Many people have visceral but opposite reactions to the word "regulation." Some have an immediately positive reaction to almost any mention of regulation, in a belief that it is likely to be necessary corrective. Others have an immediately negative reaction, in the belief that it is likely to be a wasteful and perhaps even harmful overreaction. Me, I'm just a wishy-washy guy who thinks that some regulations can be useful, while others are misguided. On the off chance that there are a few more like me out there, how should we be reacting to the Trump administration's deregulation agenda?
Ted Gayer, Robert Litan, Philip Wallach provide an overview in "Evaluating the Trump Administration’s Regulatory Reform Program" (published by the Center on Regulation and Markets at Brookings, October 2017). For a discussion of potential benefits from regulatory reform, one of the first reports from the Council of Economic Advisers in the Trump administration is "The Growth Potential of Deregulation" (October 2, 2017). I'll draw on both reports here.
But before digging into those details, it's worth noting that this "regulatory reform" or "deregulation" effort is in some ways quite different from the two main types of policy changes that have previously gone under the name of "regulatory reform." As one example, the "deregulation" that happened in the late 1970s and into the 1980s. The "deregulation" of airlines, banking, trucking, railroads, and some other industries around that time involved removing rules that involved setting prices and limiting competition. Two-for-one and a budgeting process for regulations is not this kind of deregulation.
The other main kind of regulatory reform, which dates back to the 1970s but has been pursued by each president since then, has typically involved requirements that cost-benefit analysis be carried out before certain kinds of rules are implemented. This may seem like an obvious step, but as Gayer, Litan, and Wallach point out, "many regulatory statutes—those that authorize or compel agencies to issue rules in the first place—do not permit agencies to balance benefits against costs, or effectively limit their ability to do so." In contrast, "President Trump’s approach—both the “two-for-one” requirement and the regulatory budget—breaks from the historical emphasis on maximizing net benefits and improving the use of and commitment to benefit-cost analysis, and instead offers a blunt institutional reform to rein in regulatory costs (without attention to benefits). This is presented as necessary to counter the political impulses that may produce excessive or inefficient regulation, or regulation that could be better designed (for example by using market-like incentives rather than commands and controls)."
"In 2001, the Canadian province of British Columbia committed to reducing the regulatory burden by one-third in three years. It required that each ministry establish a baseline of its existing inventory of “regulatory requirements,” defined as “an action or step that must be taken, or information that must be provided to access services, carry out business, or meet legal responsibilities under provincial legislation, regulation, policy, or forms”. . The initial count found over 330,000 such regulatory actions. In order to meet the three-year goal, each cabinet minister was required to match any new regulatory requirement with a plan to eliminate at least two offsetting requirements. In 2004, having surpassed the goal and achieving a 40 percent reduction in regulatory requirements, British Columbia imposed a regulatory cap mandating no net increase in regulatory requirements. This requirement has been extended three times, most recently to last until 2019, leading to a total reduction in regulatory requirements of 49 percent since 2001. Motivated by the success in British Columbia, in 2012 the Conservative-led Government of Canada released the Red Tape Reduction Action Plan, which required that for any new or amended regulation, regulators offset “an equal amount of administrative burden cost” from existing regulations. It also required at least one regulation be eliminated for every new one introduced. ...
"In January 2011, the Conservative and Liberal Democrat coalition government of the United Kingdom instituted a regulatory reform plan that included a “one-in, one-out” system in which each department must assess the “net cost to business” of complying with any proposed regulation, ensure that the cost estimate is validated by an independent committee of experts (known as the Regulatory Policy Committee), and find a deregulatory measure that offsets the cost of the new regulation. In January 2013, the requirement was increased to a “one-in, two-out” rule, which requires that the deregulatory measures must offset twice the cost of the new regulation, not merely eliminating two other regulations, as Canada has required and the Trump administration has just adopted. In March 2016, the United Kingdom ramped up its regulatory offset program again, to become “one-in, three-out,” again referring to costs, not the number of regulations. The “net cost to business” under the United Kingdom’s approach is computed as the “annualized direct net cost to business, incorporating direct recurring costs and transition costs, direct recurring benefits, and direct transitional benefits, spread out over the lifetime of the policy”. The “deregulatory” measures pursued as offsets in the U.K. system often do not actually remove any regulatory requirements, but rather make regulatory compliance less costly, for instance by streamlining paperwork processes so that businesses could make some filings without the need of a lawyer ... The United Kingdom’s regulatory initiative, however, does not use a social welfare yardstick, and thus does not seek to maximize the net benefits of its regulations to society as a whole."
In short, these general types of regulatory reforms have worked reasonably well in Canada and the UK. What about the Trump proposals in a US context? Here, Gayer, Litan, and Wallach are more cautious.
In US law, an existing regulation that has been duly created through a legislative and regulatory process cannot just be wiped out by the president. Instead, the two regulations that are supposed to be wiped out for each new regulation are will instead need to go through a process of comment and review. As the authors note: "Since some of the proposals to eliminate rules will undoubtedly invite legal challenges, there will be considerable uncertainty as to whether those rules really will end up being wiped from the Code of Federal Regulations. Any approach that attempted to bypass notice-and-comment procedures would likely run afoul of the APA [Administrative Procedure Act], leading to defeats in courts and likely political backlash as well. Even when standard procedures are observed, there is no guarantee that attempts to roll back regulatory requirements will pass APA muster."
The idea of a regulatory budget is that government will first set a certain total amount of regulatory cost that is acceptable. Then it will attempt to allocate those regulatory costs in the way that brings the greatest total benefit. Of course, measuring the total cost and benefit of a regulation is a tricky business. Gayer, Litan, and Wallach write:
"It is fair to say that the Trump administration has launched the most ambitious regulatory budgeting program in human history—just a tremendous undertaking. Whereas Canada and the United Kingdom have managed to get their programs up and running with some success thanks to relying on relatively simple metrics of cost, in the United States the regulatory budget will attempt to get much closer to real social costs, at the expense of adding considerable complexity. That makes it potentially more meaningful and deep reaching, but also more likely to bog down and create a massive bureaucratic headache to go with those that already exist."
Again, I'm certainly open to the notion that lots of regulations have too little justification, and that regulatory reform can be socially beneficial. But the Trump proposals run a real risk that they will simply freeze all existing regulations in place: it will be too difficulty to remove old rules, and also too difficult to justify implementing new ones. As Gayer, Litan, and Wallach note:
"But if all that the Trump administration’s regulatory budget turns out to be is an elaborate moratorium on new actions, that would represent a missed opportunity for would-be deregulators. The whole purpose of instituting a forcing mechanism is to confront the problem of accumulated and outdated regulatory requirements that burden U.S. businesses, thereby freeing Americans’ energies for productive purposes and unleashing economic growth. If this administration’s initiative ends up being nothing more than a pause in further accumulation—of both good and bad prospective regulations—it would stand as a harsh judgment on the likelihood that existing regulation would ever be seriously reformed."
A version of this article first appeared on Conversable Economist.
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.