Seeking Rational Regulatory Reform

This year America's elected leaders rediscovered the idea that federal regulatory agencies should consider the effect of regulations on the economy before they impose new rules. President Obama issued a new executive order telling agencies to conduct economic analysis of regulations, and Congress followed suit with a series of hearings. But none of these efforts will generate more cost-effective regulation without fundamental institutional reforms to ensure that regulatory agencies conduct objective economic analysis, and actually use it to make decisions.

Since 1981, executive orders have required federal agencies to assess the economic effects of proposed regulations and take these effects into account when they choose among regulatory alternatives. Agency regulatory analysis is supposed to identify the root cause of the problem the agency seeks to solve, develop a variety of alternative solutions, and assess the pros and cons of the alternatives.

So how well do regulatory agencies do what presidents have been telling them to do for more than three decades? Not very well.

Two years ago at the Mercatus Center, we launched a research project called the Regulatory Report Card. This project evaluates the quality of regulatory analysis executive branch agencies conduct for all of their most important proposed rules. We also examine the extent to which agencies claim to use the analysis to make decisions.

There is ample room for improvement. The Report Card's criteria are drawn directly from the presidential executive order that governs regulatory analysis. Yet the highest score any regulation received in 2008 or 2009 was about 80 percent, equivalent to a B-. Agencies claimed the analysis affected a major decision for only about 20 percent of the regulations.

Deficiencies in the quality and use of regulatory analysis are institutional, not partisan. The average Report Card scores are about the same in both 2008 and 2009. This finding is consistent with previous research by Robert Hahn, who found little difference in the quality of analysis of environmental regulations during the Reagan, G.H.W. Bush, and Clinton administrations.

Simply "throwing the bums out" will not fix the problem either. Effective solutions require institutional changes in the way regulations are developed, proposed, and promulgated.

First, sound regulatory analysis needs to be required by legislation, not just by executive order. Regulatory agencies usually do better analysis when legislation tells them they must consider specific factors like costs, benefits, and efficiency.

A legislative requirement for regulatory analysis would also ensure that "independent" agencies like the Federal Communications Commission and the new Consumer Financial Protection Bureau must do economic analysis before they issue regulations that affect our economy. Currently, the president can only ask such agencies to conduct economic analysis of their regulations, and they rarely comply.

Second, the analysis needs to be objective. All too often, regulatory analyses read as if most of the decisions about the regulation were already made before the analysis was done. Inevitably, agency economists come under pressure to produce an analysis that supports what decisionmakers have already chosen to do.

Congress could help prevent this by requiring agencies to publish their regulatory analysis, along with all underlying data and models, at least six months before they actually propose the regulation. This reform would prompt agencies to analyze the alternatives before they pick one. It would also allow public interest groups or other stakeholders to perform their own analysis as a check on the agency's work.

Third, the analysis must be used. At a minimum, legislation should require agencies to explain when they propose regulations how their understanding of the problem, and the benefits and costs of alternatives, affected their decisions. A tougher approach would require agencies to satisfy the courts that the regulation is indeed justified by their analysis.

These changes might not usher in a Nirvana of rational regulation, but they would at least encourage agencies to look before they leap.