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It turns out that when regulators are told to implement a thorough economic analysis of proposed regulations, higher quality work is the result.
A recent Mercatus Center study by Jerry Ellig examined recent court cases that pushed the Security and Exchange Commission (SEC) to drastically improve its regulatory impact analysis practices.
In a relatively short period of time, the SEC issued new guidance for economic analysis, reorganized internally to give economists a greater voice in rulemaking, and produced a measurable improvement in the quality of economic analysis accompanying its regulations.
The Mercatus study shows that having judges review substantive rulemaking documentation leads to better agency analysis of regulatory impacts and provides the public with more of the necessary information that is required for them to engage in the federal regulatory process as intended by Congress under the Administrative Procedure Act.
While specific to securities regulations, the paper shows that when federal judges require more regulatory analysis it improves the regulatory process.
Here’s where the Regulatory Accountability Act (RAA) comes in. Passed by the House of Representatives on Jan 11 and awaiting action in the Senate, the RAA would put the biggest and costliest proposed regulations under more in-depth scrutiny.
By modernizing the regulation-writing process, established in the 1940s with the Administrative Procedure Act, the RAA would restore checks-and-balances on federal agencies.
The RAA would require:
- Allows for earlier public participation to help shape the most important regulations;
- Requires agencies to choose the lowest cost option that achieves the goal or demonstrate that the rule would not succeed without the more costly option;
- Allows for on-the-record administrative hearings for high-impact regulations so that interested parties can challenge agency assumptions and the reliance on poor quality or biased data;
- Courts must be satisfied that agencies conducted thorough, unbiased rulemaking procedures before deferring to their decisions; and
- Places restrictions on agencies’ use of interim final regulations.
How would the RAA apply in real life? A look at the federal water rule, WOTUS.
The waters of the U.S. rule (WOTUS) was issued by EPA and the Army Corps of Engineers in 2015. In the name of “clarifying” Supreme Court rulings covering regulation of water bodies in the U.S., the rule would drastically expand the reach of these two federal agencies and extend their reach into land use decisions. Private property owners would have to hire consultants and lawyers just to determine if they have to seek federal permits for developing their own land. For instance, a hardware store owner could be required to obtain a federal permit for water runoff from a parking lot. WOTUS is currently tied up in the federal courts.
If the RAA were law, how would that have improved WOTUS?
If the RAA had been law, small businesses, and state and local governments who would be affected by the regulation could have petitioned the agency for an on-the-record hearing on the scientific and economic analysis of the rule and challenged EPA’s and the Corps’ claims about the scope of the rule, and why they didn’t consider more reasonable alternatives. The agencies would have to defend why they didn’t properly assess the true effects of WOTUS.
As a result, when reviewing the regulations, a federal court would have a more robust record on which to base its decisions.
When pushed—dare I say, “nudged”—federal agencies are capable of improving how they analyze regulations. By conducting better, more thorough analyses during regulation development, agencies will then tend to produce better regulations (within the limits of the relevant statutes). That’s what the Mercatus Center paper found.
Regulatory reform isn’t a simple question of whether the federal government is writing too many or too few regulations. It’s about getting the rules right. Sound regulations developed through thorough analysis should produce the maximum public benefit at minimal cost. The RAA would help make that happen.