All Red Tape Burdens Are Not Equal

  • Cutting Red Tape
Ask “Why are we doing it?” often enough, and it becomes clear that there is a bad red tape burden, and a really bad red tape burden. Not all red tape burdens are equal, even if their estimated costs are.

Good system or process thinking always asks what the objective of a process is, and whether standard measures and processes lead to that objective.

The same applies to red tape reduction. Why are Australian Federal and State governments doing it?

The first, obvious response is to reduce the burden government imposes unnecessarily on business, NGO and personal stakeholders. Well, yes.

A red tape burden is imposing an unnecessary time or dollar cost on a stakeholder. Time or money that could be used elsewhere to benefit someone. It is a clear loss to society. Bad enough, and good to eliminate. This red tape burden is captured by the International Standard Cost Model (SCM) for calculating red tape, and Australian variations on it (see here).

The Australian variants of the SCM break red tape burden down into:

  • Stakeholder administration time
  • Direct fees and charges
  • Costs of real actions stakeholders have to take to comply
  • Delay time imposed on the stakeholder.

But ask another ‘Why are we doing it?’ and it becomes clear that there is a bad red tape burden, and a really bad red tape burden. Not all red tape burdens are equal, even if their estimated costs are.

The Really Bad Red Tape Burden The SCM Misses

Asking a second “Why?’ leads to ideas of economic distortion.

The basic red tape burden imposes some or all of the costs listed above, but doesn’t necessarily change behaviour or decision making.

Consider being required to turn up at a Motor Registry to renew your licence – a clear imposition of an administrative time cost burden. But it doesn’t affect the decision to hold a licence. People will do it anyway. So moving licence renewal to online reduces the red tape burden and frees up an hour for other productive activity, but has no effect on the basic behavioural choice to renew a licence or not.

But consider the red tape burden for opening a restaurant, adding a house extension, or starting a company. In these instances the red tape burden is such that some people will change their behaviours to avoid it.

Those red tape burdens distort economic decisionmaking. People often walk away from the planning, employment, health and safety, food handling, disability provisions and other requirements in setting up a restaurant. They walk away from extending their home when they encounter their local council’s planning requirements. They walk away from starting a company when they have to deal with ASIC, ATO, state registries, and trademarks. It may not be the content of the regulation that discourages; it may be the time and dollar cost alone.

These examples have large measurable red tape burdens for people who keep going. Across all types of red tape cost: administration time, fees and charges, substantive action to comply, and delay costs.

But they also have an unmeasured red tape impact – the impact on stakeholders who are unwilling to engage at all. And that cost isn’t captured in any red tape cost model, because no-one knows who gives up before they start. These discouraged economic actors are the unseen and unmeasured victims of red tape.

The Red Tape That Does The Most Damage

This section discusses the economic concept of elasticity of demand with respect to a price, and assumes that there is demand for a regulatory good (such as a licence, or regulatory approval) and a cost for that regulatory good – the red tape burden it imposes. Red tape burden is a price to the stakeholder. Regulatory approval is a service the stakeholder demands. How much changes in the red tape burden affect demand for regulatory approval is the elasticity of regulatory demand with respect to red tape.

Now consider a case where two different regulations (A & B) have the same number of stakeholders affected (100), and same red tape cost – say an hour of admin time and a fee of $1000. Total burden for each regulation equals $105,000 at $50 per hour admin time: 100 x ($1,000 + $50).

Two regulations with the same notional red tape burden
Fee Admin Time
No. Stakeholders Notional Red Tape Burden Burden After Enacted
Regulation A
$1,000 1 hour 100 $105,000 $105,000
Regulation B
Theatre Groups
$1,000 1 hour 100 $105,000 Nil

But in this case, only one regulation has an effect on people’s behaviour. One hundred companies will ‘spend’ an hour and $1000 for Regulation A without blinking. One hundred amateur theatre groups will be discouraged by the hour and $1000 of Regulation B and not apply at all.

On any economic or common sense view of the two regulations, eliminating the burden of Regulation B is more valuable than eliminating the burden of Regulation A, because Regulation B creates more substantial economic distortions. The companies will pay the price and continue. The theatre groups simply won’t exist.  But the two regulations’ notional burdens are equal under the Standard Cost Model ($105,000).

Worse, once the regulations are enacted, only the burden of Regulation A will be measurable. Regulation B will have no measurable burden because it has discouraged anyone from trying to meet it. In essence, it’s as big an impact as you can get, but isn’t captured or measured at all.

This reveals a major weakness in the Standard Cost Model for red tape, and suggests a second way of prioritising red tape reduction.

Red Tape Reduction – More than just burden

The higher the Regulatory Demand Elasticity, the more people are dissuaded from applying by red tape. The theatre groups of Regulation B have very high elasticities.

The lower the Regulatory Demand Elasticity, the less likely people are to care about red tape. The companies of Regulation A have very low elasticities.

This isn’t rocket science.

In short, a red tape burden is a really bad burden when it is applied to a regulatory good with highly elastic demand.

Not all red tape burdens are equal. And right now the way we measure red tape doesn’t reveal that at all.

Meaningful red tape reduction has to take into account effects of red tape that aren’t captured under the model of red tape burden that is currently being used.

The Payoff for Recognising Varying Elasticities of Regulatory Service Demand

There are several benefits from taking the elasticity of regulatory demand into account. If you use guesstimates to guide reform projects, you can:

  • highlight areas where economic distortion due to red tape may be the greatest
  • prioritise red tape reduction efforts across projects with similar imposed red tape costs
  • predict reform impacts on regulator workloads
  • predict reform impacts on specific sectors, markets and activities
  • minimise economic distortions in general.

This is not a call for finely-estimated regulatory elasticities. What a waste that would be. Rather, it is a call to realise the cost estimating models for red tape are deeply flawed, and that supplementing them by taking into account the discouraged economic actor will give a far better indication of red tape impacts on people.

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