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This Week's Commentary Previous Commentaries Future Commentaries Objectives

June 8, 2009
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

This week, Susan Dudley and Art Fraas discuss the role of the Office of Information and Regulatory Affairs (OIRA) in providing independent assessments of the benefits and costs of agency rulemakings. They also recommend ways in which regulatory oversight and analysis could be improved by creating an earlier review process for important regulations, and by expanding the scope of OIRA's coverage to the so-called independent regulatory agencies.

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The Future of Regulatory Oversight and Analysis
By Susan Dudley and Art Fraas

White House

As the Obama administration advances its agenda for change, many of its most important actions will be implemented through regulations. Compared to programs financed directly through taxes, the effects of regulations—their benefits and costs—are less visible and less well understood. Particularly in today’s economic climate, a careful and deliberate consideration of the effects of regulatory actions, facilitated by effective, centralized review, is important to ensure regulations are accountable to the American people.

Like presidents before him, President Obama recognizes the importance of the "dispassionate and analytical 'second opinion' on agency actions," that the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB) provides, and is seeking ways to improve this regulatory oversight function. Here we provide recommendations on what has worked, and what could be improved.

What Works

Centralized Regulatory Review has Withstood the Test of Time
While regulatory agencies tend to shape their decisions to accommodate the interest groups most directly affected, OIRA’s mandate is to advance the general public interest. OIRA currently operates under President Clinton's 1993 Executive Order (EO) 12866, which requires centralized, coordinated review of regulations, and states that agencies should "adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs."

Benefit–Cost Analysis: Not Perfect, But the Best We've Got
Presidents over the last three decades have recognized that while benefit-cost analysis (BCA) is not perfect, it is the best tool available for understanding the effects of potential regulations and determining whether regulatory alternatives will do more good than harm. BCA provides an extremely useful framework for decisionmaking by identifying the underlying problem to be solved, identifying and evaluating alternative regulatory (and nonregulatory) approaches, and organizing this information in a consistent, coherent, and comprehensive way. Though it does not serve as the sole basis for crafting regulations, it does help decisionmakers consider a wide range of possible effects. EO 12866 directs agencies to "select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires another regulatory approach" (emphasis added). 

Analyzing and understanding distributive effects is a particularly important aspect of BCA because regulatory actions are sometimes regressive, imposing net costs on lower income groups or on other specific subgroups of concern. Even in cases where it is not regressive, regulatory action generally represents a relatively ineffective way of addressing concerns about income distribution.

Critics of BCA rightly point out that it will never be capable of quantifying all the different effects of regulation, nor will any level of analysis allow government decisions to improve upon those that are best left to individuals acting on their own behalf. BCA is, however, still the best tool available for ensuring that when government action is appropriate, it is designed to make the public better off. Alternatives are bound to be less robust, less transparent, and result in decisions that are less well informed.

What Could Be Improved

While the analytical framework established in EO 12866 remains generally sound, two changes to the executive order could make the review process more effective: (1) creating an explicit "early review" mechanism for major regulatory actions and (2) subjecting independent agencies to executive oversight.

Early Review. OIRA's review occurs after an agency has developed a proposed or final rule. Agencies often complete the regulatory analyses required by EO 12866 just in time for OIRA review—well after the agency has made key decisions on the draft rule.  Regulatory analysis prepared after policy decisions are made often becomes an exercise in supporting the rulemaking. At this point, regardless of the merits of arguments raised during interagency review, regulatory agencies are understandably dug in and reluctant to deviate from a specific approach.

Furthermore, this end-stage review process has been susceptible to gamesmanship that undermines the purposes of the EO. Though the EO envisions up to 90 days for interagency review, reviews are often severely curtailed—sometimes lasting only a few days—because of internal agency delays combined with either an internal administration deadline or a statutory or court-related deadline. In March, for example, after only one day of OIRA review, EPA published a proposed rule with estimated costs of $350 million per year and benefits of roughly $1 billion or more. The hasty review was necessitated by the obligation to meet a deadline arising from a settlement agreement. 

This is not a new problem. Previous administrations have addressed it informally at the staff level, through briefings and discussions of early drafts of regulations subject to tight timeframes. These informal reviews have raised questions, however, so in keeping with this administration's focus on transparency and its interest in increasing the integrity of the regulatory review process and the quality of analysis underlying its major regulatory initiatives, it should adopt a formal early review process for key regulatory issues. It would cover the administration's most significant rulemakings, including all major rules expected to have annual benefits or costs in excess of $1 billion.

 

 Susan E. Dudley
Susan E. Dudley
served as the administrator of OIRA at OMB from April 2007 through January 2009, where she was responsible for the review of draft executive branch regulations under Executive Order 12866, the collection of federal-government-wide information under the Paperwork Reduction Act, the development and implementation of government-wide policies in the areas of information policy, privacy, and statistical policy, and international regulatory cooperation efforts.

Art Fraas
Art Fraas
is a visiting fellow at RFF. In 2008, he retired after 21 years as chief of the Natural Resources, Energy, and Agriculture Branch of OIRA at OMB. Much of his work has examined the federal regulatory process, with a particular focus on the impact of environmental regulations. His current research includes a project examining the tradeoffs between using biomass in transportation and electricity applications.

Under this early review process, OIRA would formally designate key rulemakings, probably about 20 per year, after consultation with the affected agencies and other offices within the Executive Office of the President. After designating a rulemaking for early review, OIRA and the agency would form an interagency group to play an active role both in identifying issues and options and developing the associated regulatory analysis. This process would encourage broader discussion of options and issues at an early stage in the development of these rulemakings and provide greater policy consensus within the administration on regulatory decisions. In doing so, it would help to address the "endgame" confrontations between OIRA and the agencies and the resulting delays that arise under the current EO process.

Independent Agencies. Some of the most highly publicized regulatory problems today stem from so-called independent regulatory agencies, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Communications Commission, and the Consumer Product Safety Commission. These agencies have never been subject to the analytical or procedural requirements of executive oversight. Because they adopt regulations of enormous consequence to the nation, President Obama should subject their regulatory decisions to executive order review to ensure they provide net benefits to the public and do not duplicate or conflict with other government actions.

Looking Forward

As President Obama considers improvements to the regulatory analysis and oversight process, he should recognize that centralized oversight of regulatory development is essential for an accountable government and, though not perfect, a goal of maximizing net benefits using a BCA framework provides the most transparent and robust approach to ensuring regulatory proposals make Americans better off.

While executive oversight has served presidents and the American people well for almost three decades, President Obama could improve the process by adopting a formal early review process for the most significant regulatory actions and holding independent agencies to the same analytical and oversight standards as other agencies.

 

Further Reading:

President Barack Obama. 2009. Memorandum for the Heads of Executive Departments and Agencies on Regulatory Review, January 30, 2009, in Presidential Documents. Federal Register 74(21) 5977–5978, February 3.

Stigler, George J. 1971. The Theory of Economic Regulation. Bell Journal of Economics and Management Science 3: 3¬–18.

Harrington, Winston, Lisa Heinzerling, and Richard Morgenstern (eds.). 2009. Reforming Regulatory Impact Analysis. Washington, DC: Resources for the Future.

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Views expressed are those of the author.
RFF does not take institutional positions on legislative or policy questions.

The views expressed do not necessarily represent those of U.S. Environmental Protection Agency or other federal entities.

This commentary is based on an article by the authors, The Future of Regulatory Oversight and Analysis, published by the Mercatus Center at George Mason University.

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