Regulation and the Obama administration: Red tape rising
The regulatory state is expanding sharply. But Barack Obama hints that there may be moderation ahead
Jan 20th 2011 | WASHINGTON, DC | from the print edition
[Greg Ip] EVER since his thumping in the mid-term elections, Barack Obama has been busily mending relations with business folk. He has extended existing tax cuts, introduced new ones, completed a free-trade deal and appointed a banker as chief of staff. Now he is attending to their biggest grievance: that he has enmeshed them in stifling new rules, from health care and finance to oil-drilling and greenhouse gases.
Unlike many charges lobbed at Mr Obama, this one is well grounded. In his first two years in office the federal government issued 132 “economically significant” rules, according to Susan Dudley of George Washington University. (“Economically significant” means that either the rule’s costs, or its benefits, exceed $100m a year.) That is about 40% more than the annual rate under both George Bush junior and Bill Clinton. Many rules associated with the newly passed health-care and financial-reform laws are still to come.
Existing rules are also being enforced more keenly. The workplace-safety regulator slapped employers with 167% more violations in Mr Obama’s first year than in Mr Bush’s last, according to OMB Watch, a liberal watchdog. The Food and Drug Administration (FDA) has stepped up scrutiny of drugs that have already been approved for sale. Last year it barred the use of Avastin for breast cancer, not because it was unsafe but because its benefits seemed too uncertain. The regulatory workforce has grown 16% in Mr Obama’s first two years in office, to 276,429, while private employment has fallen (see chart 1).
Has this extra regulation made the economy worse off? Not necessarily. The White House Office of Information and Regulatory Affairs (OIRA), which vets most new federal rules, reckons that although Mr Obama’s regulations cost more than his predecessors’, they also bring greater benefits (see chart 2): fewer lives lost from inhaling mercury, being hit by lorries, or eating contaminated food. “I take any costs seriously, but they may be worth incurring if, in return, we get much higher benefits,” says Cass Sunstein, who heads OIRA and, like Mr Obama, taught law at the University of Chicago.
Even business concedes that some new rules were long overdue. A law passed last December gives the FDA sweeping new authority to order food recalls, track the supply chain for fresh food and order companies to submit food-safety plans, while authorising some 1,000 new staff to carry out its orders. Despite its intrusiveness, food manufacturers backed the law in the hope that it would restore public trust in the food system, which had been shaken by fatal outbreaks of E. coli and salmonella.
Nonetheless, Mr Obama now seems more sympathetic to business complaints about regulatory overkill. On January 18th he signed an executive order laying out his philosophy of regulation. It reiterates guidelines first issued by Mr Clinton and adhered to by Mr Bush: rules should be subject to cost-benefit analyses, imposed in the least costly way and leave companies free to work out how to comply. Mr Obama also went further, ordering all regulatory agencies to put in place within 120 days a system for reviewing old rules to see if they can be amended or repealed, and to ease the burden of regulation on small businesses.
Yet the order also expands the scope of regulation by telling agencies that they may consider “values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts”. That is an important consideration for rules such as better access to toilets for the disabled. The risk is that such criteria could be used to justify rules that cost the earth. Banning limits on health insurance, for example, as the health-care law does, may reduce the anxiety of people who might otherwise lose coverage, but whether that is worth the increase in premiums is impossible to say.
A similar attitude underlies both the thicket of homeland-security rules that has sprung up since the terrorist attacks of September 2001, and financial reforms since the banking crisis. These are justified largely by arguing that another terrorist attack or financial crisis would be unimaginably damaging. But since the probability of either event seems unknowable, so are the benefits that might accrue from the laws. Vikram Pandit, the chief of Citigroup, has likened the new Basel capital rules to maintaining a standing army large enough to fight the second world war.
Also unquantifiable is the innovation that may be deterred by regulation. Michael Mandel, a scholar at the Progressive Policy Institute, a think-tank, says some of Mr Obama’s rules, though well intentioned, interfere with the most dynamic parts of the economy. Rules meant to deter the abuse of student aid by for-profit colleges could stunt the growth of college courses taught over the internet; tighter conditions on drug approvals, prompted by much-publicised scandals, raise the cost of drug research, especially for small companies; and “net neutrality” rules could expose internet-access providers to stifling litigation.
Mr Obama’s regulatory surge would be less damaging if it had not followed one by Mr Bush, Mr Mandel says. Because of fears about national security, telecoms and internet companies came under pressure to accommodate federal eavesdroppers. The Sarbanes-Oxley accounting law has made it more expensive for start-up companies to list their stock publicly.
Perhaps Mr Obama’s new edict will hack away some of the regulatory undergrowth that has flourished over the decades. But business could be waiting a while for results. In December the Environmental Protection Agency took saccharine, an artificial sweetener, off its list of hazardous materials—more than a decade after scientists had concluded it was not carcinogenic after all. Mr Sunstein vows: “It isn’t going to take ten years to get rid of rules that deserve to be got rid of.”
The original article is linked here.