Revamping Regulatory Review

Just the idea that the job market’s troubled state might signal excessive regulation is roiling Washington. Rep. Darrell Issa (R-Calif.), the new chairman of the House Oversight Committee, has already committed to hearings and sent letters to more than 150 business leaders — asking for their “wish list” of rules that they feel are too burdensome.

Even more striking, President Barack Obama’s release of an executive order offers a new way of examining how we can create a regulatory structure that improves our health and safety, our environment and the economy. Indeed, he has taken the first step in moving toward a system that can better gauge the real effect of regulations, both current and future.

Potential gains are huge. Regulatory policy determines the prescription drugs we can buy, the pollutants in the air we breathe, the quality of the water we drink and the rules that govern our employment contracts, workplace safety and much more.

On the other side of the ledger, regulation is a major factor in the costs of doing business in the United States.

Without question, the regulatory system has produced tremendous benefits. Regulations issued under the 1963 Clean Air Act, for example, have greatly reduced air pollution, allowing many Americans to live longer and healthier lives.

But the regulatory system is not without faults. There is significant room for improvement, as the president suggests. For the structural problem facing our system is not how much we regulate but how we regulate.

Most potential regulations are evaluated before implementation — when we know the least about how they will work. New rules go on the books and can stay there, unexamined, for years, even decades. There is no system for collecting information about regulations once they are in place, and usually little-to-no requirement that regulations be evaluated after they are implemented, to test if they are working effectively.

Limiting evaluation to the period before implementation lacks common sense. Let’s consider an example from the private sector.

If a company hires a new employee, the human resources team checks references and other background information before employment. That gets the employee in the door. But would the evaluation process end there? Certainly not. The employer then uses year-end performance reviews and other information about that employee’s work to determine his compensation and future career path.

We should expect — in fact, demand – a similar form of performance evaluation for our nation’s vast regulatory structure, based on hard evidence about what works. We need a culture of regulatory experimentation and evaluation that can measure a regulation’s success.

The first step is to institute a system of backward-looking evaluation for new and existing regulations, as Obama has proposed. This requires modest resources, but costs are small compared to the costs of regulations that stifle job growth or otherwise fail the American people.

The next step is to develop a virtuous feedback loop of continuous improvement, where regulations are tried and then expanded or reformed based on how well they work. With the assurance that ineffective regulations can be revised or removed, lawmakers may feel more confident about experimenting with new regulations.

There is also a real opportunity for transparency in the regulatory process and increased public confidence if we release the information from these evaluations through government Websites. This added layer of transparency would surely increase the quality of the regulations and their continued evaluation.

Both Obama and Issa have highlighted the need for meaningful regulatory reform. If the president’s executive order is implemented wisely, it can aid in our economic recovery by providing lawmakers with the tools necessary to determine whether new regulations are doing their job.

The alternative is to continue to make decisions about regulations in the dark; or with only partial information. Such an approach would discourage the very job growth that we aim to promote — and endanger the health and well-being of the people we aim to protect.

Michael Greenstone served as chief economist for President Barack Obama’s Council of Economic Advisers in 2009. He is the 3M professor of economics at the Massachusetts Institute of Technology and serves as director of The Hamilton Project at the Brookings Institution.