Obama Approaches Regulations Backwards

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After two years of issuing regulations that have exacerbated recession-induced unemployment by discouraging job creation, President Obama has issued an executive order to evaluate whether rules and regulations have benefits that exceed costs. This backwards process-backwards because the benefit-cost calculus should have been applied first-does not inspire confidence.

No matter that this calculus been used for almost 30 years, and the executive order is similar to President Reagan's Executive Order 12291 of February 17, 1981, stating that "Regulatory action shall not be undertaken unless the potential benefits to society for the regulation outweigh the potential costs to society."

Mr. Obama wrote in The Wall Street Journal on Tuesday, "Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way." The president, alas, pays only lip service to the importance of keeping government off the necks of small business. One might ask him:

Mr. President, have you read the health care and the financial regulation bills you signed last year (available at http://www.thomas.gov/)? Or have you taken a look at your regulatory agenda (at http://www.reginfo.gov/public/)?

Whether small firms do or do not create most new jobs-and this is open to debate-there is much standing in their way, and in the way of larger firms, ranging from recent legislation to proposed regulations under consideration by executive branch agencies.

A few obvious examples:

FINANCE-On Wednesday, it was reported that Americans will not be allowed to invest in Goldman Sachs' private offering of $1.5 billion in Facebook shares, in case the transaction would be termed improper by financial regulators. Foreigners will be scooping up the shares of an American company in a deal organized by an American securities firm, but Americans are excluded. How's that for inefficient regulation?

DRILLING-Because the Interior Department stopped issuing permits after the BP well blew out in 2010, drilling in the Gulf of Mexico has ground to a halt, with 33 rigs idled, a decline of $1.8 billion in spending by oil drillers, and 23,000 workers unemployed or underemployed.

CARBON--The Environmental Protection Agency is insisting on regulating carbon emissions, even though Congress chose not to pass cap and trade legislation that would have achieved the same objective. This would raise the cost of energy for large and small firms alike, and would particularly harm energy-intensive manufacturing firms and the coal industry.

TAX COMPLIANCE--The health care law would require, beginning in 2012, that firms submit a Form 1099 to the Internal Revenue Service with names of vendors from whom they have purchased $600 or more in goods and services. This will impose new burdens on companies, such as having to elicit the tax ID of each of its suppliers, add up purchases, and submit the 1099 form.

GENDER--Consider the gender quotas in the financial regulation bill. It sets up 29 Offices of Minority and Women Inclusion, in the 12 Federal Reserve regional banks, the Treasury Department, the Securities and Exchange Commission, and other agencies, to make sure that financial firms and their subcontractors practice "fair inclusion" of minorities and women. "Fair inclusion" is to be defined by the directors of the 29 offices, and firms could be guilty of breaking the law even if no minority or female applied for a job.

OBAMA'S RECORD-Last fall 4,225 proposed rules were published at http://www.reginfo.gov/public/. The Environmental Protection Agency alone lists (here) over 340 rules in various stages of development.

Susan Dudley, director of George Washington University's Regulatory Studies Center, notes "there are 183 more regulations underway now than last year at this time, representing a 5 percent increase in activity...The agenda reveals a 20 percent increase in economically significant regulations, or 40 more regulations with impacts of over $100 million under development now than at this time last year."

Many of the rules, adopted and proposed, would indeed stand in the way of job growth. Just look at the Department of Labor rule list, here. It contains 99 rules in various stages of promulgation.

One proposed rule, Construction Contractor Affirmative Action Requirements, "will strengthen and enhance the effectiveness of the affirmative action program requirements for Federal and federally-assisted construction contractors and subcontractors, particularly in the area of recruitment and job training." It can be seen here.

The rule would set affirmative action rules for minorities and women at on-site construction jobs. Now, there's a reason more women are not represented in on-site construction-they're not usually as strong as men, and may prefer working in the service sector.

The rule would mean that any project with even a small percentage of federal funds would have to grant affirmative action to women and minorities. It is already illegal to discriminate against qualified women and minorities, and firms that do that can be sued. This proposal would raise the project costs to taxpayers and to state and local governments that receive federal funds.

Another rule being developed is the Non Discrimination in Compensation: Compensation Data Collection Tool (found here). This is Mr. Obama's substitute for the Paycheck Fairness Act, which failed to pass Congress last year. That bill would have required firms to keep records of the race, sex, and earnings of employees, so the government could check that women were being paid no less than men. Now the Labor Department seeks to achieve the same end by regulation. Although aimed at federal contractors, "it may be used to conduct establishment-specific, contractor-wide, and industry-wide analyses."

It's welcome news that Mr. Obama now understands that regulations should have benefits that clearly exceed their costs. Perhaps he will now instruct his administration before it promulgates any new regulations. That should bring a refreshing halt to many of the rules in the pipeline.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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