Remembering Charlie Schultze

George Eads
The author, George Eads
by George Eads, Ph.D, Senior Consultant to Charles River Associates
November 08, 2016

When Brookings economist Charles Schultze died in late September, the obituaries that I read largely focused on his activities related to macroeconomics. The only mention of activities related to regulation and regulatory reform that I was able to find was in Ed Cowan’s Washington Post piece in which he stated that Charlie’s “longest-lasting impact may have been on moving the government away from … command and control regulation.”

I will leave it to others to describe and assess Charlie’s macroeconomic-related activities.  I want to highlight his regulatory-related work, especially during his term as President Carter’s Chairman of the President’s Council of Economic Advisers. I had the honor of serving as the CEA’s “microeconomic member” during the last half of that term, with regulatory policy being among my assigned areas of responsibility.Charles Schultze

While Charlie was a very strong supporter of the then unfolding deregulation of the airline, trucking, and railroad industries, it was in the area of “social regulation” that Charlie had the greatest impact. Most of this regulation had begun during the early 1970s with the creation of the EPA, the CPSC, and NHTSA. Unlike the traditional “economic” regulatory agencies such as the ICC and the CAB, these newly-created agencies were established not as “independent agencies,” but as entities within the executive branch of the Federal government. Thus, their regulatory activities fell under the purview of the White House. But just what this meant in practice was controversial.

Just prior to being named as CEA Chairman, Charlie delivered Godkin Lectures at Harvard. These lectures were later published in revised form as a short Brookings book titled The Public Use of Private Interest. In this book, Charlie argued that government regulators should replace detailed regulations specifying what regulated entities could or couldn’t do with economic signals such as taxes or subsidies that firms could react to in order to achieve the regulators’ desired results. This would not be possible in all cases.  But where it could be employed, the result would be lower compliance costs and more innovation.

At the time he made this proposal it was strongly resisted by regulators and by their supporters who argued that economic incentives wouldn’t work and even if they did, they were merely “licenses to pollute.” In fact, though, command and control regulation provided only spurious certainty. Compliance deadlines were routinely shifted when they proved unrealistic. And the levels of (for example) emissions being targeted were frequently modified in response to pressure. Focusing on the desired outcome, rather than specifying how it should be attained, offered the possibility of substantial improvements in cost-effectiveness.

While Charlie’s proposal spawned considerable discussion and debate, it had little immediate practical impact. Command and control continued to be the preferred regulatory strategy in nearly all cases. However, as regulation was applied to more and more tasks, the impossibility of relying on command and control became increasingly apparent, and the use of economic incentives became more and more respectable.  Witness, for example, the current strong push for carbon taxes and tradeable permits as a means of reducing carbon dioxide emissions. 

During the Carter Administration, Charlie’s principal regulatory achievement was the creation of a more transparent Executive Office review process. As Michel Fix and I document in our book Relief or Reform? Reagan’s Regulatory Dilemma, the Nixon administration intervened in proposed EPA regulations through a process known as its Quality of Life Review, operated by the Office of Management and Budget. Most of these reviews were kept as quiet as possible, though their existence (and sometimes even their deliberations) were leaked. To the best of my knowledge, they left no paper trail. After Nixon left office, the EPA refused to continue to submit its proposed regulations to the OMB. I do not know whether Quality of Life reviews continued to be conducted in some form during the Ford Administration. But during that administration, the President’s Council on Wage and Price Stability began to publish public comments on proposed executive branch (and, in a least one case, independent agency) regulations.

At the beginning of the Carter administration, officials began to grapple with the problem of devising something that would give them some control over the executive branch regulatory agencies without the perceived disadvantages of the Quality of Life Review. Charlie was assigned the job of developing this new review process. (See Chapter 3 of our book). The CEA’s proposal had two main elements: a broadened requirement for analysis and a mechanism for formal interagency review of these analyses. It was perceived that the analyses prepared during the Ford administration had been too narrowly focused on a formal or informal comparison of regulatory costs and benefits as a means of determining whether the regulation was “justified.” The new process was to be focused on achieving more cost-effective regulation. The interagency review group that was created was known as the RARG (Regulatory Analysis Review Group). 

The creation and operation of the RARG was not without controversy. Perhaps the most controversial regulation reviewed by RARG was EPA’s proposal in June 1978 to tighten the National Ambient Air Quality Standard (NAAQS) for ozone. A NAAQS did not itself directly contain regulations mandating specific controls over processes that produced ground-level ozone. Rather, it was supposed to establish the level of ambient ozone that, if attained, would “protect human health.” As originally envisioned by the Clean Air Act, this level could be quite clearly defined based upon scientific evidence alone. Ozone levels above this level were to be considered as dangerous to human health. Ozone levels below this level were to be considered “safe.” Given the NAAQS for ozone, EPA was charged with setting regulations on stationary and mobile sources that would assure that ambient ozone levels would eventually fall below this threshold.

However, by the time that the EPA made its proposal in 1978, it had come to be realized that no such clear threshold actually existed. Instead, there was a continuum of health effects. Thus, setting an NAAQS for ozone actually involved a decision about how far along this continuum to go. Different NAAQS levels implied vastly different stringency for the regulations that eventually would have to be established to meet it. Tighter levels of stringency involved fewer health benefits and greater costs at the margin; looser levels implied the reverse.Thus it was impossible to completely ignore questions of cost and benefit in setting a NAAQS, even though the Supreme Court would later declare that the language of the Clean Air Act implied that costs should not be considered.

The RARG produced an analysis of the cost and health impacts of EPA’s proposed NAAQS for ozone. The analysis did not propose that the costs and benefits identified by the RARG be mathematically balanced in order for the proposed standard to be “justified.” It was understood that such analyses were not up to such a task – that the eventual decision was as much a political as an economic decision. But it did set the stage for heated discussions between Charlie and EPA Administrator Doug Costle.

The RARG continued to operate during the remainder of the Carter administration, though in my memory, without as much controversy as arose during the promulgation of the proposed ozone NAAQS. The RARG made a point of not focusing its efforts as much on EPA as it was perceived to have done earlier. And a greater effort was made to use the review process as a means of helping all Executive Branch regulatory agencies understand how they ought to consider costs in writing their regulatory proposals.

President Reagan’s administration continued the economic deregulatory initiatives that President Carter had pursued. For example, he quickly completed the removal of the oil price and allocation controls that Carter had begun to phase out. And it implemented some of the improvements in social regulation that Charlie and the RARG had advocated.  For example, near the end of the Carter Administration, the Energy Department proposed to issue mandatory energy efficiency standards for household appliances. The RARG had reviewed this proposal unfavorably, concluding that DOE had not persuasively demonstrated that mandatory standards would work better than the existing appliance efficiency labels. DOE’s final rule, issued in 1982, adopted the RARG’s approach, concluding that mandatory standards were not justified. There also were instances in which the approaches that Charlie had proposed in his book were adopted. In 1982 the EPA adopted emissions trading, an approach that Charlie had advocated in his book, for lead in gasoline. This not only reduced the cost of compliance, it enabled EPA to phase out lead in gasoline altogther by 1987.

In general, however, the approach to social regulation favored by Charlie and the Carter Administration stood in sharp contrast to the approach taken by the incoming Reagan regulation. The stated objective of the former was regulatory reform; the latter, regulatory relief. The message that Reagan sought to convey both in his regulatory appointments and his version of Executive Office oversight was quite clear. Regulation was to be reduced – period.

A large number of things occupied Charlie’s time during the period he served as Chair of the President’s Council of Economic Advisers. I believe that he thought at the beginning of his term that regulatory reform could be a more important part of the Carter administration’s agenda than it turned out to be. And he underestimated the level of resistance that his efforts in this regard would face from the regulatory agencies that nominally were under the President’s control. But he laid the basis for making social regulation substantially less costly while achieving its stated goals. Although the change in administrations in January 1981 introduced a strident and polarizing rhetoric toward regulation, Charlie’s legacy remains intact after 40 years. The U.S. approach to social regulation continues to be characterized by centralized executive oversight and by policies that focus on understanding regulatory impacts. Moreover, that regulatory approach has come increasingly to favor economic incentives over command and control.

George Eads served with Charles Schultze on President Carter’s Council of Economic Advisers.