How the federal regulation cycle affects the real estate industry

Real Estate Issues, Dec 1995 by Ordway, Nicholas, Friedman, Jack P, Harris, Jack C

Stage One: Creation And Implementation

A system of federal government regulations often begins with good intentions. A problem is identified that is harmful to the public and is not being addressed by state governments. For example, the problem of DDT and pesticides was identified in Rachel Carson's classic book Silent Spring (1%2). This exposure resulted in a public outcry for environmental legislation some of which is listed in this article. Other motivations for new legislation might include economic benefits for the special interest groups which are favored by a political party in power Often model legislation from specific states or other countries can lead to "me-too" laws on the federal level.

Laws passed by Congress usually set broad policy and require implementation by an administrative agency. If a law does not fall under the purview of an existing agency, a new one may need to be established. Stage I is illustrated in Figure 1.

Agencies dealing with popular issues, such as the environment, attract professional administrators as well as idealists recently out of law schools and graduate programs. Often the benefits of the regulations far outweigh the costs on the regulated. Initial regulations generally attack obvious abuses underway in the free market. Such overt abuses usually can be quickly corrected at relatively low cost. As indicated in Figure 1, this causes a net social benefit reflected by A-B. At point B the et social benefit is the greatest. This point is indicated when the protection function created by the regulations becomes tangent to line H, which is drawn to run parallel to the cost function line. The quantity of regulation reflecting the greatest net benefit is indicated as R^sub^n.

Stage Two: Bureaucratization

Due to the nature of state and/or federal regulation, new administrative roles continue to be added even when the net social benefit begins to shrink. The key is to increase the protection or benefits to the special interest groups involved. Once the net social benefits begin to diminish, the bureaucratization stage begins.

Bureaucratization occurs for several reasons. As described in Philip K. Howard's book The Death of Common Sense (1994),(1) "Our regulatory system has become an instruction manual. It tells us and bureaucrats what to do and how to do it. Detailed rule after detailed rule addresses every eventuality, or at least every situation lawmakers and bureaucrats can think of."

The major stakeholders who contribute to bureaucratization are the bureaucrats themselves. The fixation is on paperwork, and make-work becomes the pattern for many of these employees. However, the bureaucratic operational rule is that if a regulation does not permit the firm's action, it is probably illegal and the regulated business firm must prove it has acted correctly. Bureaucrats don't want to make decisions for fear of setting a precedent. Often decisions are delayed or not made. Bureaucrats also make rules to make their jobs easier and more convenient however, this can result in considerable expense for the private sector.