[I]f the government confined itself to enacting a code of laws simply intended to prevent mutual aggression and to maintain peace and order, it is hard to see how such a code would run into any great number of laws.
—Henry Hazlitt, “The Wisdom of Henry Hazlitt” (Foundation for Economic Education, 1993)
The Administrative Procedure Act of 1946 (APA) set up the foundation of the public consultation rulemaking procedure. Part one of this two-part glance at APA limitations covered rule cost categories prone to escaping measurement and disclosure; this column identifies some process/oversight shortcomings. There are far more extensive costs with respect to the administrative state as a phenomenon beyond mere execution of the APA (some are outlined here) that will be covered elsewhere. For further context on that notion, see my recent Forbes column “Rule of Flaw and the Costs of Coercion: Charting Undisclosed Costs of the Administrative State.”
Process/Oversight Shortcomings Generating Unknown Financial and Societal Costs
Costs of Abandonment of Formal Rulemaking. While the APA established formal rulemaking processes with semi-judicial proceedings for regulations, these rarely occur. Under the APA an agency that wishes to adopt a rule must publish a “[g]eneral notice of proposed rule making,” allow the public to comment, and “incorporate in the rules adopted a concise general statement of their basis and purpose.” We have noted that agencies enjoy a long leash that formal rulemaking could—as an intermediary of sorts between congressional lawmaking and notice-and-comment rulemaking—but does not, restrain.
Costs of Agencies’ Failure to Issue a Notice of Proposed Rulemaking (NPRM) for a Significant Portion of Rules. In the absence of formal rulemaking, ordinary notice and comment rulemaking remains the final opportunity to safeguard accountability. But agencies enjoy latitude in ignoring public consultation and comments and proceed with their rules as they see fit. The Government Accountability Office (GAO) noted in 2012 that agencies did not publish an NPRM, the trigger for public comment on a proposed rule, for about 35 percent of major rules and about 44 percent of nonmajor rules published during 2003 through 2010. A primary agency justification was the APA’s “good cause” exemption to notice and comment, which “specifically authorizes any federal agency to dispense with its requirements for notice and comment if the agency for good cause finds that the use of traditional procedures would be ‘impracticable, unnecessary, or contrary to the public interest.’” This exemption was invoked for 77 percent of major rules and 61 percent of nonmajor rules published without an NPRM in GAO’s sample.
The takeaway is that agencies therefore regarded it practical, necessary, and in the public interest to bypass normal notice and comment most of the time. Relatedly, interim final rules are emergency rulemakings with short review times. As the Congressional Research Service noted in 2009, “Interim final and direct final rules are considered particular applications of the APA’s good cause exemption.” With respect to the latter, a July 2012 report from the U.S. House Committee on Oversight and Government Reform noted:
These rules are issued without the benefit of initial public comment, yet they are legally binding as of the date of publication. Often times the ‘emergency’ is a merely an unrealistic deadline in a statute. Abuse of the emergency procedures completely deprives the public and job creators of their right to provide the agency with feedback on the expected impact of the regulation before that regulation takes legal effect.
These degradations of public consultation illustrate the APA can be only a minor barrier to executive law.
Costs of Agency-Gamed Notice-and-Comment Processes. When notice and comment does happen, it can be manipulated. For example, the Environmental Protection Agency prominently manipulated the public comment phase for the Waters of the United States Rule. As CEI’s Iain Murray put it, “Rather than publish the proposed rule and await comments, the agency actively and in advance prepared its environmentalist allies to deluge the agency with comments supportive of the rule. Meetings were held to brief ‘stakeholders’—which pointedly did not include likely opponents of the rule—to encourage them to get their members to submit favorable comments.” See also the 2015 article in The New York Times “Critics Hear E.P.A.’s Voice in ‘Public Comments.’”
Costs of Agencies’ Undermining the Congressional Review Act by Failing to Submit Final Rules for Consideration. Compounding Congress’s indifference to arrogation by agencies of its lawmaking power and its own over-delegation, a large proportion of agency rules and guidance documents have not been submitted properly to both houses of Congress and the Comptroller General of the GAO as required by the Congressional Review Act (CRA). This submission is the means by which the opportunity for an expedited “resolution of disapproval” is generally activated. By failing to submit rules, “the rulemaking agencies have arguably limited Congress’ ability to use the expedited disapproval authority that it granted itself with the enactment of the CRA.”
Costs of Baked-In Pro-Regulatory Bias of the Administrative State. Strictly speaking, under the APA process, rules cannot be eliminated, merely replaced by a new rule. When agencies write new rules to eliminate or delay existing ones, the process can be as detailed and lengthy as enactment. The size of government cannot easily be reduced, only expanded, using administrative state mechanisms. While it could not have been otherwise given the double-barrel of Progressives’ goals and congressional overdelegation, the APA amounts to self-perpetuating oxygen for agencies, biased toward governement growth and rarely, if ever, principled retrenchment. These limitations are visible in the declining punch of Executive Order 13771’s requirement to remove two rules for every new rule added, and in agencies’ published longer-term plans that signal more future regulation than deregulation. Similarly, default deference by courts to agencies’ own interpretations of statutes they administer, known as Chevron deference (from the decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 1984), and to agencies’ interpretations of their own rules, known as Auer deference (from the decision in Francis Bernard Auer, et al., Petitioners v. David A. Robbins, et al. 519 U.S. 452) puts a thumb on the scale for agencies’ expansions of scale and scope.
According to Columbia University law professor Philip Hamburger, the result is “a precommitment to the government’s legal position. Chevron, in other words, forces judges to engage in systematic bias favoring one party—the most powerful of parties—in violation of the Fifth Amendment’s due process of law.” While judges “regularly defer to precedent [by other judges]…It is quite another thing, and clearly unconstitutional, for them to defer to the judgment of one of the parties—indeed to favor its legal position whenever it comes into court.” Resolutions of such questions in administrative law may then propagate across agencies: “Administrative law is somewhat unique in that precedents are created and shared by all agencies. An administrative law decision in an EPA case could therefore be cited in an otherwise unrelated case from the Department of Health and Human Services.”
Costs of Policy Uncertainty that Disrupts Economic Activity. A 2017 White House Council of Economic Advisors report “The Growth Potential of Deregulation” surveyed material increases in growth potential from moving from regulated to less-regulated conditions. While such regulatory certainty is overriding, one is more likely to hear of policy uncertainty as a dilemma. A 2013 Vanguard report estimated $261 billion in “cumulative drag” since 2011, and contended that without this “uncertainty tax, real U.S. GDP could have grown an average 3% per year since 2011, instead of the recorded 2% average in fiscal years 2011-12.” For an opposing view that “policy uncertainty has a mixed effect on innovation,” see Luke A. Stewart, “The Impact of Regulation on Innovation in the United States: A Cross-Industry Literature Review.”
These uncertainties may consist of regulations, monetary policy, foreign policy, fiscal policy, trade policy, the national debt and more. Agencies’ are charged with estimating costs of life under enactment compared to a no-action baseline, but incentives might be changed by uncertainty created during the proposed rule phase. In 2018, uncertainties over antitrust, trade, and regulatory treatment of social media and tech firms may have undercut markets to an extent greater than Trump’s regulatory savings boosted them.
Costs of Regulation by Sue-and-Settle Agreements. “Sue-and-settle” agreements are mock adversarial productions in which environmental pressure groups “sue” an agency that is all too happy to be sued and views lawsuits positively since they increase its power. The settlement becomes an implemented regulation without there having been congressional input or a public notice-and-comment process. The U.S. House Committee on Oversight and Government Reform in 2012 noted that these legal settlements are “often the result of a lawsuit brought by special interest groups that mandate subsequent regulatory action under a compressed timeline. Rules issued in this manner are often unfair to job creators because they force specific agency action often desired by environmental groups, while denying other stakeholders a seat at the table.”
Costs of Regulatory Accumulation. Legislative and regulatory requirements stack as firms grow from few to greater numbers of employees, and the underbrush is only occasionally cleared. While individual regulations may well pass a cost-benefit test, the cumulative effect can be that of “pebbles in the stream” that eventually clog the flow (phrase referenced in John Dearie and Courtney Geduldig, “Where the Jobs Are: Entrepreneurship and the Soul of the American Economy,” 2013). On regulatory accumulation. Patrick McLaughlin, Nita Ghei, and Michael Wilt observe, “Proponents of regulation often cite the need to protect society as a whole, and particularly low-income individuals, as justification for regulating despite potential economic costs. However, numerous regulations disproportionately burden poor Americans, who are least able to afford them, by raising the prices of basic goods such as food and utilities.” The result is aggravated inequality and reduced entrepreneurship.
Costs of Differential Effects of Rules on Businesses. Innovation and wealth creation do not advance at same rate in regulated and less-regulated firms, and the regulatory guidance in the Office of Management and Budget’s Circular A-4 even explicitly instructs agencies to “consider setting different requirements for large and small firms.” Regulations crowd startups into less-regulated areas at the expense of vitality in others, as entrepreneur and investor John Chisholm notes in “Unleash Your Inner Company”: “There are hundreds of thousands of start-ups in mobile apps but relatively few in pharmaceuticals, aviation, construction, consumer banking, and medical devices.” The very existence of regulation can end up picking winners when a disruptive firm emerges that does not fit the mold; that is, there can be complex differential effects on incumbents with hands tied relative to newcomers. Worryingly for the future of innovation (but encouragingly for the administrative state), some in the tech sector are beginning to appear less regulation-averse than those who came before.
Costs of A Regulatory Bell That Tolls for All. While the lucky may dodge direct regulation for a time, every company has business suppliers and business customers, and effects propagate sooner or later. Fixed, difficult-to-change regulations bind all of society—not just the target firm(s) and the market wealth-creating process—to suboptimal conditions. Eventually, given the interconnectedness of business (supply chains, business customer networks) the regulatory bell tolls for all, apart from other indirect effects of specific rules. Airline regulation affects companies other than airlines; pulling strings in one sector can entangle partners and other sectors, sideline entrepreneurship, and impoverish. At unpredictable times, it may become apparent that regulation affecting rivals will eventually boomerang, and that may be the impetus for reform.
Again, see part one of the two-part “Administrative Procedure Act Limitations” series on cost measurement and disclosure” here. Watch for updates of this “Rule of Flaw and Costs of Coercion” theme and the accompanying chart/outline. Time permitting, these will explore further undisclosed costs of regulation and intervention beyond APA operations.