Reforming Regulatory Analysis

To address the institutional problems inherent in our regulatory system, we should help insulate analysts from political pressure and create a stronger oversight role for the courts. 

Last month, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (USACE) proposed a regulation to roll back the controversial Waters of the United States (WOTUS) rule finalized near the end of the Obama administration. Whatever one thinks of the this policy, the EPA and USACE should be chastised for a repeal proposal sorely lacking adequate economic analysis.

The analysis of the rule repealing the WOTUS regulation has a number of severe deficiencies, each of which illustrates a key principle of rulemaking. Unfortunately, this rule is not alone in being backed by insufficient evidence and analysis. The question is: Why is this such a common occurrence? 

Specifically, the proposal’s analysis contains no information about the problem the new regulation is intended to address, which is, presumably, some deficiency with the old WOTUS regulation. Second, it evaluates only one policy alternative, i.e., repealing the old rule. Third, the analysis has a questionable baseline — its projection of how the world would look in absence of the rule — in light of a recent court ruling and potential future actions by the states. Finally, while the agencies deserve some credit for at least speculating as to how different segments of the population might be impacted by the new rule, they make no attempt to quantify this. 

The elements of a thorough analysis are all clearly outlined in a Clinton-era executive order and guidance from the Office of Management and Budget. These include a detailed look at the problem being addressed; consideration of a wide variety of policy (and non-policy) alternatives; a realistic baseline (or multiple baselines); and analysis of differing impacts across the population. Unfortunately, agencies routinely ignore these explicit guidelines and produce incomplete analysis.

A Mercatus Center project called the Regulatory Report Card evaluated the quality of regulator economic analysis from 2008 to 2013. Among the main findings was that agency analyses are routinely deficient, regardless of which presidential administration they fall under. Two of the most common elements missing from agency reports are information related to the problem being addressed by regulation and careful consideration of realistic alternatives to the regulation being proposed. Understanding the problem a rule is intended to address is critical if solutions are to tackle root causes and not just symptoms. And considering a wide variety of alternatives helps ensure regulators identify the best option to improve societal wellbeing.

Even worse than the incompleteness of the joint EPA-USACE analysis is its politicized nature. A recent New York Times article describes how EPA employees were instructed by their political bosses to craft analysis favorable — in terms of benefits and costs — to a repeal of the WOTUS clean water rule. While this may sound like a problem unique to the current administration, interviewsconducted over the years with regulatory agency economists reveal how economists are often asked to craft their analysis to justify regulations — rather than evaluate them objectively. 

This is why the expert analysts employed by regulatory agencies often don’t act like experts. Think about it: If your job were to analyze the consequences of your boss’s decisions, you might feel pressure to produce glowing reports that gloss over inconvenient details. Hence the incomplete and political nature of regulator economic analysis has little to do with the capabilities of the agency analysts. On the contrary, it’s the incentives these analysts face that prevent them from doing their jobs to the best of their abilities. 

Fortunately, there are ways to address these problems. First, the courts can play a role in ensuring that regulator economic analysis follows basic procedures signifying completeness. If an analysis does not include certain elements, the associated regulation should be deemed “arbitrary and capricious” and the agency forced to start the rule over.

Second, the analysts could be removed from the regulatory agencies and housed in an independent regulatory analysis agency, preferably outside the executive branch. Federal agencies have demonstrated again and again an inability to analyze their own rules objectively. Separating the role of regulator and the role of analyst could help solve this problem. 

Deficiencies in regulator economic analysis are nothing new. Problems were evident as early as the 1970s, when regulatory analysis started becoming more widespread in the government. And the defects are not specific to any presidential administration or political party. Rather, they are a feature of the regulatory system itself.

To address the institutional problems inherent in our regulatory system, we should help insulate analysts from political pressure and create a stronger oversight role for the courts.