Topic: Cato Publications

Much Regulatory Ado about Nothing?

This story has all the makings of a Shakespearean comedy: a public watchdog asleep at the switch, a scorned woman, and the silliness of politics.

(OK, I’m hyping a post about regulation. But really, the other elements are in here and it’s a good tale. So keep reading.)

SLEEPING WATCHDOG   Last January 18, President Bush quietly approved major changes to the federal regulatory review process. Federal agencies will now be required to offer greater justification for new regulations, estimate those regulations’ costs and benefits, and the White House will have oversight of agencies’ quasi-regulatory “guidance documents,” which until now have been largely free from executive review.

The changes initially went unnoticed by the media — almost. Lauren Morello of the energy & environment trade publication Greenwire (subscription required) ran a good article the next day (full disclosure: I was one of her interviewees). But, unless I missed it, none of the major media reported the story.

None, that is, until this week. On Tuesday, Bloomberg Media’s Cindy Skrzycki dutifully reported the changes in her column “The Regulators.” The same day, the New York Times ran the story front-page, above-the-fold. But for more than a week, the major policy change went unnoticed by the press, other than Greenwire. And, I might add, Greenwire did by far the best job of explaining the new policy’s substance and controversy.

THE SCORNED WOMAN   The policy change has been attributed to new White House regulatory affairs adviser Susan Dudley. Dudley came to national attention last summer, when President Bush nominated her to head the Office of Information and Regulatory Affairs (OIRA), a small but very important part of the Office of Management and Budget. At the time, Dudley was directing the Regulatory Studies Program at George Mason University’s Mercatus Center, and she has contributed a number of articles to Cato’s Regulation Magazine. (For a fun read, see her short article “A Regulated Day in the Life” from the Summer 2004 issue.)

Dudley’s nomination was met with considerable controversy, and even nastiness, reminiscent of the earlier OIRA fight over Harvard professor John D. Graham. Graham was ultimately approved by the Senate, but Dudley’s nomination never received a committee vote.

I have read some of Dudley’s work, and I’ve found it to be well reasoned and illustrative of issues of legitimate concern — even though I’ve sometimes disagreed with her conclusions. OIRA’s job, as I interpret it, is to scrutinize regulatory agencies’ proposals and require the agencies to justify why they would restrict people’s interactions and impose costs. Such scrutiny is, after all, part of deliberative policymaking. Perhaps Dudley’s scrutiny would have been unreasonably difficult, but a good OIRA chief would certainly ask the tough questions that Dudley’s analyses raise.

THE NEW POLICY   Technically, what President Bush did on Jan. 18 was issue Executive Order 13422, amending President Bill Clinton’s Executive Order 12866. EO 12866 pushes federal regulatory agencies to consider the costs of the various regulations they propose, and to examine alternative regulations that could accomplish the same goals at lower costs. EO 12866 also places several transparency and openness requirements on the regulatory process. Finally, EO 12866 gives OIRA a regulatory review role — albeit a less muscular one than what OIRA had under President Ronald Reagan’s Executive Order 12291. (For more on OIRA and EO 12866, read Dudley’s “Bush’s Rejuvenated OIRA” from the Winter 2001 Regulation.)

The new Bush amendments make four important changes to EO 12866:

  1. Regulatory agencies will have to identify what “market failure” a proposed regulation is intended to address. In other words, an agency will have to explain why the “problem” addressed by the proposed regulation cannot be solved through private action.
  2. Agencies must give some estimate of the aggregate costs and benefits of their regulations.
  3. Guidance documents, which give informal direction for how to comply with various federal regulations, will have to undergo OIRA review if they are considered “significant.”
  4. A political appointee in each agency will have oversight of that agency’s regulatory process.

The first amendment should be unobjectionable, at least on a theoretical level. ”Market failure” is the fundamental justification for government regulation (e.g., pollution should be regulated because no one “owns” the environment), so requiring a regulating agency to cite the relevant market failure when proposing a new regulation seems an appropriate requirement. Indeed, this requirement was part of the original EO 12866 and of President Ronal Reagan’s previous EO12291, but compliance with the requirement has been weak. That is unfortunate, because clearly identifying the market failure should help agencies to formulate effective and efficient regulations.

Likewise, the second amendment seems unobjectionable, at least in theory. Most citizens assume (incorrectly, it turns out) that government regulations undergo and pass a cost-benefit test. Requiring an estimation of the aggregate costs and benefits of regulation would help to ensure that regulation produces a net gain in public welfare — which, I take it, is the ultimate goal of regulation.

The third amendment involves guidances, a broad category of agency-issued documents that try to explain the application of various statutes and regulations. Guidances lack the force of law and also are not subject to the sort of rigorous review process that regulations are. Guidances are thus subject to a number of complaints, including that agencies do not adequately identify the documents as “advisory” and thus not having the force of law, and that agencies improperly use guidances as a way to expand government’s regulatory reach while avoiding the scrutiny of regulatory review. Those concerns are supposed to be addressed by the amendment’s subjecting “significant guidances” to OIRA scrutiny.

Finally, the fourth amendment is intended to put the regulatory process more under the control of the President. A justification for this change is that the public is better served if greater regulatory responsibility is taken by the appointees of an elected official than by career civil servants.

SILLY POLITICS   But is this shift in regulatory responsibility such a good thing? And, indeed, don’t each of the amendments put regulation more under the control of politicians? A good cost-benefit analysis or thoughtful consideration of market failure would certainly improve the regulatory process, but if politicians are in charge of the analysis (whether a President Bush or, say, a President Al Gore), could we trust the analysis they produce?

To be honest, I’m not sure whether we’d be better served by having the politicians, or the bureaucrats, lead the regulatory state. And I’m also not sure that the fight over EO 12866 matters.

In the Fall 2006 Regulation, New York Law School professor and environmental lawyer David Schoenbrod tells the disturbing story of the Environmental Protection Agency’s Faustian bargain. Schoenbrod claims that Congress created the EPA to be a whipping boy, making the difficult decisions and absorbing the abuse that Capitol Hill’s politicians want to avoid. Congress gets the accolades for voting to “save the environment”; the EPA gets the nightmare of figuring out how to do it, how much of it to save, and who absorbs the cost. And the EPA suffers the wrath of angered environmentalists and industrialists.

I would extend Schoenbrod’s analysis to all regulatory agencies: Congress is supposed to oversee the laws and consider the difficult tradeoffs implicit in regulation. But, because Congress has abdicated its duty, regulatory analysis has fallen to the White House and/or the federal bureaucracy — a situation that serves no one particularly well.

And what is more, it may not really matter whether the White House mandates additional regulatory analysis or who carries it out. As Rutgers University’s Stuart Shapiro argues in the Summer 2006 Regulation, the findings of regulatory analysis have surprisingly little effect on a proposed regulation; what seems to matter is the White House’s position on the regulation. If the White House likes the regulation, the regulation usually gets adopted regardless of the analysis; if the White House dislikes the regulation, it usually gets abandoned regardless of the analysis.

Despite the immense blood-feud over it, regulatory analysis seems to have neither produced the rational, low-cost regulatory paradise that proponents envisioned, nor the misery-plagued wasteland that opponents decried. Instead, as Cato chairman Bill Niskanen has cynically observed, regulatory analysts produce a bunch of lonely numbers that the politicians usually ignore. I suspect Bush’s EO 12866 amendments will produce more of the same — which is to say, the current brouhaha is much ado about nothing.

[Hat tip to Dr. Richard Belzer for correcting my description of EO 13422’s second amendment. You can read Dr. Belzer’s thoughts on EO 13422 at www.neutralsource.org.]

Fighting Government-Run Health Care (Some Exceptions May Apply)

I receive the occasional email from Sarah Berk in her official capacity as the executive director of a group called Health Care America.  (Disclosure: Sarah and I used to work for the same U.S. Senator.)  Typically, these emails riff on the theme:

“Health Care America promotes common-sense policies that limit government control … in the U.S. health care system.”

A recent example is an email informing me that “Health Care America has recently released two op-eds that explain why increased government-control over our health care system reduces consumer choice, quality and innovation.”

So I’m always amused to find an example of government control that Health Care America thinks is just hunky-dory.  And then another.  And another.  And yet another.

For example, Health Care America supports:

  1. Socialized drug coverage for seniors.
  2. Government barriers to trade that prevent Americans from purchasing prescription drugs from abroad. 
  3. State laws that require people to purchase health coverage and that regulate health insurance in a manner reminiscent of HillaryCare: “The recent success of Massachusetts Gov. Mitt Romney in creating a universal system using the private sector demonstrates that it is possible to reach bipartisan agreement on positive changes.”
  4. Government control over charity care in general: “Health Care America believes in the social safety net that is funded by government.”
  5. The nightmarish Medicaid program in particular: “the U.S. rightfully invests significant resources in the program.”
  6. Expanding the State Children’s Health Insurance Program.  According to Health Care America’s ad campaign: ”SCHIP is a notable health care success story…Expanding SCHIP to allow states to cover custodial adults is one easy way to get more children covered by the program.”

How does an organization come to adopt such a sharp yet selective distaste for government control?  And with so many types of government control that it supports, why the strident anti-government rhetoric?

One Reason Why RomneyCare Costs So Much

According to the Boston Globe:

Employees of the new state agency established to provide health insurance to the state’s low-income residents have been hired at an average salary of $111,000 a year, with 12 of the 22 staff members making more than $100,000 and six earning more than Governor Deval Patrick and his Cabinet secretaries…

Eventually the Commonwealth Health Insurance Connector’s administrative costs will be funded by insurance companies through a surcharge . . . of 4 to 5 percent on the premiums they collect as a result of the program. Some have raised concerns that insurers will pass along the cost to consumers in higher premiums.

According to the article, the salaries are so high because the “Connector” is a species of quasi-independent state bureaucracy with the power to set its own salaries.  Former Gov. Mitt Romney once “railed against [such agencies] for their overly generous compensation packages” – that is, until he created one.

The Invaluable Gina Kolata Strikes Again

Read the story of her running injury here.

My interpretation of her story is that the market will often deliver a better diagnosis and more efficient treatment than that specialist who happens to be in your network.  But the market has to be able to experiment with new approaches, such as telemedicine.  And the patient has to care about the money she’s spending.

For more, read Arnold Kling’s Crisis of Abundance.

Boston Tea Party? REAL ID Party!

Our nation has many gentle rivalries. As a northern California native, I have always known that I’m slightly superior to our friends in So Cal. (LA-LA land’s ignorance of our disdain validates it wonderfully, by the way.)

Maine people have a similar feeling toward their neighbors in Massachusetts (even while they root for Boston’s professional sports teams). This is among the things I enjoyed discovering this week as I traveled to the far northeast for some lively discussion of the REAL ID Act.

On a panel I was privileged to join at a community center in Augusta Wednesday night, George Smith, executive director of the Maine Sportsmen’s Alliance, stood to share his opinion of our national ID law and what Maine should do about it. A Norman Rockwell painting come to life, he spoke with all the directness (and accent) of a lifelong Mainer. Summarizing, his message was this: They had their Boston Tea Party. Let’s have a REAL ID Party!

All the spirit and independence that makes me so proud of Americans — without sparing that family rivalry for even a minute!

The result of George’s work — along with the Maine Civil Liberties Union and a bipartisan consensus of the state’s political leaders — was near unanimous passage of a state resolution refusing to implement REAL ID. Maine is now the first state to reject the REAL ID Act, and the tide against the bill is beginning to run. 

(For some equally stirring rhetoric in defense of liberty and against a national ID, here’s New Hampshire Representative Neal Kurk (R-Weare) on the REAL ID Act last year. New Hampshire is one of many states likely to join Maine in rejecting a national ID.)

I have tried to supply the intellectual arguments for rejecting a national ID in my book, Identity Crisis: How Identification is Overused and Misunderstood. I was pleased to offer Smith and a number of Maine’s political leaders copies of the book. 

Gruber & Simon: Crowd-out Is Clearly Significant

Have you checked your inbox for this week’s summary of the latest working papers from the National Bureau of Economic Research? 

If not, you might have missed the latest from Jonathan Gruber and Kosali Simon about how expanding government health programs reduces private health insurance coverage. Here’s the abstract:

The continued interest in public insurance expansions as a means of covering the uninsured highlights the importance of estimates of “crowd-out,” or the extent to which such expansions reduce private insurance coverage. Ten years ago, Cutler and Gruber (1996) suggested that such crowd-out might be quite large, but much subsequent research has questioned this conclusion. We revisit this issue by using improved data and incorporating the research approaches that have led to varying estimates. We focus in particular on the public insurance expansions of the 1996–2002 period. Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%…. We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

In other words, for every 10 people added to the Medicaid rolls, the number of people with private health insurance falls by six.

And just in time for the debate over SCHIP reauthorization.

Hear That? It’s the Sound of a Nation Constricting

Beginning today, citizens of the United States, Canada, Mexico, and Bermuda are required to present a passport to enter the United States when arriving by air from any part of the Western Hemisphere.

This new restriction on local international travel is part of the “Western Hemisphere Travel Initiative.” Tightening up on travel documentation was a recommendation of the 9/11 Commission that Congress passed into law in the Intelligence Reform and Terrorism Prevention Act of 2004.

To downplay the consequences of this new travel restriction, a Department of Homeland Security press release points out that over 90 percent of U.S. citizens, 97 percent of Canadians, and just about all Mexicans and Bermudans flying to the United States over the past week arrived with passports. But this means that fully 10 percent of Americans who currently travel overseas this way are going to be at least inconvenienced, and at most dissuaded, from doing so.

It’s hard to quantify what a marginal restriction on travel like this means, but let’s try:

As early as January 1, 2008, the new restriction may apply to citizens entering the U.S. from the Western Hemisphere by land or sea. Air travelers are probably more likely than land or border crossers to have passports so let’s assume that 10 percent of all American border crossers lack passports.

To get a rough idea of what this means, in 1999, there were approximately 300 million roundtrips between the United States and Mexico and the United States and Canada, the vast majority of them same-day trips. Let’s assume 250 million of them were U.S. citizens. If 1% of these trips don’t happen (10% of current non-passport holders) because of the new Western Hemisphere travel restrictions, that’s 2.5 million cross-border trips forgone each year, along with the commerce, goodwill, and freedom those trips would have entalied.

What price freedom? Well, let’s make it 10 bucks. At that price, using these strictly back-of-envelope estimates, WHTI costs $25 million per year (not counting the cost of administration). The net present value of a $25 million annual expenditure is $500 million (at a 5% interest rate). In other words, more than half-a-billion dollars (a low estimate) worth of freedom and commerce goes down the drain starting today.

It would be worth every penny if it improved our national security by a similar margin. Alas, it does not.

The reason why requiring passports at borders provides so very little security boils down to the fact that identity does not reveal intention.

In our daily lives, we use identity to assure ourselves of the bona fides of others - neighbors, coworkers, stores, and restaurants, for example. But terrorists and hardened criminals are not similarly constrained by the social and legal pressures we can bring to bear on our law-abiding neighbors.

You could have perfect knowledge of who everyone is - lock down everyone’s identity with a mandatory cradle-to-grave biometric tracking system - and you would still not prevent crime and terrorism. I have carefully analyzed the utility of identity for security in my book, Identity Crisis.

Terrorists can defeat an identity-based security system either physically or logically. They can enter the country someplace other than a border crossing for example - and the half-billion expendture on WHTI is 100% wasted. A logical evasion of identity-based border security is to enter the country legally, not having participated in terrorism planning or acts before. This was the technique used by al Qaeda with most of the 9/11 terrorists.

Checking passports at the border of the country is what security expert Bruce Schneier correctly calls “security theater.” It may make you feel safer, but it doesn’t make you safer. It does corral law-abiding citizens into the habit of showing ID as they go about their business, and it puts information about law-abiding travelers into government data stores for who-knows-what future use.

With the travel restrictions going into effect today, America does not get safer, just smaller.