Pro: Proposals will spur job creation by requiring regulators to improve good rules, scrap bad ones

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Michael Greenstone
Saturday, June 25, 2011
EDITORíS NOTE: The writer is addressing the question, Will the Obama administrationís regulatory reform proposals boost private-sector job growth?

Yes, the Obama administrationís regulatory reform proposals will help spur private-sector job growth by identifying the regulations that fail to protect American families and then reforming or removing them.

Despite their centrality to our economy and well-being, the debate over regulations has remained unchanged and largely uninformative for decades.

Opponents of regulations shout that they cost jobs. At an equal volume, proponents claim that the failure to adequately regulate costs lives or in some other way endangers our well-being.

Indeed we see these debates taking place right now over the regulatory decisions required by the health care and financial reform bills passed by Congress, as well as the fight over the authority of the Environmental Protection Agency to regulate greenhouse gases.

These debates miss the central question about regulations: are the costs justified by even greater improvements to Americansí health and well-being? The Obama administrationís recent regulatory reform proposal, spelled out in Executive Order 13563, is a revolutionary step in the right direction. It reaffirms the principle, established in the Reagan administration, that enacted regulations should have benefits that exceed their costs.

Where the Presidentís Executive Order breaks from tradition is the requirement that agencies routinely revisit the measurement of costs and benefits of existing regulations and identify the least costly ways to achieve a regulationís goals. It then requires agencies to amend their regulations, based on these findings. Supporting these reforms should be natural, but it should not be lost that these are dramatic changes in regulatory policy.

Until the presidentís reforms, the approach to developing regulations has not been inspiring. When a potential regulation is under consideration, the implementing agency estimates its likely costs and benefits. Since the regulation is untested, decisions must be made based on an incomplete analysis.

Once a regulation is implemented, it goes on the books and generally stays there unexamined for years, often decades. If the costs to our economy outweigh the benefits, we generally wonít know and the regulation will remain in force.

This approach of limiting evaluation to the period before the regulations take place lacks common sense. After all, this is the point when we know the least.

If a company hired a new employee, the human resources team would check references and other background information for that person prior to employment. But would the evaluation process end there? Certainly not! The employer would use year-end performance reviews and other information to determine the employeeís compensation and career path. There is no reason that the federal government cannot act with this same goal of continuous improvement.

In the spirit of continuous improvement, the presidentís reforms also require agencies to design new regulations in a manner that facilitates their evaluation.

The combination of this advanced planning along with advances in computing power and understanding about evaluation methods means that we could be at the doorstep of a critical transformation.

The goal is a virtuous feedback loop in which regulations are reformed or discarded based on how they work in the real world.

Of course, the Executive Order is not perfect. The evaluations are currently performed by the agencies that write the regulations. But, objectivity about oneís own performance is always difficult and a primary reliance on self-evaluations is not the hallmark of a well-functioning system.

While these evaluations are subject to public comment and White House review, a next step might be to consider shifting to a system of independent evaluations in addition to, or in place of, self-evaluation.

Still, the Obama administration has taken vital steps in reforming our system of regulation. In doing so, it has moved past the tired black and white debates about regulation. The result is a regulatory system that has newfound potential to spur private sector job growth, while also protecting the health and well-being of American families.

Michael Greenstone is director of The Hamilton Project at the Brookings Institution and the 3M Professor of Environmental Economics at the Massachusetts Institute of Technology. He served as chief economist on President Obamaís Council of Economic Advisers in the first year of his administration. Readers may write to him at MIT Department of Economics, 50 Memorial Drive, Building E52 Room 359, Cambridge, Mass. 02142-1347; email: mgreenstmit.edu.

Last updated: 5:34 pm Thursday, December 13, 2012

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