March 20, 2020 5:08PM

Coronavirus and Regulation

Crises often illuminate “inefficient” public policies—ones with costs that outweigh their benefits. Society can tolerate (and may not even notice) them in ordinary times, allowing the policies to continue and protect and enrich special interests. But in crises, their costs become less tolerable.

Because of the coronavirus, the U.S. economy is experiencing simultaneous negative shocks to demand and supply. The demand shock is broadly understood: “social distancing” is causing people to avoid (and governments to close or curtail) mass transit, restaurants, personal services, and other businesses. The supply shock is less recognized but more troubling: quarantines and worker illness threaten to disrupt supply chains for goods that are in strong demand, including medical supplies, food, disinfectants and cleaners, and energy.

Inefficient regulations exacerbate this supply shock, limiting production and raising prices. Chris Edwards and Jeff Singer have written about some of these regulations that governments are now hastening to suspend in order to boost supply.

Cato’s policy journal Regulation examines government rules on economic activity, points out inefficient ones, and suggests reforms. In times like these, improving any regulations would be helpful; however, several articles over the last several years are especially relevant to the coronavirus crisis.

Below the jump is a list of these articles, with short summaries of each and links to the full articles. The list is divided into two sections: rules whose reform would help immediately, and rules whose reform would help in future crises. For federal and state policymakers looking for responses to the current crisis, this list is a good place to start.

Reforms that would help immediately:

Liberalize medical licensing: Academic research shows that licensure requirements on doctors and other medical professionals do little to promote public safety but instead serve to reduce competition within the professions. Private ordering—provided by malpractice insurers, privilege-granting hospitals and medical practices—does the hard work of separating competent health care providers from dangerous ones. State legislatures should suspend licensing requirements for insured health care professionals; if they do not, Congress should use its authority under the commerce clause to overrule the states.

Reform occupational licensure generally: The need for more health care professionals, especially in places where the outbreak is intense, is obvious. This reasoning extends to non–health care professionals; the looming supply shock will affect all sorts of valued services. States should immediately liberalize their occupational licensing regimes; if they do not, Congress should use its authority under the commerce clause to overrule the states.

Remove trade barriers: President Trump’s recent trade wars place large taxes on foreign supply of all sorts of goods. These will be especially painful in the coming supply shock, hurting American consumers as well as domestic workers who will need foreign-sourced inputs. All trade barriers and tariffs should be dropped immediately, either by the Trump administration or by Congress overriding any White House veto.

Repeal the Jones Act: The 1920 Merchant Marine Act, better known as the Jones Act, requires that goods transported between American ports be transported on American-made ships. But the U.S. merchant marine’s ships are considerably scarcer, more expensive, and in worse condition than available foreign vessels. This raises freight costs and slows distribution in ordinary times; it is especially harmful in a supply shock. Congress should immediately repeal the Jones Act.

Suspend price-gouging laws: As distasteful as sharp price increases are in a crisis, they do induce increased supply and moderate demand. That will be especially important in the coming supply shock.

Recognize “free speech” protections for off-label drug use: Many medications are used “off label,” meaning for purposes other than what was approved by the Food and Drug Administration. This is legal; in fact, many important drug therapies are off-label uses. However, drug companies are prohibited by the FDA from discussing off-label uses with health care providers. In the current crisis, improving the flow of information about possible therapies is vital. The White House should immediately order federal regulators to respect the free speech rights of drug companies to inform health care providers of their products' potential off-label benefits.

Liberalize regulation of home-based businesses: Many states and localities have laws or regulations that limit or outright prohibit home-based businesses and work-from-home arrangements. These conflict with “social distancing” efforts to slow the spread of coronavirus. Congress should use its power under the commerce clause to immediately suspend these state and local laws and regulations, and states and localities should repeal these regulations.

Protect H-4 EAD: The Trump administration is attempting to end the H-4 EAD program, which allows legal immigrants to work and operate businesses in the United States. Ending the program would weaken the labor supply both by removing these immigrants from the labor pool and the thousands of U.S. workers that the immigrants employ. The Trump administration should halt this attempt immediately or else Congress should act to preserve H-4 EAD.

Preserve DACA: The administration’s effort to end Deferred Action for Childhood Arrivals (DACA) would result in many of these immigrants disappearing into the underground economy, increasing the risk of coronavirus transfer and reducing their availability for legal work. The Trump administration should halt this attempt immediately or Congress should act to preserve DACA.

Liberalize the funeral and other “death care” markets: Funerals, caskets, and other “death care” goods are expensive, in part because the industry is heavily regulated at the state level and competition is minimal. Congress, using its power under the commerce clause, should suspend these regulations, helping grieving families to better bear the costs of saying goodbye to loved ones lost to the coronavirus.

Reforms that will take time (though some can be implemented temporarily):

Alter FDA's ultraconservative approval culture: FDA reviewers have strong incentive to restrict access to new drugs and other therapies until there is extensive evidence that the therapies are safe. These incentives work against patients suffering painful or terminal diseases that have no effective therapy. In the past, FDA rules have granted some exceptions for such illnesses, AIDS and some cancer drugs being the chief examples. Some policymakers attempted to construct a broader policy for other therapies, but the resulting recommendations were not adopted. Policymakers should reconsider and adopt those recommendations.

End CON laws: Many states have “certificate of necessity” (CON) laws on health care (and other industries), limiting the supply of medical facilities in order to economically protect those that currently operate. These laws raise health care prices and reduce capacity that would be especially valuable in a crisis. Congress should use its power under the commerce clause to suspend state CON laws.

End attempts to tightly regulate laboratory-developed tests: The Centers for Disease Control’s refusal to permit non-CDC-developed coronavirus testing, even as the CDC’s own test proved faulty, is now recognized as a serious failure of the federal government in the current crisis. There has been a long-term push for laboratory-developed tests to be tightly regulated by the FDA. The White House should order that that push be abandoned and these tests be broadly permitted.

Expand medications that can be purchased "over the counter": Many medications, when introduced, are only available by prescription to ensure physician oversight of their use. In time, as the public demonstrates that these drugs can be used safely, some become available "over the counter" (OTC). However, many drugs remain prescription-only despite the public’s safe use. This raises the drugs’ cost, reduces public access, and makes poor use of medical professionals’ time and resources. Congress should direct the Food and Drug Administration to expand the drugs available OTC.

Refocus public health agencies on actual public health issues: In theory “public health” agencies promote public goods, such as containing contagious diseases. However, in recent decades, these agencies have increasingly devoted resources to private health matters ranging from smoking and food choices, to automobile use and firearms ownership. It’s unclear what sound justification public health officials can give for these new interventions; meanwhile these efforts distract from actual public health issues.

Reform labor regulations and slash red tape: Governments, especially at the state and local level, place hefty regulatory and reporting requirements on employers. These depress hiring and wages in ordinary times, but are especially onerous in economic crises like the impending supply shock. State legislatures should suspend many of these regulations immediately and later conduct extensive review and reform.