by the Editor
Our government’s regulatory apparatus is one of the most important but least appreciated factors impacting the productivity and growth potential of the American economy. We constantly hear how the mounting level of government debt poses a threat to America’s future economic growth, but expanding regulations have a similar impact and should be approached with the same level of seriousness as government spending and taxation.
It has been estimated by the Competitive Enterprise Institute (CEI) that current federal regulations impose a cost of around $1.9 trillion (9% of GDP), roughly equivalent to the total amount of individual and corporate taxes collected by the federal government in 2019. This averages out to over $14,000 for each American household. CEI notes that the government’s disclosure of regulatory costs is incomplete, so the true cost is likely much higher.
Given the extensive impact regulations have on our economy and society, it is critical for our country’s growth potential that our regulatory system operates by applying principles of democratic accountability, transparency, efficiency, and fairness. To maintain a healthy regulatory structure over the long term, our government should formalize a process for robust oversight and continuous improvement in the regulatory space.
Principle One: Democratic Accountability
The regulatory system is one of the most significant ways our government interacts with its citizens and the economy, so it is important that regulations are designed and implemented through a democratic process with proper accountability to the members of society.
Our Constitution gives Congress responsibility for making the laws affecting our country and allows voters to provide input through the political process. In a complex society like ours, it is inevitable that government will need to delegate certain aspects of regulation to specialist agencies which, by their nature, lack direct democratic accountability. However, excessive delegation is an abdication of political responsibility. We need to find the right balance.
Unfortunately, bureaucracies like our regulatory system are prone to evolving in an anti-democratic direction for several reasons. It is well known that bureaucrats have a natural propensity to enlarge their agencies as a way to grow their influence and power base. Less appreciated are the incentives for politicians to enable the expansion of the regulatory structure as a way to avoid political accountability for difficult decisions by shifting responsibility to regulators. While taxes, spending, and government debt are clearly visible, the impact of regulations is much less transparent and harder to quantify. This makes the regulatory system vulnerable to abuse by politicians. When there is pressure on government budgets, politicians can use regulations as a way to achieve political goals by outsourcing the burdens onto society at large. Over time, these tendencies have resulted in an imbalance between the regulatory state and the rightful legislative function of Congress.
To reinvigorate the proper role of Congress, we can implement a range of reforms to our regulatory structure. Since regulations function like a tax, we can start to treat them like a tax. Congress should be required to explicitly approve regulations with a significant economic impact, say over $100 million, ensuring major regulations receive the scrutiny they deserve. Congress should set a budget for regulatory costs, just like it sets a budget for expenditures and taxes. This would force our politicians and regulators to weigh the costs and benefits of various initiatives and prioritize competing goals. After a period of time, laws and regulations should expire or “sunset” unless reauthorized by Congress. Circumstances change and a “sunset” provision would prompt a reassessment of specific regulations in light of the current situation, including new data on regulatory effectiveness and consideration of alternative approaches that could be better solutions.
Our federal system has the benefit of enhancing democratic accountability by delegating substantial political power to state and local governments, moving decisions closer to the people affected. Congress should build on the advantages of this arrangement by devolving as much regulatory responsibility as possible to state and local governments. Where it makes sense to regulate on a national basis, there should be a focus on effective coordination with state and local regulatory bodies. Done properly, this would help to counteract the inherently anti-democratic nature of distant, unaccountable regulators.
In addition to rebalancing the relationship between the elected members of government and regulatory agencies, the operation of the regulatory system can be further optimized by emphasizing the additional principles of transparency, efficiency, and fairness.
Principle Two: Transparency
Regulations impose a cost on society in a way that is much less visible than government spending or taxation, contributing to a deficiency in democratic accountability. It is difficult to manage or reform what you can’t see. One way to mitigate this issue is through improving regulatory transparency. Over the years, some attempts have been made on this front, but there is much room for improvement.
There are already some existing obligations for regulators to disclose proposed rules and seek public input, along with some requirements for benefit-cost analysis of regulations that exceed certain materiality thresholds. These steps are helpful, but they are not comprehensive enough nor do the regulatory agencies consistently follow these guidelines in practice.
First, some background on efforts to improve regulatory transparency. One of the earliest major attempts to establish some uniform standards for the operation of the regulatory system was the Administrative Procedure Act (APA) of 1946 which recognized the importance of a transparent process for establishing regulations. The APA includes requirements for public notice of proposed rules along with procedures to seek public feedback, with some exceptions if the rulemaking agency finds good cause that the notice and comment process is “impracticable, unnecessary, or contrary to the public interest.” Generally, public comment periods run between 30 and 60 days.
The most comprehensive public overview of the regulatory pipeline is “The Regulatory Plan and Unified Agenda of Federal Regulatory and Deregulatory Actions” (the Agenda), a report to Congress in which regulatory agencies outline their regulatory priorities and plans. While this report is supposed to be submitted annually, it is often late. Also, the activities of the regulatory agencies are not legally limited to what they disclose in the Agenda. The content of the Agenda is governed by the executive branch, not Congress, so its scope is subject to change as new administrations come into power.
In 1996, Congress passed the Congressional Review Act (CRA) which requires regulatory agencies to report to Congress all regulations with annual costs estimated to be $100 million or more. After a rule is submitted under the CRA, Congress has 60 legislative days to overturn it. However, not all rules have been submitted to Congress as required.
Over the years, Congress has passed a few pieces of legislation intended to limit some regulatory excesses and improve transparency. The Regulatory Flexibility Act of 1980 requires federal regulatory agencies to assess the economic impact of new regulations on small businesses and consider ways to reduce significant compliance burdens. The Unfunded Mandates Reform Act of 1995 covers regulations that affect state, local, and tribal governments with costs over $100 million. It requires the Congressional Budget Office (CBO) to perform benefit-cost analysis on these rules and seek input from affected parties.
There are other legal requirements for the regulatory bureaucracy to report on the costs of its actions. In 2000, Congress passed what is known as the “Regulatory Right-to-Know Act” which directs the Office of Management and Budget (OMB) to prepare an annual report with “an estimate of the total annual costs and benefits of Federal regulatory programs.” This Act requires that costs and benefits must be presented in the aggregate and broken down by agency, agency program, program component, and major rule. However, this report is often late, sometimes by years. Recent reports have also been incomplete – the last report that included the legally required presentation of aggregate costs and benefits was in 2002. At the very least, regulatory agencies should comply with the reporting requirements mandated by law.
Transparency is further diminished because regulatory agencies often find creative ways to skirt the process established for promulgating new regulations. Instead of issuing a regulation that is subject to the requirements for disclosure, public comment, and benefit-cost analysis, a regulator can instead release more informal “guidance.” This can manifest itself in a variety of forms including letters, bulletins, memos, notices, and administrative interpretations. Let’s call this “stealth regulation.” This strategy has often been used by regulatory agencies to achieve their objectives without going through the established regulatory governance procedures. While not formal regulation, these types of stealth regulation can be just as burdensome because regulated parties often conclude they have no choice but to comply. To be effective, regulatory reform must capture stealth regulations as well.
Recently, some progress has been made in addressing the issue of stealth regulations by subjecting them to procedures more consistent with those applicable to formal regulations. In 2019, the Trump Administration issued Executive Order 13891 to improve the process around stealth regulations. This executive order took an important step to improving transparency by directing regulatory agencies to create “a single, searchable, indexed database that contains or links to all guidance documents in effect.” Additional provisions applied to “significant” guidance documents including new procedures for public notice and comment and a requirement for regulatory analysis by the Office of Information and Regulatory Affairs (OIRA), along with a confirmation that benefits exceed costs. Regulatory agency compliance with this executive order is still incomplete, but the results so far demonstrate the importance of this issue: as of September 2020, CEI has counted over 72,000 guidance documents disclosed in response to Executive Order 13891.
At the same time, these reforms were further strengthened by Executive Order 13892, which focused on improving due process in regulatory enforcement by preventing agencies from alleging violations of stealth regulations unless they have gone through the process of disclosure in the Federal Register or elsewhere.
The result of these reforms has been to bring the process for issuing and enforcing stealth regulation more in line with the requirements applicable to formal regulations, including obligations for disclosure, public comment, and regulatory analysis such as the assessment of costs and benefits. While this progress is encouraging, more work needs to be done to improve transparency.
Principle Three: Efficiency
Regulations have an enormous impact on the productivity and growth potential of our economy so it is important that we design our regulatory system in a way that allows us to prioritize scarce resources and to achieve our objectives in the most efficient way possible.
A key building block in developing efficient regulation is robust benefit-cost analysis (BCA). When done properly, this allows us to understand the trade-offs inherent in imposing regulatory burdens on society and to create a framework to explore alternative methods of achieving regulatory objectives. Sound BCA is also a prerequisite to producing a level of transparency that is accurate and useful. In particular, we need to understand regulatory costs and benefits in order to identify the regulations with impacts that are significant enough to merit political oversight from Congress or other politically accountable bodies.
To be effective, BCA should be conducted in accordance with best practices. This should include public disclosure of all data, models, and assumptions used in the process. Analysis should be based on sound science that is reproducible, with input from independent advisors and peer reviews where appropriate. Consistency of approach is important to improve comparability among BCAs and to allow prioritization of different regulatory initiatives. The regulatory process should start by answering threshold questions including a discussion of the problem the rule is seeking to address, along with an examination of the alternative approaches. Rulemaking should only proceed when benefits exceed costs, except where explicitly required by law.
BCAs should focus on the primary benefits targeted by a specific regulation as opposed to secondary effects, sometimes referred to as co-benefits or ancillary benefits. BCAs should not double count the same benefit as a way to justify more than one regulation. When developing projections, BCAs should use realistic assumptions, not worst-case scenarios that can distort results. To enhance the analytical value of BCAs, they should include a breakout of gross benefits and costs, not only a presentation of net benefits. This would facilitate an assessment of the reliability of the projections because it is generally more difficult to predict benefits than costs. Also, this granularity is helpful because costs and benefits sometimes fall on different groups. Likewise, it would be informative to separately present domestic and non-domestic benefits.
There are some laws that require benefit-cost analysis for significant regulations (generally defined as having an economic impact in excess of $100 million), but most of the guidance on how to prepare BCAs comes from executive orders and internal agency instructions. Over the years, the executive branch has provided some constructive direction on how to perform BCAs, but this still falls short of implementing best practices. For example, sometimes data is not fully disclosed in a way that would enable reproducibility of results. Often, there is a troubling overreliance on secondary benefits to justify regulation. BCAs sometimes only present net benefits instead of disaggregating gross benefits and costs, thereby obscuring a full understanding of the economic impact of regulations. Regulatory agencies frequently ignore legal mandates to report the costs of their regulations. Finally, since the bulk of current guidance on the preparation of benefit-cost analysis derives from the executive branch, it can be revoked by future administrations.
As part of its focus on improving the efficiency of the regulatory system, the Trump administration in 2017 issued Executive Order 13771 which directed all regulatory agencies to repeal at least two regulations for each new “economically significant” rule, defined as having an economic impact of $100 million or more. Further, it required that the total costs of economically significant regulations enacted should at least be offset by the costs of regulations repealed. To revoke a regulation, the government must go through the same process used to implement a regulation in the first place, so reducing regulations takes time. The Trump administration reports that from 2017 to 2019, they have exceeded the two for one target by eliminating over seven existing regulations for each new one, saving around $50 billion in regulatory costs.
The reform efforts emanating from the executive branch highlight another issue in our regulatory structure. Independent regulatory agencies are by virtue of their design insulated from the influence of the executive branch and therefore not legally bound by its reform initiatives, resulting in a gap in the executive branch’s efforts to improve the regulatory system.
While the independent agencies are not legally obligated to follow directives from the executive branch, it would nevertheless be beneficial for the executive to issue guidance urging them to conform to regulatory best practices, including public notice and comment, proper disclosure, and robust benefit-cost analysis. Well-run independent agencies should strive to operate in line with regulatory best practices and publicizing these guidelines can help citizens understand the extent to which independent agencies are following good procedures. Ideally, Congress should take action to require independent agencies to conform to these guidelines.
Another opportunity to improve regulatory efficiency would be to address situations where more than one agency seeks to regulate the same issue by clarifying which agency is in charge. If there is an unavoidable overlap of responsibility for a particular regulatory area, a lead regulator should be designated and given primary authority. Efficiency could also be enhanced by promoting the coordination of global regulatory efforts, with American regulators working to align those activities with our national interests and encouraging sound principles of regulatory governance.
Principle Four: Fairness
Our regulatory system should strive for fair treatment across society and the economy without discrimination or favoritism. To work towards that goal, we should seek to ensure the regulatory process preserves fundamental rights, due process, and the equitable treatment of individuals and businesses.
An important part of enhancing fairness in the regulatory system is adherence to a clear framework for establishing regulations with requirements for accountability, transparency, and efficiency. Some progress has been made toward those goals, but there is more work to do and we need to eliminate other sources of inequity in the regulatory system.
Politicians have a tendency to use the regulatory system to achieve social and political goals by outsourcing their objectives onto the private sector. When this happens, some unlucky people and businesses end up bearing the burden while other members of society get a free ride. This inherent unfairness is made worse by the illegitimacy of the implementation process – when politicians implement their objectives via regulations instead of legislation, they are often pursuing initiatives that lack sufficient public support to gain approval through the democratic process. To avoid this type of unfairness, we should establish limitations on politicians’ ability to achieve socio-political objectives by transferring obligations to the private sector through regulations. For example, we should implement budgets for regulatory costs, expanded disclosure obligations, more effective benefit-cost analysis, and requirements for old regulations to expire unless specifically re-authorized.
We can also see unfairness in the way regulations often function as a barrier to entry, thereby benefiting large businesses and incumbents. Of course, regulations can impose monetary costs that discourage new entrants, especially smaller companies. But this issue is broader than the necessity for newcomers to spend money to comply with regulations. Complicated regulations require significant expertise and managerial resources to ensure compliance. As a result, many larger companies and incumbents actually encourage regulatory complexity as a way to deter new competitors. To enhance fairness, we need to ensure the regulatory system does not serve as a barrier to entry for new market participants. To this end, our regulations should focus on simplicity and efficiency to reduce compliance burdens. Not only will this improve the fairness of our system, it will also increase innovation and productivity.
Another manifestation of unfairness in the regulatory process is the implementation of rules that have the result of benefiting certain parties at the expense of others. This type of preferential treatment is rarely explicit, and sometimes appears in the guise of setting technical standards or operating procedures within a sector of the economy. Such favoritism can have the effect of government picking winners and losers, a role that bureaucrats are inherently ill-suited to play. We should guard against this type of discrimination and central planning. In addition to being unfair, this inevitably contributes to economic inefficiencies and reduced productivity.
The proper involvement of the judiciary in the regulatory system is also an important aspect of ensuring fairness for citizens and businesses. Unfortunately, the judiciary has often fallen short in fulfilling this responsibility by being overly deferential to regulatory agencies. One example is what is known as “Chevron deference.” This refers to a 1984 Supreme Court decision that says courts should accept the interpretations of regulators as long as they are “reasonable,” meaning the regulator’s decision is not “arbitrary, capricious, or manifestly contrary to the statute.” This is a relatively low standard to meet, allowing regulatory agencies to accumulate a significant amount of power.
The judicial branch has a critical role to play as a check on the overreach of regulators, and when it retreats from this responsibility it weakens the proper operation of the separation of powers. Further, the judiciary lets down our citizens when it fails to preserve due process and to defend the ability of parties to protect themselves by contesting improper regulation. Because companies and individuals benefit from certainty, legal predictability is important to achieve a healthy society with a growing economy. The judicial branch should do its part by upholding fairness in the regulatory system.
Principle Five: Formalize a Process for Continuous Improvement
Our economy and society are very complex and are constantly changing. Unfortunately, the regulatory system has not demonstrated a commensurate ability to evolve. To remedy this deficiency, Congress should create a permanent framework for enhanced oversight and updating of the regulation system. This effort should be guided by the principles of democratic accountability, transparency, efficiency, and fairness.
To improve transparency, this process should require disclosure of all regulations and guidance along with their costs in a comprehensive, consistent, and easily accessible format. Also, Congress should adopt a requirement that old regulations expire after a certain period of time. This would put the onus on lawmakers to affirmatively re-authorize regulations based on an updated assessment of the current situation, including revised benefit-cost analysis. This discipline will create a helpful check on the natural tendency for the regulatory state to expand. Often politicians find it challenging to make these types of difficult decisions because inevitably some special interest will be adversely affected. To address this concern, regulatory decisions could be presented to lawmakers as a package for an up or down vote, similar to the Base Realignment and Closure (BRAC) process used by Congress to rationalize military bases. As part of this process, Congress should review the scope and mission of regulatory agencies on a regular basis with a view to streamlining their responsibilities.
Over the years, some progress has been made in reforming the regulatory system through the issuance of executive orders that require additional transparency, enhance benefit-cost analysis, and impose some limitations on the economic impact of regulatory burdens. While constructive, these regulatory reform initiatives from the executive branch are less than ideal because they can be overturned by subsequent administrations. Despite this drawback, executive orders can still be a powerful impetus for reform because any subsequent repeal would highlight a retreat from sound regulatory practices. Hopefully, this would create a political disincentive to backtrack on reform initiatives. In any case, Congress should pass laws to formalize these reforms as a way to improve regulatory stability. More importantly, Congress should commit to robust oversight to ensure regulatory agency compliance with reforms on an ongoing basis.
Independent regulatory agencies are an increasingly significant contributor to regulatory costs and complexity, so they should not be ignored. As part of a more holistic approach to regulatory optimization, Congress should re-examine the operation of these independent agencies to improve transparency and efficiency.
The regulatory system can be thought of as a living, breathing organism that constantly grows and evolves to propagate its own power. In light of this reality, it is important for our government to formalize an ongoing process to update and optimize the regulatory system. Such a commitment to continuous improvement is the aspect of regulatory reform with the greatest potential for an enduring beneficial impact on our economy and society.
Conclusion
Over the years, our regulatory system has grown immensely in size and complexity and is now one of the most significant ways our government interacts with society. Even beyond the massive impact of the regulatory state, it is important to recognize that it is the very nature of this bureaucratic system that makes it particularly concerning. It is inherently prone to expansion because bureaucrats naturally tend to seek to increase their power. This problem is exacerbated by politicians who often prefer to achieve their political objectives by shifting responsibility to regulatory agencies as a way to avoid political accountability and obscure the costs of their initiatives. The result is an approach to governance that can be wasteful, opaque, and unfair.
A large, complex government needs regulations. But to manage and mitigate the natural weaknesses of the regulatory system, we need to focus on several key principles: democratic accountability, transparency, efficiency, and fairness. Periodic attempts at reform are not sufficient. A healthy regulatory system must not be neglected. The tendency of the regulatory bureaucracy to expand will inevitably return, along with the increasing costs it imposes on the economy and society. Therefore, it is important for our government to create a permanent mechanism for continuous reform and updating of the regulatory system.
Due to the significant impact of our regulatory system, when it functions poorly it can be a huge burden on the economy and our citizens. The massive reach of the regulatory system is also an opportunity – regulatory reform is one of the most effective ways for our country to enhance productivity, growth, and individual opportunity. It is time for regulatory optimization to be approached with the seriousness it deserves.