Regulating Electronic Commerce

The current rage in Washington is to try to regulate electronic commerce (such as sales of products via the Internet). Given the long and sad experience with regulating business, Congress should stop, look, and listen before it acts. The stakes are high. Even if the current, explosive growth rate of electronic commerce slows down significantly, a very substantial portion of the national economy will be involved in coming decades. There are important lessons to be learned from examining the nation's past efforts to regulate private-sector economic activity.

Number one: Don't rush to regulate. Once a regulatory system is in place, it is extremely difficult to reform it. Those who benefit from the regulation quickly become a powerful--and often very emotional--lobby against change. Unfortunately, the way the national legislature usually proceeds almost guarantees that newly written regulations will be poorly written. Members of Congress devote most of their time and energy to highly publicized hearings on the nature of "the problem." The actual writing of the law is such a hasty matter that the senators and representatives rarely have a fully drafted bill in front of them when they vote on the new regulatory statute. Usually, the staff is still working on the details. Once a regulatory system is in place, it is extremely difficult to reform it. Those who benefit from the regulation quickly become a powerful--and often very emotional--lobby against change.

Number two: Don't ignore the unexpected side effects. Every regulatory statute generates a wide variety of consequences--good and bad--that are unintended or unexpected by proponents of the law. Members of Congress need to carefully examine the case for the proposed new law, especially in light of the concerns raised by the people who would be affected. The latter may not exactly be disinterested observers--not that the proponents can be so characterized either--but they may be far more knowledgeable about the likely practical consequences.

Number three: Don't assume that "market failure" will be fully cured by government intervention. Shortcomings in the private sector (such as inadequately informed consumers and other so-called "market failures") are typically cited as the rationale for government involvement in the private economy. However, the enthusiasts for proposed new laws usually overlook the other side of the case--inadequacies in the bureaucratic processes of the public sector, which can be labeled "government failure." Until the analysis is made, the open-minded citizen does not know whether the case for the new proposal is compelling or not.

Number four: Carefully weigh the advantages and disadvantages of the proposal, both quantitatively and qualitatively. This lesson does not automatically clinch the case for performing a quantitative benefit/cost analysis, but it leads in that direction. As a long-term user and reviewer of benefit/cost analyses, I caution the reader, before embracing the conclusions, to check the key assumptions underlying the analysis and the reasonableness of the methodology used.

Evaluating the advantages and disadvantages of a proposal is far more than a statistical or accounting matter. Many of the effects of regulation cannot be readily quantified, especially in dollar terms. What is required is careful judgment. Thus, under many circumstances, the most appropriate analysis may simply be a considered conclusion that the benefits of the new regulatory statute are worth the costs (or alternatively, that they are not). A word of caution: this approach is hardly the same as the frequently encountered emotional statement that the object is so compelling that we are willing to spend any amount to achieve it. That attitude is a virtual recipe for waste, bureaucratic arrogance, and inefficiency.

Number five: if in doubt, don't regulate. There is no shortage of laws, rules, and regulations already on the books. They fill a good-size library. Moreover, the existing regulatory system taxes the limits of the government's enforcement capability.

Frequently, the elimination of some archaic rule, regulation, or statutory requirement would adequately meet the concerns of those who are advocating government regulation of electronic commerce. Let us recall that the now-extinct Interstate Commerce Commission goes unmourned. We should resist the temptation to create an Internet Commerce Commission.

Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.

For more information ...

A New Approach to Regulatory Reform. Past efforts at regulatory reform have failed because they focused on the way agencies write regulations. It's time to require estimates of costs and benefits in legislation. (Center for the Study of American Business, 1998).

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