High stakes in regulating electronic commerce

At a time when interest is increasing in Washington to regulate electronic commerce - sales of products via the Internet, for example - it seems desirable to reflect on the US experience with regulating economic activity. The stakes could be high. Even if the currently explosive growth rate of electronic commerce slows substantially, a significant 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 business.

Lesson No. 1: Do not rush to regulate. Once a regulatory regime is in place, it is extremely difficult to reform. Those who benefit from the regulation constitute a powerful - and often very emotional - lobby against change. Unfortunately, the tendency is for Congress to devote a large amount of time and energy to highly publicized hearings on the nature of "the problem." The actual writing of the law is frequently such a hasty matter that senators and representatives don't have a fully drafted bill in front of them when they vote on the new regulatory statute. The staff is still working on the details.

Lesson No. 2: Don't ignore the unexpected side effects. Virtually every regulatory statute generates a wide variety of consequences, many of which were unintended or unexpected by the proponents of the law. This means that the 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 extremely knowledgeable about the likely practical consequences.

Lesson No. 3: Don't assume that "market failure" will be fully cured by government intervention. Shortcomings in the private sector - such as inadequate information to consumers and other "market failure" - are typically cited as the basic rationale for government involvement in the economy. This, of course, may be a very legitimate argument. However, the enthusiasts for the proposed new law usually overlook the other side of the case - inadequacies in the bureaucratic processes of the public sector which can be labeled "government failure." Nevertheless, until the analysis is made, the open-minded citizen doesn't know whether the case for the new proposal is compelling or not. This leads to the next lesson from the past.

Lesson No. 4: Do carefully weigh the pluses and minuses of the proposal, both quantitatively and qualitatively. This lesson does not automatically clinch the case for performing a quantitative benefit/cost analysis, but it does lead in that direction. As a longterm user and reviewer of benefit/cost analyses, I would caution the reader - before embracing the conclusions - to examine the key assumptions underlying the analysis as well as the reasonableness of the methodology and the competence of the analyst.

But it is far more than a statistical or accounting matter. After all, many of the effects of regulation cannot be readily quantified, especially in terms of dollars. What is required is careful judgment. Thus, the most appropriate analysis under many circumstances may simply be a considered conclusion that the benefits of the new regulatory statute are worth the costs. A word of caution: that 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.

Lesson No. 5: If in doubt, don't regulate. There is no shortage of laws, rules, and regulations already on the books. They literally fill a good-size library. Moreover, the existing regulatory system taxes the limits of the government's enforcement capability. Perhaps the elimination of some archaic rule, regulation, or statutory requirement would adequately meet the needs of those who now advocate government regulation of electronic commerce. Thus, the now-extinct Interstate Commerce Commission goes unmourned. If Congress does legislate in the area of electronic commerce, it should take account of the lessons of past regulatory experiences.

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