On July 24, at the peak of a hot summer, a local news station in North Carolina reported on a new example of the sharing economy. It’s a swimming pool app that connects homeowners saddled with expensive swimming pools they rarely use to neighbors who’d like to take a peaceful dip in a private setting without all the hassle and noise of public pools. The news told viewers they could “Use the app to rent a pool for the day.”
The app, Swimply, has been described as “the Airbnb of pools.” That description says more than you might think. It gets across the basic idea — a service that links people who want a pool for the afternoon with pool owners willing to rent out — while illustrating just how ingrained this kind of service has become.
The news report acknowledged as much in its introduction: “It seems like you can rent absolutely anything from your friends and neighbors these days, from their car sitting unused in the driveway to their house.” Viewers then met Tim, who “shared a problem with many across the county: an expensive swimming pool that goes unused much of the time.” Meanwhile, “schools are closed and neighbors need things to do.”
Without meaning to, the report has described a situation where a mutually beneficial trade has been prevented by what economists call transaction costs. Tim has a desirable resource that is being underutilized. Tim might not even know he could earn money from it. If he did, how could he find the people in his community who would like to rent a quiet pool for a few hours? Suppose he did. How could he trust them not to trash his place? And how could they trust him to provide a clean pool? How could they mutually agree on liability and other worrisome matters?
Not recognizing a trade opportunity, recognizing it but not knowing how to bring it about, not having the time to search out potential trading partners, not being able to foster trust between potential trading partners, and not being able to reduce uncertainty in the potential agreement are all transaction costs that keep mutually beneficial trades from occurring. Without a platform for reducing those costs, Tim’s pool would continue to be used less than its full potential, and Tim’s neighbors would resort to less enjoyable pursuits on a hot summer day.
Here, however, Tim signed up for Swimply and in two days reported making money on his pool. The pool-goers reported happiness with the transaction, with one describing Tim’s pool as “a beautiful atmosphere, kind of a mini getaway.” The app brought about this mutually pleasant arrangement by providing the platform that reduced those transaction costs, including the uncertainty of liability (the report explained that users “sign liability waivers that prevent them from pursuing pool owners in case of an accident”).
A little over a month later, the same local news station found itself reporting on Swimply again. Something unpleasant had surfaced: regulatory dark matter.
On August 31, the station reported that “People renting backyard pools told to stop operating ‘public pools.’” The state Department of Health and Human Services (DHHS) had issued guidance stipulating that renting out a private pool via Swimply made it “public” and therefore subject to all state regulations binding on public pools. This guidance was distinct from state law that clarifies that a swimming pool that is part of a home rental is considered private. Rent the home, and the pool is private: That’s the law. Rent the pool, and it’s public: That’s the guidance.
The distinction introduces a ton of costs making pool rentals unworkable. A Swimply host received a letter from his county warning him that he needed “a public pool plan review, a commercial grade pool and an operational permit from the county to keep operating as a public pool.” DHHS told the news station that “North Carolina public pools must comply with construction standards, disinfection, safety protocols, and related requirements that help to reduce swimming-related illnesses and injuries.”
So how did it come about that Swimply rentals are regulated as “public” pools? Technically, they’re not. It’s through agency guidance, which is a rule that isn’t a rule — what regulation expert Clyde Wayne Crews Jr. calls “regulatory dark matter”:
“Regulatory dark matter” refers to the thousands of executive branch and independent agency actions including guidance documents, proclamations, memoranda, bulletins, circulars, letters and more that are subject to little scrutiny or democratic accountability but carry practical, binding regulatory effects.
Essentially, DHHS wants to regulate pool rentals without going through the process of formal rulemaking. So the agency releases a guidance document telling impressionable county officials and homeowners that, as far as they’re concerned, they’re treating Swimply rentals as if they have a rule in place. There’s no actual rule, but do you want to take that chance? The uncertainty of an expensive regulatory intervention introduces a sizable transaction cost.
Regulatory dark matter is a serious problem of an encroaching administrative state, an egregious affront to liberty as well as to open, accountable governance of the people, by the people, and for the people. As Crews explained, “with regulatory dark matter, there are literally tens of thousands of documents that agencies can use to circumvent Congress, and the Administrative Procedure Act’s (APA) public notice and comment requirements, allowing the federal government to inject itself more and more into our businesses, states, communities, and personal lives.” Then consider we also have similar stealth regulatory expansions in all fifty states.
Whether federal or state, the solution is the same, however. Rulemaking is a limited lawmaking power delegated to agencies by elected legislators (in Congress and state legislatures) to implement their enacted laws. Legislative bodies therefore have authority over guidance documents, interpretive statements, and the rest treated like official rules without any formal adoption as rules. They should pass laws requiring the agencies to identify all such rule-like material and then either formally adopt or retract them. As Crews observed regarding federal regulations, the compliance costs of known regulations have been estimated around $2 trillion. What about for all the unknown, unofficial, but still binding regulatory dark matter? Those are murky waters indeed.