March 13, 2017 5:29PM

Dire Fears of Trump Deregulation

Four decades ago, the United States began a dramatic change in domestic policy, repealing swaths of economic regulation and abolishing whole agencies charged with managing sectors of the U.S. economy.


If you mention this “deregulation” today, most people think it refers to wild Reagan administration efforts to undo environmental, health, and safety protections. In fact, the deregulation movement predated Ronald Reagan’s presidency, had broad bipartisan support, and had little to do with health, safety, or environmental policy. Rather, deregulation targeted regulations that directed business operations in different sectors of the American economy: which airlines could service which routes, what railroads could charge what amounts for their services, how telephone service would be billed and what technologies would be used, how the power industry was organized, and much more.


For decades, policy researchers had compiled evidence that those regulations harmed consumers and stunted economic growth by suppressing competition and innovation. With America mired in the stagflation of the 1970s, policymakers decided to stop sheltering (some) U.S. businesses from the demands of consumers and the competition of upstart and foreign rivals.


That policy change now seems obviously virtuous, but at the time some commentators predicted it would unleash mayhem and disaster: a crippled economy, spiraling prices, "ruinous" competition, frightened consumers, plane crashes, hobbled communications, and other horribles. Fortunately, those frightful predictions did not obstruct reform. Today, the 1970s–1990s deregulations are broadly recognized as having yielded great benefits to consumers and contributed to the two decades of American prosperity that ended the 20th century. (For more on deregulation, see the spring issue of Regulation, celebrating the magazine's 40th anniversary.)


Which brings us to current criticisms of Trump administration efforts to launch a new wave of deregulation. Like yesteryear, the critics are predicting mayhem and disaster. But their arguments aren’t convincing.


Consider, for instance, Northwestern University law professor Andrew Koppelman’s warning that “Trump’s ‘Libertarianism’ Endangers the Public.” (Credit Koppelman for using scare quotes to indicate that President Trump isn’t a libertarian.) Specifically, he worries about Trump’s recent order on regulation, which instructs agencies to (temporarily) keep the nation’s aggregate cost of regulatory compliance at its current level and to repeal two regulations for every new one adopted.


Writes Koppelman:


When he was President, [Barack Obama] demanded (following a principle laid down by Ronald Reagan!) that any new regulations survive rigorous cost–benefit analysis. … Trump, on the other hand, has replaced cost–benefit analysis with cost analysis. Benefits are ignored. … Consumer fraud, tainted food, pollution, unsafe airplanes and trains, epidemic disease all have to be put up with, if stopping them would increase the costs of regulation.

Koppelman properly praises cost–benefit analysis, the idea that proposed regulations should be scrutinized to ensure that they do not produce more harm (cost) on net than good (benefit). But even if we assume that all federal regulations were covered by Obama’s order (they weren’t) and all of the cost–benefit analyses were accurate (ditto), there is still a serious problem with Koppelman’s argument.


He assumes that passing a cost–benefit test should be sufficient for a new rule to be implemented. Yet, human resources are limited, and resources devoted to complying with regulations cannot be devoted to producing other benefits. Put another way, all rules—even terrific ones—have opportunity costs, and ignoring those costs is bad public policy. As President Jimmy Carter explained back in 1979:


Our society’s resources are vast, but they are not infinite. Americans are willing to spend a fair share of those resources to achieve social goals through regulation. Their support falls away, however, when they see needless rules, excessive costs, and duplicative paperwork.

(H/T Richard Williams)


Federal cost–benefit analysis is supposed to take opportunity costs into account, but that accounting is dicey to say the least. So it’s sensible to place a limit—which in essence is what Trump’s order does—on the United States’ total regulatory compliance cost in order to ensure that plenty of resources can be devoted to other benefits.


Admittedly, the Trump order is a crude way to do this. The limit de facto assumes the current level of U.S. spending on regulatory compliance is the right amount, whereas Koppelman apparently believes there is no limit to what the nation should spend on new rules so long as they pass a cost–benefit test. On the other hand, many Americans say that they are already overburdened with the costs of regulatory compliance.


But crude initiatives can be useful. In theory, capping compliance costs should prompt regulators to prioritize current and prospective rules, embracing those with high net benefits and dispensing with those with low (and even negative) net benefits. It’s outlandish to think that good regulations protecting from “consumer fraud, tainted food, pollution, unsafe airplanes and trains, epidemic disease” should be prioritized over, say, low-value but costly regulations.


Of course, the devil is in the details, and the Trump administration’s performance so far gives little confidence about its ability to manage details. For instance, how reliable will his agencies be at estimating the costs of regulations implemented and repealed? What does it mean to repeal “two” regulations—repeal two small provisions or two whole rules? Doesn’t repeal of a regulation require the writing of a new regulation striking the old one? Will, say, the Occupational Safety and Health Administration give up on a low-value worker safety rule in order for a high-value Environmental Protection Agency to advance?


Still, the cost limit and the one-in, two-out requirement (versions of which have been tried in other countries) could be useful exercises to cull poor federal regulations. Contra Professor Koppelman, they shouldn't be dismissed out-of-hand.