In June, British voters voted to leave the European Union, whose bureaucracy had imposed alien laws and regulations on them for decades. The EU system has frequently been described as having a “democratic deficit,” whereby the governed have little voice in the formulation of government policy. Now, as UK government officials scramble to figure out how to separate their system of law and regulation from the European model that has been grafted onto it, our British friends might well look toward the U.S. for a model of how to proceed – and some pitfalls to avoid.
The bureaucrats in Brussels still believe they are creating a more equitable and harmonized set of rules for all Europeans. If a new law is good for France, surely Lithuania deserves its benefits as well, goes their thinking. They subscribe to a logic of administrative efficiency that calls for a single set of rules for everyone in Europe. Businesses, they say, will benefit from have to comply with only one set of rules that enable them to operate anywhere on the continent. On the surface, that sounds like a pretty good deal.
The argument has been persuasive even to some free market advocates. In a snapshot world that ignores the future, minimizing paperwork is valuable. A single system, even a democratically deficient one, seems better than multiple sets of rules. But that ignores the hazards of concentrating power into too few hands. Predictability can be valuable up to a point, but a competitive system that yields increasingly better outcomes is better still.
My colleague Iain Murray, in a recent study that provides a road map for Brexit, suggests finance as an area in which competing jurisdictions can provide important advantages to both customers and firms. People worried about big banks precipitating another recession should be especially interested. If every financial institution ends up being regulated—and possibly bailed out—the same as last time, there will be no safe harbor if the regulators get their interventions wrong. Only a diversity of approaches—in Frankfurt, London, Singapore, New York, and elsewhere—would be able to truly backstop a disruption to global markets. A major player like the UK seceding from the regulatory structure of the EU actually makes capital markets more stable.
The idea of competing legal systems might seem like a strange new theory, but here’s where the American system provides the best example. For all of the discontents about contemporary politics in the U.S., we do possess certain structural advantages, most notably the decentralized power-sharing of federalism. While many aspects of public policy are dominated by laws passed by Congress that apply nationwide, individual states—and in some cases, even counties and cities—retain considerable authority to set their own rules. Those different sets of rules, for everything from starting a business to paying property taxes to selling alcohol on Sundays, create different legal environments for people to choose from, and put pressure on states and localities to compete for residents and taxpayers.
That competitive pressure benefits everyone, and provides a vital steam valve against policies in one place becoming too onerous or unwieldy. Independent-minded Americans have long sought to move to parts of the country with fewer government burdens—whether it was East Coast residents settling in the frontier West or modern tax refugees moving from Massachusetts to New Hampshire. Now, more than ever, people and companies have the ability to move to where they think their prospects for success will be greater. That freedom can be a powerful force for disciplining those who write the rules the rest of us have to live under.
Unfortunately, the American system has at times faced a democratic deficit of its own. That is a threat that competing nations, like competing U.S. states, need to watch out for. George Mason University legal scholar Michael Greve has done an excellent job describing the virtues of competitive federalism and its gradual erosion. In his book, The Upside-Down Constitution, he documents the gradual movement of states away from operating independently to forming cartels that suppress regulatory competition.
It’s a natural impulse for regulators to want to turn off the competitive pressures that keep them on their toes, and to stop other jurisdictions from siphoning away “their” businesses and taxpayers with more attractive rules. In the U.S., states have used legal agreements called compacts to that end, and the original Constitutional requirement that multi-state compacts be approved by Congress and the President has been significantly eroded. In a similar way, groups of countries have used trade negotiations to “harmonize” regulations in ways that have increased burdens on their citizens. Advocates of free markets need to evaluate any such proposals closely.
The Brexit planners in London have a complex and difficult task ahead of them, but not an impossible one. The UK can negotiate an exit from the meddling and high-handed EU bureaucracy and emerge stronger and more prosperous on the other side. By taking the best parts of the U.S. system while eschewing the mission creep that both state and federal officials often engage in, British policy makers will have a valuable set of tools for moving forward.
Originally posted to Forbes.