July 17, 2017

Keep It Simple

James Broughel

Senior Research Fellow
Summary

The Office of Information and Regulatory Affairs needs an explicit regulatory reduction target.

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Last week, the Senate voted to confirm law professor Neomi Rao as the latest administrator of the Office of Information and Regulatory Affairs, a small but influential agency housed within the Office of Management and Budget. In the past, some commentators have referred to OIRA as "the most important government office you've never heard of," primarily for its role in reviewing the most significant regulations issued by executive branch agencies.

Job one for Rao should be ensuring that every rule makes sense for the country – both as a standalone regulation and as a coherent part of our maze of federal regulations.

Since the early 1980s, one of OIRA's main jobs has been to review the economic analysis that agencies produce alongside their biggest rules. Among other things, that analysis should include a benefit-cost analysis, i.e., an evaluation of the expected benefits and costs of a rule and its realistic alternatives. Thus, one of Rao's most important jobs will be to ensure that regulators are properly considering, and balancing, the costs and benefits of rules before they go into effect.

Benefit-cost analysis is important in rulemaking, but it's not the whole story. Rules should not just be viewed in isolation but should also be viewed as part of the entire regulatory system. Even when a particular regulation sounds like it makes sense on its own, that rule could form part a larger system that, in fact, makes no sense whatsoever.

Michael Mandel of the Progressive Policy Institute likens these effects to dropping pebbles in a stream. The first pebble may not slow the flow of water in a noticeable way, but the thousandth pebble might, and the millionth pebble might stop the flow of water altogether. This is true even if that the millionth pebble would have little consequence if it were the first pebble dropped in the stream.

This example highlights how the accumulation of regulations can be detrimental to economic growth, and by extension to living standards now and in the future. The Trump administration's economic forecasts predict an improvement to 3 percent annual growth. Treasury Secretary Steven Mnuchin has stated he believes 3 percent growth can be achieved through historic tax and regulatory reforms.

But if reformers continue thinking about rules just one at a time – rather than in groups or as an entire system – then the impact of current reforms may be much more limited than these forecasters hope.

An unnecessarily complicated regulatory system adds costs that won't be identified in the analysis of any particular rule, and just rolling back a few recent regulations, while it may bring some relief, isn't likely to simplify the code in a meaningful way. Complexity has been rising for decades. In 1970, the U.S. Code of Federal Regulations contained about 406,000 restrictive words like "shall," "must" and "required." Today, that number stands at more than 1.15 million.

Even if agencies could fully account for the costs of complexity, agencies tip the scales in their analysis toward benefits and away from costs, meaning agency analysis is not always a reliable guide for assessing the desirability of rules.

Benefits are systematically inflated. For example, agencies use upper bound "conservative" risk estimates that exaggerate the risks hazards pose to the public, and thereby exaggerate the benefits of reducing those risks. The benefits of energy and fuel efficiency rules are inflated when regulators assume consumers are made better off when forced to pay more for vehicles or home appliances. Some regulatory analysis includes benefits to the entire world, but uses costs to Americans as the comparison.

Agencies also underestimate costs in numerous ways. Beyond ignoring complexity costs, agencies ignore indirect responses to regulations, such as when the inconvenience from 9-11 airport security regulations deters flying, which has led to increases in estimated car accident deaths as individuals substituted driving instead.

Perhaps the most obvious costs that regulators overlook are when special interest groups spend big bucks to influence regulations in their favor. This spending is socially wasteful when all it accomplishes is a transfer of wealth to the powerful and politically connected.

The lesson for Rao is clear. Analysis is important, but so is the regulatory system as a whole. With more than 1.15 million restrictions on the books, simplicity should be the goal. The best way to do this? Set an explicit reduction target, like reducing the size of the code by 10, 20 or 30 percent, or more.

When it comes to regulation, don't miss the forest for the trees.