Practicalities of a Regulatory Budget

A “regulatory budget” begins with the notion that, just as governments write down their planned and actual taxes and spending, they should also write down the costs that are imposed by regulation.

To take it a step further, one can imagine the government setting an overall “budget” for the costs of regulation that might be imposed in a given year, and then requiring that regulatory agencies operate within that budget.

In general, developing a good sense of the costs of regulation–and comparing costs to benefits–seems a worthwhile program. But the parallel from taxes and spending to regulation is obviously not exact.. The costs and benefits of regulation are both estimated with considerably less precision than, say, the taxes and spending involved in the Social Security system. The costs of implementing regulations are often not as simple as writing a check for a certain new item of pollution-control equipment or financial management software. Instead, producers will seek out ways to change how they operate in ways, sometimes in subtle ways, to reduce the costs of implementing regulations. Some benefits of regulation, like improved worker productivity or reduced health care costs, can be converted to monetary terms relatively easily, but gains in human health or environmental protection may be harder to put in monetary terms.

The ultimate costs and benefits of a series of regulations–that is, a comparison to what costs and benefits would have looked like if the series of regulations had never been implemented–is often unclear, especially five or 10 or 20 years down the road. And at a basic level, if a given regulation seems likely to have benefits greatly in excess of costs, do you really want to postpone the regulation because the current costs exceed some “regulatory budget”?

Where do these practical difficulties leave the issue of “regulatory budgeting”? The Harvard Journal of Law & Public Policy offers “A Symposium on Regulatory Budgeting” in its line-only “Per Curiam” Summer 2022 issue.

The Trump administration set a regulatory budget in 2017, thus making the idea anathema to many of the non-Trumpists. But as the symposium reminds us, the idea of a regulatory budget has deep nonpartisan roots. James Broughel writes in “The Regulatory Budget in Theory and Practice: Lessons from the U.S. States” (footnotes omitted):

Before the Trump administration’s actual implementation of a regulatory budget, interest in regulatory budgeting likely peaked in the United States in the late 1970s and early 1980s. Robert Crandall of the Brookings Institution has been credited as “probably the first proponent” of a regulatory budget. Democratic Senator Lloyd Bentsen introduced the Federal Regulatory Budget Act of 1978, which would have created a role for Congress in setting regulatory cost allocations for agencies, akin to the role it plays in making fiscal appropriations. At that time, there was considerable support for a regulatory budget throughout the U.S. federal government. President Jimmy Carter’s 1980 Economic Report of the President references a regulatory budget as a potential means of improving priority setting. The Joint Economic Committee of Congress issued a subsequent report endorsing a regulatory budget. Thereafter, OMB circulated a draft Regulatory Cost Accounting Act in 1980. Later, in 1992, John Morrall III, an OMB official, wrote a report for the Organisation for Economic Co-operation and Development endorsing a regulatory budget. These early proponents of regulatory budgets were noticeably bipartisan.

I took a closer look at Trump’s regulatory budget proposal a few years back when it was enacted. One component that got a lot of publicity was the requirement that two regulations be eliminated for each new regulation introduced. This requirement was probably of more symbolic than practical significance, given the possibilities for eliminating small-scale, long-age regulations, or for “eliminating” two regulations while replacing them with what would be counted as a single new regulation. The more interesting component was, as Broughel writes, “The major requirement was that each new dollar of regulatory cost was to be offset by the elimination of one existing dollar of regulatory cost.” In effect, regulatory agencies were asked to identify regulations where a given level of costs provided low or negative benefits, and replace them with regulations where that same given level of costs provided higher benefits.

This approach makes the most sense if you believe that many regulatory agencies are predisposed to add new regulations, rather than reconsider the effects of older regulations. The “regulatory budget” idea is intended to create some pushback, by making it necessary for regulatory agencies to continually reconsider their past regulations–especially those that may have worked less well or become outdated. Indeed, those who worked on these issues for the Trump administration (like Broughel) argue that they succeeded in putting a cap on regulatory costs during the Trump presidency.

While I am skeptical of the bigger claims made for a regulatory budget (for example, it’s the equivalent of saving thousands of dollars for every family every year, and in addition will unleash a surge of productivity growth), I do think that some form of pushback against the expansionary bias of regulators makes sense. In the symposium, Andrea Renda discusses the spread of regulatory budgeting around the world in “Regulatory Budgeting: Inhibiting or Promoting Better Policies?” She writes (footnotes omitted):

Over the past two decades, several governments have introduced tools to incentivize regulators to become more aware of the costs they impose on businesses and citizens when they propose new rules. In some European countries, such as the Netherlands and Germany, this cost-focused approach has taken priority over more comprehensive better regulation strategies such as the use of ex ante regulatory impact analysis (RIA), or comprehensive retrospective reviews of the costs and benefits of individual regulations. In a dozen European Union Member States, plus Canada, Korea, Mexico and the United States, governments of various political orientations have introduced forms of regulatory budgeting, which require administrations to identify, every time they introduce new regulation entailing significant regulatory costs, provisions to be repealed or revised, so that the net impact on overall regulatory costs is (at least) offset. These rules are generically referred to as “One-In-X-Out” (OIXO). … In their most common form of “One-In-One-Out” (OIOO), these rules amount to a commitment not to increase the estimated level of burdens over the chosen timeframe. The OECD refers to these commitments as “regulatory offsetting.”

Depending on the circumstances, the OIXO rule may explicitly refer to the number of regulations, and thus require that for every regulation introduced, one or more existing regulations are eliminated; or to the corresponding volume of regulatory costs, and hence require that when a new regulation is introduced, one or more regulations are modified or repealed, such that the overall change in regulatory costs is zero or negative. Most countries adopted the latter version, based on cost offsetting rather than on avoiding increases in the number of regulatory provisions. …

There are at least twenty countries in the world that have adopted an OIXO rule. These include ten EU member states (Austria, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Spain and Sweden) as well as Canada, Mexico and Korea. In the past, three countries have had a similar rule in place (Denmark, the UK, and the United States), but later decided to gradually phase it out … . Four other countries were reportedly introducing similar regulatory budgeting systems in 2020: Poland, Romania, Slovakia, Slovenia.

Renda argues that many of these countries, of varying political persuasions, believe that the OIXO formulation has been a genuine success. She emphasizes, via a list of 10 lessons, that a regulatory budget is only one part of an overall approach to thinking about regulatory reform. One of her 10 lessons seemed worth repeating here:

Lesson 5. If carefully designed, regulatory budgeting rules are not incompatible with an ambitious policy agenda. Some countries have introduced OIXO rules and burden reduction targets in the context of a deregulatory effort. But the fact that these rules have been used in the context of a deregulatory attempt does not mean that they are, per se, incompatible with a more far-reaching and proactive approach to deregulation. In Germany, for example, the OIOO rule was adopted in a context in which ambitious programs such as Energiewende are in place, and a systematic scrutiny of the impact of new legislation on sustainable development is carried out. In France, the government uses the OI2O rule but at the same time adopts ambitious proposals in terms of social and environmental benefits. In short, there is no incompatibility per se between the adoption of a cost reduction or regulatory budgeting system and an ambitious regulatory and policy agenda in the social and environmental domain.

Clearly, some supporters of an activist and aggressive regulatory policy, in countries around the world, are recognizing that the best way to build public support for such policies is not by passing a lot of rules, but by reassuring the public that rules are being considered and reconsidered with appropriate care.