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Michael A. Livermore and Richard L. Revesz  Headshot

A Year of Rethinking Regulations

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Imagine you're the CEO of a major national corporation with two million employees and 312 million customers. Now imagine having no consistent plan to revisit past decisions to determine what worked and what didn't.

That's how our government behaved until a year ago when President Obama put new rules in place to require review of past regulations -- a process with the potential to make the government smarter. Businesses should be pleased since, in practice, this process has mostly meant the snipping away of red tape.

Prior to promulgating a regulation, federal agencies generally do a decent job of gathering data and estimating costs and benefits. But the follow-up has been lacking. Retrospective analysis, designed to see what works and what doesn't, has rarely happened as agencies move on to the next crisis.

Obama signed Executive Order 13,563 on Jan. 18, 2011, which requires agencies to engage in this kind of examination of their own dockets. Past presidents have made similar moves, but the Obama Administration has been the first to take the project so seriously -- evidenced by the steady, careful progress that has been made since.

After the requirement went into effect, agencies coughed up preliminary review plans from which businesses have seen the lion's share of the benefit. Most have a distinct deregulatory slant and a focus on cutting administrative costs or easing burdens on industry. Many call for rules to be rolled back, tweaked to eke out more efficiency, and updated to reflect new innovations and technology.

There are plenty of examples: This fall, the White House announced that its retrospective review program had led the Department of Health and Human Services to scrap a set of overly burdensome regulations. Among those jettisoned are rules requiring ambulatory surgical centers and end-stage renal disease facilities to purchase and maintain unnecessary yet expensive equipment. The move will save these facilities $170 million the first year and $37 million each year thereafter.

And the Department of Labor announced that it will take advantage of technological advancements to reduce paperwork and compliance costs relating to worker safety regulations. OSHA is currently improving its system for communicating information about the dangers of chemical products to business and workers. The agency's Standards Improvement Project is revising health and safety rules to remove any inconsistencies and confusing language. Updates to the Hazard Communications System will ensure that necessary information is conveyed efficiently and clearly to those at risk. Workers can better understand the risks of the chemicals they're handling and employers are expected to benefit handsomely, saving between $580 million and $800 million each year in the form of increased productivity and more efficient training.

On Oct. 26, the Obama Administration issued a new memorandum with more detail on how agencies should implement retrospective plans. It asks for standardization of the process across agencies, periodic reports to OMB, and public transparency.

Businesses will be pleased to hear that the October memo puts all its emphasis on using retrospective review of regulations to achieve cost-savings and eliminate "annual paperwork burdens." A template report attached to the memo asks agencies to describe, quantify, and monetize anticipated cost-savings from these actions.

But, a year after the original request, the administration needs to even out this process: looking at the rules where the public benefit could be increased at low cost would also be wise. The goal of regulations is to maximize net benefits. Rolling back expensive and ineffective rules is one way to get there, but so is expanding inexpensive and effective programs. Obama's Executive Order provides a blueprint not only for improving businesses' bottom lines but for adopting beneficial regulations that protect the well-being of the American public.

The President unveiled his regulatory review measure in an op-ed in the Wall Street Journal saying:

...throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.

Up to this point, that balance has not been seen. While some rules are overly burdensome and have to go, there are others that deliver major benefits for low costs and should be expanded.

There are several areas where retrospective analysis that has been done has shown successes that can be built on. When EPA examined the effects of its acid rain trading program, they found that those environmental protections (signed into law by President George H.W. Bush) delivered massive economic benefits in excess of compliance costs, by saving tens of thousands of lives and preventing hundreds of thousands of lost work days. Part of the reason was the cap-and-trade model, which EPA has tried (with some limited success) to duplicate in other areas.

Analysis that has been done on early childhood education has shown huge benefits to certain programs. In Michigan, a Head Start program has seen serious success, with students that went through the program earning 11 to 34 percent more and having fewer run-ins with the law in the future. This program costs the state $15,827 per participant, but it returns $12.90 for each dollar invested. Rules announced by the Obama Administration in the first week of this month help ensure that those successes are replicated across the country, by requiring Head Start programs to compete on the basis of how well they put similar practices in place.

In contrast, states and the federal government spend billions of dollars on the criminal justice system, but there is scant analysis of the cost-effectiveness of different approaches to crime control and public safety. While the Environmental Protection Agency and Department of Health and Human Services dedicate 7 percent of their budgets to research, the Department of Justice spends two-tenths of a percent to see how well tax dollars are being spent. There is a wealth of potential data -- information on sentences, crime statistics, and information from other government bodies (like child welfare agencies) -- that can be used to help policymakers understand what government policies and programs work, and which are just throwing money down the drain.

These and other types of programs are ripe for retrospective review. While some policies might be unjustified, deeper examination can find areas where expansion and duplication are valuable. Many programs that are sometimes decried as wasteful uses of taxpayer dollars actually deliver massive economic benefits to the American public.

So while the Obama Administration has given the business community quite a bit to celebrate when it comes to retrospective review, at some point they must reckon with the other side of the coin. Weeding out old and outdated regulations makes sense. But so does keeping and expanding programs that could be working even harder.