Deregulation – It’s Harder Than it Looks

Last month I wrote a post that explained why cutting the federal workforce is much harder than it might appear. That post prompted a discussion with one of my ICF colleagues (Gary Light) regarding President Trump’s Executive Order on deregulation. It should not come as a surprise that deregulation, much like cutting the workforce, is easy in theory and difficult in execution. I asked Gary to write a guest blog post so ChiefHRO readers can take a look into the complex world of federal regulations.  

President Trump’s January 30, 2017 Executive Order, “Reducing Regulation and Controlling Regulatory Costs,” is intended to reduce the number of federal regulations by requiring agencies to identify two regulations to be repealed for each “new” regulation (the “2 for 1” rule) and offset costs from “new” regulations with cost savings (the “net zero” rule).  On February 2, 2017, the Acting Administrator for OMB’s Office of Information and Regulatory Affairs (OIRA) published additional guidance for implementing the Executive Order.  To implement both the “2 for 1” and the “net zero” rules, agencies will be required to navigate several major challenges, some resulting from the Order and related guidance itself, and others inherent to the laws and conventions of the federal regulatory system.

On the face of it, the “2 for 1” rule – repealing 2 regulations for each new regulation — is both clear and significant.  But how do we count “regulations”?  And how do we look at costs? To understand the challenge, let’s review how federal regulations are published and organized. Like many seemingly easy ideas, the transition from concept to execution can be a challenge.

When an agency wants to change a regulation or wants input from the public on a possible change, it must publish a notice of the change in the Federal Register (FR). Whether the change is to make the regulation more restrictive or less restrictive is irrelevant. FR notices typically include background information, such as history and legal authority, various options that were considered or are being considered, a summary of public comments and economic impacts, and the actual regulatory language.  Final regulatory text is officially recorded by the Government Publishing Office in the Federal Code of Federal Regulations (CFR).  Watchdog groups and scholars often cite the number of pages the FR takes up in a given year, but that metric has little to do with the magnitude of regulation because the FR also includes many other agency notices, studies, public filings, and public meeting announcements. The number of words in a regulation is also far less important than what the regulation does.

Within the existing framework, how would an agency start offsetting one (or two) regulations for another?  The January 30 Executive Order defines “regulation” to exempt rules related to national security and to include Agency policy, interpretation, and guidance documents.  The OMB Interim Guidance uses to the term “regulatory action” rather than “regulation” to make it more intuitive that it may include the rollback of guidance.  Additional clarification is sure to follow, but any such “2 for 1” approach without additional guidance is inherently prone to manipulation and mischief, and may distract from the president’s goal of identifying and repealing “outdated, ineffective, or unnecessary regulatory actions.”

The second provision of E.O. 13771 – the “net zero” regulatory burden requirement – is the more substantive provision intended to focus attention on eliminating “unnecessary regulations.”  The OMB Interim Guidance suggests that the Acting OIRA Administrator sees the overall regulatory burden as the core issue and metric.  While the current guidance addresses only pre-September 30, 2017 regulatory actions, the general provisions or something like them are likely to be extended.

The OMB Interim Guidance clarifies that the “2 for 1” and “net zero” provisions apply only to “significant” regulatory actions, which generally means regulatory actions that have an effect of $100 million or more on the annual U.S. economy.  In addition, the OMB Interim Guidance clarifies that the Order applies only to regulatory actions taken by executive departments, and not to independent regulatory agencies (e.g., FTC, NRC, and FCC).   According to the OIRA web site, there were 77 such actions between October 1, 2015 and September 30, 2016.  Given the emphasis on offsetting new significant rules, an agency may need roll back two, three, or more lesser regulatory actions to offset $100 million or more in cost impact of a new significant regulation.  This would likely be the case no matter how we count regulatory actions.  On the other hand, if an agency comes up with a single deregulatory action that would fully offset the impacts of a significant regulatory action, it is hard to imagine that OMB would not exercise its authority to grant a waiver to the “2 for 1” provision.

Another interesting and important aspect of the OMB Interim Guidance is the emphasis on and suggestions for conducting new cost analyses to account for savings from deregulation.  The guidance essentially disallows reliance on past Regulatory Impact Analyses (RIAs) (i.e., cost-benefit analyses) that would have been required at the time of the original rule (assuming that the original regulation was considered a significant regulatory action).  The guidance implies – and it is reasonable to assume – that the data in past RIAs may be outdated.  However, one might expect a reference in this area to the provisions of Executive Order 12866 or OMB Circular A-4, which are the documents that require and specify the details of how agencies must analyze the costs and benefits in an RIA for a proposed significant regulation. Both of these documents remain in force according to the guidance.   In the OMB Interim Guidance, instead of referring to previously conducted cost-benefit analyses, agencies are “strongly encouraged to use program evaluation and similar techniques to determine the actual costs and other effects of eliminating regulatory actions.” The potential implication of these provisions is that, although retrospective reviews and cost analysis methodology are relatively well established, new and different forms of analysis will be needed to support deregulation.

But why focus on program evaluation and not mention cost-benefit analysis?  The guidance never mentions the societal benefits that might be accruing due to existing regulations (such as improved health associated with cleaner air or lives saved by safety standards).  Perhaps consideration of such benefits is implied within the framework of “program evaluation and similar techniques”, but it is difficult to see how the Administration intends for agencies to address potential benefits from past regulations that might be foregone to achieve regulatory cost savings.  Could the Administration consider only the cost savings and not the loss of benefits that would be associated with deregulation?

Probably not – at least without additional changes to the broader law, policies, and guidance that comprise the federal regulatory system.  Most significant federal regulations are adopted by agencies under the authority or direction of laws enacted by Congress directing agencies to engage in evidence-based rulemaking. This statutory authority provides the basis for any rulemaking, and it typically articulates the societal benefits that Congress hoped to achieve through regulation.  One way or another, this new “2 for 1” regulatory system is likely to require full consideration of costs and benefits for each regulatory action that is part of the package required to maintain the “net zero” cost impact.

Most federal regulatory actions are governed by the Administrative Procedure Act (5 U.S.C. §§ 551-559), which requires agencies to provide ample notice and opportunity for public comment on proposed regulations, and that regulatory decisions be well-reasoned rather than arbitrary and capricious.  Judicial review of regulatory actions generally requires that agencies build a case for regulatory actions, and once having done so courts review an agency decision as it is reflected in the administrative record, which consists of all the information the agency had before it when making the decision.  According to the Supreme Court, an agency must defend and provide a detailed justification for a policy change to the same extent as if the agency were promulgating a new rule.[1]   So while it may not be good enough to rely on past RIAs when Agencies consider “undoing” a regulatory action, federal courts may want to look beyond just the cost savings to consider a full cost-benefit analysis or Cost Effectiveness Analysis (if one was prepared) for the original action now being considered for repeal.

Another way that the well-established federal rulemaking process compels a comprehensive analysis of costs and benefits of each component of the overall “net zero” regulatory burden requirement is through the RIA that will be required of the new significant regulatory action that is to be offset by repealing 2 past regulatory actions.  OMB Circular A-4 directs Agencies to select an appropriate baseline against which to compare costs and benefits of regulatory actions.  Such a baseline needs to reflect how the world would likely look absent the regulatory action.  If the new regulatory action is bundled with deregulatory or streamlining actions in the same regulatory program, then the costs and benefits of the repealed or streamlined regulation would need to be considered either as part of the new regulatory action or as a change to the regulatory baseline for the new regulatory action.

The new Executive Order and related guidance, particularly the “net zero” cost impact provision, further complicate and add uncertainty to the regulatory process.   The administration has clearly raised the bar for getting new regulations through OMB.  However, because of the Administrative Procedure Act and the rules for justifying all regulatory actions (both regulatory and deregulatory), efforts to repeal regulations should consider both the costs and the benefits of past rules, despite the cost emphasis in the January 30 Executive Order and OMB Interim Guidance.  While many uncertainties remain about how this will play out, it is clear that agencies are being encouraged to think big and broadly about how to achieve regulatory objectives most efficiently, and to take a hard look at past regulations for opportunities to make them more efficient and effective.

Gary Light is Senior Vice President for ICF and an expert in developing and evaluating regulatory and policy options and programs. His expertise centers on integrating engineering, economic, and legal principles with information technology to solve complex public policy challenges. In addition to providing project, program management, and advisory services, Gary is a cocreator of CommentWorks®, ICF’s commercial Web-based application for managing public comments. 

 

[1] Motor Vehicles Manufacturers Association v. State Farm Mutual Automobile Insurance Co, 463 U.S. 29 (1983); Federal Communication Commission v. Fox Television Stations Inc., 556 U.S. 502 (2009).

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