Reviving Regulatory Reform: Options for the President and Congress

Issue Analysis 2005 No. 3

Full study available in pdf format

I. Executive Summary

This report has a twofold purpose: reinvigorate public debate on regulatory reform, and help policymakers fashion a more affordable, effective, and accountable regulatory system. The report is organized as follows.

Section II examines the role of regulatory policy in sabotaging the 1990s economic boom. It finds that Federal Communications Commission (FCC) regulations, which subjected the telecommunications industry to a “what’s yours is mine” regime of infrastructure socialism and price control, inflicted trillion-dollar losses on an industry that was a key driver of the nation’s economic growth. Regulatory excess contributed to and prolonged the recession. The section concludes that Congress and the president, who are entrusted with stewardship of the U.S. economy, cannot afford to leave major regulatory decisions in the hands of unaccountable bureaucrats.

Section III tackles head on the opinion that regulatory reform is a pipedream—a thankless quest fraught with political peril and little chance of success. The chapter argues that although reformers in the 104th, 105th, and 106th Congresses failed to establish cost-benefit analysis and risk-assessment as touchstones of regulatory decision-making, they also achieved some notable successes. The Unfunded Mandates Relief Act (UMRA) has discouraged Congress from imposing new regulatory burdens on state and local governments. The Regulatory Flexibility Act, as amended by Small Business Regulatory Enforcement Fairness Act (SBREFA) and buttressed by President Bush’s Executive Order 13272, has, in some measure, reined in regulatory costs and agency discretion. The section recommends that future reform efforts be clearly based on three recognized principles of good government: cost disclosure, political accountability, and competition. 

Section IV examines the basic flaws of the current process. Regulatory costs are large, growing, and, what is more disturbing, uncontrolled. Federal fiscal discipline is indeed weak, but federal regulatory discipline is practically non-existent. Many regulations function as implicit taxes, with far-reaching effects on consumer prices, employment, and innovation. Yet, nothing in the current process requires or even allows policymakers to make explicit choices about how much of the public’s resources regulatory agencies should control, or how regulatory authority should be allocated among alternate uses of the same resources. Moreover, most regulatory decisions are made by bureaucrats—officials over whom “We, the people” have little, if any, control. Americans live under a constitutionally dubious regime of regulation without representation.

Section V surveys initiatives reformers have proposed, adopted, or enacted during the past three decades, and identifies two main types: policing reforms and checks and balances reforms. Policing reforms aim via rules of rulemaking and centralized review to regulate the regulators. Checks and balances reforms seek to increase Congress’s responsibility for regulatory decisions, create inter-agency competition, or foster competition between agency experts and outside experts. Both types will be needed to make the regulatory system more affordable, effective, and accountable. Section VI outlines steps to liberate the telecom industry from infrastructure socialism.  Congress should amend the Telecommunications Act to phase out forced access regulation and price controls as quickly as possible. Section VII discusses several near-term, mid-term, and long-term options for improving the regulatory process. Because of its complexity and controversial character, the most ambitious long-term reform—regulatory budgeting—is discussed separately, in section VIII.

The most important recommendations for policymakers presented in sections VII and VIII may be summarized as follows:

(1) Make agencies compete for the right to score the costs and benefits of their regulatory proposals. Agencies enjoy an exclusive right to determine which estimates of costs and benefits inform the rulemaking process. This creates a classic conflict of interest, because agencies have an obvious incentive to skew regulatory analyses in favor of their policy preferences and agendas. The Office of Management and Budget (OMB)—and the General Accounting Office (GAO), if Congress approves—should hold a contest to determine which analysis of each major regulatory proposal is best, reviewing the rulemaking agency’s cost-benefit estimates plus those submitted by experts in industry, state agencies, and the non-profit sector. To win the contest, the agency’s analysis would have to be more plausible than those submitted by competitors. At a minimum, agency analysts would have to visibly conform to OMB’s best practices and information quality guidelines or lose credibility as regulatory experts.

(2) Require congressional approval before rules are effective. Congress would have much greater motivation to insist that agencies consider low-cost and non-regulatory alternatives if it had to approve final agency rules before they could go into effect. Congressional review initially could be limited to “economically significant” rules—those likely to have an annual effect on the economy of $100 million or more. The Unified Agenda of Federal Regulatory and Deregulatory Actions shows a total number of 127 economically significant rules at various stages of development in 2003, including 22 “completed actions.” Congress unquestionably could review 22 or even several dozen economically significant rules per year without shortchanging other important business. As it gained experience, Congress could lower the threshold and review rules likely to impose, for example, $50 million in annual costs on state and local governments or the private sector, or $25 million in annual costs on small business.                   

Making Congress accountable for regulation is a radical idea, but its radicalism lies in its fidelity to American principles of self-government. “No regulation without representation” clearly echoes the words and philosophy of those who signed the Declaration of Independence. No other general reform proposal has as great a potential appeal to common-sense populism. Regulations are implicit taxes that have the force and effect of law. If asked whether anyone other than their elected representatives should exercise the power to make laws or raise taxes, most Americans would unhesitatingly answer no. Paradoxically, this bold regulatory reform may ultimately be the most politically viable.                        

(3) Undertake pilot projects to explore the feasibility of regulatory budgets. Congressional review of regulations informed by competitive analysis would be a dramatic improvement over

the status quo. Nonetheless, we would never accept such a regime as adequate for making tax and spending decisions. In the fiscal arena, we do not ask Congress and the president to maximize the net benefit of each program, one at a time, in isolation from decisions about other programs, and without regard to the effects of total spending on the economy. Yet that is roughly what the current regulatory system asks agencies to do—assure the wisdom of each rule, without regard to the costs imposed by other rules, or to the cumulative burden of all rules on the economy.

Regulatory costs are, in a word, unbudgeted. Nothing resembling a budget framework requires or even allows elected officials to make explicit choices about how much of the nation’s economy should be devoted to regulatory purposes, or about how resources should be allocated among the multitude of regulatory objectives. This fundamental flaw would persist even under a system of congressional review based on rigorous cost-benefit analysis.

Ideally, regulatory costs should be capped just like taxes and spending. However, no country has implemented this approach, and it is uncertain whether policymakers can develop the information and tools needed to reasonably estimate, accurately track, and credibly enforce limits on regulatory expenditures. Experimentation will be needed to assess the feasibility and desirability of establishing regulatory cost caps.

The potential benefits of regulatory budgets include limiting the growth of government, encouraging agencies to target resources on the most serious risks, and making agencies compete based on the effectiveness of their rules in savings lives and advancing public welfare. The potential perils of regulatory budgets include intensifying agencies’ incentives to distort cost and benefit estimates, loss of political capital needed to secure other more attainable reforms, and increased paperwork burdens on regulated entities. Congress should authorize pilot projects to test the feasibility and advisability of setting regulatory budgets.