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.]

New Climate Change Report Out Today

The Intergovernmental Panel on Climate Change (IPCC) released a new climate change study today at a news conference in Paris. The study reports that global warming caused by human activities is now a virtual certainty, and paints a startling picture of the effects of global climate change. Still, not everyone is in complete agreement as to the severity of the threat. “Anyone who says that the planet is warming at an increasing rate is simply dead wrong,” says Cato scholar Patrick Michaels, author of Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media. Dr. Michaels’ full comments are available here.

It Pays to Waste Money

Despite a long history of political advocacy and fiscal mismanagement, the Legal Services Corporation (LSC) will get a $22 million budget increase if a spending bill recently passed by the House becomes law.

You might recall that the LSC made the news last year when its inspector general revealed that LSC executives were living large on tax dollars — enjoying chauffer-driven limousine rides around D.C., expensive meals, foreign trips, and a posh office suite in Georgetown. And as retribution for exposing those excesses, the LSC almost fired its inspector general.

Now the agency, a target of fiscal conservatives for decades, is poised to receive a 6.3 percent budget increase — from $327 million in fiscal year 2006 to $349 million in FY 2007.

Though the practice of rewarding mismanagement with more funding is commonplace in Washington, Congress had promised to do things differently this year. The spending bill was supposed to simply continue funding the federal government at 2006 levels. 

Unfortunately, it appears that old spending habits are hard to break.

A French Global Warming Tax Against the U.S.?

Al Gore has a new ally in his fight for new taxes and regulations to limit carbon emissions. The New York Times reports that, for all intents and purposes, Jacques Chirac is blackmailing the United States: 

President Jacques Chirac has demanded that the United States sign both the Kyoto climate protocol and a future agreement that will take effect when the Kyoto accord runs out in 2012.

He warned that if the United States did not sign the agreements, a carbon tax across Europe on imports from nations that have not signed the Kyoto treaty could be imposed to try to force compliance.

Trade lawyers have been divided over the legality of a carbon tax, with some saying it would run counter to international trade rules. But Mr. Chirac said other European countries would back it. “I believe we will have all of the European Union,” he said.

A 95 Percent Tax Rate?

Brad DeLong says in the Miami Herald that confiscating and redistributing 95 percent of the wealth generated by entrepreneurs would create “more happiness and opportunity.” Does that mean he wants a 95 percent top rate for the income tax? A top rate of 95 percent for the death tax? Surely he does not really think tax rates should be that high, but his column certainly points in that direction: 

Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations. It has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth — a successful right-wing class war. This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial and justly wealthy. But only the first 5 percent of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it. An unequal society cannot help but be an unjust society. The most important item that parents in any society try to buy is a head start for their children. And the wealthier they are, the bigger the head start. Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great.

Get Ahead of the News with Cato@Liberty

In Thursday’s Wall Street Journal, Fred Barnes makes a point (paid reg. req.) that I made here last week: Hard as it to believe, Sen. Hillary Clinton may campaign as the least statist of the Democratic presidential candidates. Barnes writes:

As surprising as this may sound, Mrs. Clinton starts her campaign as the Democratic candidate furthest to the right. The only two Democrats who might have gotten to her right — Sen. Evan Bayh of Indiana and former Gov. Mark Warner of Virginia — dropped out of the race. 

I had made that point. And I also noted that Sen. Russell Feingold would have criticized Hillary on civil liberties issues. With Feingold, Bayh, and Warner all out of the running, Hillary’s determination to constrain her big-government instincts during the campaign will be sorely tested as she fends off challengers like Sen. Barack Obama, former senator John Edwards, and maybe former vice president Al Gore.

A footnote: Barnes and I have both ignored New Mexico governor Bill Richardson, who has persuaded Larry Kudlow that he’s a “a pro-growth, tax cutting Democrat.” Maybe moderate Democrats will have a choice after all.

The Republican Future

In today’s Washington Examiner, I have a column on future directions for the Republican party. One point:

Republicans need to look to the future: Younger voters are more likely to be libertarian, more likely to accept gay marriage, and more likely to have voted Democratic in 2006.

Republicans need to reach them before the Democrats lock them in. They can do that with an optimistic, inclusive message of liberating people from the dead hand of the federal bureaucracy — a smaller and less intrusive federal government, encouragement of enterprise and economic growth, a government that respects but doesn’t embrace religion, and a de-escalation of the culture wars.