August 26, 2014

It's High Time for Effective Regulatory Reform

James Broughel

Senior Research Fellow
Summary

Forty years ago, the Code of Federal Regulations was just under 68,000 pages in length. Since then, over 100,000 pages have been added, and there are now well over 1 million restrictions with which Americans must comply. As these requirements grow year after year, the problems with our regulatory system mount.

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Four decades ago this month, in one of his first acts as president following the resignation of Richard Nixon, Gerald Ford signed into law the Council on Wage and Price Stability Act of 1974. The bill authorized the creation of an agency tasked with identifying key causes of inflation, a pernicious problem that was posing a serious threat to the American economy. Over the next seven years, the new agency, nicknamed CWPS, would play a key role not just in the fight against inflation, but in reforming the American regulatory system as well.

CWPS officials intervened in the regulatory process by submitting comments to executive agencies on behalf of the White House. These comments focused on the supporting analysis that agencies produced for their regulations. State-of-the-art tools developed by economists heavily informed the CWPS's perspective. Eventually, in 1981, CWPS was dismantled, but the regulatory oversight role it played did not go away. Instead, review of agency regulatory analysis became a permanent fixture of the regulatory system, and responsibility was moved into the Office of Information and Regulatory Affairs. One of us (Hopkins) was on the agency's staff during the Ford, Carter, and Reagan administrations, and managed its closure as acting director.

In honor of CWPS's 40th anniversary, the Mercatus Center at George Mason University released a database of CWPS filings, as well as a study summarizing findings from the many comments CWPS produced. These filings suggest that serious shortcomings persisted throughout the regulatory system in the 1970s. Agencies' analysts routinely estimated costs and benefits of regulations incorrectly, and sometimes didn't estimate costs and benefits at all.

Consider one example: In 1979, the Federal Aviation Administration proposed to increase security for small-airplane operators as a way to deter hijackings. CWPS filed a comment concluding that the FAA had ignored important categories of cost, thereby underestimating the true cost of the regulation. For instance, the FAA had assumed that security staff could be hired for a half-hour at a time. Yet in many cases, a four-hour shift was the shortest period for which such workers could be employed.

Such mistakes are not anomalies, and similar issues can be still found in agencies today. Consider a 2013 Transportation Security Administration proposal to modify the screening process for airline passengers entering airport secure areas. Like the FAA in 1979, the TSA failed to consider important costs -- this time by neglecting to properly account for rising electricity prices and the compensation growth of security personnel.

Poor analysis isn't limited to underestimating costs. Agencies consistently fail to estimate the benefits of their rules, too. Even worse, agencies routinely fail to explain precisely why any new regulation is warranted, casting doubt on whatever benefits they claim to be achieving. A recent Office of Management and Budget report to Congress provided dollar estimates of both benefits and costs for just seven of the thousands of rules finalized last fiscal year. The 2013 TSA analysis also lacked benefit estimates, making it impossible to determine whether the proposal's benefits would outweigh any costs the agency identified.

Forty years ago, the Code of Federal Regulations was just under 68,000 pages in length. Since then, over 100,000 pages have been added, and there are now well over 1 million restrictions with which Americans must comply. As these requirements grow year after year, the problems with our regulatory system mount.

This is why regulatory reform is so critical. Real reform means not only strengthening requirements for agencies to conduct sound economic analysis before regulating, but also requiring analysts to go back through the decades of old rules that have been piling up on the books. Many of these rules' drafters were poorly informed, as evidenced by CWPS's work. Given the nation's disappointing economic performance in recent years, including slow wage growth, now is the time to reform a regulatory system that is constraining economic opportunity.