Regulating Within a Budget

White House
By Susan E. Dudley
April 23, 2018

Originially posted in The Regulatory Review, a publication of the Penn Program on Regulation.

Presidents of both parties have long required federal agencies to conduct benefit-cost analyses to weigh the likely positive and negative consequences of new regulations before they are issued. But during his first year in office, President Donald J. Trump presided over what his Office of Information and Regulatory Affairs (OIRA) administrator Neomi Rao has called a “fundamental shift.”

Focusing on the negative consequences of regulations, President Trump directed agencies to reduce regulatory costs. By signing congressional resolutions, he rescinded 15 recent regulations before they went into effect. He also ordered agencies to modify or remove other existing regulations, and his agencies have dramatically slowed the pace of new regulation.

Yet despite his different rhetoric on regulation, President Trump continues to require agencies to make decisions based on an understanding of regulatory benefits and costs.

Indeed, he has maintained Executive Order 12,866, issued by President William Clinton in 1993 and reinforced by both Presidents George W. Bush and Barack Obama, which has guided the development and review of regulations for 25 years. This executive order states that regulations should address a “compelling public need, such as material failures of private markets,” assess “all costs and benefits of available regulatory alternatives, including the alternative of not regulating,” and “maximize net benefits” to society unless otherwise constrained by law.

President Trump has overlaid a budget constraint on these existing requirements to base regulations on a determination of net benefits. In a dramatic move, he issued Executive Order 13,771 within his first few weeks of taking office, directing agencies to remove two regulations for every new one issued, in addition to offsetting the costs of new regulations by removing or modifying existing regulations.

OIRA’s guidance on this order, however, made clear that Executive Order 12,866 remained intact and that, “except where prohibited by law, agencies must continue to assess and consider both the benefits and costs of regulatory actions, including deregulatory actions, when making regulatory decisions, and issue regulations only upon a reasoned determination that benefits justify costs.” Moreover, a subsequent order, Executive Order 13,777, directed each agency to designate an individual to serve as “regulatory reform officer” to lead a task force of agency staff responsible for overseeing “the implementation of regulatory reform initiatives and policies,” including Executive Orders 13,771 and 12,866.

How can one justify a budget constraint? If regulators had perfect information and incentives, benefit-cost analyses alone should be adequate to direct resources to their best use, and agencies would only issue regulations that make the public better off. In this ideal world, a budget constraint, such as that imposed by Executive Order 13,771, would either be nonbinding or harmful because it would disallow some regulations that would have offered net societal benefits.

In practice, however, agencies do not conduct benefit-cost analyses on the basis of perfect information, and they face incentives to demonstrate that the benefits of their regulatory actions exceed the costs. As a result, these analyses often look more like advocacy pieces for a preferred alternative than a transparent accounting of possible options and outcomes. Moreover, agencies rarely evaluate regulations once they are in place to see if their analyses were accurate. As Michael Mandel and Dana Carew of the Progressive Policy Institute note, individual regulations, like pebbles tossed in a stream, may do little economic harm by themselves, but eventually the pebbles accumulate until they become a dam, blocking economic growth and innovation.

Recognizing these realities, Ted GayerRobert Litan, and Philip Wallach observe that if the regulatory budget elements of President Trump’s initiatives counter the political incentives that can lead to overregulation, they could improve regulatory practice and outcomes.

Critics are correct that President Trump’s executive orders signal less emphasis on estimating regulatory benefits, but this may not be all bad.

Because estimated benefits have tended to be more speculative and controversial than costs, a focus on the costs of regulations, setting priorities, and making tradeoffs among regulatory programs might remove some of the contentiousness surrounding benefit-cost analysis and presidential oversight. Faced with a budget constraint, agencies’ analyses might focus more on achieving benefits in the most cost-effective way, instead of generating hypothetical estimates to satisfy OIRA’s analysis requirements.

Both the offset requirements of Executive Order 13,771 and the designation of regulatory reform officers of Executive Order 13,777 provide new incentives for agency staff to examine existing regulations with the intent to modify or rescind cost-ineffective requirements. For decades, Presidents of both parties have asked agencies to conduct retrospective review of existing regulations with little success. President Trump’s orders may offer the impetus needed to develop the long-lacking analytical tools and data needed for retrospective evaluation.

It is too soon to predict the long run impacts of President Trump’s policies. In the short term, the Trump Administration seems to be reallocating internal agency resources towards relieving existing regulatory burdens and away from creating new requirements, and his actions have slowed the pace of new regulations. But modifying or rescinding existing regulations requires agencies to conduct careful analysis and follow procedural steps, which will take years to complete, especially given likely judicial challenges. Throughout, benefit-cost analysis will remain an important feature of U.S. regulatory policy, but the budget constraint may add some discipline to the process.