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 Big Winners under the Trump Regulatory Budget

President Trump is the first president to impose a regulatory budget on executive branch agencies. For FY2017, the incremental cost of all new regulations must be no greater than net zero, according to Executive Order (EO) 13771, which was issued on January 30th. The EO also requires each executive branch agency to remove two old regulations for every new one that is added, and to fully offset the cost.

Who will win under such a regulatory budget? Innovators. Specifically, firms that seek to introduce new products and services into the market—but are stymied by outdated regulations—are likely to fare the best.

And here’s why. It’s all about opportunity cost.

In a regulatory context, opportunity cost is how resources that are directed by regulation (e.g., compliance dollars) would otherwise be utilized in the absence of the regulation. Regulators aim to minimize opportunity cost (and maximize net benefits) because to do otherwise is to regulate sub-optimally. OMB has determined that it will use the concept of opportunity cost as the accounting metric under the Trump regulatory budget. OMB has developed extensive guidance for agencies to calculate the opportunity cost of regulation, and more is to come.  

Opportunity cost is especially high—and difficult to justify—when federal regulators prevent or delay a beneficial product or service from entering the marketplace. If the potential market is large enough, and the regulation is outdated because it was based on old technology, then reform becomes politically attractive.

Consider the following three examples:

  • The Federal Aviation Administration (FAA) regulates commercial use of unmanned aerial vehicles (UAVs), or drones, to manage air traffic and ensure safety, but its restrictive regulations prohibit many beneficial uses of drone technology. FAA has a waiver process where it considers exceptions on a case-by-case basis, but the rapid development of UAV technology (and reduction in consumer prices)—and the limited capacity of regulators to make case-by-case decisions—is putting pressure on the agency to be more accommodating. It is not hard to see why: FAA estimates that the number of commercial UAVs will increase, on average, 58% per year over each of the next five years.
  • Technology to support highly automated vehicles (HAVs), including self-driving cars, is rapidly advancing. In November 2015, Google sent a letter to the National Highway Traffic Safety Administration (NHTSA) detailing the many existing regulatory requirements that act as a barrier to entry (e.g., references to a human driver in the regulations) and seeking helpful interpretations of regulatory requirements, known as Federal Motor Vehicle Safety Standards. NHTSA granted some these requests, but confirmed that some require regulatory changes and others may be addressed through exemption petitions. In September 2016, NHTSA described its HAV policy, essentially a “road map” describing the regulatory path it intends to take. The potential social benefits of self-driving cars include fewer car accidents, increased fuel efficiency and reduced greenhouse gas emissions, and the value of a human driver’s time. NHTSA will have to weigh these significant social benefits against any safety risk associated with the new technology, including cyber-security risks.
  • Some biotechnology products (such as transgenic organisms) have long been subject to pre-market review by federal regulators. Such products can languish for more than a decade awaiting government approval due to uncertainty over safety standards and the rapidly evolving science of genetic engineering. Most recently, FDA and USDA have proposed to regulate gene-editing techniques such as CRISPR-Cas9 technology, a disruptive innovation that has created remarkable possibilities across a wide range of products and services in medicine, agriculture, and many other fields.

In each of these cases, the potential market is extremely large, the social benefits are relatively high, and existing regulations are failing to keep pace with technological advances.

Admittedly, there are reasons why regulators might wish to take a precautionary approach to regulating new products, and the public is often wise to insist on some degree of government review. But if the worthwhile regulatory objective can be achieved without sacrificing the tangible public benefits from innovation (e.g., by requiring government review to be of a limited, but reasonable, duration or by limiting the scope of government review to products posing a significant risk), then there is no good reason to prevent the market from determining the future of a new technology.

And this is why innovators should be very interested in the Trump regulatory budget. They can make a strong case for eliminating or modernizing outdated regulations.

Another reason why innovators are likely to win is competition. Make no mistake about it—there will be more de-regulatory proposals than political will, and Administration officials will have to choose from among hundreds of ideas backed by powerful interest groups, while equally powerful interest groups line up in opposition. To a casual observer, this competition may resemble an on-line March Madness pool—countless hopeful participants, but few winners.

To those hopeful participants, I say there is a viable path forward, it is based on the concept of opportunity cost, and innovators will win—along with consumers of these new products and services.

Let the competition begin.

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