February 10, 2015

Regulatory Reform: Choose Knowledge over Ignorance

Jerry Ellig

Research Professor, George Washington University Regulatory Studies Center
Summary

Recently, the House of Representatives passed the “Unfunded Mandates Information and Transparency Act.” While the fate of this particular piece of legislation is uncertain, it contains several measures to improve the quality of agency regulatory analysis that ought to find a home in any comprehensive regulatory reform.

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Recently, the House of Representatives passed the “Unfunded Mandates Information and Transparency Act.” While the fate of this particular piece of legislation is uncertain, it contains several measures to improve the quality of agency regulatory analysis that ought to find a home in any comprehensive regulatory reform.

Regulatory agencies often produce mediocre economic analysis to accompany major regulations. As a result, they often adopt regulations without knowing whether the regulation will solve a significant problem at a reasonable cost. Regulatory reforms that establish clear standards for agency analysis and enforce those standards through judicial review would help ensure that our regulatory system solves more problems at a lower cost.

The bill passed by the House last week takes several steps in this direction. It writes into law the principles of regulatory analysis listed in President Clinton’s Executive Order 12866, which has governed executive branch regulatory analysis and review since 1993. The very first principle is that “Each agency shall identify the problem that it intends to address … as well as assess the significance of that problem.” It’s a logical first principle, since a regulation cannot possibly produce benefits unless it solves a problem.

But currently, this principle is honored more in the breach than the observance. For example, instead of identifying a specific problem, agencies often claim that the “purpose” of a new regulation is simply to implement a law requiring the agency to issue a regulation. Or they theorize about a potential problem but provide no evidence that the problem actually exists and is significant. Privately, agency economists have told me that they usually spend little time on this part of the analysis because the decision to regulate was already made, before any analysis was done!

The bill requires agencies to consult in advance with private-sector entities that would be regulated. Current law already requires agencies to consult with affected state and local governments. Mercatus Center research finds that agencies produce better analysis when they consult with state and local governments—probably because the consultation gives agencies better information about the regulation’s likely effects.

The legislation specifies that regulatory cost estimates should include forgone business profits, costs passed on to consumers or other entities, and costs created by behavioral changes prompted by the regulation. This seemingly abstruse definitional change is important, because agencies’ regulatory cost estimates usually focus on direct expenditures by regulated entities—or sometimes just paperwork costs—instead of measuring the full costs regulation imposes on society. For this reason, the Mercatus Center has developed a “Regulatory Cost Calculator” survey tool that regulators and stakeholders can use to gather information about the full costs of regulation.

The bill also plugs a loophole by applying the Unfunded Mandates Reform Act to most regulatory agencies that are independent of the executive branch, such as the Federal Communications Commission and Commodity Futures Trading Commission. Research by scholars at Resources for the Future, as well as my own research with Mercatus senior research fellow Hester Peirce, finds that independent agencies’ analysis of their regulations is often seriously incomplete.

Finally, the legislation allows courts to stay, enjoin, or invalidate a regulation if the agency fails to perform the analysis or produces inadequate analysis. Judicial review is a necessary element of regulatory reform because it provides a stronger enforcement mechanism. For example, the Securities and Exchange Commission is required to conduct benefit-cost analysis when determining whether its regulations promote the public interest. The SEC pledged in 2012 to improve its economic analysis after it lost several court cases due to inadequate analysis.

The unfunded mandates reform legislation passed in the House on a largely party-line vote of 250-173. But the fundamental conflict in the debate over regulatory process reform is not Republicans versus Democrats, liberals versus conservatives, or even business versus the public. It’s knowledge versus ignorance. Decision-makers should choose knowledge over ignorance.