The Costs of Complexity in Policy Design

Authored By 
Gabe Scheffler
Blog contributor 
Policy Fellow

Complexity is difficult to define, let alone to measure. Yet judging by the sheer length of major federal laws, policies appear to have become more complex in recent years. A consolidated version of the Affordable Care Act is 974 pages; the proposed Waxman-Markey climate bill was 1,201 pages; and the Dodd-Frank financial regulation law is 848 pages. Yet since these numbers don’t include administrative regulations and guidance, they actually understate the scale of these reforms. Dodd-Frank alone mandates that 398 administrative rules be promulgated, and many of these rules are themselves quite significant. For example, the Volcker rule, which restricts proprietary trading, is around 1,000 pages. By contrast, many important reforms in the early twentieth century were quite concise. The Glass-Steagall Act was 37 pages, while the Federal Reserve Act of 1913 was only 32 pages.  

The most obvious problem with this trend of increasingly complex policies—which political scientist Steven Teles terms “kludgeocracy” —  is that they are inefficient. For the government, more complexity means additional resources poured into drafting, proposing, rewriting, defending, and enforcing laws and regulations. One manifestation of this is a surge in the number of regulators. In 1935, there were around 4,500 total employees at the FDIC, SEC, Office of the Comptroller of the Currency, and Federal Reserve, equaling about one regulator for every three banks in the U.S. Today, there are roughly 18,500 people working at these agencies—three regulators for every U.S. bank. Greater complexity also entails increased costs for individuals and businesses. For example, a survey estimated that complying with just the first thirty rules enacted under Dodd-Frank would require about 2,260,631 annual work-hours, equivalent to over 1,000 full-time jobs. Complexity has efficiency consequences for individuals as well: according to the IRS, the average American spends 13 hours annually complying with the tax code.

In a 2012 paper, Andrew Haldane, Executive Director of Financial Stability at the Bank of England, argues that complex regulations are also less effective than simpler ones. A recent World Bank report came to a similar conclusion. Haldane contends that the financial system would be better off if regulators focused on a limited number of indicators, such as the leverage ratio, which are easy to monitor and correlate with financial risk. Drawing on a wide range of experimental evidence on subjects ranging from the techniques that physicians use to diagnose heart attacks to those that detectives use to locate serial killers, he shows that in complex environments with lots of uncertainty, simple decision rules often outperform complicated ones

Policy complexity also exacerbates economic inequality in a variety of contexts, including financial regulation, taxes, and public benefits. Complex tax regimes and regulations place a disproportionate burden on the poor, since richer individuals and corporations are more likely to be able to afford help with minimizing their own financial burden while complying with the law. For example, the Economist reports that “[d]aily updates on Dodd-Frank from Davis Polk and Morrison & Foerster have become as important to many on Wall Street as newspapers.” 

On the other end of the economic spectrum, the complex web of eligibility rules for public benefits programs, such as the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) may deter eligible people from claiming benefits, either because they misunderstand the eligibility rules, because caseworkers misapply those rules, or because the procedural costs of applying are simply too high to be worth it. These concerns are particularly troubling for TANF, whose participation rate has declined significantly since the 1996 welfare reform law, and hovered at around only 30% in 2009.  This low participation rate cannot be attributed solely to procedural complexity—for example, changes in substantive eligibility criteria, along with exogenous factors such as economic growth and expansions in the Earned Income Tax Credit, may have played roles — but there is reason to think that the complexity of TANF’s eligibility rules and work requirements have had an effect as well. 

Finally, complexity undermines the public’s confidence and trust in government.  Through reducing transparency, complexity provides cover for concentrated interest groups to engage in surreptitious rent seeking, which in turn feeds the perception that government is corrupt. Complex laws also garner less popular support since they are harder to understand: polls have repeatedly documented that although many of the main provisions in the Affordable Care Act are quite popular, the law itself is still unpopular. While this paradox could be partly attributable to other factors, the fact that one of the main tactics of opponents of the ACA has been to repeatedly emphasize its length and complexity suggests that complexity is not associated with good governance in the public mind.