Any energy policy shifts in US should reflect the benefits from past regulations

With the Trump administration determined to radically shift away from the regulatory approach that has been taken, Joseph Aldy, Associate Professor of Public Policy at Harvard University, writes on The Conversation website about the benefits that have come from regulations.

 

What Trump misses about regulations: They produce benefits as well as costs

President Trump jettisoned more than 30 years of bipartisan regulatory policy on January 30 when he issued an executive order on “Reducing Regulation and Controlling Regulatory Costs.” The order requires that whenever a new regulation is enacted by any federal agency, regulators must eliminate two rules, so that the cost of complying with the new rule is offset by the costs associated with the two existing rules. But Trump misses a crucial point about government regulations: They impose costs on society, but they also produce benefits.

The executive order refers to regulatory costs 18 times, but never mentions regulatory benefits. By focusing only on costs, the president’s order focuses on corporate bottom lines and ignores society’s bottom line. If an industry is profitable but releases pollution that makes people sick, then the best outcome for society may be to pass a regulation that lowers corporate profits slightly, but also reduces expensive health problems for thousands of Americans.

Measuring the impacts of regulations

Are regulations costly for business? Yes. If they weren’t, then businesses wouldn’t need government rules requiring them to eliminate lead paint and other toxics from children’s toys, make workplaces safer and disclose their financial risks. Most companies would not take these steps on their own. The question is not whether regulations represent good business investments, but whether they yield a good return for society.

When government regulators write rules, they use benefit-cost analysis to compare the benefits and costs that the rules produce for society, much as corporate leaders weigh the costs of new business ventures against their expected returns. This approach was introduced under President Ronald Reagan in 1981 and continued under Presidents George H.W. Bush, Clinton, George W. Bush and Obama.

As an example, the Environmental Protection Agency’s Acid Rain Program, enacted in 1990, has reduced sulfur dioxide emissions from U.S. power plants by more than 50 percent, at a cost of up to US$2 billion per year. It also has delivered up to $100 billion in annual benefits to society – mainly by avoiding about 18,000 premature mortalities and 24,000 nonfatal heart attacks. Electric utilities would not have reduced this pollution voluntarily, but the regulation that required them to do it has produced benefits that are worth at least 50 times its costs.

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Under President Trump’s executive order, such large net social benefits – or, put another way, the people’s return on rules – are irrelevant. What matters is that the regulator strikes two existing rules with estimated costs at least on par with the expected costs of the new rule. This approach is borrowed from policy debates over the federal budget. Under so-called PAYGO (Pay As You Go) laws, when members of Congress propose new programs, they have to pay for them with cuts from existing programs.

But there is no reason to think about regulations as a zero-sum game like the federal budget. Why should Americans have to give up one set of social benefits to pay for another one?

Suppose two regulations are on the books today, rule A and rule B. Regulation A keeps the American food supply safe. It costs $1 billion and delivers health benefits of $50 billion. Regulation B ensures that medical drugs are safe. It also costs $1 billion and delivers health benefits of $50 billion.

Now imagine the government proposes a new regulation that would reduce air pollution through steps that will cost industry $2 billion and deliver health benefits of $100 billion. Under President Trump’s order, the American people would have to give up rules A and B, which protect our food and drug supply with total net returns to society of $98 billion, to offset the new rule that would also produce $98 billion in net benefits from reducing air pollution. Except for the regulated businesses, who wouldn’t want to enact all three of these rules?

These numbers are not hypothetical. The Office of Management and Budget, which coordinates the review of proposed regulations and their benefit-cost analyses, provides annual reports to Congress which show that most major executive branch agency regulations have positive net benefits. In other words, they produce benefits larger than their costs.

Targeted reforms

In a democracy it is natural and important to ask what real-world returns our nation’s regulations produce. Governments dating back to the Carter administration have struggled to answer this question.

President Obama issued an executive order in 2011 that directed agencies to carry out retrospective reviews of regulations across the federal government. Some regulations deliver greater returns to society than others, and this effort identified opportunities to revise rules and lower their compliance costs without eliminating their benefits to society. Doing this well and obtaining clear answers requires serious analysis.

If the Trump administration thinks regulations impose too many costs on businesses, it could estimate the benefits and costs of existing rules to help answer that question. In 2014, the Administrative Conference of the United States (ACUS) – an independent federal agency dedicated to improving the administrative process, including regulations – recommended ways for regulators to evaluate regulatory performance. Implementing these recommendations would enable the government to make a credible assessment of regulations’ impacts on society’s bottom line.

Instead of proposing to throw out existing regulations simply because some business leaders say that regulations are bad for business, it would make more sense for the Trump administration to identify what works and what doesn’t work from the perspective of all Americans. Then it could improve regulatory policy based on evidence, instead of arbitrary rules like “one in, two out.”

8 thoughts on “Any energy policy shifts in US should reflect the benefits from past regulations

  1. Since 2008, over 25,000 new regulations were issued under the Obama administration. The economic impact, according to American Action Forum, was $727 billion with 460 million new hours of paperwork required. Annual costs of all current federal regulations are estimated at $1.88 trillion, or 11 percent of the US GDP. If the cost of regulation was a country, it would rank as the world’s 10th largest economy. Regardless of accuracy of these numbers, SMEs are hurting in the US, new business creation dropped drastically after 2006, and has been mostly downward since 1978.

    SME’s are typically harder hit by excessive regulations, so be careful what one wishes. The age of regulation may also be helping to crush entrepreneurship, at the expense of increasing advantage to large enterprises.

    • I cannot see why setting higher standards, whether on safety or ecological reasons, should be so abhorrent to well run SMEs. Simply regurgitating gross statistics, which may or not be accurate, without regard to any of the net benefits delivered by higher standards ( pejoratively called regulations) , is irrelevant.

      • Fully agree, but when ideology gets in the way of results, look at what happens. I cannot believe they would be abhorrent to well run SMEs either.

  2. The key is understanding that once you reach a point of excess, things have to be dialed back somewhere. Focusing on what you think is important, while ignoring a larger economic picture, may be fine for specific stated interests, but even safety regulations can become toxic at times. The article here is woefully uninformed, and my post simply provided some readily available numbers that the writer suggested were needed. There is a tremendous need to reduce the regulatory burden, and that appears likely to happen. The entire small business community is fed up here, and unfortunately, excess in regulatory zeal can lead to excess in regulatory repeal.

    • Sadly Mr Macdonald doesn’t explain which country the HERE is where, according to him, ” the entire small business community is fed up.” Sounds to me like he may be writing from North Korea?

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