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The Weak Fourth Leg of Reaganomics

by William A. Niskanen

December 7, 1988

William A. Niskanen is chairman of the Cato Institute and was a member of Council of Economic Advisers, 1981-85. This is drawn from his book, "Reaganomics" (Oxford University Press, 1988

One of the four key elements of President Reagan's initial economic agenda, as spelled out in an early policy statement, was "a far-reaching program of regulatory relief." As it turned out, however, this program provided little relief and no significant reform. A review of the Reagan regulatory record may provide some guidance for the next administration.

The total cost of federal regulation to the American economy continued to increase, but apparently at a slower rate. A direct estimate of this cost has not been made, but several indirect indicators suggest that the primary effect of the Reagan regulation program was to reduce the growth of new regulations. The number of new rules and the pages in the Federal Register, for example, declined substantially relative to the Carter years. Real spending by the federal regulatory agencies continued to increase, but at a lower rate. The regulatory momentum was clearly slowed, but it was not reversed.

Complementary Measures

Only a few changes in the basic regulatory legislation were proposed, some of which were not approved. Those that were okayed included the continued deregulation of depository institutions, substantial deregulation of intercity buses and ocean shipping, and repeal of some restrictions on energy uses. Several attempts to broaden the power of bank holding companies and to deregulate wellhead prices of natural gas were rejected by Congress.

The administration did not develop proposals for the complementary measures that are probably necessary to sustain the deregulation of several industries. Some change in the deposit insurance systems or a major restructuring of financial institutions, for example, is probably necessary to sustain the deregulation of commercial and savings banks. Similarly, the deregulation of domestic airlines may not be sustainable without a change in the air traffic control system and the methods for rationing congested airports and airspace. The continued deregulation of communications may also be dependent on changing the methods for allocating the frequency spectrum. Some re-regulation of these industries is likely unless the new administration wins approval for such measures.

The Reagan team would not address a reform of the authorizing legislation affecting health, safety and environmental regulation. Although the objectives of these regulations are broadly shared, much of the legislation is seriously flawed, based on inappropriate criteria or an inadequate data base, and is unduly costly to the economy. Then-White House Chief of Staff James Baker rejected proposals for changing this legislation on the basis that they would be too controversial. Prospects for these reforms are probably worse now than in 1980.

In summary, the Reagan program of regulatory relief promised more than it delivered. The failure to achieve a significant reduction in or reform of federal regulations, building on the substantial momentum of economic deregulation established during the Carter administration, was the major missed opportunity of the Reagan economic program.

There once was reason to expect a better record. During its first month, for example, the administration established a task force on regulatory relief (under George Bush) to provide general policy guidance, terminated the remaining price controls on oil and Jimmy Carter's "voluntary" wage and price guidelines (and abolished Council on Wage and Price Stability), suspended a large number of pending regulations for further review, and centralized the review of regulations in the OMB Office of Information and Regulatory Affairs (OIRA). Moreover, many of the Reagan appointees to regulatory positions were first-rate-most important, the successive directors of OIRA; the chairmen of the federal communications, energy, and trade commissions; and the new judges on the federal court of appeals for the District of Columbia.

Although this program started with a bang, it ended with a whimper. The more aggressive actions to review, modify, or delay new regulations were soon checked by botht the courts and Congress. A 1981 decision by the Supreme Court ruled that an agency must set the tightest feasible standard, if that is the standard established by law, even if the benefits are much less than the costs-a decision that may be good law but is lousy economics. Separately, the "hard look" doctrine of the D.C. federal court, developed during the late 1970s and endorsed by the new Reagan appointees, had the effect of restricting the authority of both OIRA and the regulatory agencies to interpret their legislative authority.

This position of the courts increases the importance of changing the regulatory legislation if the momentum for deregulation is to be revived. But the legislative picture is bleak. In 1983 Congress attempted to restrict the authority of OIRA to review proposed regulations, and in 1986 Congress attempted to deny funds for this office; although both of these threats to the executive review of regulations were defeated, they had a substantial deterrent effect on the OIRA role.

The most important lesson from the record is that an aggressive strategy of deregulation is necessary to avoid a net increase in regulation. Most current regulations do not have a termination date, and most of the propsed changes would increase regulation. Most proposals for new regulations were the result of agency interpretations of legislative mandates, a process that wasn't significantly checked by Reagan appointees to these agencies, especially in light of the position of the courts. Those involved in the regulatory review process usually could only limit the damage. With considerable skill and effort, some proposals for new regulations were rejected, modified, or delayed. In most cases, they were not.

The Next Administration

The White House bears some responsibility for this problem. The program for regulatory relief was clearly the lowest priority of the four elements of the Reagan economic agenda, notwithstanding George Bush's chairing of the regulatory-relief task force and a later one on financial deregulation. And the post-1981 political strategy of not going to bat unless one could hit a home run limited the opportunity to propose the repeal or reform of the large body of regulatory legislation.

In the next administration, disciplining federal regulation probably will be even more difficult. Although George Bush has a record of supporting deregulation-at least up to the point of serious political controversy-the probable control of Congress by the Democrats would limit his opportunity to change the underlying legislation. And though a Dukakis administration would have a greater opportunity to reform the health, safety and environmental lawas, the federal fiscal condition will increase the incentive to use regulations to achieve a wide range of welfare objectives. Little evidence suggests regulatory reform will be a higher priority for the next administration-of either party-than it was for this one.

This article originally appeared in the The Wall Street Journal on June 30, 1988.