Doubling Down on Trump’s Two-for-One Regulatory Reform

In a previous post, I was critical of President Trump’s “two-for-one” executive order mandating regulatory reform, under which two regulations would need to be eliminated for every new regulation issued. But as I noted there, the order left open a number of important issues to be addressed by the director of the Office of Management and Budget (OMB). Last Friday, OMB issued a memorandum to address at least some of these issues and invited comments. My concerns about this policy were only underscored by the memo. Here’s my take on the latest development.

First, the basics of the executive order, which contains three key sections: (i) “For every one new regulation issued, at least two prior regulations be identified for elimination…;” (ii) “The total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero;” (iii) “No regulations exceeding the agency’s total regulatory cost allowance will be permitted” (i.e., what used to be called the regulatory budget can’t be exceeded).

Of the many unresolved issues, most have been addressed in the new memorandum. Regulations covered will be “significant” regulations, meaning they cost or benefit the economy $100 million or more in any given year or adversely and materially affect various aspects of the economy (prices, jobs, etc.). Agencies will be permitted to seek regulations to eliminate from anywhere within an agency or from other agencies—in effect creating a trading program in eliminated regulations—in itself a reasonable attempt to find and eliminate the most costly regulations, wherever they may occur. However, trades will need OMB’s approval rather than being automatic.

The memorandum also explains how the two-for-one rule is defined. The administration does indeed mean that literally—that two regulations must be eliminated for every new regulation. But OMB adds the stipulation that costs must not rise over the three regulations—i.e., that the two regulations eliminated must offer cost savings at least equal to the cost imposed by the new regulation. This explanation begs one question: If the rule is all about cost savings, why two for one? Why not one for one if the regulation to be eliminated offers cost savings greater than the new regulation? Must agencies search for specific regulatory elimination packages to achieve the necessary two-for-one ratio enunciated as a campaign slogan?

Another major issue resolved by the memorandum is the definition of cost. Here, to its credit, OMB builds on its Circular A-4, a highly vetted and accepted guide to doing cost-benefit analysis of agency rules. Costs are negative effects on what economists call “welfare”—i.e., 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.

When are costs supposed to be measured? Here the OMB positions are illogical and unreasonable. Costs are to be the net present value of projected costs from the time of the regulation’s repeal forward. Thus, to estimate cost savings requires understanding the baseline situation with the regulation in place and then how that baseline would change if the regulation were removed, with a discount rate used to aggregate the projected cost saving stream to the present. This mirrors the usual examination of a new regulation provided in Circular A-4, where the baseline is the situation into the future without the regulation and the costs are losses in welfare associated with meeting the regulation. But the memorandum wants the “start and end points” of the analyses of costs to be “directly comparable,” when all that is logically required is for the same discount rate to be used to calculate the net present value of the cost streams whenever they start and end.

The unreasonableness of this approach comes from the realization that the analysis needed to eliminate a regulation is every bit as complex as the analysis needed for a new regulation. Thus, to promulgate a new regulation actually requires three new analyses instead of one—two for the regulations on the chopping block and one for the new one. The result, without waivers or exceptions, will likely be serious procedural roadblocks and delays in regulatory activity.

Fortunately, waivers and exceptions do exist for statutory and judicial mandates, but they are very limited. If an agency is required to issue a regulation because of “imminent statutory or judicial deadline” it may avoid the two-for-one offset temporarily. Here the definition of imminent would be important, as issuing major rules—such as re-promulgating the National Ambient Air Quality Standards every five years under the Clean Air Act or regulating 10 toxic substances over the next three years under the 2016 updates to the Toxic Substances Control Act—requires several years of effort. But, even for these rules, the agency would be required to eventually find offsetting regulations to eliminate. With an agency issuing only a few exceedingly costly regulations a year, and all with statutory mandates, where will the offset come from without violating the statutory mandates underlying the major regulations slated for elimination? More generally, because regulations are issued in the first place to meet statutory (and by extension, regulatory) goals, how can their elimination not lead to those goals being missed or compromised? Does the Trump administration really believe that there are significant regulations on the books that do not aid in meeting statutory goals—and that such regulations are numerous enough that they can offset necessary new rulemaking?

Waivers can also be offered on other, still unspecified grounds. And regulations issued “with respect to military, national security, and foreign affairs functions” are exempt. And, as usual, independent agencies (those agencies that don’t submit regulations to OMB) are exempt.

The most important unanswered question raised by the executive order is whether benefits count. On this the OMB memorandum is unequivocal: No. Even the cost savings to a company that, say, buys energy efficient lighting as a result of a rule do not count against the cost of the lighting fixtures because “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 don’t count because OMB classifies them as benefits, and counting benefits is not part of this new regulatory process. It then goes almost without saying that the main rationale for many of these rules in the first place—often benefits to health and the environment—is to be ignored in assessing which regulations are to be eliminated.

Here is where all logic is firmly left behind. As I noted earlier:

Counting only costs is like having scissors with only one blade: pretty useless for accurate cutting, but great for gouging. … Since costs and benefits were used to justify the regulation in the first place, how can benefits be ignored now? Indeed, the purely efficiency-driven economists’ prescription would be to count social costs and benefits—net benefits—and the policy prescription would be 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 the memorandum’s statement that the purpose of the executive order is to eliminate ineffective, unnecessary, and outdated regulations. How is one to know which regulations are ineffective and unnecessary without considering the regulations’ benefits? Clearly one cannot. And yet, the memorandum is careful to say that statutory goals must continue to be met—“agencies must confirm that they will continue to achieve their regulatory objectives (e.g., health and environmental protection).” By the same token, how can one know whether or not this is the case without considering the benefits (i.e., health and environmental protections)?

The fundamental problems with Trump’s two-for-one executive order and the OMB memorandum are that regulations can be eliminated that have larger benefits to society than costs, and that new regulations face three times the analytical hurdles they would normally face. In the process, it is hard to see how statutory goals would not be compromised. Thus the order is counterproductive, unreasonable, and illogical. Comments on the memorandum must be submitted to OMB by this Friday, February 10.