Tag Archives: rules

Do We Need Greater Congressional Oversight of Agency Rulemaking?

Katherine McFate, president of the Center for Effective Government, writes in the Hill that all regulations are based on congressional law, implying that efforts aimed at greater oversight of agency rulemaking are unnecessary. Technically, she is correct – agencies cannot regulate unless they are authorized to do so by congressional statutes. But her assertion is highly misleading. In fact, agencies have considerable discretion to determine policy and to publish rules that fit their as opposed to Congress’s agenda. Thus, Congress is fully justified in its efforts to push for greater agency accountability.

Scholars have long realized that the traditional rulemaking model (or the “transmission belt” model as Richard Stewart called in his seminal article) in which Congress determined policy through legislation and agencies simply filled in the details was far from reality. While constrained by congressional statutes, agencies nonetheless can substantively shape the policies within their jurisdiction.

Agencies have two sources of power in the rulemaking process: the first mover advantage and expertise. Congress over time delegated considerable policymaking powers to agencies through broad open-ended statutes, which meant that agencies did not need to seek congressional approval in order to regulate. In many cases, they can point to existing statutes as a source of their authority. Rather than initiate policy, Congress ends up reacting to the bureaucracy’s regulatory actions. Yet, given how difficult it is for Congress to agree on any legislation, it may be an uphill battle for Congress to overturn a regulation, letting agency decision stand by default.

Expertise is the second source of agency power. Congress defers to agency expertise on many complex regulatory issues. However, agencies engage in what Wendy Wagner called “the science charade” – masking policy decisions as matters of science. As she explains in her article and an edited volume, scientific analysis often drives policy decisions. Through selective use of evidence or assumptions, agencies can push the scientific analysis towards the answer that would yield their preferred policy alternative.

The EPA’s and DOE’s use of social cost of carbon (SCC) in their rulemaking estimates demonstrates the point. The SCC is an estimate of economic damages caused by greenhouse gas emissions. Agencies use the SCC to estimate the benefits of rules aimed at reducing greenhouse gas emissions and consequently to decide whether the rules’ benefits justify the costs. Higher SCC estimate would justify more expansive and costly regulations.

Even though the agencies claim that they derived the SCC through scientific analysis, critics point to policy choices embedded within the analysis that pushed the estimated cost higher. For example, the agencies chose to estimate global rather than domestic impacts of carbon. Similarly, they omitted from their analysis the recent scientific literature, which pointed to a lower impact of greenhouse gases on climate. These and other choices pushed the SCC higher (almost double the previous estimate), allowing agencies to push for more stringent and costly regulations.

Despite the major policy impact of the SCC’s use in rulemaking, the agencies did not have to consult Congress. They could chose to use the SCC estimates under the powers already delegated to them, even in the face of stiff opposition from Congress. In the meantime, congressional efforts to reassert its authority on the major environmental policy issue have stalled. The GOP-led House passed a bill that would prevent the EPA from factoring in the SCC in its economic analysis. Yet, the measure’s fate in the Senate is uncertain and it would still face the presidential veto.

Contrary to McFate’s assertion, agencies do not simply implement congressional policy. As the SCC example demonstrates, agencies can drive major policy decisions without congressional approval. Thus, Congress needs better tools for more effective oversight of agency regulations.

Has the Sequester Hurt the Economy?

Several weeks ago, Steve Forbes argued that the federal government spending cuts known as the “sequester” are actually having beneficial effects on the US economy, and not slowing growth as many economists and pundits in the media have claimed. Forbes’s statement attracted critics, and many economists have expressed skepticism about the sequester too. One economist even went so far as to say, “The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime.”

So have the sequester cuts hurt the economy? One possible answer comes from a new paper by Scott Sumner of Bentley University. Sumner argues that cuts to government spending don’t have serious deleterious macroeconomic effects when the Federal Reserve is targeting inflation. This is because the Fed ensures that prices stay stable under an inflation targeting regime, which keeps demand stable even in the face of government spending cuts. Similarly, when the Fed stabilizes the price level it also offsets any beneficial effects that fiscal stimulus might have, which helps explain the lackluster results from the 2009 American Recovery and Reinvestment Act (aka the “stimulus”).

Implicit in Sumner’s theory is that expansionary austerity, or the idea that the economy can grow even in the face of large government spending cuts, is indeed possible. Some of my colleagues at the Mercatus Center have described other ways in which expansionary austerity is possible.

Luckily, there are still things Congress can do to improve the economic outlook, even as spending cuts take hold. Lawmakers can enact policies that boost the performance of the real economy. By this I mean policies that increase the amount of real goods and services the economy produces, as opposed to policies that affect demand (i.e. spending).

One example is reforming the regulatory system, which discourages production of all sorts. With over 174,000 pages of federal regulations in place, there must be a few obsolete or duplicative rules that can be eliminated to relieve the burden on businesses and entrepreneurs. Congress could also reform the tax code, with its perverse incentives and countless carve outs for special interests.

Starting new government programs isn’t likely to do much to benefit growth. New projects take too long to implement, politicians waste too much money on silly boondoggles, and monetary policy will likely offset any beneficial effects anyway. If Congress wants to do something to improve growth, it should focus on creating a regulatory and tax environment that encourages investment and entrepreneurial risk taking.

Asymmetric Information and Taxicabs

Under traditional taxi service models, consumers are at an informational disadvantage when hailing a cab. Since they can see the cab only from the outside as it screeches to a halt, people can’t tell whether the inside is clean, whether the driver is well-kempt, whether he will drive safely or whether the price is reasonable.

So, the argument goes, government regulators like the D.C. Taxicab Commission can solve the problem by establishing uniform codes of conduct and by pre-screening drivers for the consumers’ benefit. To this end, the commission establishes detailed cost and quality regulations, mandating everything from the per-mile fare that cabs may charge to the appropriate shade of carmine (or is it chestnut?) with which to paint cabs. Ideally, these rules make sure that cabs and their drivers meet the highest standards of quality and customer service.

Taxi

One company has found a way to solve this asymmetric information problem without government regulation. How have regulators reacted?

You can read the rest of my piece in the Washington Times to find out.

Occupational Licensing Hurts Consumers and Limits Entrepreneurship

This week I’m at U.S. News and World Reports looking at how occupational licensing hurts consumers and acts as an obstacle to new business creation. However, licensing requirements are difficult to repeal because they benefit a vested interest. In California, state policymakers were considering a bill to allow nurse practitioners to practice independently, until heavy lobbying from an organization that represents state doctors successfully resulted in a heavily amended bill.

The current political situation in California reflects the typical dynamic of occupational licensing considerations. The supporters of licensing rules often benefit from licensing because it protects them from competition. With improved technology offering greater information sharing, it is also worth questioning the effectiveness of some licensing rules. Today, the pervasion of free online reviews on nearly every service-based business provides consumers with more information about service quality than any license can convey.

The full article is available here.

Should SEC Be in Charge of Foreign Policy

Last week, the United States District Court for the District of Columbia ruled in SEC’s favor on the Conflict Minerals rule. The rule requires public companies to track their sources of coltan, cassiterite, wolframite, gold and derivative minerals. These so-called “conflict minerals” are often used to finance violent armed groups in the Democratic Republic of Congo (DRC). SEC ‘s rule aims to reduce funding that flows towards these armed groups. Yet despite its laudable goals, the rules will likely fail due to poor analysis:

  • The rule fails to examine the extent of the problem. The rule seeks to reduce funding for armed groups in DRC but fails to examine whether the identified minerals actually constitute a major source of funding for these groups. If they are not, targeting other sources of funding could be more effective.  Similarly, if the armed groups can easily shift to alternative funding sources (DRC is rich in minerals that are not on SEC’s list), the rule’s benefit would be rather limited.
  • The rule presents no alternatives. One can easily think of other ways to reduce armed violence in DRC, including military assistance to DRC’s government or US-led operations to disrupt arms flows into the country. It is difficult to say whether SEC’s approach is more effective when the rule presents no alternatives that its decision could be compared to.
  • The rule fails to estimate benefits. In contrast to its elaborate discussion of the rule’s costs, SEC devotes less than a page to describe the rule’s benefits (only to acknowledge that it is unable to quantify the benefits due to lack of data). While few would expect SEC to have internal expertise on armed conflicts in Africa, the agency’s failure to solicit expert opinions from external sources is inexcusable.
  • The rule makes no plans to measure its effectiveness. In light of the SEC’s admission that it lacks data to estimate the rule’s effectiveness in reducing violence in DRC, one would expect the agency to identify specific metrics to measure success and to establish plans to collect data on the rule’s progress. Yet, SEC seems uninterested in whether its rule will actually produce positive outcomes.
  • The rule makes no plans for retrospective review. Even the best-intentioned regulations can lead to unintended consequences. Given that SEC knows so little about the area that it is regulating with this rule, the chances for things to go wrong are even higher. In fact, some commenters suggested that the rule’s burdens may fall mostly on ordinary citizens and not the armed groups that the rule targets. It is possible that the rule may do more harm to ordinary Congolese than good. Since SEC makes no place to reexamine the rule, it will likely remain in place regardless of its merits.

Troublingly, the court sided with SEC, singing off on the agency’s virtually non-existent economic analysis. My colleague Hester Peirce commented last week:

Although the court did not believe that the SEC had to do cost-benefit analysis for this particular rule given that Congress–not the SEC–made the public interest finding for this rule, the court signed off on the SEC’s analysis. The court reasoned that the SEC’s consideration of efficiency, competition, and capital formation sufficed; “to suggest that the [Securities] Exchange Act mandates that the SEC conduct some sort of broader, wide-ranging benefit analysis simply reads too much into this statutory language.” The need to assess benefits, according to the court, is particularly weak when–as here–a rule’s benefits are supposed to be humanitarian.

 The court’s assertion that humanitarian benefits need not be assessed is startling. One can reasonably argue that benefits of reduced violence cannot be easily monetized. Yet, the reduction in violence can and should be measured. How else would SEC know if its rule is having any impact?

Proponents of better economic analysis are often criticized that they only care about costs. As this example demonstrates, a better analysis can lead to a better rule – the one that actually saves lives.

Do We Need Speed Limits to Drive Safely?

A recent RegBlog post discussed a paper by van Benthem, which suggested that the social costs of higher speed limits outweigh their benefits. The paper examines the data from a natural experiment – the repeal of National Maximum Speed Law in 1995 that led many states to increase speed limits – to make its point. Yet, both the RegBlog post and the paper miss the larger question: lower driving speeds may be safer, but do we need the government-imposed speed limits to drive at safe speeds?

In the study, van Benthem finds that “a 10 mph speed limit increase on highways leads to a 3-4 mph increase in travel speed, 9-15% more accidents, 34-60% more fatal accidents.” Thus, he concludes that the difference between private benefits and social costs of faster driving provide a strong rationale for speed limits (while the paper looks at both traffic fatalities and increasing pollution levels, I focus on traffic safety. As the RegBlog post points out, there are alternatives to speed limits to deal with pollution, e.g. emission standards).

However, there is a natural experiment that van Benthem does not discuss: only a third of highways in Germany (mostly around urban areas) have permanent speed limits. On the remaining portion of highways, drivers choose their own speed. The data indicate that there is little difference between traffic fatality rates on highways with and without speed limits. In fact, over the last 20 years, the number of highway traffic fatalities in Germany decreased by 71% despite a 17% increase in number of vehicles on the road and a 25% increase in traffic flow. At 5.6 deaths per billion vehicle-kilometers driven, Germany’s traffic fatality rate is lower than the US rate (6.83) or even France’s (7.01). Apparently, German drivers are able to choose safe driving speeds even without government prodding.

Entrusting drivers with responsibility for their own safety and safety of those around them is behind another natural experiment adopted in several European cities – the concept of shared spaces. These cities are doing away with a thicket of street signs, streetlights and in some cases even sidewalks on some busy intersections. Instead, cars and pedestrians share the road, negotiating their ways as they go. While this may sound like a disaster waiting to happen, the cities report fewer accidents and increased foot traffic in businesses along the roads. The key to the concept’s success comes from drivers’ psychology; drivers compensate for lack of predictable traffic rules by paying attention to their surroundings and being more considerate to others. As Hans Monderman, a proponent of shared spaces, points out “The many rules strip us of the most important thing: the ability to be considerate… The greater the number of prescriptions, the more people’s sense of personal responsibility dwindles.”

For social regulation proponents, stringent rules are the go to response to all social ills. Yet, as European experiences with traffic demonstrate, regulation is not the only and may not even be the best alternative. Crazy as it may sound to some, treating people as responsible adults and trusting them to make the right choices may in fact lead to better social outcomes for all.