Optimal red tape and regulation

Mon, 28 Sep 2015  |  

The following is an extract from a recent keynote speech I delivered to a client dealing with red tape and regulations.

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Australians are clearly happy with 1,200 deaths on the road each year. The number could be reduced to zero, but at what cost?

The road toll could be reduced to zero. That is no deaths at all on the roads.

Easily.

We could simply introduce rules and regulations that make it illegal for all cars, bikes, buses, trucks and humans to be on the roads at any time. Ever. Quite clearly, road deaths would be reduced to zero.

Now – obviously – there are issues with this regulatory proposition. You don’t need any economic modeling to realise that these regulations would fail the test of efficiency, productivity and would involve income destruction for society, among many others.

It would be ridiculous to eliminate road deaths in this way.

But how far from no road rules to a complete ban are we willing to go?

In 1970, there was discontent about the 3,800 people being killed in road accidents each year.

Regulations were introduced progressively that would still allow people to travel on roads - driving their cars for business and pleasure; for taxis; and for trucks to deliver the goods we all want and need.

Those 3,800 deaths were equivalent to 28 deaths per 100,000 population.

The regulatory response was multi-faceted – and took many years to implement and arguably is still being adjusted and tweaked according to changing circumstances.

Better, safer roads were built. The roadworthiness of cars was improved, although much of this change was via technology rather than regulatory changes.

There was the compulsory installation of seatbelts in cars. Low cost and very effective.

Can you imagine today getting into a car without a seat belt?!

More traffic lights were installed, stop signs and the like were placed in dangerous areas. Speed limits were lowered and importantly enforced.

Not only were these rules changed, but drivers were increasingly regulated – stricter license testing, no drinking to excess and driving, eye sight testing and the like.

These were all “red tape” or costly regulations in a strict sense but had as their objective fewer deaths whilst still allowing the economy to function via its road transport system.

An anti-red tape zealot might bemoan the fact that they now are more or less forced to pay $40 to get a taxi home if they have had too much to drink. That is one of the cost burdens of the rules. Or, even when sober, the fact that it takes them 5 minutes longer to go home because they have to stick to some arbitrary and low speed limit set by some bureaucrat in Macquarie Street or Spring Street - this is having a negative impact on the economy’s productivity.

But because cars and trucks were not banned, and a range of regulations were introduced or progressively changed, the economy kept functioning, people could still go about their business relatively easily and with minimal disruption even if they had to drive more slowly and were not as able to drink and drive and had more traffic lights to deal with.

The social gains are this regulatory change are obvious. More people are alive.

Indeed, with lives saved, the economy is larger and more productive because of the regulations and red tape.

And in addition to saving lives, there were positive unintended consequences or quicker travel times because of improved roads, for example.

An issue is that people still die on the roads. Lots of them.

As a society, we collectively are willing to have 5 in every 100,000 people die a year on the roads so that we can all still drive. It is not the zero road toll outcome but the outcomes are clearly better now than a few decades ago.

I might just note that rather than the rules and regulations failing, the current death toll is largely because many people break the rules – they still speed and drink drive, play on their mobile phones or do not learn to drive properly. Red tape is not the cause of the problem, it is many people not sticking to the rules.

That aside, it is fair to say that the regulations regarding road transport have had more benefits for society and the economy than the costs.

One important thing about these rules and regulations are that they are transparent. They are well understood. The government even advertises the fact that they heavily regulate driving with the drink driving, double demerit points, speeding ads having a high profile.

All drivers know they risk being fined or losing their license if they drink and drive, speed, use their mobile phone or drive an unroadworthy car. Some people still do these things, but they take a huge risk when they do knowing that these regulations could hurt them is they are caught breaking the law. The laws are strictly enforced.

When looking at the road rules, I often ask myself how could they be improved from the current position? To be frank, I cannot think of how they could be improved.

Maybe the regulatory environment for driving is about as good as it can get.  This doesn’t mean it is perfect – far from it. But they are pretty good.

Maybe more enforcement of the rules such as extra speed cameras and police on patrol? What about tougher penalties? Say two years jail for going 10 kilometers an hour over the speed limit? Cut the speed limit to 20 kilometres an hour? Have some one walk in front of each car waving a flag so no one gets run over? Like they did 100 years ago?

I make these absurd suggestions to make the point that many regulations are about managing risk, not stopping outcomes altogether.

As noted, road deaths are now around 1,200 a year.

And just to reiterate, given population growth over the last four decades, this is the equivalent of 5 deaths each year per 100,000 people.

Had the deaths per 100,000 people remained at the 1970 level, there would now be closer to 7,000 people a year dying on Australian roads – that is 15 people extra a day being killed on the roads.

Some risk is acceptable and regulations are tilted up and back along a continuum according to society’s acceptance or tolerance of risk.

Long live red tape and regulation!

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