Liberate to stimulate – Live in the UK!

When the financial crisis hit, across the world there were two main reactions. First, regulate industry more “to prevent this sort of thing happening again” and, secondly, attempts to stimulate the economy by providing large amounts of taxpayers’ or borrowed money to shore up vulnerable industries, normally by funding projects that no-one would fund even when the economy was strong.

These reactions have not proved successful. Industry has struggled under the weight of regulation, which was not light to begin with (the so-called deregulatory administration of George W. Bush actually increased regulation) and the vast increase in public spending has led to a second, larger financial crisis in the shape of public sector debt problems across the world

Many people, including my organization, CEI, foresaw these problems. That’s why we proposed a stimulus package based around deregulation. The “liberate to stimulate” plan was intended to make it easier to start businesses and keep them going, leading to an explosion of innovation and creativity that would lead us out of recession. Unfortunately, governments all over the world were too frightened to try this option, leading, as it does, to loss of control for central planners.

Until now, that is. The newly-elected coalition government in the UK between the Conservatives and Liberal Democrats has embraced a policy that encompasses the tradition of trusting the market that exists in both parties. They have announced a suite of policies that other governments, not least the US, would do well to follow. Some examples from the coalition agreement should suffice

•    We will cut red tape by introducing a ‘one-in, one-out’ rule whereby no new regulation is brought in without other regulation being cut by a greater amount.

This sort of regulatory budget idea has been a great success whenever it has been tried. It forces regulators to think hard about the utility of existing regulations, which are often introduced as a knee-jerk reaction to a one-off problem.

•    We will end the culture of ‘tick-box’ regulation, and instead target inspections on high-risk organisations through co-regulation and improving professional standards.

One of the worst aspects of regulation is the creation of a ‘check-box’ culture, in which what matters is going through the motions enough to earn a check in a box from the regulators to say that you have addressed this issue. Small matters are thereby as important as large ones. This engenders a false sense of security and leads to lapses. It is plausible that the recent BP oil spill in the Gulf of Mexico was at least facilitated by a ‘check-box’ approach to regulation. In most cases, such as the American financial regulations known as Sarbanes-Oxley, ‘check-box’ cultures cause massive amounts of time to be spent on minutiae, greatly harming economic efficiency and driving up costs for end-users, which is you and me.

•    We will impose ‘sunset clauses’ on regulations and regulators to ensure that the need for each regulation is regularly reviewed.

‘Zombie’ regulations that keep on existing years and even decades after their useful life has ended are an important part of regulatory bloat and the ‘check-box’ culture. They impose costs but provide no benefits. Sunset clauses are therefore vitally important.

•    We will reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.

Corporate taxes are generally extremely inefficient. It is possible that the US corporate tax actually costs more to the economy than the revenue it raises. This measure might actually increase the amount of revenue from corporate taxes (a documented phenomenon known as the Laffer Curve effect).

•    We will give the public the opportunity to challenge the worst regulations.

A very welcome initiative, which amounts to the crowdsourcing of regulatory policy. But the regulatory ombudsman, or whoever is charged with being the honest broker here, must be seen to have teeth. No nation’s regulators will not give up powers without a fight.

•    We will make it easier for people to set up new enterprises by cutting the time it takes to start a new business. Our ambition is to make the UK one of the fastest countries in the world to start up a new business. We will reduce the number of forms needed to register a new business, and move towards a ‘one-click’ registration model.
•    We will end the ban on social tenants starting businesses in their own homes.

These final examples demonstrate just how difficult it can be to start a new business. I am told by those in the know that it is actually much more difficult to start a business in the US than it is in the UK, even before these reforms. Zoning restrictions on businesses in homes are a case in point (they even restrict the adoption of telecommuting).

If the US adopted similar deregulatory policies, we would see an explosion of new businesses and innovative approaches.  As some American states seem to be vying to emulate Greece in their public spending habits, the liberate to stimulate agenda may represent our last best hope.