over first to Luke to get us started. After opening remarks and discussion between our speakers, we will go to audience Q&A. So audience members, please think of what you’d like to ask our speakers. Thank you both for joining us. Luke, the floor is yours.
Luke Wake: Thank you so much. And as an attorney for the NFIB, we represent small business owners all across the country with NFIB Small Business Legal Center. So I’m constantly talking to small business owners about their regulatory issues throughout the country. And as the chair of The Federalist Society’s State and Local Regulation Working Group within the RTP project, we’ve been charged with writing a series of white papers highlighting regulatory problems and, more specifically, trying to shine a light on regimes where the costs and the burdens imposed in society outweigh the societal benefits.
So most recently, we released this “Managing the Regulatory Thicket” paper, which I encourage everyone to read, in which we argued that there really is a systemic problem of over-regulation in this country. And we refer to this concept of the regulatory thicket because I think there’s a real sense, especially for entrepreneurs and small business owners who — by the way, those guys don’t have in-house attorneys or compliance experts, and they certainly can’t afford to run to an attorney every time something comes up. There’s a sense that they’re swimming in regulation and that it’s essentially impossible to be 100 percent compliant 100 percent of the time. And I think that’s especially true in jurisdictions like California where they’re constantly piling on.
So when I use the term “regulatory thicket,” that’s what I’m talking about here – this phenomenon where small business entrepreneurs have to navigate through layers and layers of regulation at the federal level, which is already very cumbersome. And federal regulation covers almost every aspect of economic life today in some way. But then there’s the state and local regulation on top of that. And again, in an environment where there’s constant change, that makes it more difficult on a day to day basis.
So in this paper, we argued that we need to think proactively about how to control the growth of the regulatory state. Again, specifically, we’re talking here about state and local regulation because there are forces and incentives that inevitably will push for more and more regulation. Madison would call these factions. I think, today, we’ll refer to them as special interests — but whatever it would be. And I think also exacerbating the problem is this tendency I think a lot of times for legislators to come into office and think that they’re not doing their job if they’re not creating new laws. And maybe, if they’re thinking seriously and critically about this regulatory thicket issue, they will maybe change that attitude.
So I’m going to share just a few insights that I think we gathered in our work on this paper. One is that I think there’s a ratcheting effect. So regulation usually is a one-way ratchet. It’s relatively easy to pile on new regulatory impositions, but it’s often exceedingly difficult to eliminate these regimes or to have real reform. Relatedly, us attorneys — we know that it’s extremely difficult to expect any sort of change from the courts. Courts are extremely deferential to legislative bodies and usually deferential also to administrative agencies, both at the state and the federal level.
And just as a concrete example of, I think, the ratchet effect — I realize this is a federal example, but the Affordable Care Act was an extremely controversial major piece of legislation at the federal level. But there was tremendous opposition to it and grassroots support for repeal. Nonetheless, that has gone nowhere, and it’s the law of the land and probably will continue to be so. So my second observation about the regulatory thicket is—and the phenomena of this—is the clutter. So regulations have a tendency to build up and ossify over time.
And this is true both in blue states and in red states, in the same way that clutter will slowly take over your home if you’re not proactively looking for ways to tidy up on a continual basis. If left unchecked, the natural course is for the clutter to become more and more cumbersome to the point that it really is stifling and beginning to get in the way. And I think that’s precisely the problem that entrepreneurs and small business owners are struggling with when they’re trying to grow and establish their business. This is a regulatory environment that’s just stifling them.
And my third point—and it’s related—is that a large part of the problem here is that we’re dealing with not a static environment but a changing environment. So I think the regulatory environment is especially challenging for small business in these jurisdictions where lawmakers are more indulgent of regulatory innovation. It’s difficult enough, I think, for an entrepreneur to fully understand and be totally compliant with the law even in a static environment. But when the regulatory landscape is changing year to year, it’s really easy to make costly mistakes just because you didn’t realize that there was a change. Especially it’s problematic if you face lawsuits or whatnot as a result of that.
And I have to emphasize for a moment here that this sort of regulatory environment gives an inherent competitive advantage to large businesses over small businesses because they can better absorb the cost of compliance and because they have access to the resources to navigate these regimes in a way that small businesses don’t. The reality is that small business, without in-house attorneys, without in-house HR, it’s the owner themselves that are usually pulled away from much more productive things that they could be doing and spending inordinate time and energy trying to figure out what to do.
My fourth point here, in observation, is about what I call a balkanization. And that is that the regulatory environment is especially challenging in these jurisdictions that allow for local and municipal authorities to pile on regulation on top of federal and state. So we see this phenomenon most in the bluest of blue states, really, where you see already very stringent regulatory standards in place as a matter of state law. And then, these local municipalities balkanize with their own, sometimes inconsistent, rules in a way that it really makes it cumbersome and often exceedingly difficult for businesses that have multiple locations or a mobile workforce. So you could have your base of operations in a neighboring community and have the business just greatly complicated by the fact that you’re sending people in to do jobs here and there.
My fifth observation in describing the regulatory thicket and the phenomena we’re talking about is that it’s not any one regulation or regulatory regime that’s stifling economic dynamism in America. It’s really the aggregate effect of all that regulation — so death by a thousand cuts. We’re not talking about — it’s a systemic problem in need of a systemic solution. So by its nature, the regulatory thicket is comprised of many, many regulations that may very well be well-intentioned, and many of them are defensible if viewed on a granular level. But in considering the totality of regulation and the aggregate and this phenomenon that we’re calling the regulatory thicket, there is a compelling case for regulatory measures that may winnow the field of regulation or, at least, control the growth of regulation.
So at the very least, when we’re considering the propriety of new regulation, new proposals, one has to bear in mind that it would be piling on. I think that this should give lawmakers pause; that they should stop to question whether it really is a compelling enough concern to justify contributing further to the thicket.
And my sixth point is about unreasonable complications. So insofar as they’re going to move forward with new regulation, the regulatory thicket is exacerbated in these cases where the government — where there’s cited public concerns, but they could address those through less burdensome alternatives. Again, there’s often room for reasonable minds to disagree on particular regulation. And we all realize that, but I think we should all be able to agree that, if regulation really is necessary, that the states should be seeking to achieve it’s ends while minimizing the burdens and disruptions for the small business community especially.
And to provide just one concrete illustrative example, numerous states have implemented this “Ban the Box” legislation that prohibits employers from running background checks until after a job applicant has been given a tentative offer. But California has complicated things in the hiring process even further by dictating very specific steps, waiting periods, and notices that are very easy to trip up on. And again, if you need to have a new — you want someone to go in there and change the drywall tomorrow, it’s, as a practical matter, very cumbersome to have to worry about all these things and then face the possibility of a lawsuit over a good faith mistake.
And that brings me to our seventh observation about the proportionality of penalties. So the regulatory thicket is also exacerbated by the fact that many state and local regimes punish even good faith violations with what I would call shock-and-awe penalties or by creating punitive causes of action. For example, I spoke with a small business owner who runs a shop here in California selling sporting goods. And at some point, he had California Air Resources’ board come in, and they told him that he was in violation of some regulation that he had no idea about — had never heard of. But apparently, it made it illegal for him to sell an electric bike that he had in stock.
And he was told that he faced $37,500 per day in penalties for each bike in his inventory and for each one he had sold. And these are bikes that he had maybe $100 profit on. And relatedly, while we’re talking about the penalties, a major component of the problem with regulation and the proportionality of the penalties is these states that have a tendency to create causes of action for benign regulatory mistakes. And California provides a whole litany of examples. I could talk to you about the California Private Attorney General Act, which authorizes lawsuits over such innocuous mistakes as misstating — listing your “doing business as” name instead of your official incorporated name on the employees’ paystubs.
But the reality is you could achieve, in most cases, the very same regulatory objectives without authorizing the cause of action, which is usually punitively expensive. People have to pay $20,000 or $30,000 often to prove that they did everything right in a lawsuit. So I’ve been talking for a while. I certainly have other things I can say on this, but I do want to hand things over to Brooks, who will talk for a little bit here.
Brooks Rainwater: Great. Thanks so much, and it’s wonderful to be with you all today and thank you for inviting me to this conversation. Again, I’m Brooks Rainwater, and I’m the Senior Executive and Director of the Center for City Solutions here at the National League of Cities. And the center that I oversee works on research, technical assistance, on the ground engagement with city officials, as well as leadership education. We do this across a wide range of issues from kind of traditional issues like economic development, infrastructure, and transportation, to all of kind of the changes we’re seeing within kind of the urban innovation space – thinking about mobility shifts around Uber, autonomous vehicles, ride-hailing, scooters and more.
So I really want to start with the premise today that decision making that takes place closest to the people is the best type of decision making that can happen in a well-functioning democracy. It’s reflective of people’s wants and needs, and poll after poll shows that people support local elected officials at higher levels than their counterparts at the state and national level. This is why local control, local decision making, and local regulation makes sense and are able to best reflect the will of the people electing our leaders to represent their interests, not special interest in government. And so if this is my baseline premise, the purpose of regulation in a well-functioning society is to protect the health, safety, and welfare of the general public.
That being said, there are too many regulations place on Americans that want to start and grow businesses in the aggregate, and there are a multitude of ways they can be adjusted, but not decimated. The regulatory thicket may have grown a tad bit too much, but rather than taking the hedge clippers out and cutting deeply into what is working—and working successfully—I would posit that a pair of scissors to trim judiciously would suffice and create a better environment for all. Because, ultimately, there is a concern that, if you trim the regulatory thicket too much, you create holes in the policies that make sure our food is safe, the products we use don’t kill us, and the people placed in positions of most importance—watching our children, taking care of the elderly, and protecting the general welfare—are not properly vetted.
And the end result in that type of limited regulatory environment is ultimately deleterious on society. So I would like to explore the regulatory environment and its impact on entrepreneurship innovation at multiple levels – global, national, state, and local. First, if we take the global and the national levels, I believe that we need to ask ourselves a foundational question. If the U.S. regulatory regime is strangling entrepreneurship and impeding innovation, what is the model that you would recommend? In other words, what and where are we comparing the U.S. to in order to come to these conclusions that regulation is holding us back? From the global perspective, America consistently ranked at the top of the pack for entrepreneurship and innovation.
The Global Entrepreneurship Index, which is done by the Global Entrepreneurship and Development Institute, ranks the U.S. as number one in entrepreneurship. Following out and rounding out that top five, U.S. at one, Switzerland, Canada, U.K. Australia. The Global Innovation Index has the U.S. at number six, which is actually down from number four in 2017, even as we’ve been cutting regulation at the federal level. So there, we see the top five being Switzerland, Netherlands, Sweden, U.K. and Singapore, before we get to the U.S. So again, what we’re starting to see with these trends are actually more highly regulated states, like in Europe, are actually leading on innovation entrepreneurship at some instances. And then, in other instances, the U.S. is on top.
And I’ll give one more to reinforce this point. U.S. News and World Report Entrepreneurship Ranking has America at number three. So now that we’ve established that America is, indeed, the top of rankings and has been consistently over the years, let’s drill down to the state and local level, particularly to some of the challenges raised with examples given in the regulatory thicket paper. At the state and local level, I would really posit that the state level is where we could do some trimming and devolve more authority to the local level. Again, I say that. Obviously, I’m an urbanist and feel like things should be — decision-making should be taken at the city level, rather than state.
But before we get into that, I wanted to speak directly to some of the examples in the thicket paper. Examples are given—and I really love these examples—of Dan’s Hamburgers, Amy’s Ice Cream, and Wild Jimmy’s Sausage and Beef Jerky and the challenges they are facing. These budding entrepreneurs all agree about one thing, quote, “If they knew before what they have learned through hard experience, they would never have started or expanded their businesses.” I just take a little bit of issue with this as a premise because, while their concerns are valid, the southern region of the country, where these businesses were located, has arguably the thinnest regulatory thicket in the country. So again, what and where would we be comparing states like Alabama, Florida, and Georgia to?
Generally, these places in the South are compared to California or maybe New York in the northeast, where regulation can, at times, be a bit more stringent. But according to the Kaufman Foundation, states like California, often spoken about in terms of its regulatory challenges, actually have the highest rate of new entrepreneurs, at 0.44 percent of the population and high numbers of early startup job creation at 6.56 jobs on average created by startups in their first year. Also, I think that, again, looking at the global rankings of entrepreneurship and innovation, America is clearly at or near the top. So we should celebrate that we’re doing well as a country within this space, make changes, but also just hue back to the fact that America is number one, or near number one.
In fact, again, I would posit that the state government is the real problem and where we might want to try to trim the regulatory thicket or, indeed, create more dynamic space for cities to innovate. And the way that we can do that is by curbing state-level preemption, not leaning into it. State-level preemption has been on the rise across the country. Our research shows there’s a lot of other people that have dug into this, particularly in those states where politics diverges between states and cities. And state preemption is too often the result of legislative capture by existing incumbents. Policy that is driven by incumbents is rarely designed to empower insurgents and is rarely there to help kind of create a better entrepreneurial environment.
Instead, it’s there, generally, to help large corporations that are trying to kind of move forward with regulatory capture. And there’s currently a great lack of evidence that preemption actually helps solve any problems. And in fact, for all the conversation about a patchwork of regulation impeding companies bandied about, these arguments are largely built on belief rather than fact. We’re in the midst of exploring research in this various space that will be coming out later this year, which seeks to answer questions around preemptions impact on entrepreneurial environment and look forward to sharing that with you all once completed because this current dynamic of increase preemption against cities has actually tamped down on dynamism and impeded the ability of cities to regulate based on the needs and priorities of local citizenry.
Why should a state government regulate how a local community zones for property, as is increasingly happening in states to allow businesses to proffer short-term rentals? Why should a state government stop cities like Chattanooga from expanding high-speed broadband access outside of its city limits to smaller communities that would like access to gigabyte level internet at affordable prices? That is actually not being offered by private actors. Why should states, like we have seen in Arizona, be so heavy-handed that they are limiting the ability of cities even fight against onerous state-level regulations to where, if they bring suit and lose, they can face punitive fines?
And why in the world should a state, like we saw in North Carolina and others try to do, regulate who can use what bathroom? Not only is this an overreach that makes no sense from policy and human rights perspective but from a knock-on economic perspective, it impeded the businesses across the country that wanted a site there from moving there due to a lack of inclusiveness enshrined in9 law. So all of these examples of state-level impediments to local decision-making take me back to the original premise, which is that, while there should be movement afoot to trim the regulatory environment we have here in America, we should remember that, when it comes to how America ranks in the world, we’re either at the top or near the top for innovation and entrepreneurship.
Much of this comes from the fact that America’s federal system is a success and has been built this way over generations. How did America get to be at or near the top of the world? We started small and scaled up, always starting in a city and then expanding these good ideas, whether in business or policy, to the state, national, and global level. We should celebrate local innovation, not impede it. Thank you all.
Luke Wake: Well, thanks, Brooks. I will just take a couple minutes to maybe respond to some of what you said, and I’ll let you do the same to respond to what I say. And then, maybe we’ll just have a conversation for a little bit. It seems like — I’m going to respond to a few of these things here. First, what is the baseline that we’re comparing to? I would say I’m comparing this to, in part, the regulatory environment that we think would be optimal. For one, I would say would be a whole lot less federal regulation. But secondly — so maybe we might agree on that part. I don’t know. It seems to me that our greatest point of sort of disagreement is probably over this issue of the propriety of preempting local municipal regulation.
By the way, I should say I have to respond to one other point before I tackle the preemption thing. And that is we’re not advocating, in this regulatory thicket paper, getting rid of all regulation. What we’re talking about is revisiting existing regulation to say is this really necessary? If there really are compelling health and safety concerns, we’re not saying throw those out the window. But even so far as there are, we’re saying are there ways that we could address those concerns that would be less burdensome. And often the case is yes.
With regard to the preemption issue, again, I would argue, first of all, that it is best public policy to generally preempt local regulation, at least of commercial activity. Zoning is quintessentially local in nature, so I don’t necessarily disagree with my counterpart here. But in terms of regulation of business activity vis-à-vis the business, I think it’s bad for the states’ overall business climate if you have inconsistent rules from one municipality to the next. You could have 300 different sets of rules for businesses, and that would be exceedingly complicated and difficult.
Two, related on this point, if local government is given a free hand, we can inevitably expect that sort of balkanization because it’s easier for special interest groups, I think, to co-opt and to lobby to local officials to effect change that otherwise state lawmakers have judged to be imprudent.
And often, that’s when — and by the way, this is a very timely conversation because we live in an age of gridlock in Washington, D.C., for better or for worse. If you are like me and you want to see deregulation at the federal level, well, it’s frustrating that Congress can’t get much done. But there are a lot of people who are frustrated that Congress isn’t piling on more regulation at the federal level. I get that. But the reality is not a whole lot is going on in D.C. So what we are seeing on the ground nationally is all of the regulatory action — most of the regulatory action is happening at the state and, especially, the local level. So there’s a lot of action in the various state legislatures.
It does seem like there’s a real — at this level, a very stark distinction between the blue states and the red states — different sets of issues. Now, there are still things happening in the red states, and there’s definitely a problem of ossification of just regulation that’s grown up over time there. But my counterpart is right that things in Georgia and Texas are different than in California. Although one of the examples he was citing about from Texas was dealing with the city of Austin, I believe, which was — made things exceedingly complicated. But getting back to my point, look, if local government is given a free hand, we can just expect, as a practical matter, that they’re going to pile on and create more complicated rules for people.
And it’s going to — what we see is that it actually enables dominate cities to effectively establish regional rules. If San Jose is establishing its own minimum wage — which was, again, higher than — these people who want the higher minimum wage in San Jose — they didn’t think that the State of California, which already had an incredibly high minimum wage, was going far enough. In the meantime, they have effectively set a default regional standard because employers next door either have to — they have to worry about losing prospective employees in this labor market to San Jose, or they’ve got mobile employees themselves. And they’ve got to track down to the minute how long those employees are in San Jose in order to be compliant. Either that or just always pay them San Jose wages.
And then, there’s a paid sick leave and a whole host of things that we’re seeing — sort of regulation of things that have traditionally been handled at the state and federal level there at the local. And just with regard to this idea that it’s inherently better to have things done at the local level, I would just mention that is sort of — a lot of conservatives I talk to — there’s this tendency to reflexively say local government is better. And that might be true with some things, but I think it’s — in an age when we’re so interconnected, I think when we’re talking about business activity, we should especially maybe question that premise.
I would suggest that good government has to be defined about what best serves the common good and, specifically, individuals. But I don’t think that more regulation is always going to serve the common good, and I think that’s the phenomenon you see where you have the local entities allowed to do more and more regulation. So I’m going to let my colleague respond to me.
Brooks Rainwater: Sure. So I think I’ll start with where you ended, which is more regulation doesn’t always positively affect the common good. And I think that I would completely agree with you on that point. Specifically, when we talk about something like San Jose having a higher minimum wage and creating a default regional standard, fundamentally, I don’t see why that’s a bad thing when the San Jose region is the number two most economically vibrant place in the country. I think the median income is around $125,000 a year. So you have a very unique set of circumstances that’s going to be different than, say, Stockton, California or other inland parts of California. And wages may, and probably should, reflect that.
Similar to your point about things in Georgia and Texas being different than California, these variations happen both within states, as well as between states. Since the 1970s, we’ve seen a large divergence between income levels in our largest metropolitan areas versus other parts of the country. I think there’s more of a need to make sure that’s properly reflected in how people are paid where they happen to live. You could go state by state, thinking about New York City versus Albany and the cost of living in both places. As I said, you can do this in most states with large cities versus more rural parts of the state.
So while you kind of posit that the best policy is to prevent business regulation and activity — and that’s where preemption is actually a good thing. While I’m still hoping to see what our research shows around this very question, I do get curious about the question of whether what you’re doing is helping large business kind of solidify their hold on kind of a national business perspective rather than helping small businesses thrive. And back to kind of the broadband question, whether it’s either a municipal broadband scheme trying to expand beyond their jurisdiction or whether it’s a smaller incumbent that might want to get into the marketplace, that’s incredibly difficult when the state-level regulation that often looks very similar in multiple states because of state-level lobbyists on behalf of business making similar cases. I get curious on whether that’s actually impeding innovation and entrepreneurship rather than helping to kind of make it go further.
Your point on it being an age of gridlock in Washington, D.C., yes, it definitely is. And we’ve started to see that transfer more and more to the state level over recent years. I remember back in the 1990s when states were seen as the laboratories of innovation. It seems like, since the 1990s, cities have taken up that mantle, and states have almost been a barrier on both sides of the issue, rather than helping kind of smooth innovation and economic development. And in many cases, they actually can impede that.
So I think that the best policy would be to kind of smooth that over and have states and cities work better. Because coordinated efforts, particularly on something like paid sick leave, are going to be much, much better than just San Francisco having a policy rather than the full state of California having a policy. And frankly, I think that the reason why cities have led on so many of these issues is because the federal government gave up on its traditional role with minimum wage and many of these issues years ago. It’s very much a bi-partisan issue that neither side’s been able to come up with the solutions that people, in poll after poll, are demanding. So city leaders, mayors in particular, have taken it on themselves to lead. And I think that that, again, gets that — where a better local-state relationship could take these policies that we incubate at the local level and make them go more broadly across the state.
And then kind of hueing back to this idea of states being a laboratory of innovation, we could see how this plays out in a very different way in Kansas versus California and create national policy that’s reflective of this. So if anything, I think where we would agree that, to kind of counter this gridlock, it would be great to see government work better again because I think that’s broadly where the failings have come and the different levels of government are trying to kind of fill gaps rather than necessarily do what they would do in an optimal situation.
Luke Wake: Yeah. Well, I guess we’ll just have a conversation here, now. I think — one of my thoughts that came to mind when you were just talking about San Jose and sort of the need for maybe a higher minimum wage in San Jose versus Stockton is the cost of living. The cost of living is higher in San Jose and then the Bay Area in general, also, as a result of regulatory problems. The fact that regulation in California, both state and local level regulation, make it so exceedingly difficult to build any new housing, on top of all sorts of regulation that actually effects the price of consumer goods throughout California, which makes California more expensive than living in, say, North Carolina.
Those are societal costs that — so this all becomes like a snowball effect, if you will. I do question also this — I especially question this premise that limiting — trying to winnow the field of regulation, or at least hold more of a static environment, that that somehow benefits established businesses. But I say this because, look, I’m not an economist. But as a matter of common sense, as well as the economic research I’ve seen, says that the more regulations that you put up — the more roadblocks you put up for someone trying to establish and run a legitimate business, the more difficult you make it, especially for someone who doesn’t have a lot of resources.
Brooks Rainwater: To that point, I think that there could be a case to be made for kind of routinizing the regulatory regime across the state. I would just argue that the most economically vibrant part of that state should be in the lead on figuring out how that regulatory environment might look. And that’s where the divergence with what you’ve seen in state preemption — is that, oftentimes, the economic centers, the metropolitan regions within that state, are being overridden by the rural interest in the state, where a lot of the economic activity actually isn’t taking place. So that’s where I think that the divergence in how policies are being implemented — if there was more of kind of a political convergence on how to approach these things, you might be able to get a more optimal outcome.
Luke Wake: Mm-hmm. Obviously, we do disagree, I think, on this preemption issue quite a bit. Again, there’s certainly some things that I would agree are quintessentially local in nature and ought — zoning, I agree. I might have, probably, a much more restrained view of what a proper zoning regime would do than you. But the bottom line for me is that, when it comes to — a lot of the sort of — you talk about these cities taking the lead on things. I think that this — when we’re talking about, for example, minimum wage or paid sick leave, there’s nothing sort of quintessentially local in its concern when it comes to those issues. Again, you have a default. There’s other models you could look at, even aside from the municipal thing.
Oregon, for example, has done something kind of interesting with these regional — to address the regional concerns you’ve mentioned. But when you have state lawmakers either balk at the idea of imposing new regulation or set what they think is already a controversial for, at least in some quarters new minimum wage or whatever, you have a consensus from the elected officials who ultimately are supposed to represent the interests of the people, as a whole, of the state. Ultimately, sovereignty — I’m getting a little legalistic on you here. Ultimately, sovereignty rests in the people of the state collectively. And the cities are sort of chartered, but they have to, I think, be subordinate to the sovereign will of the people of the state as a whole.
Brooks Rainwater: I would not try to kind of counter the argument that the way our federal system is structured isn’t a positive benefit to society. What I think has actually gotten a little out of whack, though, is the political and economic power within any given state are not lining up the way they used to be. And there’s a lot of reasons for that – gerrymandering, kind of the political environment that we live in, the lack of people working across the aisle within the state level, just like at the federal level. All of these things come into play. So again, it’s not that we wouldn’t want to have an optimal environment where the regulatory regimes aren’t smoothed across the entire state.
It’s just a question of what is the model that you would go on in a state like Tennessee? Is it looking at your biggest cities and what seems to be working there, from an economic perspective, and then making regulation that meets that across the state? Or is it looking at the smaller communities in the state and the legislators that represent those coming into Nashville and Chattanooga and others and saying, “This is how policy should be made”? Because I don’t think we’re in an environment right now where, at the state level, many of the legislatures, on either side, are representing the full scope of what’s happening within the state; that people have very much gone into their respective corners, rather than coming together to legislate on these types of matters.
Luke Wake: Yeah. Well, I wanted to — I don’t want to exclusively dwell on this preemption issue. That’s one of a couple recommendations that we highlighted in this white paper of things that could be done to cut back on the regulatory thicket. But there are other things that we talked about, and it seems that we have some agreement that the state-level regulation is a significant part of the problem. There are things that we think could be done there. For example, having sort of a regulatory budget like Canada and the UK have experimented with and now, the Trump administration have actually systematically going through and either systematically eliminate regulation that maybe is outdated or may be unnecessarily cumbersome or to say — put some sort of controls on — for every new regulation, we’ve got to eliminate one.
So there are things like that that can be done, short of legislative changes. And then, the other things I would just point out here is that—one thing—we both talk about the need for good government. I think we maybe have slightly different ideas about what optimal government would look like. But one thing I think we should be able to agree on is that, insofar as we’re going to have a complicated regulatory regime — hopefully, we’re trying to make them less complicated and more straightforward. But also, hopefully, we’re giving people guidance to help them understand this stuff in a way that they can find easily and rely upon.
Brooks Rainwater: Yeah. No. I think I agree with you there in that there are ways to address many of these concerns that are less burdensome. One of the points I want to go back to that you rose a little earlier, too, was, when you’re looking at kind of the research you’re doing or the way that you approached it, you’re comparing it to an optimal environment. From your standpoint and perspective, you’ve seen throughout the United States particular places where we’re close to that optimal environment? And what’s happening within those contexts that’s not happening in other places?
Luke Wake: Well, that’s a good question. Again, I’m not an economist. We do have some — within this regulatory thicket paper, we have some bright economists who were involved with that. And we do have a section talking about economic dynamism and the fact that overly restrictive regulatory regimes and just this aggregation of regulation do tend to have a stifling effect on the economy and on people. For example — a concrete example of that — and again, occupational licensee comes to mind, as economic research on that shows very clearly that, where you have more restrictive regimes, it really impedes movement between people — it impedes economic activity.
I could hone in on different studies on specific forms of regulation. For example, overly restrictive zoning regimes — and this is quintessentially a local issue. But overly restrictive zoning regimes in major metropolitan cities studies show actually has a negative effect on U.S. GDP. So there is an economic impact. What I would say specifically to your question is that what I see is that a lot of businesses are moving from a place like California to a place like Texas, probably in large part because of the regulatory environment.
Brooks Rainwater: Yeah. I think what kind of counters that at times is the amalgamation effect of people wanting to be near others within the space that they’re in. So you continue to see the startup activity in a state like California outpacing many other states. But you’re right. There is that transfer of businesses due to kind of high cost. I think you’re right as well on kind of the regulatory regimes within communities leading the higher cost on housing. And it’s an issue that we’ve been very concerned about and working with mayors throughout the country to kind of address because I do believe, from the local perspective, we want to do all that we can to make sure that more people can live in communities, can afford to live in those communities.
While we’re creating lots and lots of jobs in our major metropolitan areas, oftentimes housing construction isn’t keeping up, leading to some real divergence and challenges for people to be able to live and work within the same areas. So yeah. I think that there is a bit that we also agree with on these matters, too. And I think, too, when you look at like the state leave rent-seeking that takes place on everything from car dealerships to beauty salons, that there are areas, when I talked about taking the scissors out and kind of trimming, that I think you could definitely see where the thicket has grown to a perspective that it probably doesn’t need to be as broad. I think across the spectrum, it’s thinking about where would we make changes like that.
But on the other side of it, where do you make sure that you’re strengthening the social safety net so entrepreneurship can actually flourish? You mentioned the Affordable Care Act earlier in a completely different context. But one of the things that comes out to me, regardless of what you think about it as a policy, is a lot of the work that I’ve done on the on-demand economy and kind of the broader gig economy — companies like Uber and Lyft and Airbnb and others wouldn’t have been able to thrive as much if not for the fact that people were more willing to leave other jobs and take on gigs because they had health insurance covered through a government program rather than having to have it attached to their work.
So I think there’s kind of a push-pull that needs to take place to make these things optimal.
Luke Wake: You raise an interesting point, specifically with regard to the ACA. The small business owners that NFIB represents — about 300,000 small business owners across the country and the cost of health insurance was, and has all the more been, sort of a highest concern. We actually have a research foundation that has a problems and priorities survey that they do. They list 75 potential problems and priorities, and they ask small — and this is a quadrennial survey, so every four years. It’s interesting because we can actually go back and track what the concerns of small business are. And these are immensely practical people, right?
And the cost of health insurance remains right up there, both before and after the ACA. But unreasonable regulation is consistently at the top of the list. It’s right up there with taxes. I always wonder, when people say unreasonable regulation, what do they mean? I think any time someone’s dealing with a headache — it’s giving them a headache, they might call it unreasonable, sure. But I think trying to be more precise I think is helpful. So again, we’ve indevoured to give, basically, I think a formula for identifying what is unreasonable regulation.
And I would suggest, again, it’s regulation that doesn’t really either achieve any specific cited public goals, which it doesn’t further them. Or it does so in such an attenuated way that you have to question whether the benefits of the regulation are worth the imposition, the burden on society, especially when it is contributing to this regulatory thicket. And then, again, I keep coming back to this idea that regulation should be viewed as unreasonable if it’s more complicated than it needs to be or if it’s more punitive than it needs to be. Because that’s so often the case. Just going back for a second to the municipal regulation again, Los Angeles has its own minimum wage — I think like 25 different municipalities here in California.
And in L.A., if you violate — if you inadvertently don’t realize that you need to pay those truck drivers who were driving through and making one delivery in L.A. — that you need to actually be paying them minimum wage for the little bit of time they were working in L.A. — because it kicks in after so many hours worked in there. Well, over in the course of a year, the employee hits it. So let’s say you had 15 employees that you didn’t realize that you were supposed to be paying minimum wage on and they’re fined — it could be up to $170 for each employee — every day that the violation occurred.
So let’s say you had 15 employees and you just didn’t realize that they needed to be paid a heightened minimum wage under L.A.’s standard. That would be $2,550 per day for those 15 employees. If you didn’t realize you were making the mistake, that mistake could go on for quite a while. Say, just a month, that would be almost $80,000 in penalties for a good-faith mistake. And these are penalties that are imposed on top of requiring the employer to pay back wages. Obviously, the employer in that situation has to pay back what was owed.
But these are penalties on top of it just to be punitive for, in this situation, a good-faith mistake. Again, that’s liability that they wouldn’t even bear if we were just dealing with the state law, which is sort of heavy-handed enough.
Brooks Rainwater: Yeah. I understand your perspective. I think I go back to, again, the divergence of income levels and cost of living in places throughout a given state often necessitate different income levels, whether we’re talking about the minimum or whether we’re talking about what it costs to pay a coder. So I think the challenge comes into play that people at the lower end of the income spectrum are feeling the brunt of kind of large technological changes and kind of workforce shifts more than others. So unfortunately, the competitive space that they are a part of within kind of the income drivers — it just isn’t there in the same way.
So having cities come in and offer higher minimum wages to help counteract that is, I would say, a net good, even if you have some of the stickiness and challenges that you’re raising with a company that may be doing business only part of the time within that community. Is it optimal? Would it be better that the whole state of California had a $15 minimum wage? Possibly. I’m not trying to make the case that you wouldn’t want to scale what you’re seeing in a few of the larger metro areas. But it would definitely have a larger impact if you went on the most high cost part of the state and kind of regularized that across the full state.
It would be a net positive for low wage workers, but then you would, I imagine, make a different case on behalf of the business owner that now has to pay that added cost throughout the entire state. So it’s kind of — how you deal with that is a challenge. It can be a little bit tricky.
Luke Wake: Right. Again, as I said, any specific regulatory regime — arguably, there’s going to be proponents. There’s always going to be defensible — or at least arguably defensible on a granular level. But my point in raising the L.A. example was not necessarily to — my views are already very clear on the value of preemption — but more to emphasize the idea that, insofar as L.A.’s going to do this, okay, then make it as simple as possible, for one, and provide good guidance. But also, if someone’s made a good-faith mistake, the answer shouldn’t be to hit them with such ruinous penalties that they face the possibility of going bankrupt. It should be an educational moment.
I realize, with something like minimum wage, people will say, “Well, that’s pretty cut and dry. Maybe they should get that.” But there’s a whole host of very innocuous mistakes that people don’t realize “Oh, I needed a Prop 65 warning for this.” I’m talking about state law now, here. I could give — I have these conversations with people all the time. Some of them blow me away. I talked to a guy in, I think, the San Jose area, actually, who ran a convenience store. And it turned out that he was notified that he was being penalized—and I’m not recalling the numbers, but I’m being conservative when I’m saying it was something in the order of $20,000 or $30,000. It might well have been more than that—because he didn’t accept — he hadn’t been accepting cans and bottles that people had deposits on that they wanted to recycle. He had not opened up a way for people to deposit those.
He had no idea that he was required to do that. In fact, most convenience stores aren’t required to do that here, unless — if there’s already an established sort of recycling center in their zone. That was just catastrophic penalties. But the cause of action thing is the other one that just really kills me because, again, so often you could achieve the very same regulatory outcome, insofar as you’re concerned about some sort of pressing issue, without authorizing someone to just automatically run out and sue. Because again, even if you did everything right, you’re still facing punitive damages because you’re having to pay $20,000 or $30,000 in order to prove that you did everything right.
[Possible sound cut 52:23] — address how highly the United States ranks as far as entrepreneurship and the regulatory environment. And I would just ask — I’d like to hear your thoughts on what you’d say to somebody who might object to that and say, “Well, that can be a lagging indicator”? For example, there’s been many cities and geographic areas throughout history that have been at the forefront of commerce or industry or industrial revolution and have fallen behind the rest of the world for varying reasons but one of which can be regulatory environment. So just wonder what you would say to the objection that maybe looking at where we’re at now as far as entrepreneurial output isn’t as good of an indicator as looking at how much regulation we’ve got and have that being a better indication of probably where we’re headed as far as our level of entrepreneurship.
Brooks Rainwater: Yeah. I think there’s always kind of iterative change that we can make to make things better. So functionally, these ratings are a lagging indicator, but we’ve got a good sightline on a number of years where we’ve seen the U.S. consistently at or near the top. So I would say that, while we should continue to always be cognizant of changes that can be made — making sure we’re streamlining processes. I think back on work that we did with the Commerce Department in the past on startup in a day, when we were working with a number of cities throughout the country to figure out ways that we could streamline these processes. And you could arguably start your business within a day.
I think things like that are ultimately for the good, and they do, in fact, look to kind of cut regulatory barriers that might be put in place. So there’s always room for improvement. I just want to make sure, while we are lagging in some kind of global rankings, in this particular space, America is still the most innovative place in the world. And while we have challenges from China and other countries that are kind of hot on our tracks and working across a range of different areas to compete on much higher levels than they used to, wanting to make sure that we ground it in the success that we see and then kind of work collectively to make that even better.
William Hild: Thank you, Brooks. A reminder to the audience that you can consult the full schedule of our upcoming calls on the RTP website, regproject.org. And there’re also available — there are previously recorded Free Lunch Podcasts. It doesn’t look like we have an additional question, but I want to throw it back to you guys to see if you have any additional comments before — oh, actually, it looks like we just got one question. Let’s see if I can — Caller, the floor is yours.
John Shu: Hello, this is John Shu in Orange County, California. And I am with the RTP, thanks to you gentlemen. I was particularly interested if you would please discuss Facebook in more detail, especially with respect to the regulatory environment for the future, both in the United States and in the EU. Having represented investment banks in the past, when the bulge bracket banks are supporting Dodd-Frank and SOCS, it’s really because they are the only ones who can afford their regulatory costs. Now that Zuck himself is supporting the heavier regulations for the future, I tend to come down on the side of I’m a little suspicious as to why.
And the second question would be, do you think that the cities in northern California will continue to try to push for heavier regulation of the large companies that are based in the Valley — for them to try to force them to contribute to social causes, like homelessness, drug use, poop on the streets, etc., etc.? Thank you.
Brooks Rainwater: I can jump in real quick on that last question. Then, I’ll let you take the other part, Luke. I think from the perspective of asking companies to chip in, what I’ve been most impressed with in northern California cities is how companies themselves have taken the lead on jumping in themselves or pushing particular pieces of legislation. And you saw this around homelessness and housing where Larry Ellison and Oracle were really at the forefront of kind of pushing a particular bill. Similarly, over in Oakland, where — the company name is leaving me right now.
I think it was Kaiser Permanente that put together an investment fund on affordable housing. So I think that it’s actually in partnership, for the most part, where you’ll see a lot of this happen, rather than a strict kind of regulatory regime that will be put in place where companies will have to do so. And I think it gets at the nature of what we see in cities, just not in that region, but throughout the entire country where mayors are working across kind of the private sector — non-profit sector, philanthropy and kind of bringing everybody to the table to really try to confront large scale social and economic problems that have come about as, unfortunately, the economy has grown but inequality has grown alongside it.
Luke Wake: Okay. Well, look, I likewise share the view that it’s great if public corporations as individuals want to do charitable things for society. That’s great. I don’t think it’s as good when you see them getting engaged in actually pushing for regulation that’s maybe going to stifle economic opportunity for others. So I’m not weighing in one way or the next on the specific bills that were just alluded to. But what I am concerned with is what we see, sometimes, in the policy world in which either big corporations or those who represent them may be more willing to either indulge regulatory proposals or maybe even advocate them, either because it promotes their brand.
I think for a lot of companies it’s just part of the culture of the people that they are trying to market to, and it makes them look trendy to try and weigh in on and push for legislation on social issues that maybe otherwise they wouldn’t be as interested in. So maybe that’s a slightly cynical way of viewing what they’re doing. But there’s also — and also slightly cynical is the notion that a lot of times when the corporations are urging for more stringent greenhouse gas emission restriction standards and things like that — they tend to be the more established sort of companies that can implement and can actually afford to invest in the technologies that would be prohibitive for someone else.
So I’m not speaking to the propriety of any one specific bill or proposal. But with regard to this Facebook thing, I’m not sure exactly what our caller is referencing. I’m not as caught up on all of the regulatory issues that Facebook is dealing with. But insofar as you have an established company like Facebook pushing for regulation of its industry, it probably does so with the knowledge that it probably can comply with whatever regime it’s pushing for. But that regime may very well make it more difficult for new entrance to the market.
Again, new entrance — small business entrepreneurs are always, I think, at a disadvantage in a more heavily regulated environment. Maybe my co-presenter disagrees with me on that. I’m not entirely sure. But that certainly is my view of things. And certainly, we point to some interesting research in the paper on that point.
William Hild: Well, on behalf of RTP, I want to thank Luke and Brooks both for their interesting and valuable insights today. We welcome listener feedback by email at email@example.com. Thank you all for joining us.