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Regulatory Reform at the Local Level:
Regulating for Competition, Opportunity, and Prosperity

Reason Public Policy Institute Policy Study No. 238, February 1998

By Adrian T. Moore and Tom Rose

Executive Summary

There is a growing realization in the United States that regulation, for all its apparent benefits, comes with significant costs as well. Long concerned with the rising costs of federal regulations, public officials are now starting to realize that the costs of state and municipal regulation are also quite substantial, and they are beginning to develop state and local regulatory reform programs.

Notable regulatory reform programs exist in San Diego, New York City, Colorado, Pennsylvania, Minnesota, New Jersey, and Virginia. But these programs have all focused on newly proposed regulations, with little attention paid to regulations already on the books. The regulatory reform program in Indianapolis stands out from these other programs because it focuses on existing regulations.

By systematically going through the city code and methodically analyzing the merits of its regulations, Indianapolis has brought sense to its regulatory structure, eliminating or modifying regulations found to be outdated or more costly than their benefits merit.

Examining what Indianapolis is doing, why they do it, and what they have learned along the way offers lessons for other cities. Our review of the Indianapolis experience offers a "how to"and "how not to"guide to the economics and politics of urban deregulation. The key principles of reform garnered from the Indianapolis experience are:

Create an Independent Reform Commission. Someone must have ownership of the reform process. Individual agencies are too often wedded to the status quo.

Recognize the Merits of Competition. More competitive markets are more disciplined, creating incentives for innovation, customer service, and efficiency.

Acknowledge the Existence and Influence of Interest Groups. Even if a policy change produces net gains for the community, the losers have an incentive to oppose change. Reformers can encourage those groups burdened by existing regulations to help push for reform.

Focus on Outcomes Rather Than Process. Indirect regulations, aimed at process rather than results, increase the chances of unintended outcomes. If the concern is the safety of taxicabs, policymakers should enforce laws against negligence or publicize safe operators to help the market information process. They should not limit the number of taxi's on the theory that by controlling licenses they can induce safety. Focusing on outcomes makes the impact of a regulation more transparent and allows officials and the public to see direct effects of a regulation.

Weigh Both the Costs and the Benefits of a Regulation in Deciding its Worth. The success of a regulation should be tied to its intended effect, not to the behavior of regulators. It's not how many fines are levied, but how many harmful actions are prevented, and what costs to society are avoided that measures the success of a regulation.

Regulations Should Be Simple and Narrowly Focused. The broader or more complex a regulation, the more likely are unintended consequences. Also, the less likely it is that ordinary citizens can understand the rule and its impact. An opaque regulation plays into the hands of the special interests that benefit from it.

Adopt a Transparent Analytic Framework. A decision process like the one Indianapolis used (see p. 8) assures a consistent analysis on each regulation, and that no steps are overlooked. It also improves citizen and interest group visibility of the reform process, and encourages their input.

Table of Contents
INTRODUCTION 1
THE NEED FOR REGULATORY REFORM 2
Adapting Reform to Local Circumstances 4
INDIANAPOLIS, INDIANA: A SNAPSHOT OF LOCAL REGULATORY REFORM 5
A. History of the Regulatory Study Commission (RSC) 6
REFORMS PLANS 9
A. Ground Transportation: Indianapolis Reform in Action 9
B. Business and Occupational Licensing-Fair Fees for Small Business in Indianapolis 14
C. Building and Construction Permitting 18
D. Future Reform Initiatives 21
E. Conclusion 21
LESSONS FOR REGULATORY REFORM PROGRAMS 23
A. Principles of Regulatory Reform 23
B. Barriers to Reform 24
CONCLUSION 25
ABOUT THE AUTHORS 26
REGULATORY REFORM PROGRAMS AROUND THE COUNTRY 27
A REGULATORY REFORM TOOLBOX 30
A. Alternatives to Regulation 30
B. Tools for Regulatory Reform 31

Part 1

Introduction

"Planning and competition can be combined only by planning
for competition, but not by planning against competition."
F.A. Hayek, The Road to Serfdom, 1944

There is a growing realization in the United States that regulation, for all its apparent benefits, comes with significant costs as well. In response, proposals to reform the federal regulatory apparatus have proliferated.

But regulatory reform is not limited to the federal level. Analysts long concerned with the rising costs of federal regulations are now starting to reveal that the costs of state and municipal regulation are also quite substantial. State and local regulations often directly intervene in specific markets, causing greater distortions than broader federal regulations. Some policymakers are responding to these revelations with state and local regulatory reform programs.

Much of the focus of local regulatory reform is on removing impediments to competition and achieving more efficient markets. This study concentrates on such regulatory reform, examining and evaluating significant regulatory reform ideas and offering a detailed case study of the regulatory reform program in Indianapolis.


Key Elements

• Need for Regulatory Reform
  
• Indianapolis Case Study
  
• Lessons for Regulatory Reform Programs
  

The Need For Regulatory Reform

To advance regulatory reform first requires an understanding of the context of regulation as a policy tool: why regulations exist, how they are useful, and what problems they generate. Regulations arise from particular circumstances, either in response to a problem or to political pressure. Like all policy instruments, regulations embody tradeoffs. They may effectively resolve a problem, but give rise to new problems or to unintended consequences. To decide if regulation is the right answer, you must look at the tradeoffs between the solution and all of its consequences.

There are two popular explanations for why governments use regulation. First, regulations are presumed to prevent, control, or somehow cope with problems that free markets do not manage well, so-called market failures. Typical examples are what economists call externalities, such as pollution and "natural" monopolies, like electric and water utilities. Second, a political explanation describes regulations as emerging to benefit those willing to exert political pressure to get a regulation enacted. For example, some regulations restrict competition by limiting the number of firms in an industry or by making entry into the market expensive. Economists call this behavior "rent seeking."

There is a third explanation, often overlooked, for why regulation is a popular policy instrument. Regulation imposes an order and certainty onto free markets that many find desirable. Free markets involve change, often rapid and vast, and the losses from change can be certain and visible, while potential gains remain uncertain, even invisible. Thus, proponents of the status quo often favor regulation that maintains it.

While regulation has successfully solved many problems, and produced real benefits for many citizens and consumers, they do not come without costs, and with problems of their own. A flood of studies have estimated the costs of regulation in the past few years. These estimates of the cost of regulations range from $300 billion to $1 trillion a year. Taking a mid-way estimate ($677 billion) implies that the regulation costs an average household 19 percent of its after-tax income.

Besides direct costs, years of living with extensive regulation have made clear a number of problems that offset the beneficial effects of regulations:

Efficiency Losses. Regulations reduce competition and distort markets, which cause efficiency losses. Moreover, many regulations overlap and interact, and the cost of the whole may be greater than the cost of the sum of the parts.

Focus on Inputs instead of Outputs. Regulations often focus on the inputs into the process that creates a problem, rather than the output that is the problem itself. Regulating inputs often dictates specific technology, reducing incentives to innovate and search for new approaches. Opportunities for greater efficiency are foregone, as a new firm with a new innovation has no market if a regulation requires the use of existing technology.

No Accountability. Regulators are often insulated from the consequences of their decisions. They receive only indirect and diffuse feedback from their actions, and human nature and politics ensure that many goals besides the explicit purpose of the agency become wrapped up into a regulatory decision. Internal goals compete with social goals to influence agency actions, and there is little pressure on regulators to revise methods that do not work or are too expensive.

Unintended Consequences. Regulatory actions often cause outcomes other than those intended by the regulators. Just as it is hard to measure the effects of a regulation, it is hard to predict how individuals and businesses will react to regulations.

Hidden Costs. Regulatory costs are often hidden, and not clear to taxpayers the way ordinary budget expenditure's are. It is difficult for taxpayers to see what benefits they get for the costs that regulations impose.

Regulation Creates a Cycle. One regulation frequently leads to more. Each use of a blunt instrument begets unintended consequences, then further intervention with a blunt instrument, and so on. Once this intervention dynamic takes life, regulatory costs rise, and the tangled web of regulation and consequence grows ever more complex and opaque, making simple market transactions increasingly complex and costly.

Adapting Reform to Local Circumstances

There are two ways to look at how local conditions affect attempts to reform regulation. One is a matter of public institutionsæthe laws, political ideologies, and regulations in place in a particular locale. A regulatory reform program has to identify the most crucial local restrictions on competition and the particulars that make the local reforms unique. These details may involve a change in the law, or may simply mean using existing powers in new ways. For example, Indianapolis reformers discovered that the city had an unexercised authority to grant 30 percent more taxi licenses than were ever issued. Thus, a real increase in the competitiveness of the taxi market was possible simply by exercising for the first time the power to grant these additional licenses.

The other way to look at local circumstances is from the market side. Markets are extraordinarily complex, which is why regulations have unintended consequences, and why many nations have learned that central control of the economy is neither possible nor efficient. Competitive markets, through prices, give information about consumer values and resource availability that no amount of effort by a city council can uncover.

Part 3

Indianapolis, Indiana: A Snapshot of Local Regulatory Reform

Under the leadership of Mayor Stephen Goldsmith, Indianapolis has earned a national reputation for improving the quality of government. In addition to competively contracting more than 70 city services over the past four years, Indianapolis embarked on the most extensive municipal deregulation effort in the United States. Examining what Indianapolis did, why they did it, and what they learned along the way offers lessons for other cities. Our review of the Indianapolis experience offers a "how to"and "how not to"guide to the economics and politics of urban deregulation.

Indianapolis has moved aggressively to reform regulation as part of a commitment to use competition to reinvigorate the local economy. Often the least justifiable regulations have been those that hurt lower income citizens more than anyone else.

Indianapolis's regulatory reform program has two unique features. First, it focuses on existing regulation, using a formal process to analyze the current regulatory code and develop reform proposals: it is not limited to screening proposed new regulations. Second, the program is comprehensive and holistic in ways exceeding other local regulatory reform efforts. City officials plan to continue the review until they have analyzed every part of the local code and implemented necessary reforms. They also link the program to companion competitive government programs, especially plans to expand public-private partnerships.

The goal of regulatory reform in Indianapolis is to help make the city more competitive and successful. Like other cities, the Indianapolis government had previously imposed cost premiums and service deficiencies on its citizens through its excessive control and regulation of local markets. To remedy these problems, the administration employed a series of related initiativesregulatory reform, privatization, and other reformsto restore a market orientation and enhance local competitiveness.

This holistic approach to municipal governmentwhich emphasizes opening up public services to competition and encouraging competition in the private sectorhas earned Indianapolis national acclaim for its approach to urban management.

A. History of the Regulatory Study Commission (RSC)

In 1991, mayor Goldsmith commissioned a survey of existing Indianapolis businesses. The results confirmed suspicions that local regulations were a significant impediment to business opportunities, and that many rules seemed to serve little or no purpose. The survey elicited suggestions for how to make Indianapolis a more attractive business environment. The survey questioned 1,600 local businesses of all sizes asking them what they viewed as the chief external "impact on profits." The results: 1) taxes; 2) environmental regulations; and 3) "all other regulation."

This information stimulated the formation of the Regulatory Study Commission (RSC), charged with weeding out bad regulations and doing cost-benefit analysis on all new ones. The RSC's first task was to articulate a set of regulatory principles that could serve as the basis for future actions. Although not cast in stone, the following principlesunaltered in five yearshave stood the test of time:

1) The cost of a regulation should be no greater than the value of the benefit created for the community;
2) Regulations must be written to insure the imposition of the minimum possible constraints upon the community;
3) Regulations must be simple, fair and enforceable; and
4) Local regulations should not exceed federal and state standards unless there is a compelling and uniquely local reason.

Based on these principles, the first task was to calculate the cost of regulations, which included enforcement costs and the costs to business payrolls. Because "regulation" is a term that often defies clear definition, it is impossible to know precisely what percentage of the city budget is dedicated to municipal regulatory functions. However, using projections of the cost of federal regulations as a guide, the RSC estimated that roughly one third of the city's resources (around $125 million a year) goes toward fulfilling regulatory responsibilities.

The direct costs imposed by regulation on businesses and consumers depend on the circumstances. They were calculated on a case-by-case basis when the RSC began to look in detail at the city code. Also, regulations prevent some market transactions from occurring at all. These so-called "dead weight losses" are not measurable, so the RSC did not attempt to factor them in.

The benefits of reforming a given regulation were calculated much like the costsspecific to each regulation examined. The RSC concentrated on regulations where the benefits were clearly very small or nonexistent. This was easy in cases where regulations addressed conditions that no longer existed, due to technological or other changes. Other regulations clearly did not serve the public interest.

The RSC needed three things to make a regulatory reform program successful: community support, political will, and sound economic analysis.

Community Support. The RSC and the mayor's office invested considerable time and effort in laying out their plans and intentions to the city council and the citizens, and in answering community concerns. This made the reform process a part of the public debate and helped garner support for the RSC proposals.

Political Will. Even with community support, one needs a great deal of political will to embark upon any meaningful reform. Reform efforts involve hard political choices. Regulatory reforms create losers as well as winners. However, some regulations can be costly to everyone while benefiting only a few. Reform requires the political will to end benefits for a minority at the expense of the majoritya difficult achievement since benefits of restricted competition are concentrated, while the benefits of reforming regulations are diffused. They accrue to almost everyone, but only indirectly through small price decreases and expanded services. Those who enjoy the concentrated benefits of regulation have every incentive to protect those benefits. The many who pay slightly higher prices as a result of each regulation do not. If the interests of the latter are not heard, then real reform is not likely. Standing up to the special interests in Indianapolis required carefully choosing battles and making meticulous cases in support of reform.

Economic Analysis. The third requirement for success was sound economic analysis. Sloppy economic analysis provides a tool for special interests to use against a reform effort. Even more important was the need for a sound economic framework to assess regulations and determine where effort should be directed. Properly applied, such analysis made the need for many reforms self-evident, easing the political task of enacting the reform. The RSC chose to use a simple and uniform type of cost-benefit analysis to measure each regulation considered for reform. (See Box)

The RSC plunged into the nearly 2,800 single-spaced pages of municipal regulations in order to break them down into manageable groups. Each regulation was placed into one of two chief categories: 1) regulations that affected business operations; and 2) noncommercial regulations that affected citizens.

While this exercise was important, the RSC had neither the political nor financial resources to weigh the costs and benefits of each regulation. Instead, they first identified the regulations affecting the greatest number of citizens and most significantly hindering job creation. The result was a set of regulations related to ground transportation, business and occupational licensing, development and housing, and health and hospital services. The RSC decided to concentrate on these areas.

RSC Simple Cost/Benefit Analysis

1. How does the regulation benefit the consumer/public?
2. How does the regulation benefit the regulated parties?
3. How does the regulation cost the consumer/public?
4. How does the regulation cost the regulated parties?
5. What administrative or enforcement costs are paid by taxpayers?
The next step was to develop a process for determining which specific regulations needed reform. To this end the RSC developed an analytic framework that included economic and political tradeoffs, as well as potential alternatives. (See Box) The process filters each regulation through a series of questions to identify those that need to be eliminated and those that could be improved.

RSC Analytic Framework


Part 4

Indianapolis Reforms Plans

Applying the RSC analytic framework led to detailed proposals to reform specific regulations and a comprehensive program to create political and popular support for the changes.

A. Ground Transportation: Indianapolis Reform in Action

The first area the RSC tackled was ground transportation, a heavily regulated area important to the city's economy. After analyzing existing regulations, the RSC developed a game plan for both the legal and political initiatives needed to bring about successful reform, initiatives that harmonized the influence of principle, economics, and politics. This model guided future efforts.

1. Why Reform Taxi Regulations?

Like other large U.S. cities, Indianapolis's ground transportation industry had been heavily regulated for decades. Taxis and other transportation services were tightly controlled, making the market more designed to meet regulatory requirements than the competitive needs of the marketplace (see Box).



The Indianapolis Taxi Market Before Reforms

• The quality of "called for" taxi service was poor in Indianapolis. Long waits were common after calling for a taxi; and sometimes taxis did not respond at all. Service was especially poor for locations from which most calls are short trips.
  
• Four taxi companies (holding 270 vehicle licenses) had computer dispatch equipment. Some other companies had radio dispatch equipment. Smaller taxi companies relied on cellular phone equipment.
  
• Taxi fares for long trips were higher in Indianapolis than in many other major cities.
  
• A small number of companies dominated the Indianapolis taxi market. One company held 201 of the 392 existing licenses, and the five largest companies held a total of 326 of the licenses.
  
• A very substantial number of the 392 licensed taxis were not "on the street" at most times on an average day.

• Remove the overall limitation on the number of taxis and limousines that can be licensed.
  
• Allow taxi fares to be set by taxi companies, with some constraints on maximum fares.
  
• Regulate limousine companies and drivers at the municipal level, not at the state level.
  
• Retain the ability of the city to ensure vehicle safety, but allow greater flexibility in how this is done.
  
• Eliminate provisions that constrain taxi and limousine business operations without community benefits.
  
• Delete the provision forbidding taxis to "cruise" to find customers.
  
• Allow special taxis to carry passengers in wheelchairs. Allow jitney businesses greater operational flexibility. Allow jitneys to pick up passengers within a broad corridor between origin and destination points and allow jitney businesses to provide a "charter service."

B. Business and Occupational LicensingFair Fees for Small Business

Collectively, states regulate more than 1,000 separate occupations. The average state issues dozens of different types of occupational licenses including licenses for barbers, doctors, lawyers, and embalmers. In North Carolina, barbers must complete more than 1,500 hours of study from an accredited school, pass both a written and practical exam, and serve as a barber's apprentice for a year before they can be licensed by the statethe people of North Carolina should have the nation's best-cut hair.

Indianapolis, like most cities, targets some industries for special regulation, while leaving others alone. The industries singled out for special municipal regulation are usually those that at one time were considered a potential threat to public health, safety, or community standards if not carefully monitored.

Taxi Reform Results

1. Number of taxis working the streets increased from ª225 to ª500
2. Number of taxi companies increased from 26 to 70, and 40 are owned by minorities or women
3. Fares decreased
4. Service complaints declined
5. Average waiting time for arranged service has gone from 45 minutes to 20 minutes

Source: City of Indianapolis.

1. Why Reform Business and Occupational Licensing?

Occupational licensing laws are justified on the basis of protecting public health and safety. Licensing requirements are supposed to ensure that incompetent, untrained, or otherwise unfit practitioners of various professions don't take advantage of their customers. The assumption is that the government is better able to determine the fitness of a business than are customers. One can imagine that customers indeed might have a hard time judging qualifications for some professions, such as doctors or dentists. After all, not everyone knows what the good medical schools are, and the doctor or dentist is not likely to tell the patient how many times he has been sued for malpractice.

However, there is evidence that the government cannot judge qualification much better than customers. Government licensing requirements often appear arbitrary and vary from place to place, suggesting that there is no one ideal criterion. For example, many governments require twice as much training for X-ray technicians, and eight times as much training for dental assistants as the military does.

"The chance to earn an honest living without arbitrary government interference is the hallmark of the American experience."

Perhaps more important, though, is the effect licensing has on the individuals who simply want to start or run a small business. By raising the cost of starting a business, licensing fees and arbitrary license requirements restrict the opportunity to succeed which has long been a tradition in America. As Chip Mellor, President of the Institute for Justice, put it, "The chance to earn an honest living without arbitrary government interference is the hallmark of the American experience."

The problem is compounded when municipal regulations restrict opportunities for individuals to start new small businesses in those areas most available to a city's poorest residents. Youths, minorities, and others who already suffer from the limitations that poverty or a lack of education often impose on job opportunities, find themselves further hemmed in by the licensing requirements imposed by the city.

Examples of such regulations abound. Cities charge large fees for licenses to sell food, operate vending carts, shine shoes, remove and dump snow, repair VCRs, etc. New York City charges over $1,000 for a license to operate a newsstand, and is considering a new system that will raise the fees. These type of high fees and other licensing requirements discourage many budding entrepreneurs from getting started at all, and drive many others to operate illegally. Like other limits on entry, licensing fees and requirements create black markets with all of their incumbent problems. Black-market transactions, since they are illegal anyway, often lack other civilizing influences. Warranties, guarantees, and honesty are no longer enforced. Since both buyer and seller are violating a minor law (no business license or permit), they rarely are willing to appeal to the law if one of them commits a larger crime (such as robbery) against the other.

Business and Occupational Licensing Reforms

"Fair Fees for Small Business I" reformed regulations for many businesses, including:

• Hotels and Motels
  
• Movie and Live Entertainment
  
• Secondhand Dealers
  
  "Fair Fees for Small Business II" included:
  
• Amusement Devices
  
• Carriage Businesses
  
• Commercial Parking Lots
  
• Junk Dealers
  
• Kennels, Grooms, and Stables
  
• Sidewalk Cafes
  

C. Building and Construction Permitting

Most local governments regulate development, including not just construction of new homes, but also improvements and changes to existing homes. One common form of regulation is to require a permit to build or significantly modify a structure. Significant modifications include installing bathroom ventilation fans, adding windows and widening doors. The rationale for requiring a permit is to ensure compliance with local ordinances and to protect the safety of homeowners. Problems arise, however, when the requirements make simple home modifications a tangle of red tape, or increase costs by requiring a licensed contractor to do the work.

1. Why Reform Building and Construction Permitting?

Indianapolis ordinances demanded permits for even the smallest of property-owner tasks. A large number of property owners were affected by rules and regulations dictating when and how they could improve or repair their property. Reforming these regulations would have a direct impact on more people than previous RSC reforms.

The city's permit requirements imposed significant costs on property owners. Homeowners who wanted to legally perform any significant work on their own house had to obtain one or more permits from the city. The often arduous process required submitting an application and waiting up to eight weeks while the site plan was reviewed and approved by as many as four separate city agencies. One local bank president who tried to put an awning on his new downtown branch spent more than twice as much money winning bureaucratic approval for his plan to beautify his business than it cost him to buy the awning.

If property owners are unwilling to deal with these bureaucratic hassles, their legal alternative is to hire a licensed contractor, who will secure the permits as part of the job. Hiring a contractor, however, is much more expensive than the property owner doing the work himself (Not surprisingly, licensed contractors are great supporters of the property-owner work permit requirements.) Thus the consequences of the permitting process and associated costs may deter property owners from repairing or improving their property.

Another option for the property owner is to do the work illegally. The RSC estimated that less than one percent of homeowners in Indianapolis comply with the permit regulations. There is no evidence that this permit avoidance has resulted in any incidence of injuries or accidents. With such a low compliance rate, and the absence of a measurable safety problem, the RSC concluded that the permit in itself was not vital to citizen protection.

The low compliance rate indicated another cost of the city's permit rules as well. As one RSC member pointed out, such widespread disobedience of a rule implies that almost all citizens do not think the rule is justified. By encouraging this type of disobedience, these regulations undermine respect for the law. Regulations are far more likely to be obeyed if they are deemed reasonable and just by the populace.

The work of licensed contractors does not escape city regulation either. Local regulations impose extensive fees and permits on almost all work performed by contractors. In most cases, each subcontractor must go through their own fee and permit process, often increasing construction costs. These rules distort housing markets, especially across jurisdictional boundaries where fee and permit requirements differ. As one local contractor put it:
"To us, each permit requirement is an invitation for the government to hassle us, tie us up, slow us down and drive us crazy. We understand the need for permits, but why are there are so damn many of them?"

The Indianapolis Homeowner Freedom Act

Six major changes to the Indianapolis "procedural building code":

1. Eliminate building permits for construction activity that creates no significant health or safety risk.
2. Simplify issuance of building permits for major construction projects by allowing general contractors to obtain a "master building permit" for structural, electrical, heating and cooling, plumbing, and wrecking work.
3. Allow employees and agents to apply for building permits.
4. Allow owners of residential and commercial buildings to secure building permits for construction work to be done by their employees or by subcontractors that the owners hire.
5. Authorize the city to charge a re-inspection fee where contractors do not cooperate with city inspection policies.
6. Enhance consumer protection by increasing the city's ability to police illegal contractors and contractors who violate building code provisions.
As with property owner work permits, there is little evidence that contractor fees and permits have a significant impact on the quality of work and compliance with local codes. Direct inspections for code compliance, with direct punishment for infractions, regulate outcomes rather than inputs and are far more effective. Permit requirements should be limited to ensuring compliance with zoning laws and other such broad community concerns.

2. Major Initiatives

On balance, the RSC concluded that many of the fees and permits required by local development regulations did not pass the cost/benefit analysis, nor the RSC principle of minimum constraints on markets. Many of the rules exceeded state and federal requirements for no discernible reason.

Legal and Administrative Changes. The RSC created a subcommittee to improve the local permitting system. Consisting of citizens from all walks of life, they spent more than a year devising a program balancing the need for reform with consumer safety concerns (see Boxes). The result was the "Indianapolis Homeowner Freedom Act," which had two main purposes: First, it eliminated many of the restrictions, fees, and permit requirements on low-impact property-owner repairs and improvements. Second, it dramatically reengineered the local building-permit process by reducing the number of annual transactions required of citizens and developers and by allowing more freedom and flexibility for contractors while strengthening customer protection.

To encourage ease of use the Homeowner Freedom Act allows a developer to obtain one master building permit on a new project rather than requiring all subcontractors to be individually permitted. This reduces the time and money spent by the contractor to meet requirements and increases the time and resources they can devote to building new homes and businesses.

Common Jobs for Which the Homeowner Freedom Act Eliminated Permits and Fees

• Window and Door Replacement
  
• Home Remodeling, including:
  1. Replacing Kitchen Cabinets
  2. Hanging Dry Wall
  3. Installing Flooring
  4. Closet Construction
  5. Knocking Down Interior Wall
  6. Erecting Interior Wall
  7. Fixed Bookshelves
  
• Replacing Stairs _ Heating and Cooling Duct Work
  
• Fence Construction _ Fire Sprinkler Installation
  
• Installing and Repairing Siding _ Replacing Bathroom, Attic, or House Fans
  
• Decks _ Chimney Repair
  
• Window Awnings _ Gutter Replacement and Repair
  
• Patio Covers _ Replacing Plumbing Fixtures
  
• Most Roofing Jobs
  

D. Future Reform Initiatives

Indianapolis is continuing to target additional areas for reform. In 1997, the most extensive review focused on the city and county health code. The Marion County Health and Hospital Corporation (HHC) is an independent municipal corporation not directly answerable to any elected city or county official. It is governed by a seven-member board of trustees appointed by the mayor, the city-county council, and Marion County commissioners. HHC's formal powers are formidable. In the interest of preserving and protecting public health, HHC can close businesses, destroy homes, and order arrests.

The RSC analyzed the county health code and developed a comprehensive reform package. Political opposition to these reforms, however, has been fierce, and by mid-1997 only a few reforms had been enacted, and they were but minor or watered down changes. The RSC continues to identify new areas to tackle, and some have suggested they look into such areas as parking requirements built into the zoning ordinances, and regulations governing home-based business, including childcare.

E. Conclusion

Indianapolis's regulatory reform program has focused on existing regulations, using a formal process to analyze the current regulatory code and develop reform proposals. Not being limited to new regulations made it much easier for the RSC to garner grass roots and political support for reform.

Putting together political support for reforms proved to be a crucial strategy, since there are always interest groups organized to defend the status quoæbe they taxi drivers or building contractors. By directly involving those who suffer under misguided regulations, the RSC forced the city/county council to face those who pay for regulations as well as special interests who benefit from them.

Regulatory reform programs that review existing regulations upset those with an interest in the status quo.

The result was a series of successful reform efforts that changed the face of the taxi market, business licensing, and development and building licenses in Indianapolis. Residents of Indianapolis get noticeably better service from the city's taxis, and are even able to start a taxi business if they so desire. Small business owners and workers, who no longer have to pay burdensome licensing fees, are saving over half a million dollars a year. And those residents who want to build new homes or improve their existing ones no longer have to wade through mountains of red tape, wasting untold hours and higher costs to get a permit.


Part 4

Lessons for Regulatory Reform Programs

Philadelphia Mayor Ed Rendell likes to quote a local professor at the University of Pennsylvania, Theodore Hershberg:

"All of America is on greased skids. What differentiates one city from another is the angle of descent."

In order to stop the skid of urban decline, city governments have begun to acknowledge the many current structural incentives that foster the very decline that threatens them. In Indianapolis, and other cities, ill-conceived regulations are an important component of that decline.

A. Principles of Regulatory Reform

While many of the regulatory burdens that constrain urban areas are well understood, policymakers have had less success figuring out how to reduce this regulatory burden. The example of Indianapolis and others with regulatory reform have demonstrated a number of principles that help make a regulatory reform plan successful.

1. Create an independent reform commission. Someone must have ownership of the reform process. Individual agencies are too often wedded to the status quo.

2. Recognize the merits of competition. More competitive markets are more disciplined, creating incentives for innovation, customer service, and efficiency.

3. Acknowledge the existence and influence of interest groups. Even if a policy change produces net gains for the community, the losers have the incentive to oppose change. Politicians need to resist special interests and act on behalf of the silent majority. Reformers can encourage groups of those burdened by existing regulations to help push for reform.

4. Focus on outcomes rather than process. Indirect regulations, aimed at process rather than results, increase the chances of unintended outcomes. If the concern is the safety of taxicabs, policymakers should enforce laws against negligence or publicize safe operators to help the market information process. They should not limit the number of taxis on the theory that by controlling licenses they can improve safety. Focusing on outcomes makes the impact of a regulation more transparent and allows officials and the public to see direct effects of a regulation.

5. Weigh both the costs and the benefits of a regulation in deciding its worth. The success of a regulation should be tied to its intended effect, not to the behavior of regulators. It's not how many fines are levied, but how many harmful actions are prevented, and what costs to society are avoided, that should determine the success of a regulation.

6. Adopt a Transparent Analytic Framework. A decision process like the one Indianapolis used (see p. 8) assures a consistent analysis on each regulation, and that no steps are overlooked. It also improves citizen and interest group visibility of the reform process, and encourages their input.

Regulations should be simple and narrowly focused. The broader or more complex a regulation, the more likely are unintended consequences. Also, the less likely it is that ordinary citizens can understand the rule and its impact. An opaque regulation plays into the hands of the special interests that benefit from it.

It is crucial to keep in sight the efficiency gains from fully implemented reform and increased competition.

B. Barriers to Reform

The greatest barrier to regulatory reform is resistance to change by existing firms who enjoy a protected market. The fear of competitionof failure or diminished successleads some firms to oppose regulatory reform. Those firms which do well in a regulated environmentwho know how to work the systemmay not be as good at serving customers.

A second source of opposition to reform comes from those who simply believe that greater government control improves public welfare. They will oppose replacing regulation with competition for intellectual and ideological reasons.

Regulatory reform efforts are usually controversial. To succeed a reform program needs a well-articulated goal and a plan to get there. A plan must analyze the political dynamics associated with each reform option, and select the option that offers the most gains for an acceptable level of effort. Reformers need to assess their "political capital," and determine how to expend it to get the most reform. This is an efficiency consideration. Better to embark upon a well-considered campaign of selective reforms for which sound arguments can be made, and perhaps less violent opposition will be provoked.

However, a number of studies show that small, marginal changes towards greater competition may actually decrease efficiency. Efficiency gains emerge only once competition is significantly increased. This is called the "marginal adjustment trap," and implies that reformers need to work through the short term problems with an eye on the ultimate goal. It is crucial to keep in sight the efficiency gains from fully implemented reform and increased competition.

Part 5

Conclusion

The Indianapolis experience demonstrates the power of regulatory reform to improve the local competitive environment and reduce the burdens on individuals and businesses. Removing outdated or overly costly rules and requirements increases individual opportunities and makes simple things like improving a home or getting a taxi ride easier and less costly.

Other local governments can learn from and emulate the Indianapolis regulatory reform program. The first step is to recognize that visible results come from effectively representing the interests of the usually-silent majority that are burdened by excessive or flawed regulations. Then, the key to a successful program, as Indianapolis learned, is to establish a well though-out, simple and transparent process for identifying regulations that are in need of reform and to devise political initiatives to push for each proposed change. Combining political savvy with a sound methodological administrative process enables reformers to successfully take on the special interests that defend the status quo.


Part 6

About the Authors

Adrian Moore is Associate Director of Economic Studies at the Reason Public Policy Institute, where he is responsible for research on regulatory issues. Mr. Moore is co-author of Curb Rights: A Foundation for Free Enterprise in Urban Transit. He can be reached at 310/391-2245 or at Adriantm@aol.com.

Tom Rose was Special Assistant to Mayor Stephen Goldsmith from 199297, where he managed the regulatory reform program. Currently, Mr. Rose is a senior executive with Hollinger International, Inc. one of the world's largest publishers of English language newspapers in the United States, Canada, Britain and Israel.



Appendix A

Regulatory Reform Programs Around the Country

States and cities nationwide are exploring and experimenting with regulatory reform. Some programs are ambitious; others are tentative. A virtue of these experiments is that each presents a lesson that others can learn from, each adapts to some special local circumstance, furthering our knowledge of how regulations function.

These regulatory reform programs present several common themes. The most important is the distinction between reforming existing regulations and setting up systems for analyzing or controlling new regulations. The latter is less politically controversial, and hence, more common. Programs that review existing regulations upset those with an interest in the status quo. Also, it requires considerable resources to review the existing regulatory code and to develop reform proposals.

Most state and local regulatory reform programs do not extend to existing regulations, though some intend to do so in the future. Two exceptions are San Diego and Indianapolis.

San Diego. Under the initiative of Mayor Susan Golding, in 1993 the San Diego City Council initiated periodic "Regulatory Relief Days"which the Council devotes to reviewing existing and proposed regulations. The goal: eliminating unnecessary regulation and red tape. (The 104th Congress adopted a similar program at the federal level.)

One typical Regulatory Relief Day eliminated several types of permitting penalties, allowed certain types of low-grade construction without a permit, reduced the requirement for expensive geologic reports on several types of development projects, and eliminated the requirement for temporary signs.

One review uncovered a rule requiring large warehouses to use an antiquated system of fire suppression. The city changed the regulation and allowed warehouses to replace old systems with newer methods, which saved warehouse permit holders an estimated $150,000 to $400,000 a year. The program continues, and is helping reduce costs and foster competition in the city.

New York City. In 1994 Mayor Rudolph Giuliani formed the SWAT Team on Regulatory Reform whose mission was to lighten the burden of regulation on New York City businesses. The SWAT team's approach was to target unnecessary rules for elimination, improve enforcement efforts, and improve rule-making policy.

In one case, the city was regulating movie projector operators because decades ago film was made of combustible nitrates, and theater fires were a real threat to lives. The technology has since changed but the regulations remained. Enforcement was costly and wasteful for both the city and projector operators. The SWAT team eliminated the license requirements for projector operators, as well as for auctioneers, billiard employees, and fancy dress balls. Annual savings totaled $4.1 million.

The SWAT team also streamlined regulatory and citizen-service processes. Many overlapping and redundant codes were eliminated, and enforcement, inspection and information services were consolidated to avoid wasteful duplication.
By eliminating the a few licensing requirements, the New York SWAT team saved $4.1 million annually.

Colorado. The State of Colorado established the Office of Regulatory Reform (ORR) in 1981 primarily to review proposed regulations and identify duplicative, burdensome, and unnecessary requirements. The ORR also serves as a one stop information and assistance center for business on regulatory issues.

While the ORR doesn't systematically review existing regulations, it does act on recommendations from businesses or other groups. In one case, Colorado bed and breakfast (B&B) establishments complained about rules governing alcoholic beverages. To serve liquor to their customers, they were required to have an expensive permit and to serve all comers, not just their B&B guests. (In a sense, they had to become a bar.) The ORR developed a new $50 permit strictly for owner-occupied B&Bs allowing them to serve alcohol only to guests.

In another case, the ORR discovered that state codes required the Department of Health to inspect all mattresses. The rule was an artifact of bygone days when mattresses were stuffed with old clothing, much of it from the dead at local morgues. At that time there was a public health interest in ensuring the cleanliness of the stuffing. Though the technology of mattress filling has changed, the state still employed mattress inspectors and required inspection of every mattress. Eliminating this outdated rule reduced the cost of every mattress sold in Colorado between $10 and $15.

Pennsylvania. Since 1983 the Pennsylvania Independent Regulatory Review Commission has reviewed proposed regulations. Over the last 14 years the commission has eliminated or modified over 1,000 regulations. In one case, the commission helped to kill a proposal by the Labor and Industry Department to broaden existing prevailing wage rules, imposing higher cost, above-market wage rates on a wide range of construction projects.

The commission's goal is not to prevent regulation, but to ensure that regulations meet the legislative intent and serve the public interest at the least possible cost. The commission does not review existing regulations.

Minnesota. The Minnesota Board of Government Innovation and Cooperation was created in 1993 to oversee local experiments in regulatory reform. Any local unit of government can apply to the board for a temporary waiver from a regulatory requirement. If their program accomplishes its goals, the Board can propose legislation to make the change statewide. The virtue of this program is that experiments with reform are local, minimizing the consequences of mistakes. Almost 40 waivers have been approved, most of them too recently to permit evaluation of their results.

New Jersey. In 1995 New Jersey released the STARR (Strategy To Advance Regulatory Reform) Report, which proposed a regulatory review program and a streamlining of government processes. To date little substantial reform has come out of this process. The program does not entail review of existing regulations.

Virginia. Gov. George Allen of Virginia required in 1994 a review of all proposed regulations to see if they were necessary, and if they used the least burdensome method available. He also required a review of each regulation for effectiveness within three years of its starting date. His intent was to prevent enactment of ill-conceived or heavy-handed regulations and to institutionalize the termination of ineffective regulations.

The chief instrument for evaluating proposed regulations is the Economic Impact Analysis (EIA), which incorporates criteria such as employment effects, number of individuals or business effected, and estimated compliance costs. The program is still new, and the state has not evaluated the overall impact of EIA, but there are examples of success. In one case an EIA stopped a rule proposed by the State Police that required motorcycle riders to wear a helmet, and specified the type of helmet. The EIA revealed that the specified type of helmet was available in very few shops, and cost $300 or more. Alternative helmets were found with prices ranging down to $50, each of which was rated for its degree of safety. The market was already providing sufficient information to consumers without need of regulation.

Gov. Allen further directed all agencies to review existing regulations on a regular basis, and recommend retaining, amending, or eliminating them. Agencies must solicit public comments and must measure each regulation against the criteria of efficiency, flexibility, and accountability. To date some outdated and duplicative rules have been eliminated, but state agencies are just beginning to follow up on their analyses.

Appendix B

A Regulatory Reform Toolbox

Two approaches can facilitate regulatory reform. The first is to look for an alternative to regulation to mitigate a particular problem. In many cases, tort law or institutional changes can address the problem without need for recourse to regulation. A second option is to design the regulation in a way that reduces or eliminates the problems and unintended consequences that often accompany them.

A. Alternatives to Regulation

The most pervasive alternative to regulation is competition. A competitive market disciplines participants, punishing inefficient behavior. If consumers can readily turn to an alternative source, a producer is not likely to get away with behavior customers dislike. Ensuring that markets are competitive goes a long ways towards reducing the need for regulation.

When competition is not sufficient to prevent a harm, an alternative is simple tort and common law. Many regulations seek to protect consumers from "harmful" competition or from unsafe or inadequate service providers by limiting the ability of new businesses to enter the market. Yet such behavior in the absence of government complicity is rare. Antitrust law can usually provide more than adequate protection for one firm against another's illegal or anticompetitive practices. Likewise, safety is enforceable by negligence law, and competence to provide a service is a matter of contract between buyer and seller, enforceable in the courts. Regulation takes the case out of the courts and resolves it by fiat. This may be particularly harmful since, in court, the particulars of each case have great bearing. Regulation imposes blanket prohibitions and overrides the particulars of each case, and preempts opportunities for evolution and discovery of new resolutions.

Another tool for resolving problems with perceived market failures is enforcement of property rights. Economist Ronald Coase has suggested that, if the cost of negotiation is low enough, then giving any one party in a dispute a clear and enforceable property right will lead to an efficient outcome. They will be able to trade, so whoever values the good the most will obtain or keep it. In recent years, economists have led the drive to broaden use of property rights to address "commons" problems. For example, tradable permits in various types of pollution emissions have created more flexible and efficient emissions reductions activities in the United States.

Property rights can also resolve many of the problems associated with natural monopolies. If we break down the different elements of a natural monopoly, there may only be economies of scale or network economies in one element of the industry. Property rights can allocate a commodity so that the market can function competitively. For example, the electric industry is often thought of as a natural monopoly. One may argue that we do not want competing companies running parallel power lines down the streets when all the electricity is most efficiently carried in one system. However, if property rights are established for packets of electricity, then power generating and marketing can be competitiveonly the actual transmission networkthe power lines-need be a regulated monopoly. This process is one of the more popular options being considered by states looking to deregulate their electric utilities. A similar idea can be applied to water, natural gas, and urban transit.

Competition often achieves the desired outcome more effectively than the most well-intentioned and finely crafted regulation.

Any of these alternatives to regulation may resolve a potential problem in a much less costly manner than regulation. The key is recognizing which approach is best, and that depends on the given situation. The primary focus must be on devising a framework that fosters competition, and competition often achieves the desired outcome more effectively than the most well-intentioned and finely crafted regulation. To foster efficient competitive markets in which governments primarily enforce property rights and contracts, policymakers need to focus on removing barriers to competition.

B. Tools for Regulatory Reform

When choosing a regulatory reform tool, policymakers should consider the principles of regulatory reform described earlier, including recognizing the positive impact of competition on service quality, acknowledging the influence of special interest groups on the process, focusing on outcomes rather than inputs, and keeping regulations as simple and focused as possible, and using a transparent and well-defined process to analyze regulations.

Several useful regulatory reform tools warrant special consideration. If you re-examine the analytic framework on page 8, you can easily see where each tool can be applied.

1. Cost/Benefit Analysis

Cost/benefit analysis (CBA) offers a direct approach to analyzing a regulation's effects. CBA involves adding all the costs of a regulation, adding all of its benefits, and comparing the two totals. Reform efforts should focus on those regulations in which costs outweigh the benefits. Note that some of the costs or benefits might not be quantifiable in monetary terms, and must be subjectively evaluated against some criterion of the public good.
Regulatory Reform Tools

• Cost/Benefit Analysis
  
• Risk Analysis
  
• Legal Tools
  
• Sunset Clauses and Reviews
  
• Regulatory Budgets
  
• Administrative Simplification
  

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