The Future of E.O. 12866: Embracing Regulatory Humility

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By: Susan Dudley
October 05, 2018

The last four American presidents have held very different views on regulation, yet they have all embraced the principles and procedures embodied in Executive Order 12866, which President Clinton signed 25 years ago this week. E.O. 12866 requires agencies to “assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating,” and to regulate only on evidence that the benefits justify the costs. It also requires the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget (OMB) to review and coordinate significant regulatory actions.

On September 24, 2018, the GW Regulatory Studies Center, American Bar Association Administrative Law Section, Society for Benefit-Cost Analysis and Trachtenberg School of Public Policy & Public Administration hosted a forum to commemorate the lasting impact of the order. Panelists—including current and four former OIRA administrators, as well as other officials and experts—reflected on its durability and contemplated its future.

In a recent Forbes column, I shared observations on the longevity of the order. This commentary offers some thoughts on the influence of E.O. 12866 today and its continuing future impact.

The spirit of E.O. 12866 is increasingly apparent in legislative and judicial branch decisions.

Clearly, the principles and procedures embodied in E.O. 12866 have withstood the test of time. Executive branch agencies have embraced the tools of regulatory impact analysis and panelists at the forum agreed that the order’s analytical requirements have increased regulatory agencies’ capacity for evaluating regulatory impacts and improved the quality of regulations. Independent regulatory agencies, which the E.O. and its predecessor exempted, are beginning to adopt the analytical steps and may soon be subject to review.

Congress is also embracing the spirit of E.O. 12866 and debating codifying the principles and analytical requirements in statute (most notably H.R.5 and S.951). At the forum, legislative staff representing both parties and both chambers of Congress reinforced that broad bipartisan agreement exists on the core principles embodied in the executive order and discussed efforts to reach consensus on legislation.

Perhaps even more significant is that the courts are increasingly demanding that agencies take the benefits and costs of alternative actions into account in justifying their regulatory decisions. Even when enabling legislation does not directly call for such analysis, the courts are interpreting statutory text—such requirements to set “appropriate” standards—as embodying tradeoffs that the analysis required by E.O. 12866 can identify. The Supreme Court has even suggested that a failure to consider benefits and costs might be “arbitrary and capricious” (a fatal flaw in rulemaking).

Efforts to constrain regulatory costs are not inconsistent with E.O. 12866.

Some are concerned that President Trump’s requirements to offset new regulatory costs by modifying or rescinding existing regulations would undermine the benefit-cost principles in E.O. 12866, but that need not be the case. As a supplement to analyzing benefits and costs, requiring agencies to work within a budget could be a valuable tool for countering the political incentives that can lead to overregulation. This isn’t a new concept. In 1980, President Jimmy Carter’s Economic Report of the President suggested that it may be necessary “to develop a ‘regulatory budget,’ similar to the expenditure budget, as a framework for looking at the total financial burden imposed by regulations, for setting some limits to this burden, and for making tradeoffs within those limits.”

Regulatory humility needed to address new regulatory challenges.

Going forward, one key element of E.O. 12866 may deserve more attention. The order directs agencies to issue regulations only as required by law or to meet a “compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people.” President Clinton’s articulation of this prerequisite to regulating is arguably more explicit than President Reagan’s (in predecessor E.O. 12291), and a greater focus on it could improve future regulatory decisions. It requires regulators to appreciate the role that competition and accelerating technological innovation have in increasing social welfare.

A greater respect for the ability of market forces to regulate behavior and appreciation for the diversity of individual preferences and choices is particularly important for meeting the challenges of regulating promising new technologies and new business models emerging in the sharing economic. Regulators must acknowledge uncertainties and potential risks without taking a “precautionary” approach, which can halt innovation in its tracks. In that regard, they must not only be humble about what regulatory interventions can achieve, but they must also be on guard against regulations that reduce or hinder competition.

The future of E.O. 12866 is bright.

The forum commemorating 25 years of E.O. 12866 reinforced that sound principles and good regulatory practices can be bipartisan and lasting. Greater attention to these principles, and the regulatory humility embodied, in them will help regulators navigate the emerging challenges going forward.