Deregulatory executive orders require a new approach to analyzing regulatory impact.
The Trump Administration’s regulatory policies have commanded considerable attention from the national media. But little has been said about the effects of its initiatives on regulatory analysis.
For more than three decades, both Democratic and Republican administrations have required federal agencies to assess the benefits, costs, and other impacts of major U.S. regulatory actions prior to their adoption. That required assessment aims to provide an evidence base for decision-making, to ensure that agencies regulate only when the benefits likely justify the costs unless otherwise required by law.
Given this longstanding commitment, many observers have concluded that regulatory analysis is here to stay. The Trump Administration’s policies, however, pose new methodological challenges and magnify existing ones. The increased emphasis on deregulation requires greater attention to approaches for assessing the impacts of decreasing—rather than increasing—regulation. In addition, Executive Order 13,771 on “Reducing Regulation and Controlling Regulatory Costs” requires integrating a new set of analytic requirements into existing practices. These challenges reinforce and strengthen the continuing need for increased analytic capacity in the regulatory agencies, including staff and other resources.
Conducting Prospective Analysis of Deregulatory Actions. To meet the Trump Administration’s deregulatory goals, agencies must determine which regulatory provisions to target for revision or deletion then assess the impacts of these changes. Much attention has been paid to methods for prospective analysis of new regulations and, in recent years, to methods for retrospective analysis of existing regulations, both of which can aid in identifying provisions for removal. However, these analyses do not necessarily predict the consequences of the change. The costs, benefits, and other impacts of removing an existing rule may differ significantly from the effects of implementing a new rule for several reasons.
First and foremost, prospective analysis of deregulatory actions is needed because the world is changing. These changes will affect predictions both of baseline conditions—that is, what would happen if the regulation were to remain in place—and of conditions if the regulation were to be removed. Comparing these two alternative states of the world is fundamental to assessing impacts prospectively. Although a retrospective analysis that looks back from the present into the past will capture some of these trends, a prospective analysis of a deregulatory proposal is needed to predict the extent to which these trends are likely to continue in the future.
Second, and perhaps most obviously, some implementation costs are now sunk and will not materialize as savings if deregulation occurs. For example, if a regulation caused firms to build new facilities or purchase new equipment, removing the regulation is unlikely to lead to savings that are commensurate with the original costs. Significant savings also may not materialize if practices originally imposed by regulation—such as seat belts in cars—have become so widely accepted that they are likely to continue even in the absence of the legal requirement.
Third, emerging research changes our understanding of regulatory impacts. Retrospective analysis suggests that we are not very good at predicting innovation in response to changes in regulatory requirements. More generally, attempts to understand future impacts often lead analysts to unearth new research that might otherwise be unfamiliar to stakeholders. Although the analysis itself provides important insights, the analytic process is also important. New information received or discovered in the course of the analysis may significantly change our understanding of impacts and hence of how best to regulate or deregulate.
Integrating Executive Order 13,771 with Executive Order 12,866. Prospective and retrospective analyses are currently required under President William Clinton’s Executive Order 12,866 on “Regulatory Planning and Review” and President Barack Obama’s Executive Order 13,563 on “Improving Regulation and Regulatory Review,” both of which remain in force. President Donald J. Trump’s Executive Order 13,771 adds two additional sets of requirements. First, it requires that agencies identify two regulations to be removed for each new regulation issued. The Administration later announced that agencies will remove three regulations for each new regulation issued in fiscal year 2018. Second, the executive order caps the total net costs of new regulations. In fiscal year 2017, this cap was zero for all agencies subject to the executive order. In fiscal year 2018, it is zero or negative (depending on the agency), indicating that cost savings must be achieved.
The challenges these requirements pose for the regulatory development process may be self-evident, particularly given that many regulations are required by law rather than issued solely at the discretion of the regulatory agencies. As guidance documents developed by the Office of Management and Budget (OMB) to implement Executive Order 13,771 acknowledge, the order cannot override these statutory requirements. In addition, most previous administrations worked to remove outmoded or unnecessary regulations, which may leave relatively few easy targets for additional repeals.
Executive Order 13,771 also creates challenges for regulatory analysts because of the characteristics of the new requirements and their relationship to the older executive orders. For instance, OMB, which oversees the regulatory analysis and review process within the Executive Office of the President, has published guidance on implementing Executive Order 13,771. This guidance essentially supplements the longstanding guidance on implementing Executive Order 12,866.
However, despite this guidance, many concerns are not likely to be identified and resolved until OMB and the agencies gain more experience in assessing deregulatory actions. For example, OMB recently found it necessary to issue further guidance on how to discount future impacts when assessing compliance with the regulatory cost caps, due to concerns about the comparability of the results for provisions that differ in timing. The complexity of the analytical issues is illustrated within the OMB Executive Order 13,771 guidance itself, which suggests in 12 places that analysts consult with OMB when faced with various issues related to interpretation and implementation.
In addition, agencies seeking to deregulate in response to Executive Order 13,771 will face the challenge of assessing the impacts of actions for which analysis was not previously required. Executive Order 12,866 applies to “significant” actions—that is, regulatory or deregulatory actions likely to impose costs, benefits, or transfers of $100 million or more in any given year or to have important adverse effects. The scope of Executive Order 13,771 is much broader, covering actions not previously considered “regulatory” as well as those with much smaller impacts. Specifically, its cost-offsetting requirements apply when agencies seek to issue significant new guidance documents as well as new regulations, and it includes non-significant regulations and guidance documents, some international cooperation actions, and information collection activities as potential offsetting deregulatory actions. This broadened scope will both increase analysts’ workloads and require that they address policy areas or impacts for which little previous research may exist.
Furthermore, Executive Order 12,866 requires OMB review of the analyses supporting significant regulatory or deregulatory actions. Executive Order 13,771 does not necessarily require that OMB review the analyses of the additional types of deregulatory actions it covers, meaning the extent to which these analyses will be scrutinized is unclear.
The distinction between costs and benefits poses another problem. Executive Order 12,866 requires that both be assessed, while Executive Order 13,771 only requires assessment of costs. However, agencies differ in their categorization of impacts as costs or benefits. For example, if a new regulation makes it easier for firms to automate previously manual processes, should the associated savings be counted as an offset to the costs of imposing the regulation or as a benefit? Recent guidance developed by the U.S. Department of Health and Human Services (HHS) attempts to move towards more consistent categorization, but other agencies do not necessarily follow HHS’s approach. This lack of consistency may make it difficult to determine what impacts should count as costs when assessing whether agencies adhere to Executive Order 13,771’s regulatory cost caps.
Another question is what role, if any, benefits will play in deregulatory decisions, especially in cases where agencies find them difficult to estimate. Although agencies must consider benefits under Executive Order 12,866 for significant regulatory and deregulatory actions, it is not always possible to quantify them. The available scientific research may, for example, suggest that a regulation will decrease the risk of illness or of a terrorist attack, but it may not be possible to estimate the magnitude of those benefits because of data gaps or inconsistencies.
Recognizing this problem, Executive Order 12,866 encourages agencies to consider both quantified and non-quantified impacts in determining whether the benefits of an action justify its costs. Yet analysis of foregone benefits is not required for the additional actions covered by Executive Order 13,771. Given the pressure to deregulate, it is not clear how much attention will be paid to the loss of existing regulations’ beneficial effects, especially if they are neither quantified nor subject to review. As a result, deregulation may occur in cases where the lost benefits outweigh the cost savings.
Conclusions and Implications. Over the past 30 years, analysts have learned an incredible amount about how to collect and use information to assess the impacts of new regulations prospectively and retrospectively. Although this experience is very useful in estimating the impacts of deregulation as well, more work is needed to understand better the extent to which savings will accrue given the status of past investments as well as other influencing factors and trends. The new developments addressed in this and in other essays in this series suggest an increased need to invest in analytic capacity.
Much has been said about the role of scientific evidence in current policy debates. Promoting better understanding of the value of regulatory analysis, as well as encouraging the completion of high quality, useful analysis that addresses both costs and benefits, requires continuing improvements in our capacity to conduct and interpret this work. Ensuring that federal agencies have adequate funding and staffing to conduct needed analyses and investing in policy-relevant academic research are necessary but not sufficient steps.
For example, regulatory and deregulatory analyses often require dealing with data gaps, limitations, and significant uncertainties. The academic training that many analysts receive often does not sufficiently address these skills. Hands-on training and experience is needed to develop an understanding of how to use the best available data to inform decision-making, without misleading policymakers or other stakeholders about the associated uncertainties. Additional academic research is also needed to enhance our ability to understand both regulatory and deregulatory impacts and to appropriately assess uncertainty.
When staffing is inadequate and analyses must be completed quickly to meet legal or other deadlines, communication also often suffers. Analysts need time to determine how to best convey both the results of their work and the role that analysis plays in the decision-making process. Regulatory analyses are often dense, long, and technical; it can be difficult even for those who work in this area to understand the approach taken in these analyses and their full implications.
Most assessments of the role of regulatory analysis focus on the final, published product. But the role that analysis plays in the regulatory development process has an equal or greater importance. The effects of preliminary analytic work are often hidden from public view but they can be significant. This behind-the-scenes work may lead an agency to abandon a regulatory effort because the available evidence suggests it will not be cost-beneficial. Or it may lead the agency to significantly change the policy options under consideration.
In sum, the Trump Administration’s initiatives pose many analytic challenges. A culture of commitment to regulatory analysis, to thinking before acting, is essential to ensuring that federal regulatory and deregulatory policies enhance rather than diminish society’s welfare.
This essay is part of an eight-part series, entitled New Developments in Regulatory Benefit-Cost Analysis.
