Courts may be paying closer attention to regulators' arbitrary analysis

Lately, a great deal of attention has focused on the Trump administration’s struggles in court. One widely cited database at New York University notes that the administration has won fewer than 6 percent of court cases relating to its deregulatory efforts. While many involved minor issues such as delayed implementation deadlines, hiccups like these could be an omen that greater challenges lie ahead for Trump’s red tape cutters.

The courts have been right to chastise the administration for failing to follow the law in some cases, but the worst agency abuses continue to fly under the radar — and they aren’t unique to this administration.

Trump’s legal woes center around an influential federal law called the Administrative Procedure Act. Prior to the APA’s passage in 1946, regulators lacked a formalized process to follow, write and put into effect rules. Many regulations were crafted in secret without public input.

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The APA’s most famous provision gives courts the authority to forbid “arbitrary” and “capricious” regulatory acts. Regulators typically have to, at a minimum, explain their actions in a reasoned way and seek input from the public, often through soliciting comments from citizens and businesses. If regulators don’t, their rules can be vacated by judges.

The APA makes it harder to regulate. But, as the Trump administration is learning, it also makes deregulation harder by forcing it through the same process for new regulations. In fact, this was a key reason mid-20th century legislators rallied around the law. 

After President Franklin Roosevelt passed away, Democrats worried that his New Deal-era reforms would be in jeopardy should a Republican win against the far less popular Harry Truman in the 1948 presidential election. Democrats — originally opposed to APA-style barriers to new regulations — changed their minds when they realized the same procedures could lock in existing regulations.

Given this history, the near-relentless growth in post-APA federal regulation should surprise no one. By virtually every measure, regulation has increased dramatically. Just look at staffing levels at federal agencies, budgetspage counts in the Code of Federal Regulations and Federal Register, or restrictive words in regulatory text.

The APA’s limits on arbitrary and capricious regulation are sensible. In fact, traditionally this has been an easy bar for federal agencies to overcome. One estimate put the typical administration’s win rate in related cases at 70 percent, far better than Trump’s record.

This could be a sign the courts are stepping up their oversight, which would be a welcome development because historically, courts have done far too little to combat arbitrary regulations. To this day, judges continue to overlook much larger regulatory shortcomings than delayed implementation deadlines or a lack of public comments.

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One such area is federal agency economic analysis. Judges increasingly view regulators’ economic analysis as a part of the basic packet of evidence explaining agency decision making. For example, in the 2015 Michigan v. EPA case, the U.S. Supreme Court chastised the Environmental Protection Agency for focusing on benefits while refusing to consider costs when determining whether a regulation was needed to address hazardous air pollutants from power plants.

But if subpar economic analysis — particularly analysis that ignores critical costs and benefits — is a sign an agency is acting arbitrarily, then countless executive branch regulations, including and beyond the EPA’s, are on precarious legal ground.

Why? As far back as the mid-19th century, a basic principle of economics has been to account for the unseen consequences of a policy, and not just those outcomes that are visible and measurable by the analyst. If a regulation forces a company to spend $1 million on regulatory compliance, this is an obvious “seen” cost. But there is an unseen cost as well: Some of the resources going toward compliance would have been invested and grown into something else.

There are unseen benefits, too. Regulations sometimes stimulate investment, the returns to which grow over time. The farther into the future we look, the more important the unseen costs and benefits become.

While some regulator economic analyses — those that focus exclusively on financial benefits and costs — account for these unseen effects, those accompanying social regulations (rules that relate to health, safety, and the environment) tend to ignore them entirely. This system-wide failure hurts people in the future most, since the unseen consequences of policy fall predominantly on them.

Trump’s red tape cutters are learning some hard lessons. Perhaps his administration is receiving more scrutiny in court than is typical. That may seem unfair, but in fact judges should expand their reviews to include supporting economic analyses, and the unseen costs and benefits that go systematically overlooked by regulators. If that doesn’t rise to the level of arbitrary and capricious, what does?

James Broughel is a senior research fellow with the Mercatus Center at George Mason University.