Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

The Best Idea to Reform Regulation

One of my college professors was known to say:  “Today’s reform is tomorrow’s problem.“ 

He had a point.  Take regulatory reform, for example.

The new Republican-controlled Congress is making regulatory reform a top priority.  Recently, the House of Representatives passed the Regulatory Accountability Act (RAA) for at least the third time in as many years.  (The President has already threatened a veto.)  The RAA, which would modernize the 1947 Administrative Procedure Act, is just one of about two dozen bills from the last Congress designed to reform the regulatory process to make it less costly and/or more beneficial.  These bills include such ideas as forcing Congress to approve the biggest regulations before they could go into effect, requiring all federal agencies to conduct cost-benefit analysis for every new major regulation, and identifying and eliminating outdated regulations that no longer make sense.

Some of these proposals are laudable and deserving of enactment.

But they also raise important questions worth contemplating.

Approve each major rule through an act of Congress?  This is clearly a second-best solution.  Shouldn’t Congress have been more circumspect when it bestowed regulatory discretion upon an agency in its authorizing statute?

Require a cost-benefit analysis for all major rules?  Sounds like a good management practice.  Aren’t agencies required to do this already?

Eliminate outdated regulations?  No argument here.  But shouldn’t the authorizing statute have been written to minimize the likelihood of outdated regulations?

At this point, you can see where I am going.  There is one reform idea that is head and shoulders better than the others:  Congress ought to write better statutes

Badly written statutes lead to bad regulation, and smart regulation starts with a carefully constructed statute.

If this is so, and I think it is, then how should Congress construct laws that create regulatory programs?  Are there any good rules of thumb?

Let me suggest three.

First, Congress should leverage markets to encourage good behavior and refrain from regulating where markets are likely to remedy the problem over time.  As a threshold matter, the presence of a market failure or other compelling public need should drive the creation of a regulatory program.  Otherwise, markets can be expected to improve, if not remedy completely, the problem over time.  For example, the Farm Bill required USDA to issue regulations establishing country of origin labeling for beef, fish, peanuts, etc.  It is not clear to me that this program was or is necessary.  Sellers who believe consumers will favor their product if information is provided on country of origin have every incentive to provide that information absent any government mandate.  And if country of origin implies concerns about safety or nutrition, there are already plenty of regulatory programs designed to protect consumer health and one more is not needed.

Second, Congress should require regulatory agencies, when crafting regulations, to utilize performance standards that are measurable/verifiable.  Such standards provide the most flexibility to regulated entities while still ensuring that regulatory objectives are met.  Consider the very real safety issues associated with leaks of propane and natural gas.  One could regulate prescriptively by hardening every container, pipeline, vehicle, building, furnace, stove, etc. used to convey such gases to consumers.  A more elegant (less costly, more beneficial) solution is to require the odorization of gases through the addition of inert substances that are easily detected by the human nose.  That is precisely the performance standard used today.  And it has worked well.

The drawback of mandating specific technology in a regulation is that technology changes over time.  A technology standard can become obsolete fast and serve as a barrier to innovation.  End result:  the regulation becomes outdated at some point.  Not so a performance standard. The drawback to a performance standard is that we sometimes cannot measure performance easily.  In such cases, agencies fall back on (less-than-optimal) requirements that serve as a (poor) surrogate for performance but are easily measured (enforced).

Third, Congress should require an agency to issue a major regulation only after the Agency is informed by cost-benefit analysis.  Cost-benefit analysis is a way to think about the likely consequences of a regulation---both good and bad—to maximize the upsides and minimize the downsides.  A good analysis covers a range of regulatory alternatives and concludes that one has greater net benefits than the others.  This is not a revolutionary idea.  Every President since Ronald Reagan has required cost-benefit analysis of each major regulation issued by an agency under the control of the President.  The bad news is that 20% of all major regulations are issued by agencies not directly under the President’s control (think SEC, FCC, FERC, and other regulatory commissions).  These agencies seldom employ cost-benefit analysis unless Congress required them to do so.  And Congress seldom did.

As the new Congress gets underway, let’s watch what happens when and if it passes any laws creating new regulatory programs or revising old ones.  If it follows these three recommendations, the new Congress may be known for regulatory reform after all.


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