Trump’s Regulatory Reform Process: Analytical Hurdles and Missing Benefits

The fundamental problems with Trump’s plan to reform regulatory rulemaking are that regulations can be eliminated that have larger benefits to society than costs, and that new regulations now face three times the analytical hurdles as before.

Protecting the health, safety, and welfare of American citizens is the fundamental role of the US federal government. No one would dispute that this is a complex and difficult task. Doing so is costly and can slow economic growth, reduce wages, or involve other economic trade-offs. Accordingly, the government commonly examines (at least for the most expensive rules) the net benefits of each new proposed regulation. There has been widespread and bipartisan agreement on this practice, at least since President Reagan’s Executive Order 12291, which requires the use of benefit–cost analysis to analyze prospective major rules. President Clinton’s Executive Order 12866 further specified the formulation of this approach—new rules can go forward when the benefits “justify” the costs.

In contrast, President Trump’s Executive Order (EO) on Reducing Regulation and Controlling Regulatory Costs (13771); the related order on Enforcing the Regulatory Reform Agenda (13777); and the new final guidance issued April 5 all muddy the water on regulatory action to protect the American public. The “two-for-one” mandate in EO 13771 contains three key sections, requiring that: (1) “For every one new regulation issued, at least two prior regulations be identified for elimination”; … (2) that “Any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations;” and (3) “The total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero”, subject to the Office of Management and Budget (OMB) director’s discretion (in other words, what used to be called the regulatory budget cannot be exceeded).

Here’s where Trump’s directives diverge from experience. Up front, the language indicates that we should literally and simply count the number of regulations. But regulations come in all shapes and sizes. Why two for one? Next would be a cost test: to move forward, agencies would need to choose existing regulations (at least two) to eliminate that would offset the cost of the new regulation. A third, broader test also holds agencies to an annual cap on the total cost of new (and for this year at least, repealed) regulations.

Of the many questions initially raised by the order, several have been addressed in a subsequent memorandum from OMB. According to OMB, regulations covered by the order will be “significant” regulations, meaning that they cost or benefit the US economy $100 million or more in any given year, or adversely and materially affect various aspects of the economy (for example, commodity prices or jobs). Additionally, agencies will be permitted to seek regulations to eliminate from anywhere within an agency—or, with OMB’s approval, from other agencies.

These provisions seem reasonable, allowing regulators to find and eliminate the most costly regulations, wherever they may occur. However, it might be more efficient if OMB approval for interagency trades was not needed.

Indeed, it is notable that a bank of cost savings will be created from the elimination of rules under the Congressional Review Act. The administration could have walled off such savings to count against new regulation but chose the more flexible route. To take advantage of this bank, though, the savings need to be allocated to agencies pursuing the most worthy new regulation, not necessarily the agencies with the bank.

Another major issue favorably resolved by the OMB memorandum concerned Executive Order 12866, which will continue to be used. Indeed, the new guidance asserts the “primacy” of benefit–cost analyses outlined in EO 12866. That is, for new rules (and presumably rules proposed for elimination), benefit–cost analysis will need to be performed. On the negative side, however, the benefit–cost analysis needed to eliminate one regulation is every bit as complex as the analysis needed to consider and justify a new regulation, making implementing the new regulatory reform approach administratively costly. In effect, under Trump’s order, promulgating a new rule actually requires three or more new analyses instead of one—two or more for the regulations on the chopping block and one for the proposed new regulation. And there is also the ambiguity about whether benefit–cost analysis would be performed on rules on the chopping block not considered “significant,” so lying outside the purview of EO 12866. Would benefit–cost analysis be done for them as well?

On the positive side, the memorandum clears up the definition of cost with regard to the new regulatory reform process. Here, to its credit, OMB builds on its Circular A-4, a highly vetted and accepted guide on benefit–cost analysis for agency rulemaking. Costs are negative effects on what economists call “welfare”—roughly the consumer satisfaction lost because of higher prices of affected products and the profit lost as a result of firms’ compliance activities under a given rule.

Another positive is that the process set up for agencies that must identify candidate rules for elimination and do the analyses necessary to rescind them seems reasonable. EO 13777 requires agencies to create a task force and designate a regulatory reform officer to head it, charged with identifying and prioritizing rules for elimination, replacement, or modification that are outdated, unnecessary, or ineffective and where costs exceed benefits. To do so, they are to seek input from affected entities, identified as industry stakeholders, but which should encompass the full range of possible stakeholders—including beneficiaries.

Yet the most important question raised by the president’s new regulatory reform process is whether benefits count in deciding which regulations to eliminate. Here, the OMB memorandum, while not unequivocal, strongly indicates “No.” First, even the cost savings to a company that, say, buys energy efficient lighting as a result of a rule cannot factor against the cost of the lighting fixtures because, according to OMB, “In most circumstances, such effects would not be counted as offsets to costs according to [the Office of Information and Regulatory Affair’s] reporting conventions for benefit–cost analysis.” In other words, the cost savings do not count where, as is normal agency practice, they were previously classified as benefits.

Second, the final guidance document and EO 13777 indicate that whether a regulation “imposes costs that exceed benefits” is one of several factors (including job loss, inhibiting job creation, and being outdated, unnecessary, or inefficient) that should be considered in deciding what rules should be eliminated. As there will be few regulations with estimated benefits less than estimated costs and considering that most regulations could affect job loss or creation, there is no guarantee this benefit–cost criteria will be an effective check on eliminating rules with high net benefits. Further, we are not told how regulations will be judged as outdated, ineffective, or inefficient. The latter two, if to be evidence-based, require retrospective analyses. But such analyses are not explicitly part of these determinations, although they are encouraged elsewhere in EO 13777. And, in any event, these analyses would add yet another administrative burden.

Thus, the main rationale for many of these rules in the first place—often benefits to health and the environment—may well be ignored or de-emphasized in assessing which regulations are to be eliminated. Considering that costs and benefits were used to justify existing regulations in the first place, how can benefits be ignored now? Indeed, the purely efficiency-driven outcome prescribed by economics would require counting social costs and benefits—net benefits—with policy designed to maximize net benefits. This would mean eliminating rules with net costs and passing rules with net benefits, with no limit on the size of the costs or net benefits.

The illogic of ignoring benefits comes most clearly from OMB’s statement that the purpose of the executive order is to eliminate ineffective, unnecessary, and outdated regulations. How do we determine which regulations are ineffective and unnecessary without considering their benefits? The answer is simple—we cannot.

Ultimately, the fundamental problems with Trump’s new approach to regulatory reform are that regulations can be eliminated that have larger benefits to society than costs, and that new regulations will face three times the analytical hurdles—or more—than they did previously. Under these circumstances, it is hard to see how statutory goals will not be compromised or whether agencies will be able to issue even highly beneficial rules. Indeed, because agencies usually make rules that are required by law, there is a real question about how many regulations would even be subject to elimination under these executive orders—the language is quite emphatic that nothing in the orders is meant to contravene such laws.

Given all this, the result may be regulatory gridlock from so many new requirements for agencies, greater hurdles for issuing new regulations, and likely budgetary cutbacks that will make it very difficult to meet both process and statutory goals—putting American public health, the environment, and overall social welfare at risk.