Regulation should be smarter, not necessarily faster

Yesterday, members of the House seeking to take a stand against burgeoning regulation passed an omnibus bill that included the Regulatory Accountability Act, which overhauls the 66-year-old Administrative Procedure Act. Critics of the bill argue that its implementation would impede the regulatory process and prevent government agencies from fulfilling their duty to promptly protect the public in times of need. Supporters of the legislation highlight its potential to reduce the economic burden of regulation on both consumers and producers.

Could this legislation produce smarter regulation? The act requires agencies to issue an advance notice of proposed rulemaking for major rules and conduct public hearings after proposing regulations that are estimated to cost $1 billion or more annually. Agencies sometimes voluntarily undertake analogous actions. In a working paper released by the Mercatus Center at George Mason University, we find that when agencies take these additional actions, they produce better analysis of the regulation’s potential effects and are more likely to explain how the analysis affected their decisions.

Since the early 1980s, presidents have required federal regulatory agencies to conduct regulatory impact analysis for major regulations. A good regulatory impact analysis identifies a widespread problem a regulation might solve, considers a variety of alternative solutions, and assesses the benefits and costs of alternative solutions. These actions are nothing more than an application of “Decision-making 101” principles to regulation.

Unfortunately, regulatory agencies sometimes flunk Decision-making 101. In 2008, the Mercatus Center’s Regulatory Report Card began evaluating the quality of executive branch agencies’ regulatory impact analysis and the extent to which agencies explained how the analysis affected their decisions. The Mercatus Report Card finds that regulatory impact analyses often fail to demonstrate the existence of a systemic problem, consider genuinely different alternatives, or fully identify the benefits and costs of each alternative. If Report Card scores were translated into letter grades, the best regulatory impact analysis evaluated in the Report Card would have received just a B-minus.

Currently, regulatory agencies often conduct their regulatory impact analysis only after they have made major decisions about the regulation. The Regulatory Accountability Act would require an advance notice of proposed rulemaking for regulations with economic impacts exceeding $100 million, a major increase in costs or prices, or other significant adverse economic effects. The advance notice of proposed rulemaking would be required to contain the agency’s preliminary analysis of the problem it seeks to solve, as well as alternative solutions. This puts the horse before the cart by prompting agencies to conduct analysis and to solicit additional data and views from the public before the analysis and the proposed rule are set in stone.

An agency issuing a “high-impact rule” with $1 billion or more in annual costs would be required to hold an oral evidentiary public hearing that would give affected parties an opportunity to provide witnesses and cross-examine the agency on its evidence. Hearings would provide an avenue for the public to challenge agency analysis and hear an evidence-based response before the agency decides to implement the regulation, thus encouraging the agency to base its decisions on more accurate information.

These potential improvements are not simply speculation. Our research shows that when an agency solicits data from the public, consults with state governments, or previously sought public comment on an earlier draft of the regulation and the accompanying analysis, it produces more thorough analysis and does a better job of explaining how the analysis affected its decisions about the regulation. When an agency commits to holding a public hearing on a proposed regulation, it also offers a more extensive explanation of how its analysis affected its decisions.

Requiring agencies to issue advance notices of proposed rulemaking and hold public hearings for the most important regulations would force regulatory agencies to conduct more thorough analysis and adopt rules based on information that has undergone public scrutiny. These reforms should introduce more transparency and accountability into a regulatory process.

In the current economic environment, with sluggish economic growth, disappointing unemployment rates, and growing concern about government spending and debt, it is increasingly important for Congress to ensure that additional regulations solve real problems at the lowest possible cost. Regulation needs to be smarter, not faster.

Ellig is a senior research fellow with the Mercatus Center at George Mason University. Fike is a doctoral candidate in economics at Florida State University. They are coauthors of a working paper released by the Mercatus Center, “Regulatory Process, Regulatory Reform, and the Quality of Regulatory Impact Analysis.”