An Effective Plan for Regulatory Reform

Rather than slashing regulations willy-nilly, these three reforms would help protect us from those regulatory burdens that do more harm than good.

In his recent Detroit Economic Club speech, Donald Trump labeled federal regulation “the anchor that is dragging us down.” He promised to remove this burden by adopting a temporary regulatory moratorium and asking every federal agency to identify and eliminate regulations that “are not necessary, do not improve public safety, and which needlessly kill jobs.”

It will take a lot more than that to ensure that regulations solve real problems at a reasonable cost. A targeted and effective regulatory reform program would consist of at least three elements:

1. Agencies should be required to show evidence that a significant problem exists, that they understand its root cause, and have considered alternative solutions that address it — before the agency proposes any new regulations. 

Data from the Mercatus Center’s Regulatory Report Card project show that only one in eight of the 130 major prescriptive regulations proposed by executive branch agencies between 2008 and 2013 were accompanied by substantial evidence demonstrating the existence, size, or cause of the problem the agency sought to solve. And for about one-quarter of the regulations, the agencies considered no significant alternatives to the regulations they proposed.

Moreover, agencies often produce economic analyses that seek to justify regulatory decisions that have already been made, instead of informing the decision-making process. A colleague of mine who had a long career at a regulatory agency reports that he was often told on a Friday that if he couldn’t find enough benefits to justify the costs of a proposed regulation over the weekend, he shouldn’t bother coming back to work Monday. 

This is backwards. The assessment of a regulation’s benefits, costs, and alternatives should be completed before the agency decides on it. One solution is to require agencies to publish their analyses for public comment before they propose regulations, encouraging them to look before they leap.

2. The regulatory system should have an external check on the accuracy of agencies’ analyses. Judicial review could provide this check.

The Securities and Exchange Commission’s (SEC) experience illustrates the salutary effects of judicial review. Unlike many agencies, the commission is required by statute to conduct economic analyses for many of its regulations. After having several important regulations overturned in court due to shoddy economic analyses, the SEC’s staff issued new guidance in 2012 that lays out analytical standards and involves economists in rulemaking from the beginning. By some accounts, the SEC’s methodology has since improved. 

3. Review of existing regulations will not be fully effective unless conducted by an expert entity that is independent of the agencies issuing the regulations.

Having agencies review their own regulations is like asking students to grade their own homework. An independent commission could be patterned after the Base Realignment and Closure Commission that recommends military bases for closure. It would assess the benefits associated with a defined group of regulations — such as all regulations with the same intended outcome — and identify a package of regulations that should be modified or eliminated if they are not effective or produce only small benefits at high costs. And the changes would take effect unless Congress voted to disapprove the entire package.

Rather than slashing regulations willy-nilly, these three reforms would help protect us from those regulatory burdens that do more harm than good.