One of the most important areas where modern government functions poorly is regulation. From my classical liberal perspective, the government often adopts regulations that are either too strict or unwise. As a result, regulation often leaves us poorer and less free.
Some of the problems from regulation can be addressed by recognizing a distinction between two types of regulation—hard regulation and soft regulation. While both types of regulation can be either beneficial or harmful, hard regulation poses a far greater danger to the health of the economy and to individual freedom. Recognizing this important distinction will help up establish institutions (such as supermajority rules for passing hard regulations) that will take account of the significant differences between these two types of regulation.
Defining Hard and Soft Regulation
Soft regulation involves government rules that do not forbid actions on the part of consumers and businesses but allow them on the condition that certain procedures are followed or information is supplied. Hard regulation, by contrast, involves government rules that forbid such consumer and business actions irrespective of the procedures followed or the information supplied.
A familiar example of the distinction involves the difference between licensing and certification. Under licensing, a person can only practice a profession, such as law, if they secure a license from the government, usually after meeting certain educational requirements and passing an exam. By contrast, under certification, a person can practice the profession without securing the license, but cannot hold themselves out as a certified practitioner. Under a certification regime for lawyers, both certified and uncertified lawyers could practice law, but only the former could advertise themselves as certified lawyers.
This distinction between licensing and certification of services is mirrored in other areas. In his book What it Means to be a Libertarian, Charles Murray argues for certification of products. Under this proposal, the government could not prevent someone from selling a product, but could only state conditions for receiving a nonbinding government approval. If a product were sold with government approval, it could state on its packaging “sold in accordance with government standards.” If the product were sold without government approval, it would have to state something like “not regulated” or “not government approved.”
There are two main goals from the certification of services and products. First, such certification provides information to the public so they know whether the service or product has received government approval. If the services or products are not certified, the consumer is warned that he needs to be on guard about their quality. Second, such certification deprives the government of the power to stop people who have not followed government requirements from selling services or products. Often government will use its hard regulation power to pass coercive regulations that have harmful results, such as protecting businesses from competition or requiring consumers or businesses to take wasteful actions. Certification thus limits the government’s power to take harmful actions in this area. Overall, these soft regulations do a good job of allowing people to protect themselves while at the same time limiting government’s ability to impose unwise regulations that infringe on freedom.
There are other similar forms of soft regulations. One involves government-supplied information, as with government recommendations. A well-known example is the food pyramid, recommending what types of foods to eat each day. Another form of soft regulation involves government required disclosures. Many products must have warning labels, provide information about their contents, or disclose information about their ingredients. For both of these types of soft regulation, the government provides information but does not forbid anyone from taking action.
A final form of soft regulation is nudging, which has been much discussed in recent years. Nudging can take many different forms and can involve private or government initiatives. My focus here is on government required nudges. For example, the government might require employer established 401(k) plans to use a default rule that treats all employees as having elected to make the maximum contribution. The employee could choose to reduce their contribution, but in the absence of doing so, he would be treated as making the maximum contribution.
This example of nudging does not involve the supplying of information. Instead, it regulates what happens in the absence of an employee’s action, supplying the government’s guidance about best practices. In the case of 401(k) plans, many Americans do not save enough for retirement, and this nudge might encourage greater saving. But as with the other forms of soft regulation, it does not prohibit the employee from making decisions for themselves.
The Benefits of Soft Regulation
Soft regulation has significant advantages as a form of regulation. While regulation is supposed to protect people from harmful actions, hard regulation often is harmful. Some hard regulation results from rent seeking by private interests attempting to protect themselves from competition, as with so much licensing. Other hard regulations results from mistaken decisions by government regulators, as with drug regulations that prevent people who are dying from taking unproven drugs even if there are no alternative treatments that can save their lives. Soft regulation prevents government from coercively imposing these harmful regulations. But it does not leave people unprotected. By requiring information to be disclosed or procedures to be followed, it provides people with the information necessary to protect themselves. Thus, soft regulation often provides a better combination of protection and freedom than hard regulation.
Of course, soft regulation is not always better than hard regulation. Hard regulation will be needed when the purpose of the regulation is to protect people from an action by a stranger (or other third party). And some who favor paternalism will want hard regulation to protect even informed consumers from their own harmful actions. But outside of these areas—which is a large amount of contemporary government regulation—soft regulation seems greatly superior.
It is true that soft regulation can sometimes be problematic. The standards it seeks to impose might be too strict or the information it supplies might be mistaken. But the nature of the soft regulation process places an important check on some problematic soft regulation.
Suppose that the government, as it often does with hard regulation, attempts to establish too strict of a soft regulatory standard. For example, it considers products that most people would regard as safe to be dangerous based on an excessively strict standard of safety. Under hard regulation, the public would be deprived of these largely safe products. But under soft regulation, something else will happen. As people come to see that the unapproved products are safe, they will start to ignore the “not government approved” warnings. Over time, the government’s limited power in this area will become even weaker.
This effect will provide the government with an incentive not to impose unrealistically strict standards for approval. If the government wishes to remain relevant, it will have to guard against its recommendations being ignored.
These advantages of soft regulation suggest that the constitutional system might draw a distinction between the processes for enacting soft and hard regulation. Given the disadvantages of hard regulation, including the rent seeking that it allows, the Constitution might require that a three-fifths or two-thirds supermajority of the legislature should be needed to pass hard regulation, but only a simple majority to enact soft regulation. In that way, the legislature will be guided towards more soft regulation, which is appropriate given the advantages of such regulation.
While there is room for both hard and soft regulation, all too often public debate discounts the advantages of soft regulation. Although both hard and soft regulation can be either desirable or harmful, the advantages of soft regulations suggest that it should be harder for the political process to enact hard regulation than soft regulation. If we could transform much of the hard regulation that is unjustified into soft regulation, that would produce a tremendous improvement in freedom and prosperity. We should do all we can to move towards that important and worthy goal.