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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.

Trump's "One In, Two Out" Policy

On Monday, November 21st, President-Elect Trump outlined the policies he plans to pursue in his first 100 days in office. In a widely posted video, he said the following:

 

“I’ve asked my transition team to develop a list of executive actions we can take on Day 1 to restore our laws and bring back our jobs . . . These include the following . . . On regulation, I will formulate a rule which says that for every one new regulation, two old regulations must be eliminated—so important.”

 

This pledge is also part of Donald Trump’s Contract with the American Voter, which can be seen on-line at https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf

Although no more specifics have yet been provided by the Trump transition team, this regulatory reform concept, known as incremental regulatory budgeting, is not new. Some form of it has been adopted in a few other countries. In the USA, past presidential administrations (e.g., Carter, G.H.W. Bush) have identified it as an intriguing reform idea. Congress has also shown occasional interest over the past few decades. In recent years, Congress has held hearings on the topic, legislation has been drafted (by Senator Warner, who never introduced it) and introduced (by Senator Rubio and Rep. Scalise in 2014, and by Senator Mike Lee in 2016), and the idea was included in the House Republican Task Force on Reducing Regulatory Burdens in June 2016.

The remainder of this article briefly describes the concept, the experience of other countries, and the policy choices that the Trump Administration must face in implementing the policy.

Depending on the details, this could be the most significant reform of the federal regulatory process since the establishment of a centralized regulatory review function (i.e., the OMB Office of Information and Regulatory Affairs, or OIRA).

The Concept

Christopher DeMuth, former OIRA Administrator and former President of the American Enterprise Institute, is credited with championing the concept of a regulatory budget in the 1970s. Modeled after the federal government’s fiscal budget, a regulatory budget would work in a similar manner. To quote DeMuth (1980):

 

The regulatory budget would operate by close analogy to the conventional fiscal process. Each year (or at some longer interval), the federal government would establish an upper limit on the costs of its regulatory activities to the economy and would apportion this sum among the individual regulatory agencies. This would presumably involve a budget proposal developed by OMB in negotiation with the regulatory agencies, approved by the President, and submitted to Congress for review, revision, and passage. Once the President had signed the final budget appropriations into law, each agency would be obliged to live within its regulatory budget for the time period in question. The budget would cover the total costs of all regulations past and present, not just new ones

 

Indeed, the idea for the regulatory budget stems from a reasonable question: Why should the federal government develop a budget for its own expenditures yet have no limit on the cost it imposes on the American people via regulation?

Critics of a regulatory budget point out that, unlike fiscal expenditures, regulatory costs are known only crudely through ex ante estimation and even then only for a subset of all federal regulations issued. There is no accounting for actual expenditures of regulatory compliance costs, and it would be very difficult to develop such an accounting system (which, ironically, would add to regulatory burden). How could one distinguish between costs due to regulation versus costs that might have occurred even in the absence of regulation? (For example, an automobile manufacturer might have added some auto safety features even in the absence of a regulatory requirement to do so.)

A variation of the regulatory budget concept, known as incremental regulatory budgeting (also called a partial regulatory budget or regulatory PAYGO), avoids many of the pitfalls associated with a regulatory budget. Under incremental regulatory budgeting, each regulatory agency must adhere to a policy that for every new regulation it issues, it must remove one or more existing regulations. This concept avoids the arduous task of setting an aggregate budget and apportioning it out among agencies. (It also avoids the need for any action by Congress.) However, like a regulatory budget, it requires a standardized methodology that can be applied consistently across agencies.

In his Congressional testimony from December 2015, former OIRA Administrator John D. Graham (now Dean at the Indiana University School of Public and Environmental Affairs) dispelled the major arguments against a regulatory budget: that a regulatory budget is not feasible because the true cost of regulation is unknown (incremental regulatory budgeting, however, is feasible), that a regulatory budget is not needed because the most costly rules are already subject to cost-benefit analysis (CBA, however, is no panacea; there is no limitation on aggregate cost of regulation, and the quality of CBA can vary by rule and by presidential administration), and that a regulatory budget ignores benefits (not true; benefits are fiercely debated when costs are constrained, just as in the fiscal budget process). Graham concluded that incremental regulatory budgeting is an appealing concept and could be implemented as a pilot project right away and expanded later.

Experience of Other Countries

A few other countries have implemented or experimented some form of an incremental regulatory budget, among them the United Kingdom, Canada, The Netherlands, Australia, Denmark, Norway, and Portugal. Here are some details about the three most publicized efforts:

United Kingdom. The British coalition government implemented a “One In, One Out” policy in 2010, a “One in, Two Out” policy in 2013, and a “One in, Three Out” policy starting in Spring 2016. The focus is on domestic regulatory costs to business and to civic organizations. There are exclusions for tax, civil emergencies, spending decisions, fines and penalties, and financial systemic risk (i.e., banking regulations). European Union (EU) regulations are off limits except to the extent the UK is going beyond EU minimum standards. The UK also imposed (initially from 2011-2014) a moratorium on regulation of micro businesses (i.e., small businesses with fewer than 10 employees) with a waiver process based on urgency. A committee of experts (economists, etc.) oversees agency estimates of burden to ensure consistency against an objective, standardized methodology. A cabinet-level committee must approve the “out” regulations proposed by each agency that issues a new rule.

Canada. Since 2001, the province of British Columbia (BC) has employed incremental regulatory budgeting with respect to regulatory paperwork. It first created a baseline of regulatory requirements, set a “one in, two out” policy for the first three years, and then a “no net increase” pledge that has been extended several times. Since its inception, there has been a 43% reduction in regulatory requirements compared to the initial baseline. At the national level, then-Prime Minister Harper attempted to replicate the BC experience (the baseline, however, is not just the number of regulatory requirements but also the cost of regulatory paperwork) by creating a “One-for-One” rule. After a two-year pilot phase, the policy was expanded and even adopted via legislation (in April 2015). Thus far, the nation has reduced regulations by 19, with tens of millions of Canadian dollars in savings. It is important to note that the scope of the Canadian effort (administrative burden, which is roughly equivalent to the USA paperwork burden) is narrower than that of the United Kingdom (net costs on business from all regulatory requirements, not just paperwork).

The Netherlands. Initially focused on reducing administrative (i.e., paperwork) burden and then broadened to include compliance burden, The Netherlands has been a leader in Europe on regulatory reform. The unique features are a quantitative target reduction goal coupled with use of a standard methodology (the OECD Standard Cost Model), a link between regulatory reform goals and the budget cycle, and creation of an independent watchdog organization. From 2003-2007, The Netherlands achieved a 20% net reduction in administrative (paperwork) burden. The government established a second target of 25% additional reduction in regulatory (paperwork plus compliance) burden for 2012-2017.

These examples, and those of a few other countries, show that an incremental regulatory budget is feasible and that there are various ways that it can be implemented.

Implementation Challenges

The experience of these countries suggests a series of questions that the Trump Administration will have to answer/address as it designs its new policy: 

  • Is the goal to reduce regulatory costs or the number of regulations?
  • What is the scope of new regulations subject to this policy--paperwork burden or the more encompassing compliance burden? Will the policy apply to each new regulation (no matter how small an impact), each new major regulation, each new major regulation with certain exceptions (for example, a national security exemption), etc.?
  • Is the focus on reducing regulations or regulatory costs on for-profit businesses, non-profits, state and local governments, or some combination and/or subset of these? Will regulation of individuals be exempt, as it has been for the countries that have experimented with this reform?
  • Are all agencies subject to the policy (e.g., including those from independent regulatory commissions)? In the USA, the President has less control over independent regulatory commissions such as the FCC and the Federal Reserve.
  • Must the issuing agency identify its own regulations or regulatory burden to be eliminated? Or can the regulations to be eliminated be those from other agencies (and, if so, who makes this decision)?
  • What standardized methodology will be employed (and who will develop it) to ensure an apples-to-apples comparison of regulation and/or regulatory burden? Will the USA adopt the OECD Standard Cost Model? Or will the USA employ annualized cost estimates that are currently used by OMB in its annual report to Congress on the costs and benefits of federal regulations?
  • At what point in time will this new policy begin? How long will regulatory agencies have to identify old regulations to be eliminated or change? Will the public be given an opportunity to help identify candidate regulations for elimination?
  • Can new rules go into effect immediately while the regulatory agency works through the process to change or eliminate old regulations? Or should each new regulation await the elimination of two old regulations before it can go into effect?

As this list of questions implies, implementation issues are not simple to resolve. In a November 23, 2016 article for Forbes on-line, former OIRA Administrator Susan Dudley (now Director of the George Washington University Center for Regulatory Studies) outlined certain implementation challenges that the Trump Administration must face. One is the choice of estimating only direct compliance cost or also including indirect costs; unique problems arise, depending on the choice. Another challenge relates to timing: a new rule can go into effect immediately, but it will take years to alter or eliminate existing regulations, and the final burden reductions may be less than originally anticipated.

Other implementation challenges can be envisioned. For example, let’s assume OMB will be placed in charge of managing the new policy. The OMB regulatory office will need to develop the methodology, develop guidance for regulatory agencies, ensure compliance, and maintain the ledger. Current staffing of this office (which reviews all significant regulations before promulgation) is approximately 48 FTEs, a number that is arguably insufficient for its current duties, let alone for additional duties.

It is likely that some answers to these implementation questions will be forthcoming, perhaps in the form of a Presidential executive order. Nevertheless, an executive order is not likely to address all the questions (such as the methodology for standardizing estimates of regulatory burden), and agencies will need the specifics, training, and time to plan for implementation. Do not expect this new policy to hit the ground running once it is formally announced. It will take months, if not years, to put this system in place.

 For Further Reading:

Clyde Wayne Crews Jr. 2016. Toward a Regulatory Budget: The Pitfalls in Quantifying Regulatory Costs and How to Avoid Them, Competitive Enterprise Institute.

Christopher C. DeMuth et al. 1979. “The Regulatory Budget as a Management Tool for Reforming Regulation,” Chapter 1.  Joint Economic Committee. U.S. Congress.

Christopher C. DeMuth, 1980. “The Regulatory Budget,” Regulation, March-April, 1980.

Susan E. Dudley. 2015. Can Fiscal Budget Concepts Improve Regulation? George Washington University Regulatory Studies Center. Working Paper.

Susan E. Dudley. 2016. “President-Elect Trump’s Two-for-One Plan To Reduce Regulatory Accumulation,” Forbes on-line, November 23. http://www.forbes.com/sites/susandudley/2016/11/23/president-elect-trumps-two-for-one-plan-to-reduce-regulatory-accumulation/#6627ec327b81

John D. Graham. 2015. Testimony. Congressional Hearing:  The Need for Regulatory Budgeting. Committee on the Budget, United States Senate, December 9.

Nick Malyshev. 2010. “A Primer on Regulatory Budgets.” OECD Journal on Budgeting, 3: 1-10.

OECD. 2005. International Standard Cost Model Manual.

Jeffrey A. Rosen and Brian Callanan, 2014. “The Regulatory Budget Revisited,” Administrative Law Review, 66(4), 835-860.

Sean Speer. 2016. Regulatory Budgeting: Lessons from Canada. R Street. R Street Policy Study Number 54.

UK Department for Business, Energy, & Industrial Strategy. 2015. Better Regulation Framework Manual, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468831/bis-13-1038-Better-regulation-framework-manual.pdf

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