By Joseph Aldy, Harvard University
President Trump jettisoned more than 30 years of bipartisan regulatory policy on January 30 when he issued an executive order on “Reducing Regulation and Controlling Regulatory Costs. The order requires that whenever a new regulation is enacted by any federal agency, regulators must eliminate two rules, so that the cost of complying with the new rule is offset by the costs associated with the two existing rules. But Trump misses a crucial point about government regulations: They impose costs on society, but they also produce benefits.
The executive order refers to regulatory costs 18 times, but never mentions regulatory benefits. By focusing only on costs, the president’s order focuses on corporate bottom lines and ignores society’s bottom line. If an industry is profitable but releases pollution that makes people sick, then the best outcome for society may be to pass a regulation that lowers corporate profits slightly, but also reduces expensive health problems for thousands of Americans.
Measuring the impacts of regulations
Are regulations costly for business? Yes. If they weren’t, then businesses wouldn’t need government rules requiring them to eliminate lead paint and other toxics from children’s toys, make workplaces safer and disclose their financial risks. Most companies would not take these steps on their own. The question is not whether regulations represent good business investments, but whether they yield a good return for society.
When government regulators write rules, they use benefit-cost analysis to compare the benefits and costs that the rules produce for society, much as corporate leaders weigh the costs of new business ventures against their expected returns. This approach was introduced under President Ronald Reagan in 1981 and continued under Presidents George H.W. Bush, Clinton, George W. Bush and Obama.
As an example, the Environmental Protection Agency’s Acid Rain Program, enacted in 1990, has reduced sulfur dioxide emissions from U.S. power plants by more than 50 percent, at a cost of up to US$2 billion per year. It also has delivered up to $100 billion in annual benefits to society – mainly by avoiding about 18,000 premature mortalities and 24,000 nonfatal heart attacks. Electric utilities would not have reduced this pollution voluntarily, but the regulation that required them to do it has produced benefits that are worth at least 50 times its costs.
Under President Trump’s executive order, such large net social benefits – or, put another way, the people’s return on rules – are irrelevant. What matters is that the regulator strikes two existing rules with estimated costs at least on par with the expected costs of the new rule. This approach is borrowed from policy debates over the federal budget. Under so-called PAYGO (Pay As You Go) laws, when members of Congress propose new programs, they have to pay for them with cuts from existing programs.
But there is no reason to think about regulations as a zero-sum game like the federal budget. Why should Americans have to give up one set of social benefits to pay for another one?
Suppose two regulations are on the books today, rule A and rule B. Regulation A keeps the American food supply safe. It costs $1 billion and delivers health benefits of $50 billion. Regulation B ensures that medical drugs are safe. It also costs $1 billion and delivers health benefits of $50 billion.
Now imagine the government proposes a new regulation that would reduce air pollution through steps that will cost industry $2 billion and deliver health benefits of $100 billion. Under President Trump’s order, the American people would have to give up rules A and B, which protect our food and drug supply with total net returns to society of $98 billion, to offset the new rule that would also produce $98 billion in net benefits from reducing air pollution. Except for the regulated businesses, who wouldn’t want to enact all three of these rules?
These numbers are not hypothetical. The Office of Management and Budget, which coordinates the review of proposed regulations and their benefit-cost analyses, provides annual reports to Congress which show that most major executive branch agency regulations have positive net benefits. In other words, they produce benefits larger than their costs.
In a democracy it is natural and important to ask what real-world returns our nation’s regulations produce. Governments dating back to the Carter administration have struggled to answer this question.
President Obama issued an executive order in 2011 that directed agencies to carry out retrospective reviews of regulations across the federal government. Some regulations deliver greater returns to society than others, and this effort identified opportunities to revise rules and lower their compliance costs without eliminating their benefits to society. Doing this well and obtaining clear answers requires serious analysis.
If the Trump administration thinks regulations impose too many costs on businesses, it could estimate the benefits and costs of existing rules to help answer that question. In 2014, the Administrative Conference of the United States (ACUS) – an independent federal agency dedicated to improving the administrative process, including regulations – recommended ways for regulators to evaluate regulatory performance. Implementing these recommendations would enable the government to make a credible assessment of regulations’ impacts on society’s bottom line.
Instead of proposing to throw out existing regulations simply because some business leaders say that regulations are bad for business, it would make more sense for the Trump administration to identify what works and what doesn’t work from the perspective of all Americans. Then it could improve regulatory policy based on evidence, instead of arbitrary rules like “one in, two out.”