This paper is forthcoming in the Economists’ Voice.
President Bush recently amended President Clinton’s executive order on government regulation, making changes that could have far-reaching consequences for how the government weighs the costs and benefits of regulatory activity. Although the critics claim that the new executive order will be pro-business and delay regulation, we think the new order is an improvement.
All presidents since Reagan have used an executive order to attempt to improve the quality of regulation, especially in the areas of environment, health and safety. A principle rationale is that regulation costs a lot—probably in the hundreds of billions annually—and that government needs to make sure that the public is getting its money’s worth when regulations are issued.
Until January, President Bush had been using President Clinton’s executive order, which focused on trying to get regulatory agencies to carefully consider the costs and benefits of big regulations before regulating. For example, if a proposed regulation required that auto makers produce only electric vehicles after 2010, its cost and benefits would be estimated and various alternatives would be considered. The regulatory agency was then supposed to choose an alternative for which benefits justified costs. The President’s Office of Management and Budget (OMB) made sure the agency did its job.
Treating Guidance More Like Regulation
The new Bush order adds to the old Clinton order in three key ways. First, instead of focusing primarily on federal regulations that are likely to cost in the hundreds of billions annually, it also focuses on regulatory “guidance,” when the impact is likely to be significant. Guidance is very similar to regulation because it presents an agency’s interpretation or policy on a particular regulatory or technical issue. For example, the Environmental Protection Agency has issued guidance on the interpretation of waste management activities, and also on some reporting requirements under the Community Right-to-Know Act.
No one actually knows the real impacts of most guidance, but it could be substantial. We do know that regulatory agencies issue significant amounts of guidance. The list of guidance documents in use by the U.S. Food and Drug Administration is 45 pages long.
Previously, agencies could issue guidance documents in lieu of regulations in order to circumvent the requirements of regulatory review required by executive orders used by Reagan, the first President Bush, and Clinton. The new Bush order will change the way guidance is handled by requiring that each agency evaluate the need for and consequences of the guidance, helping to ensure that it is reasonable. The specific requirements are modest, such as making sure that the guidance is consistent with applicable law, compatible with other regulations and guidance documents, and simple and easy to understand. Before issuing a significant guidance document, which could have an annual impact on the economy of $100 million or more, the agency must notify OMB’s regulatory office, and submit the draft with an explanation of why guidance is needed. OMB can then select guidance that could benefit from regulatory review, but there is no requirement that a full cost-benefit analysis be done.
Critics suggest that applying some of the same standards to federal guidance as now apply to regulation will simply allow big business to exert more control over the process, either by delaying the issuance of guidance or changing the guidance to meet its needs. The critics might be right in some instances, but in general, forcing guidance to be consistent, compatible, and understandable is appropriate. Moreover, applying these standards to guidance could ironically slow efforts by an administration interested in reducing burdens on business.
Some critics also contend that the new executive order could impose undue analytical burdens on regulatory agencies. For example, much guidance is “non-binding”—meaning that there is no requirement that firms and other affected parties are required to do anything specific. So, the reasoning goes, oversight may not be needed.
The critics raise an important point—the solution to which is to make sure OMB’s regulatory office implements its new oversight responsibilities wisely. If guidance is truly non-binding in an economic sense—say, because it does not affect firm behavior—then there is little reason to spend time analyzing it. However, there are cases when guidance may be non-binding in a legal sense, but could affect behavior. Consider a situation where an agency says that it is acceptable to use blue paint to comply with a regulation, but is silent on whether using yellow paint is acceptable. This guidance could have the effect of encouraging firms to use blue paint more than they otherwise would, even though there is not a formal requirement to use it.
Once OMB learns more about the likely effect of different types of guidance, it should tailor its analytical reporting requirements accordingly. In some cases, it may merely require that an agency post its guidance on the web to increase transparency. In other cases, more analysis may be warranted. Because OMB’s regulatory office has a very small staff for reviewing regulation and guidance, it has some incentive not to impose burdensome reporting requirements on agencies because then it would be expected to review these reports.
Requiring an Explanation for Regulation
A second feature, highlighted in the press, is that the Bush order requires an agency to provide a written rationale explaining why it is regulating. The only difference between the Bush order and the Clinton order is that the Bush order specifically requires that the rationale be in writing. A careful reading of the Bush order also suggests that a rationale for significant guidance should also be provided as a brief explanation for OMB.
This requirement is a no-brainer, and should be included for all regulation and guidance. Any student who goes through Econ 1 knows that government should not generally consider regulating unless there is a clear market failure being addressed, such as pollution, monopoly, or lack of good information. The Bush order does not even require that the agency specify a market failure, per se. The agency simply needs to provide a reason for regulating. Regulatory agencies owe the citizenry at least that much before they decide to regulate.
Recognizing That the Act of Regulating Involves Both Politics and Economics
The third change in the Bush executive order is to require affected regulatory agencies to designate a political appointee as the regulatory policy officer. The regulatory policy office would then need to approve a specific regulation before it could be included in the agency’s annual regulatory plan of the important regulations it expects to issue.
This change could be a big deal. Critics believe that it would politicize the process by taking away some discretion from civil servants. We agree with the critics, but think this is ultimately a good thing. First, as Justice Breyer has noted, civil servants in some regulatory agencies may tend to have “tunnel vision,” and fail to consider the broader impacts of their regulatory proposals. Second, requiring that a political appointee in a policy office sign off on regulations increases the chances that the regulations will consider costs and benefits. Third, this change will hold the president more accountable for regulatory policy. Of course, the particular person the president appoints could skew the process away or towards the balancing of costs and benefits, but we think the president should have that choice.
Another feature of the regulatory proposal that has been criticized in the press is the requirement that agencies provide aggregate annual costs and benefits of all regulatory activity on the agency’s plan. Congress already asks OMB to tally up the annual costs and benefits of all agency regulatory activity, so this requirement should not add substantially to the analytical burden of regulatory agencies. In any case, there is value in having an estimate of the annual regulatory cost, much in the same way that government provides an annual budget estimate. We would add, however, that where possible, the regulatory costs should be compared with the annual regulatory benefit.
Why Not Go Further?
If we have any complaint about the president’s executive order, it’s that it does not go far enough. In particular, it excludes a whole group of regulatory agencies from review—the “independent” regulatory agencies like the Federal Trade Commission, the Federal Communications Commission, and the Federal Energy Regulatory Commission—that play a critical role in a number of areas ranging from telecommunications to energy.
We would suggest bringing these independent agencies under the executive order’s umbrella. This change would hold a wider range of regulators more accountable for the costs and benefits of their policies, and hopefully lead to more efficient policies across the board. While it is an open question as to whether the president has the legal authority to make this change, we think that he does; if the president does not,then Congress should give this general authority to the president directly.
In addition, we would suggest subjecting significant guidance documents to the same requirements as significant regulations—namely cost-benefit analysis and a broadly based cost-benefit test. This would give regulators and the public a better understanding of the likely economic impacts of guidance, and it could also improve actual guidance.
In short, we think President Bush’s new executive order is a step in the right direction. It is not without costs, but we think the benefits will likely exceed the costs. The next president should consider taking a more significant step by subjecting all federal regulatory agencies to the same kind of discipline that the executive order requires of executive agencies.
Dr. Hahn and Dr. Litan are the directors of the AEI-Brookings Joint Center for Regulatory Studies. Dr. Hahn is a regular columnist for the Economists’ Voice. They would like to thank John Graham for helpful comments and David Burk, Caroline Cecot and Molly Wells for research assistance.
References and Further Reading
Robert Hahn and Cass Sunstein’s Working Paper, “A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis.”
Anthony, Robert A. (1992) “Interpretive Rules, Policy Statements, Guidances, Manuals, and the Like: Should Federal Agencies Use Them to Bind the Public?” Duke Law Journal, 41:1311–84.
Breyer, Stephen (1993) Breaking the Vicious Circle: Toward Effective Risk Regulation, Cambridge: Harvard University Press.
Bush, George W. (2007) “Executive Order: Further Amendment to Executive Order 12,866 on Regulatory Planning and Review,” Public Papers of the Presidents, January. Washington, DC: General Printing Office.
Clinton, William J. (1993) “Executive Order 12,866: Regulatory Planning and Review,” Public Papers of the Presidents, September. Washington, DC: General Printing Office.
Hahn, Robert W. and Cass R. Sunstein (2002) “A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis,” University of Pennsylvania Law Review, 150:1489.
Office of Management and Budget (2007) “Final Bulletin for Agency Good Guidance Practices,” Federal Register, 72(16):3432–40.
Pear, Robert (2007) “Bush Directive Increases Sway on Regulation,” The New York Times, January 30.
Reagan, Ronald (1981) “Executive Order 12,291: Federal Regulation,” Public Papers of the Presidents, February. Washington, DC: General Printing Office.
Skrzycki, Cindy (2007) “Bush Order Limits Agencies’ ‘Guidance’,” Washington Post, January 30, D01.