ELLIG: Regulatory reform should be Job 1

Better attention to diagnosing problems would produce more effective solutions

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In his jobs speech before Congress, President Obama missed a golden opportunity to deal with looming new regulatory burdens that threaten the American economy. During his brief discussion of regulation, the president declared, “We should have no more regulation than the health, safety and security of the American people require. Every rule should meet that common-sense test.” Nobody can argue with that goal. The problem is, our current regulatory system won’t get us there.

The U.S. regulatory process encourages a “ready, fire, aim” approach to issuing new rules. All too often, a regulatory agency decides what it wants to do, writes up a proposed regulation and only then hands the proposal to its economists or other analysts to research the problem and alternative solutions. Analysis that was supposed to inform the decisions gets done after the decisions are made. To fix this, agencies need to understand the problem and potential solutions before they write proposed regulations.

This is not a revolutionary idea. Somewhere along the line in our schooling, most of us learned about a few basic steps to take before making a major decision. These steps include: 1) Define the goal you are trying to achieve, 2) understand the nature of the obstacles to be overcome or problems to be solved to achieve the goal, 3) develop a list of alternative ways to solve the problem and 4) assess the pros and cons of each alternative. Call this “Decision-making 101.”

Since 1981, executive orders have required federal agencies to conduct analysis that includes these four steps when they issue big regulations. But the Mercatus Center’s Regulatory Report Card - an in-depth evaluation of the quality of regulatory analyses agencies conduct for major regulations - finds that many regulations fail in this basic process. After assessing numerous major regulations issued during the past four years, we’ve found that the very best agency regulatory analysis we’ve seen would earn just a B-minus and the average would be an F.

One of the major areas where regulatory analysis is weakest is identification of the systemic problem the regulation is supposed to solve. A systemic problem is one that is widespread and can be traced to a defect in the rules that govern behavior, as opposed to the faults of a few “bad actors” that can be dealt with on a case-by-case basis.

For example, in 2008, the Department of Housing and Urban Development proposed a revision of the disclosures borrowers receive from mortgage lenders so borrowers could better understand the cost of the loan. The systemic problem was the poorly structured disclosures required by previous regulations, not just the presence of a few crooks in the lending industry who intentionally misled borrowers.

A homely analogy illustrates why thorough analysis is important before a solution is decided. A few years ago at home, I found water on the floor of the bathroom. After using a scientific trial-and-error method, I found a crack in the plastic cold-water pipe. The crack had occurred because the toilet rocked back and forth, putting pressure on the pipe. Armed with this knowledge of the systemic problem, I replaced the broken piece of pipe, leveled the toilet and eliminated the source of the leak.

All too often, agencies go no further in analyzing the systemic problem than saying, “Look, there’s water on the floor.” The problem is obvious, but there is no perceived need know how the water got there. The only solution considered is, “Make everyone buy mops.” That’s a stopgap solution, but it doesn’t get to the root cause of the problem.

To add insult to injury, anyone who questions the mop mandate and calls for more careful analysis gets accused of wanting to let children slip on wet bathroom floors.

It’s time to flush this approach to regulation. To pass Decision-making 101, agencies need to analyze the problem and potential solutions and seek comment on that analysis before making decisions about regulations.

Existing law gives them the flexibility to do this if they want, but they rarely have an incentive to do so. Explicit direction from Congress is needed, as we have had these directions from presidents for more than 30 years. A reform proposal like this would help ensure that new regulations meet the president’s “common-sense test.”

Jerry Ellig is a fellow at George Mason University’s Mercatus Center.

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