Daily Archives: 01/19/2011

Is rationalizing regulation even possible through political processes?


From:  http://knowledgeproblem.com/

Lynne Kiesling

Like other economists, I was intrigued by President Obama’s op-ed in Tuesday’s Wall Street Journal about streamlining federal regulation. Like Matthew Kahn, I see the influence of Austan Goolsbee here, as well as Cass Sunstein; like Tim Haab, I think this is a salutary call for more, and more consistent, application of cost-benefit analysis to existing and proposed regulation and legislation. I applaud the sentiments President Obama conveys when he says

But creating a 21st-century regulatory system is about more than which rules to add and which rules to subtract. As the executive order I am signing makes clear, we are seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs. This means writing rules with more input from experts, businesses and ordinary citizens. It means using disclosure as a tool to inform consumers of their choices, rather than restricting those choices. And it means making sure the government does more of its work online, just like companies are doing.

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

Call me a skeptic, though, when I then observe that intentions and rhetoric are not value-creating unless they lead to actual results. Previous executive administrations have promised such regulatory reviews, usually amounting to little more than window dressing, regardless of political party. This administration promised a line-by-line budget review two years ago and has yet to deliver on that promise. Regulatory lag is very likely to undermine a large share of the potential benefit from this executive order; take this example from President Obama’s op-ed:

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.

The EPA listed saccharin as a hazardous chemical in 1980. He’s offering this as an example of the EPA “wisely” eliminating a costly and counterproductive regulation … but note that saccharin was discovered in 1879, the FDA considered banning it in 1977 but did not do so due to Congressional legislation, and the EPA is finally eliminating its contradictory rule in 2011, 31 years after putting saccharin on the hazardous chemicals list! Unless federal executive and administrative staff actually set deadlines and act to meet them in a timely manner, and are held accountable to do so with consequences if they don’t, regulatory lag will consume all of the potential benefit from this proposed regulatory streamlining.

Note also, while we’re on the subject of the EPA, that the EPA is involved in much of the contradictory cross-agency regulation that the Obama administration purports to want to streamline. As Matthew Kahn asked in his post linked above, “How will cross-agency disputes here be arbitrated? If one agency finds the rule helpful while another does not, how will the verdict be decided?” The incentives facing each of the hundreds of federal agencies is not necessarily to streamline their regulations, particularly when doing so might create benefits for others but would reduce their budget or their reach/power. How do the implementers of this order in the Obama administration propose to align those incentives with President Obama’s statement that “Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary.”?

Another complication that will limit the executive and administrative staff in achieving regulatory streamlining will be federalism. Some of the most costly and nonsensical cross-agency contradictory regulations are not just cross-agency; they are cross-jurisdiction, where a federal regulation and a state regulation interact to yield perverse incentives and bad outcomes. One example is the interaction of the EPA’s New Source Review regulations under the Clean Air Act with the cost-based economic regulation of electric utilities at the state level. New Source Review and regulatory approval of cost recovery for investments combine to create risk aversion and caution among state regulators, and thus to stifle technological innovation in electricity, particularly in generation. A streamlining of federal regulations would not address situations such as this one.

Finally, note that President Obama is clinging to the canard that “… we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.” He and his administration refuse to acknowledge the central role that regulation played in creating the incentives leading private actors to make the decisions they did in financial and real estate markets. I refer him and his staff to Russ Roberts for a clear and thorough analysis that will remedy their (possibly willful) ignorance.

Is rationalizing regulation even possible through political processes?
Wed, 19 Jan 2011 17:09:16 GMT