Federal regulators spend much more time and energy writing new regulations than revising or rescinding old ones. Comparatively scant attention is spent evaluating older rules against their regulatory objective, with the primary aim of reducing the regulatory burden—an exercise referred to as “retrospective review.”

The Obama administration has done more to advance retrospective review than previous administrations. It enforced a long-ignored section of a 1993 executive order requiring each regulatory agency to develop a plan for reviewing significant regulations. (Plans were first published in 2012 and include more than 500 ongoing or completed changes to existing regulations.) It set a schedule for agencies to update their plans every six months. (Plans were last updated and posted this past March 15th.) It urged independent regulatory commissions to follow suit (and they have). It required agencies to invite public nominations for reform (and most did). It required agencies to publicly release data and analysis from any retrospective reviews. It made clear that the emphasis is on reducing the regulatory burden (with special considerations for small business), including the cumulative burden. It set a goal of $20 billion in annual cost reductions associated with changing existing regulations, and identified a few regulatory changes that will count toward that figure.

These administration activities have captured the attention of think tanks and other organizations focused on regulation. Michael Mandel and Diana Crew of the Progressive Policy Institute favor establishment of an independent commission to submit to Congress a list of regulations for elimination or modification, modeled after the successful Base Realignment and Closure (BRAC) process for identifying and closing military installations. Law professor Cary Coglianese, director of the University of Pennsylvania’s Penn Program on Regulation, seeks a stronger role for the White House Office of Management and Budget: to issue guidelines to agencies on the conduct of retrospective review, to require that agencies plan for retrospective review in each regulatory impact analysis, and to recommend specific rules for agency review. The Administrative Conference of the United States, in an effort to “cultivate a culture” of retrospective review, emphasizes crafting new regulations with an eye toward future evaluation and then employing evaluators external to the agency to conduct the analysis.

Congress is also interested in retrospective review. Leading the charge is the Senate Homeland Security and Governmental Affairs Committee with its #CutRedTape Initiative, focused on reducing burdens associated with existing regulations. Last March, committee chair Ron Johnson (R–Wisc.) and ranking member Thomas R. Carper (D–Del.) sent letters to hundreds of interest groups seeking their top regulatory priorities and suggestions for improving the regulatory process. The committee established an online portal where citizens can share their stories about regulations. The committee’s first hearing this year focused on regulatory reform, and the issue garnering the most attention was retrospective review. A series of additional hearings on regulation are planned for this year and next.

This interest by external parties may be having some effect on the administration. OMB leaders recently held a series of outreach meetings with various interest groups, seeking advice on how to “reinvigorate” their retrospective review efforts. The OMB has also requested “public engagement” plans to be completed by all agencies by May 1 and is tracking the agencies’ progress in implementing their plans on a monthly basis. It is likely that any substantial changes to President Obama’s initiative will become apparent when the next update of agency plans is posted in July or August.

We should worry that regulators will ignore certain types of promising reforms or set a higher bar than necessary before making a change.

Resistance from regulators / As promising as these developments appear, there is reason for pessimism about the administration’s efforts: the exercise is agency-driven and regulators have strong incentives to resist retrospective review and preserve the status quo.

In his masterwork, Bureaucracy, public administration scholar James Q. Wilson argued that bureaucrats resist innovation that is at odds with their core task or mission, even if additional resources are provided to them. An agency whose core task is protecting consumers or workers can be expected to resist changing regulations that diminish protection, even if the resulting social benefits are large and the increased risk is slight.

An example of this can be found in the Department of Labor’s retrospective review plan. The Occupational Safety and Health Administration will identify and remove unnecessary or duplicative provisions or paperwork requirements in workplace standards for construction. Administration officials are quick to point out that OSHA’s efforts are focused on reducing burden “so long as the changes do not diminish employee protections.” So no reduction of burden is considered worthwhile if worker risk increases even the tiniest little bit.

An additional factor affecting agencies also comes into play: the so-called “endowment effect.” Behavioral economist Richard Thaler coined the term to describe the difficulty people have in giving up something, often requiring greater compensation than they would be willing to pay to obtain it. For example, if an agency believes it is “giving up” key information from regulated entities that enable it to fulfill its duties, it is likely to resist eliminating the information collection requirements unless it receives compensation in excess of its loss.

A good example of this effect comes from the Environmental Protection Agency’s retrospective review plan. The EPA seeks to eliminate certain toxicity testing requirements for pesticide registration purposes. The current regulations require that pesticide manufacturers expose whole animals to an unrealistically high dose of a pesticide to elicit an adverse effect in order to determine a “safe dose” level for humans. This approach is costly, time-consuming, and involves a great deal of scientific uncertainty, especially when extrapolating data from high doses in animals to the lower doses expected in humans. In 2007, the National Research Council called for a shift to a new paradigm where human cells are exposed to an “environmentally relevant” (that is, likely) dose of a chemical. The cellular response from such in vitro assays, coupled with selective use of whole animal testing, can be used to evaluate chemicals more quickly, at less cost, and with fewer animals. Major scientific uncertainties are also reduced.

Despite the promise afforded by these new testing methods, the EPA has taken a stance that first requires proof that a new test provides at least the same information as the old test it may replace, even if the validity or relevance of the new test to human beings exceeds that of the old method. Should the EPA allow a new test to be used, it will require data from both the old test and the new test for an indeterminate amount of time before it might decide to eliminate the requirement for the old test. In short, the agency is setting a much higher bar to replace a regulation than it did when setting it—the endowment effect at work.

To be fair, retrospective review plans include plenty of examples where there is significant alignment between regulators and the regulated. For example, the EPA aims to allow manufacturers to utilize modern optical imaging for detecting equipment leaks of air pollutants, a compliance option that is less costly and arguably more effective than current regulatory requirements. The Department of Labor plans to modernize its permanent labor certification process to make it easier for firms seeking to employ foreign workers permanently in the United States. The original regulations were established 10 years ago and have not been altered despite changes in the labor market.

We should not worry that regulators will ignore the president’s initiative; they won’t. We should, however, worry that regulators will ignore certain types of promising reforms or set a higher bar than necessary before making a change.

Regulated entities have their own reasons to be wary of retrospective review. For many if not most existing regulations that have been in place for a long time, compliance costs are greatest in the beginning, representing a sunk cost that cannot be returned. Compliance paths are relatively certain. A change in a long-established regulation would impose a new cost to change the established compliance path and would also create uncertainty over enforcement. As one retired compliance manager for a heavily regulated multinational company said, “Nothing good can come from opening up an old regulation.” Perhaps this kind of thinking stems from experience with statutory requirements for periodic review of regulations, requirements that tend to add to—not subtract from—the regulatory burden (e.g., the Clean Air Act’s mandate for the EPA to review the national ozone standard every five years).

Incremental versus significant progress / If there is reason for optimism, it stems from the fact that certain types of reforms—ones that do not threaten an agency’s core task—should be welcome, or at least not resisted, by both regulators and the regulated. These reforms can be grouped into three categories:

  • reforms that allow the use of new technologies or eliminate a requirement to use an out-of-date technology
  • reforms driven by newly established scientific knowledge
  • reforms that leverage information technology (e.g., in lieu of paper forms)

Nearly 50 percent of the listed regulations from a sample of retrospective review plans (from EPA, OSHA, and the Food and Drug Administration) involve these types of changes. There is no reason to believe the plans from other departments and agencies are any different. Admittedly, most of these types of reforms represent incremental improvements, the kinds of advances that continuously improve the efficiency and effectiveness of markets.

Unfortunately, even if the administration’s efforts to “reinvigorate” retrospective review result in many more of these positive changes, success is likely to be relatively modest for two reasons.

First, regulatory priorities at many, if not most, federal agencies are driven by statutory mandates and court-imposed deadlines, lessening the time for agency discretionary activities like retrospective review. Only a tiny fraction of the future regulations listed in the latest semi-annual Unified Agenda (listing pending regulations in development across all federal agencies) are tagged with the “retrospective review” moniker.

Second, regulatory agencies cannot change bad regulations required or compelled by statute, and statutes establishing regulatory programs (especially in the last two decades) are notoriously prescriptive. Interestingly, Executive Order 12866 requires each agency to “identify any legislative mandates that require the agency to promulgate or continue to impose regulations that the agency believes are unnecessary or outdated by reason of changed circumstances.” But despite this presidential requirement, agencies do not do this and OMB does not require that they do.

In the end, like every other proposal to reform the regulatory process, retrospective review is a second-best solution. The best solution can be found not on the back end, but on the front end: when Congress enacts or modifies statutes and when agencies craft regulations for a new regulatory program.

Congress is considering taking action. Two bills have been introduced to advance retrospective review; both build on Mandel’s suggestion of having a politically appointed commission identify a package of regulations to be eliminated, subject to an up-or-down vote by Congress. Compared to the administration’s initiative, in which the regulatory agencies determine which rules are to be eliminated or modified, Congress would be in the driver’s seat.

The Obama administration deserves credit for bringing greater attention to retrospective review, but its efforts are likely to be incremental. The best way to eliminate a bad regulation is to avoid creating it in the first place.

Readings

  • Bureaucracy: What Government Agencies Do and Why They Do It, by James Q. Wilson. Basic Books, 1989.
  • “Experimental Tests of the Endowment Effect and the Coase Theorem,” by Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler. Journal of Political Economy, Vol. 98, No. 6 (1990).
  • “Moving Forward with Regulatory Lookback,” by Cary Coglianese. University of Pennsylvania Working Paper 1190, 2013.
  • “Regulatory Improvement Commission: A Politically Viable Approach to U.S. Regulatory Reform,” by Michael Mandel and Diana Crew. Progressive Policy Institute, May 2013.
  • “Retrospective Review of Agency Rules,” Administrative Conference Recommendation 2014–5, published by the Administrative Conference of the United States. December 4, 2014.
  • “Toward a Positive Theory of Consumer Choice,” by Richard Thaler. Journal of Economic Behavior & Organization, Vol. 1, No. 1 (1980).