Regulatory Reform Concepts in the Senate Regulatory Accountability Act
The Senate Committee on Homeland Security and Governmental Affairs is scheduled to consider multiple regulatory reform bills on May 17. One bill with bipartisan sponsorship, the Regulatory Accountability Act, would require regulatory agencies to assess and consider some commonsense factors that are currently required only by executive order for executive branch agencies. These include the nature and significance of the problem the regulation seeks to solve, alternative solutions, and the benefits and costs of each alternative. Several other requirements in the bill seek to ensure that the agency’s analysis meets some minimum standards.
During the past decade, Mercatus Center scholars have conducted extensive original analysis that sheds light on the likely effects of codifying economic analysis standards and related reform concepts. What follows is a guide to the most recent Mercatus Center research relevant to reforms that could improve regulatory outcomes.
Require regulatory impact analysis as a rulemaking consideration. Executive orders currently require executive branch agencies to produce regulatory impact analysis that assess the nature and significance of the problem the regulation is supposed to address, develop alternative solutions, and (for “major” rules with economic impacts exceeding $100 million annually or certain other specified effects) estimate the benefits and costs of each alternative. Unfortunately, these analyses often suffer significant deficiencies. Agencies lack incentive to correct those deficiencies because regulatory impact analysis is not clearly subject to judicial review. Some independent agencies already face statutory requirements for such analysis, but many do not. The Securities and Exchange Commission does have a statutory requirement for benefit-cost analysis, and its economic analysis improved noticeably after it lost several significant court cases due to deficient analysis and adopted new guidance requiring staff to consider the rationale for the regulation, alternative solutions, benefits, and costs. Some argue that writing new analytical requirements into law is unwise because it already takes too long to produce regulations, but such claims of “regulatory ossification” are grossly overstated.
Require that rules must be based on the best reasonably available scientific, technical, and economic evidence. Currently, courts evaluate the quality of an agency’s regulatory impact analysis (or other similar economic analysis) only under special circumstances, such as when the analysis is statutorily required or the agency relies on the analysis as justification for its decisions. Research shows that courts are capable of assessing whether the agency has used the best available evidence in its analysis, and the judicial system as a whole does not seem to be biased for or against regulation. However, unless the statute dictates otherwise, courts evaluate the agency’s analysis under the vaguely-defined “arbitrary and capricious” standard. In practice, this has been a highly inconsistent standard of review; some courts assess whether the agency used the best available evidence in the record, while others practice extreme deference toward agencies’ analytical judgments. A clear statement in statute that the agency’s regulatory impact analysis is part of the record, and that courts should ensure that the agency bases its decisions on the best available evidence, should prompt courts to examine the quality of the agency’s regulatory impact analysis without giving judges free rein to impose their own policy views on the agency.
Require agencies to explain how their analysis informed their decisions. Currently, even when executive branch agencies produce reasonably thorough regulatory impact analyses, they often decline to explain how the analysis informed their decisions. A study of 130 major regulations proposed by executive branch agencies between 2008 and 2013 found that 59 percent of them were accompanied by no explanation of how the agency’s regulatory impact analysis affected any decisions about the regulation.
Require agencies to seek public comment on a preliminary analysis of the problem they seek to solve and the benefits and costs of potential alternative solutions before they write and propose a regulation. Agencies tend to produce more thorough regulatory impact analysis when they publish preliminary analysis, ask the public for relevant data, or consult with stakeholders before proposing regulations.
When an agency terminates a rulemaking, require the agency to publish an explanation of its decision not to regulate. This provision potentially corrects a bias in agency incentives. Regulatory agencies often measure their success and reward employees based on the number and size of regulations they complete, instead of whether their regulations produce tangible benefits for the public. As one agency economist noted, “Success is putting out 10 regulations a year and bigger regulations are bigger successes. They don’t say, ‘We examined 10 [situations] and we decided that 8 did not warrant regulation…’” Requiring agencies to publish a notice explaining why they opted not to regulate would give them an opportunity to explain why they determined the problem was or will soon be insignificant, alternatives to federal regulation would provide better solutions, or the costs of regulation would exceed the benefits.
Provide for the right to petition for a formal hearing to resolve disputed factual issues. Stakeholders often lack any significant opportunity to challenge an agency’s factual claims. If the agency disagrees with factual issues raised in public comments, it can simply state that it is not persuaded, and deferential judges will often look no further if the agency is challenged in court. In a hearing, the agency would have to demonstrate why its factual evidence is more accurate than that offered by critics. For rules with very large impacts, the benefits of this requirement may well exceed the costs.
Require the agency either to explain how the benefits of a regulation justify its costs, or provide an evidence-based explanation of why it adopted a regulation whose benefits do not justify the costs. One of the most contentious regulatory reform issues is whether to require a substantive decision-making standard, such as a requirement that benefits of a regulation must exceed its costs. A clear and flexible approach that allows consideration of factors other than benefits and costs would require agencies to select the alternative that maximizes net benefits (the difference between benefits and costs) as a default, but allow agencies to make regulatory decisions based on other factors as long as the other factors are clearly defined and the agency presents evidence that those other factors are important to citizens. This would permit serious, evidence-based consideration of unquantified benefits and costs, as well as factors other than benefits and costs. But it would prevent agencies from using undefined or unsubstantiated “values” as trump cards that allow them to ignore all consideration of benefits or costs.
Require the agency to conduct a high-quality regulatory impact analysis even if another statute prohibits the agency from considering some factors in the analysis, such as costs. For some regulations, such as air quality standards promulgated by the Environmental Protection Agency (EPA) under the Clean Air Act, the agency is prohibited from considering costs. This prohibition is associated with less thorough analysis of costs for these regulations than for other EPA regulations. To ensure that the full effects of such regulations are disclosed to Congress and the public, an agency’s regulatory impact analysis should be held to the same standards as all other agencies’ regulatory impact analyses, even if the agency is not permitted to let some parts of the analysis influence its decisions.
Permit a new administration to review the prior administration’s “midnight regulations.” “Midnight regulations” — regulations adopted at the end of a presidential term between Election Day and Inauguration Day — can be poorly thought-out because they may be rushed into place during the period when an outgoing administration faces no electoral consequences for its decisions. This was true in both of the previous two administrations. An incoming administration should have the opportunity to pull back and reconsider the previous administration’s midnight regulations without having to initiate a brand-new rulemaking.
Require expiration dates for interim final rules. Rushed interim final rules can be accompanied by deficient analysis, especially if they implement significant policy priorities that an administration has decided to pursue regardless of what the analysis shows. This was true in both of the previous administrations, where scant analysis accompanied interim final rules implementing the administration’s legacy policy priorities.
Require regulatory impact analysis and Office of Information and Regulatory Affaris (OIRA) review, and allow judicial review, for significant guidance documents. Agencies have an incentive to avoid notice-and-comment rulemaking by issuing guidance documents as a substitute. A statutory requirement for regulatory impact analysis could increase this incentive; a statutory requirement that significant guidance documents be treated more like regulations would help mitigate this incentive.
Require agencies to include a framework for evaluating the rule after it is implemented, including an identification of the data required to assess the rule’s benefits and costs and a timeline for evaluation. One of the largest but most poorly-understood costs of regulation is the cost associated with regulatory accumulation — the gradual pileup of rules that may be outdated or ineffective. A recent study found that U.S. gross domestic product could have been $13,000 higher per person in 2012 if regulation had merely remained at its 1980 level. If the US regulatory burden were its own country, it would be the fourth largest economy in the world. Agencies virtually never offer a plan for retrospective evaluation of regulations when the regulations are proposed. Few agencies have a culture of consistent, rigorous retrospective evaluation of regulations to determine whether they achieve the intended outcomes, and at what cost.
Establish an independent commission to review existing rules and recommend which ones should be retained, revised, or terminated. Because agencies can have an incentive to preserve the regulations they promulgated, retrospective review by an independent commission may be more effective at revising or eliminating regulations that fail to solve real problems at a reasonable cost.
