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.

Cutting Regulation without Sacrificing Public Protection

President Donald Trump wants to eliminate federal regulations. His January 30, 2017 executive order sets a target of “net zero” for the incremental cost of all new federal regulations in fiscal year 2017. And he has ordered regulators to eliminate two existing regulations for every new regulation (known as One In, Two Out, or OITO).

Critics are understandably worried that such de-regulation will lessen social benefits. Which raises the question: Can the President cut regulation without sacrificing public protection?

Yes, he can. The President has ample room to improve the efficiency of federal regulatory programs.

To see how, let’s first provide some context.

Federal regulators impose about $10 billion in new costs every year. The total stock of federal regulations imposes hundreds of billions of dollars in costs every year. While the exact number is uncertain, let’s assume for the purpose of this exercise that it is $500 billion. So every year, federal agencies add about 2% more to the cumulative cost of federal regulation.

The executive order aims to limit this annual 2% ($10 billion) increase to 0%.

A 2% cost reduction target is eminently achievable. Here’s how it will play out.

Agencies will first lower the cost of new rules so they do not have to cut as much out of their stock of existing regulations. And even when they are forced to issue a new rule required by statute or by court order, they will do so in the least-cost manner because the new executive order gives them that incentive. In other words, agencies get to set their own target, and for most agencies, that target will be less than 2%.

Then they will eliminate or cut back on regulations that are not contributing to the agency’s mission. Here are four categories of regulatory requirements that fit the bill:

  • outdated regulations that are no longer needed (due to technological advances, etc.),
  • redundant or duplicative regulations,
  • ineffective regulations that either address a problem that no longer exists or have made no progress in achieving the regulatory objective, and
  • regulations that penalize good performance (such as a requirement imposed on an entire sector instead of just on the bad actors).

If necessary, agencies will improve the cost effectiveness of existing regulatory programs by cutting benefits slightly to reduce costs greatly. Net benefits will go up, in accordance with one of Bill Clinton’s executive orders that is still in effect.

Agencies may also get an assist from Congress. Regulations eliminated under the auspices of the Congressional Review Act (CRA)—which allows Congress to disapprove a new federal regulation—count toward the targets set in the executive order.

And Congress can also eliminate regulatory costs without using the CRA. For example, last year Congress eliminated mandatory country of origin labeling (COOL) for beef and pork—a rule that was estimated to cost more than $1 billion annually when it was first issued.

So there you have it—cutting regulation without sacrificing public protection.

The reality, of course, is going to appear messy--especially at first. Interest groups will stake out their positions, and the noise will seem deafening. Scoring of existing regulations is hardly a straightforward exercise. And because of due process, agencies will take a long time to eliminate a bad regulation. But for those within the government who are tasked with implementing the executive order, the outlined approach represents the path of least resistance. Sooner or later, they will stumble upon this path.

And the public will have, every year, $10 billion more to spend on other things.

 

 

 

 

 

 

 

 

Public Comment on New Executive Order

On February 2nd, the White House Office of Management and Budget (OMB) issued interim guidance to federal agencies on Section 2 of President Trump’s January 30th Executive Order (EO), entitled “Reducing Regulation and Controlling Regulatory Costs.”

The OMB interim guidance clarifies that covered federal agencies must ensure that significant regulations issued between Noon of January 20, 2017 and September 30, 2017 impose a net incremental cost of zero unless otherwise required by law. Covered federal agencies must ensure that for every new significant regulation that imposes a cost, two existing regulations are eliminated. Regulatory objectives must not be sacrificed. And OMB is to serve as the referee to make sure agencies comply.

The EO raised many questions, and the interim guidance answered a few of the most important ones. Additional guidance will be needed (on other sections of the EO for FY2017, and for FY2018 and beyond). The purpose of this public comment is to (1) convey support for key components of the OMB interim guidance and (2) ensure that OMB is aware of all available implementation options as it moves forward. The focus of these comments is on regulation of businesses because that is the impetus behind the President’s EO.

Observations in Support of the OMB Interim Guidance

A few observations about the OMB interim guidance are especially worthy to highlight.

OMB Appropriately Narrowed the Scope of the EO

The new EO covers only “significant” rules—those that undergo OMB review in accordance with EO 12866 Section 3(f). (Of the roughly 3,500 regulations issued annually in recent years, only about 320 are considered significant rules.) Independent agencies—which issue about 15%-20% of the most costly rules—are excluded (but requested to voluntarily comply), as are “transfer rules”—those regulations governing income transfers from taxpayers to beneficiaries. Also excluded are certain kinds of regulations (i.e., those pertaining to national security, the military, a foreign affairs function, internal agency management, or only affect federal agencies).

It is appropriate and proper for OMB to narrow the scope in this manner given the enormous volume of federal regulation and limited resources of OMB to ensure compliance by regulatory agencies, which also have limited resources.  And although OMB could have looked backwards to create a starting point of October 1, 2016 (the beginning of FY2017), it chose a different starting point (Noon January 20, 2017) so as not to immediately put each agency in a deficit not of its own making.

The Transactional Requirement is Less Important than the Larger Policy Target

The transactional requirement (“One In, Two Out”, or OITO) is a general guide to achieve the larger policy target (an incremental regulatory budget of net zero). There appears to be some wiggle room in that agencies can apply the cost savings from eliminating existing requirements to offset the costs of new regulations without having to satisfy the net zero cost requirement for every single transaction (i.e., for each new significant rule). It is appropriate for OMB to focus agency attention foremost on this governmental-wide target because the transactional requirement is a means to an end and not an end in itself.

Benefits Matter

The interim guidance makes it clear that regulatory objectives are not to be sacrificed. This is very good news for public protections, and it makes efficiency (i.e., cost effectiveness) the watchword. Although it is not stated specifically in the interim guidance, the new EO, along with the interim guidance, effectively expands the requirement for cost-benefit analysis (CBA) from economically significant regulations (of which there are about 60 per year) to all significant regulations (about 320 per year) in FY2017. Therefore, OMB should inform agencies that it expects a regulatory impact analysis (RIA) to accompany each significant rulemaking in order to ensure a proper accounting under the EO.

Recommendations for Implementation of the Executive Order

The following recommendations will ease implementation of the new EO while adhering to its policy goals. 

OMB Should Leverage Existing Regulatory Processes

To the extent possible, agencies should utilize existing regulatory processes and mechanisms to implement the EO. This will reduce the learning curve and ensure that maximum attention is focused on increasing net benefits through reducing unnecessary regulatory costs.

The interim guidance does this by focusing on significant regulations and utilizing the established process for centralized review of significant regulations. But OMB can go further, for example, by repurposing agency retrospective review plans as a listing of future rules to be eliminated or changed in accordance with the EO. In essence, the retrospective review plan would become the “bank account” that an agency can withdraw from in order to pay for a new rule subject to the EO.

OMB Should Issue Guidance to Agencies on Appropriate Areas of Focus

OMB should issue guidance to agencies and the public on the kinds of regulatory requirements (i.e., the areas of focus) that are the strongest candidates for elimination or removal given the larger policy goal.

Ideally, the areas of focus represent potential opportunities for reform. Most importantly, opportunities identified under each area would either maintain or increase net public benefits.

The following focus areas meet this criterion:

A.   Outdated or duplicative requirements

B.   Regulations that penalize good performance

C.   Ineffective regulations

D.   Regulations that are not cost-effective per cost-benefit analysis (CBA)

Focus Area A includes regulation of products or services that no longer exist, or duplicative regulations from multiple agencies that aim to achieve the same regulatory objective. Focus area B includes regulatory programs that impose requirements not just on “bad actors”, but also on good performers (e.g., uniform requirements imposed on all firms in a sector irrespective of the firm’s performance). Eliminating such requirements will lessen the opportunity cost of such regulatory programs. Focus Area C includes regulations that are ineffective either because the [extent of the] original problem no longer exists for reasons apart from regulation or because the regulatory solution is found to be ineffective based on empirical evidence. Retrospective review efforts would likely yield additional examples. Focus Area D includes regulations that could be improved based on cost-benefit analysis (CBA) or a cost-effectiveness analysis.

Even within these areas of focus, there are certain kinds of regulations that have a disproportionate, negative economic impact, and OMB may wish to highlight these in some way (e.g., in the Unified Regulatory Agenda) or give greater weight to reducing their burden (e.g., allow elimination of a single regulation to count as multiple regulations for the purpose of OITO). For example, market innovation (as opposed to social innovation) is always sacrificed when regulation diverts discretionary resources of businesses toward mandatory compliance. Especially detrimental are direct regulatory barriers to entry such as permits, licenses, and new product approvals because the opportunity cost is relatively high. To the extent such regulatory barriers to economic activity can be reduced or lessened without sacrificing important public protections (i.e., the regulatory objective), market innovation will increase, which will have a positive effect on productivity, standards of living, economic growth, and job creation.

Such reforms benefit entrepreneurs the most, and this is important because new firms (i.e., startups) are responsible for a disproportionate share of innovation and new job creation (President’s Council of Economic Advisors, 2016). Since the late 1970s, the number of startups, the rate of new firm formation, and business dynamism (a combination of the number of new firms and firm exits) have each been in persistent decline (Hathaway and Litan 2014). The cause of this disturbing trend is not known, but regulation is likely to play at least some role. Removing regulatory barriers to increase entrepreneurship would have significant public benefits beyond a reduction in direct compliance cost and is consistent with the President’s interest in spurring economic growth and job creation.

OMB Should Solicit Public Nominations for Burden Reduction

Agencies are not always in the best position to identify meaningful reductions in regulatory burden. OMB should strongly encourage or require each agency to solicit public nominations for burden-reducing opportunities within the areas of focus as previously described. Absent a public nomination process, agencies will have less information upon which to identify and choose among de-regulatory opportunities. OMB may also wish to solicit public nominations itself because it needs to be aware of the largest burden-reducing opportunities to ensure adherence to the government-wide “net zero” target.

OMB Should Take Steps To Avoid Unintended Consequences

The EO contains a definition of “regulation” that is broader than that found in previous executive orders on regulatory review. Such a broader definition is perhaps necessary to avoid unintended consequences such as an added incentive for agencies to impose mandates in the absence of notice and comment rulemaking (e.g., regulation via press release, guidance, or memo). OMB should retain the ability to identify and review significant policy documents that would otherwise have the same effect as “informal rulemaking” under the Administrative Procedure Act. Agencies should be required to notify OMB about such policies under development.

OMB Should Clarify that OITO Applies to All New ICRs

Government-driven paperwork is the easiest and most obvious target for a regulatory budget because, unlike regulatory burden, the United States has a complete accounting of paperwork burden by agency. Surprisingly, the OMB guidance does not address paperwork or whether OITO applies to information collection requests (ICRs) not associated with a rulemaking.

New ICRs not related to a rulemaking should be included within the scope of OITO. Agencies have ample room for reducing burden because the information collection budget consists primarily of discretionary collections (OMB 2016). It will be important, however, for OMB to limit trading of paperwork burden across agencies because unrestricted trading would lessen the incentive on each agency to reduce its own paperwork burden.

As regulated entities and organized interests plan ahead, they should keep in mind that the new EO does not change statutory requirements or judicial decisions, but it does direct the discretion of regulators. In the future, regulators will be thinking more about how to minimize cost while achieving regulatory objectives. This is the ultimate take-away from the new EO and interim guidance, and it is altogether fitting and proper for the President, as manager of the executive branch, to direct federal regulators in this manner.

References

Council of Economic Advisors, 2016. Economic report of the president. Washington, DC: Executive Office of the President, Chapter 5 and Figure 5-2.

Hathaway, I. and Litan, R., 2014. Declining business dynamism in the United States: A look at states and metros. Washington, DC: Brookings Institution.

Office of Management and Budget, 2016. Information Collection Budget of the United States Government. Washington, DC: Office of Information and Regulatory Affairs.

 

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