January 31, 2017 3:00PM

President Trump’s “One‐​in, Two‐​out” Rule: Lessons from the UK

Monday saw President Trump force through another executive order - “Reducing Regulation and Controlling Regulatory Costs. The headline was the introduction of a new “one-in, two-out” rule for new regulations:

for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.

Anything that can be done to focus regulators’ minds on the costs imposed on private businesses and groups of new regulation is probably, on net, positive. But the UK has had a policy like this since 2005, first adopting a "‘one-in, one-out" rule, then a "one-in, two-out" rule and now a "one-in, three-out" variant. The results are widely acknowledged to be mixed. Here are 4 lessons from the UK the Trump administration should bear in mind.

1. Focus on costs, not counting regulations

What really matters is not the number of regulations but the costs imposed on private businesses and civil society organizations. A “numbers” approach could be gamed: a department could introduce a new regulation, and remove a defunct one, while imposing new business costs. Thankfully, both the UK government and Trump’s executive order now recognize this. Section 2, part c) of the order says:

any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations

In the UK though, “one-in, one-out” eventually meant that for every new regulation introduced with a net cost to business, regulations up to an equivalent net cost would be eliminated. It would be better named a “pound-for-pound” rule. When upgraded to “one-in, two-out” every new regulation with net costs to business had to be compensated for by regulatory removal or revision at double the monetary cost of the new regulation. And so on. Whether badly drafted or otherwise, Trump’s version reads more like the “one-in, one-out” rule on cost, albeit having to find the cost compensation across two regulations. If implemented in this way, it could become messy to implement for many agencies. Judging regulation by pure cost rather than numbers, as the UK has done, would be a stronger constraint.

2.  Judge by net costs rather than gross costs

Any new measure, whether regulatory or deregulatory, will generate some costs to private businesses and civil society. If Trump is serious about deregulation, it therefore makes much more sense to assess “net” costs, rather than “gross” costs as a target for the new rule. This was recognized in Britain which now carries out the net cost methodology. Otherwise perverse incentives are created: departments or agencies will be cautious about ever proposing deregulatory measures where benefits to business exceed new costs, because they would still have to find gross cost savings elsewhere. As Stuart Benjamin outlines, steps taken to make pipeline construction easier, for example, otherwise might end up delayed as the agency scrambles around finding existing regulations with gross costs to remove to compensate for the very small costs of a deregulating measure. This might seem an obvious point, but at the moment the order is ambiguous – simply stating that the Director of the OMB will provide guidance “for standardizing the measurement and estimation of regulatory costs.”

3.  Include as much as possible within the rule

The Centre for Policy Studies found that in 2011 42 per cent of all new regulations introduced fell outside of the scope of the “one-in, one-out” policy in the UK and this rose as high as 50 per cent in the first six months of 2012. Even when the “one-in, two-out” policy was introduced, it excluded regulations relating to tax collection, imposed by the European Union (unless the UK government went beyond EU requirements), for civil emergencies, that had no impact on businesses, with only indirect effects on businesses, to meet international obligations, relating to civil emergencies, relating to financial systemic risk, relating to fines, fees and charges, if the regulation had a temporary lifespan and if it was periodic adjustment of existing regulation, such as the National Minimum Wage.

These exclusions are significant. If one examines purely the regulations under the rule’s scope, then since 2005 the variants are said to have reduced net business costs by $10.8 billion. In truth, however, this pales into insignificance compared with the rise in net costs in areas outside of the scope. In conjunction with its “one-in, three-out” policy for 2015-2020, the UK government has an aim of reducing net regulatory costs on business by $12.6 billion. Since 2015 it believes it has got $1.1 billion of the way there. But the UK’s National Audit Office estimates that $10.4 billion of other new costs have been imposed on business outside of the framework in that period.

Trump’s executive order excludes regulations relating to national security and also includes provision for the Director of the OMB to make other exemptions. It has been reported that it will not cover independent agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. The lesson from the UK is clear: if you exclude too much from the framework, you will not make overall regulatory cost savings.

4. Don’t ignore the stock

Trump’s executive order is all about the flow of new regulations. But if one is serious about deregulation then you have to re-examine much of the stock of existing regulations, even absent new regulations being brought forward. In the UK the “one-in, one-out” rule was therefore complemented with a “Red Tape Challenge” to identify and remove regulations from the existing stock.

The UK National Audit Office identified that many departments in the UK are simply unaware of the costs imposed as a result of their existing regulations. They therefore have no idea how ambitious their targets for reducing regulatory costs really are. It’s therefore essential that a major deregulatory push in the US includes continued auditing of the stock of regulations as well as reaction to the flow.