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The Regulatory Future

Stephen Goldsmith | 06/03/2013 |

[This is the fourth in a multi-part series on streamlining government services. See part 1 here. See part 2 here. See part 3 here.]

To some extent, the regulatory rationality we addressed in the previous essay seems straightforward—better service and less fragmentation for applicants wandering their way through bureaucracies, more attention to trade offs, more emphasis on problem solving and less on procedural compliance. Here we turn to the future of reform and look at its key points: origination of the rule or requirement and the process of granting a license and enforcement. In each of these areas we suggest public officials explicitly state their goals and then determine the best way to accomplish them without imposing undue job-growth-slowing procedures on citizens who play by the rules regardless of government intrusion.

1. Targeting Bad Conduct Rather than Requiring a License or Prior Approval

Let’s assume an important public health or safety issue—although a regulator’s assumption about risk may itself be the subject of a legitimate difference of opinion, especially when it reduces risks defined by their agency while increasing costs and risks in areas beyond their scope. The first question should be whether that identified risk can be addressed in a less intrusive way than through licensing. Establishing or continuing a license or permit requirement imposes a very expensive regimen on all actors—start ups and ones that are honest, big or small.

Such a sweeping approach often produces two negative externalities. First it incents bad actors to simply avoid the entire process because the risk of getting caught is less expensive than the cost of complying. In addition it allows those currently licensed to use the process to create barriers to entry for others with whom they may be forced to compete. The New York City Buildings Department serves the public interest by working to make sure trades people possess the requisite skills and knowledge of codes. Yet almost all those processes are also a means to prevent competition. Crane licensing illustrates this issue at its extreme. New federal rules establish a national exam for crane operators and allow those with experience in handling the largest cranes in other cities to also work in NYC. Not surprisingly, Operating Engineers Local 14 is lobbying to have testing remain NYC-specific and for a continuing a requirement for local apprenticeship experience; effectively using government regulation to bar others from entering the market.

A city or state can license all its plumbers, electricians or beauticians, or it can simply require that those in the trade follow certain rules and procedures and inspect for compliance. Similarly, the permitting process for working at a new site produces additional expense. Cities spend significant time and resources permitting each home remodeling project, driving up costs for those who take the time to comply while providing an advantage to those who operate totally outside of the system.

Rather than licensing or permits, officials might simply require registration—a simple online form that certifies one is undertaking business at a certain address. [For example, some public entities now use online compliance portals, another important advancement cities can utilize in regulatory reform. Governments in places like El Paso, Chicago, New Jersey and Colorado allow businesses to report required information directly to the regulating bodies that monitor their activities]. In these jurisdictions business owners can increasingly avoid lines and submit paper forms to a series of offices that must then coordinate a swarm of new paperwork. Furthermore, storing this data in a centralized, accessible format means it can be broken down via data analytics to illuminate trends and characteristics of economic or residential development and guide policies. Such systems can reduce wait times, improve the speed of communications and reduce administrative costs, all by assuming that most companies generally comply with published standards. Why drive up homeowners’ costs by requiring a maze of permits for kitchen remodeling when registering that the contractor is undertaking such work should be sufficient? Such a notification would not require approval; inspectors could simply use civil or criminal forums to penalize bad conduct.

2. Targeting bad conduct and bad guys

Public officials, even those who decide they need a license or permit requirement, could begin to establish procedures that favor good actors in the licensing process or the inspection system. We should shape incentives to induce compliance and focus on enforcement.

Why not focus attention on those actors most likely to put the public at risk? Data mining can easily look at other applicant characteristics by combing data in other agencies for information that might trigger a deeper review: failure to pay taxes, employee complaints about working conditions, consumer complaints, operating under aliases, delinquent reporting of important issues and the like. This approach should drive inspectors’ priorities, time and attention. In New York I literally received weekly complaints from conscientious small restaurants about the business they lost and the cost of fines for nonmaterial violations. Yet, in order to guarantee consistency and avoid inspector abuse, most regulatory organizations value by-the-book enforcement, which too often discourages common sense. And almost any good inspector going by the book can find an infraction in any business or building. We no longer need to accept the tradeoff between accountability and discretion; we can have both. Digital tools now allow us to know where every inspector is all the time, how long he or she takes to inspect, what types of infractions are written, which ones are outliers, and who has produced the best-rated restaurants, the most violations, and so on. Big data not only provides much more insight into the regulated, but also into the regulator.

We have seen companies take this approach to streamline business processes. For example, Starbucks provides its inspectors with iPads that run mobile apps using geotags. They upload 243 pictures for every Starbucks, communicating with fellow inspectors through a social interface, filing forms and making reports back to headquarters in real time. As a result, the identified issue is resolved almost immediately. The public sector can utilize this distributed approach to inspections as well to garner considerable savings. The City of Baltimore awarded an innovation fund loan to its Bureau of Environmental Health to shift its 11,500+ annual inspections of food facilities, daycares, schools and the like to a portable tablet platform to allow for inspections to be recorded in the field. The program is expected to pay for itself through reduced overhead while reducing wait times and improving customer service, and has the potential to work in the same vein as the Starbucks model, shifting from formulaic to flexible regulation. We no longer need to assume that granting inspectors discretion means abuse when we know exactly what they see, how long they are at a site and which inspectors are outliers.

Regulations tend to treat every applicant identically no matter the complexity of their request or their qualifications. Why not allow streamlined certification for businesses with stellar records so they can concentrate on building their business without interference and inspectors can pay more attention to the finding the bad guys and attending to real problems?

In this regard, cities and states would do well to emulate the Federal Transportation Security Administration’s TSA Pre ✓program, which allows select frequent flyers to receive expedited screening benefits for domestic travel. As a result, the burden on government as well as the time and cost borne by consumers are lessened and government screeners can spend more time on passengers who merit closer scrutiny.

The New York City Fire Department is in the process of setting up a similar program that establishes priorities for building inspections. Realizing the impossibility of keeping up to date on all building inspections, the city is trying a new, targeted approach. Armed with vast quantities of data, fire department experts identify buildings at high fire risk by applying a newly developed series of metrics. Officials began studying data on fires in buildings that had been illegally subdivided, and their inquiries led them to a series of related fire risk findings. They ultimately identified four factors that make some New York City buildings 40 times more likely than others to experience a fire: owners in financial distress, a history of illegal conversion complaints, construction prior to the 1938 implementation of modernized codes, or a location in low-income, high-immigrant neighborhoods. As a result, inspectors can get to high-risk cases first and resolve them, rather than hoping to find them like needles in a haystack through random inspections.

Regulation will always have a place in government, to preserve the economic, social, and environmental controls that good governance must rightly preserve. However, reforms – specifically through the integration of technological advancements – can support improved transparency and accountability for all players. City governments can create efficiencies throughout the regulatory lifecycle by using a discrete set of principles to develop regulation with stakeholder solicitation and personalization, permitting and licensing using online tools and centralized databases, and enforcing compliance using hand-held tools, self-evaluation, and consumer feedback. Agencies can reduce costs and simplify processes at the same time as they enhance health and safety, which allows government to discharge its responsibilities while spurring job growth.

3. Harnessing the power of consumers and the market

Government can often advance good market conduct in ways that are more successful than writing tickets or processing applications. For example, better and more accessible market information can guide customers to upstanding businesses and therefore facilitate healthier outcomes than enforcement can. A good example of this would be integrating restaurant inspection grades and consumer fraud reports into Yelp or another consumer-facing site. Government and consumer-created content can be combined to provide citizens with the information needed to make their own decisions that in effect penalize businesses violating regulatory metrics. There are smartphone applications, such as Taxi Turvi, which is used in New York City to keep taxi-cab drivers honest by tracking their route with GPS technology. At the end of the trip, the driver is rated to see if the journey could have been made shorter or cheaper by taking a different route. Other applications, like UBER, now used in dozens of cities, allow taxi and limo passengers and drivers to rate each other, creating a network of trust and consumer safety without expensive or distortive government oversight. Customer reviews and comments are not equivalent to trained regulators, but they have a place in the inspection and review processes. Customer feedback makes for a marketplace that works more smoothly, and when that information is mined along with the data available in government databases, regulators can focus their attention on high-risk situations and entities.

In addition, allowing citizen consumers to rate services just makes sense. Providing them with the opportunity to rate services offers a form of ownership and increased agency, while simultaneously giving city departments’ relief from high numbers of complaints and the heavy monitoring allowances built into budgets. Using this type of approach, taxi drivers and other businesses with low ratings or numerous complaints can be tracked and information shared publicly to improve service and accountability. Such a system has the capacity to either direct inspection attention or to self-regulate as consumers change their behaviors accordingly.

Using this model, compliance can be guaranteed not just through government-initiated inspections, but also from the targeting that comes from big data analytics, transparency, better metrics and citizen sensors. In this age of connectedness, municipal governments like those in Boston, New York and Philadelphia that collect data through social media and civic engagement applications can share that data horizontally with departments and reduce the need for regulatory overload, while also sharing the data with the general public to help increase citizen involvement. Often these citizen reports can trigger government action way before the more cumbersome and routinized inspection processes.

Moving to Assistive Regulation

An early example of a radically altered approach occurred a decade ago when the Occupational Safety and Health Administration (OSHA) put its goal of safety above that of creating fines. In 2000, the Innovations in American Government Awards Program recognized OSHA for its Interactive Software Advisors initiative. This suite of expert software enables businesses to answer a series of simple questions, and receive reliable answers on how over a thousand pages of government regulations regarding workplace safety apply to their own businesses. Beyond simple information sharing, artificial intelligence software helped to "understand" the situations of individuals using these tools, and provides guidance tailored for their needs. The initiative enabled OSHA to assist thousands of businesses without increasing the number of agency staff or significantly increasing its budget, and to rely less on harsh penalties and more on good customer service and voluntary compliance. OSHA estimates the value of the Hazard Awareness Advisor alone as saving businesses a total of $81.5 million in consultant fees, follow-up reports, and lost manager work time. Although since the agency won the Innovations Award it has reverted to a more traditional enforcement system, the software is still a promising model for other agencies and other levels of government.

Governor John Hickenlooper’s “Cutting Red Tape in Colorado State Government” initiative replaces paper processes with electronic protocols. The Colorado Department of Transportation eliminated excessive approvals required from the Office of the State Controller. Yet a plan stalled in the legislature which would have required warnings and education to replace fines for smaller firms (of 500 or fewer employees) guilty of minor first-time violations that do not involve health or safety, as well as requiring the agencies that regulate these firms to produce and make available fact sheets for new rules adopted to ease compliance.

Even as administrations push for regulatory reform, it appears government still tends to err on the side of heavy-handed control rather than flexibility and cooperation between regulators and regulated. Giving inspectors or agencies incentives to write violations, such as having revenue from fines fund the agency of jurisdiction misalign incentives. Performance should be measured by health and safety outcomes, not violations. Even allowing online hearings for violations, which are part of the NYC Business Owner’s Bill of Rights, smoothes some of this friction.

Government regulation can greatly enhance operation of the marketplace by providing important and reliable information. It can improve safety by providing consumers with information that protects them from unqualified or bad actors. Or the regulators can kill jobs and small businesses. Thinking in new ways and acting with new tools, we can achieve a much more appropriate balance between these choices.

Stephen Goldsmith, Daniel Paul Professor of the Practice of Government and Director of the Innovations in American Government Program at Harvard's Kennedy School of Government, is a two-term former Mayor of Indianapolis and former Deputy Mayor of New York City


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