Joe Aldy:
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.
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. ...
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. ...
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.”
