Patrick McLaughlin is a senior research fellow at the Mercatus Center at George Mason University and the co-creator of RegData, an online database that quantifies regulation. You can reach him on Twitter @EconPatrick.
Several states have recently started pursuing much-needed regulatory reforms, as the rise of the Office of the Repealer in Kansas demonstrates. Despite the office's dramatic name, it is quite reasonable to aspire to eliminate and prevent the creation of regulations that are economically inefficient.
Unfortunately, it's not always easy for a reformer to tell which regulations to cut away. Regulatory reform efforts often rely on agencies to provide information about which regulations are inefficient, duplicative, or outdated. While the agencies may indeed have a good idea of which regulations need to go, they have little incentive to actually see them repealed—that would mean smaller budgets, fewer employees, and diminished power.
Here's a corollary experiment to try: ask your health care provider which of his or her services are inefficient, duplicative, or outdated so that you can eliminate them. Don't expect a long list. Unless agency incentives are changed, regulatory reform efforts that rely on agency-provided information are almost certainly bound to be merely cosmetic.
Too often, regulatory decisions are made without the insights of high quality benefit-cost analysis. Instead, if regulatory agencies conduct any economic analysis of proposed regulations, it often relies on assumptions, untested theory, or, occasionally, fantasy, to show that a regulation's benefits justify its costs. We shouldn't be surprised if just about every economic analysis an agency performs on its own proposal finds that the regulation passes a benefit-cost test.
Read that sentence again—the agency does the analysis on its own proposed regulation. That's like allowing employees to write their own annual reviews. While some would be honest enough about their performance, it wouldn't be a recipe for accurate worker assessments.
The individual economists who do the hard number-crunching that goes into regulatory benefit-cost analysis are often directly rewarded for the creation of new regulations. That means they have incentive to craft an analysis that supports the decision to regulate, whereas an ideal analyst would have incentive only to craft a high-quality evaluation. Numerous researchers have found just what you would suspect from a system with such built-in misalignments of incentives: the quality and use of economic analyses in regulation leaves a lot to be desired.
Any efforts at regulatory reform should recognize that data on the performance of regulations are sparse at best and biased at worst. Failing to address the process of economic analysis as part of the reform effort will probably limit the effectiveness of any changes in the regulatory process. In fact, a primary goal of regulatory reform should be to generate high quality information about regulations—not only prospective benefit-cost analyses of proposed regulations, but also retrospective analyses of programs coupled with reviews of whether those programs remain necessary.
Of course, you can't just order analysts to perform better analyses. If that worked, then the executive orders and guidance documents issued by each successive president for the past three decades instructing agencies to perform high quality analysis would have improved the regulatory landscape. Instead, these orders have not worked precisely because they failed to address the structures of the bureaucracies and the incentives of their employees.
It's simple: bureaucracies “succeed” by creating more regulations, regardless of their actual effect, and individuals in those bureaucracies are incentivized to support that mission. A first step towards improvement is to remove economic analysts from within their respective bureaucracies—make them independent and reward them for creating high quality analysis, regardless of whether their work supports a decision to regulate. With more independent and high quality information, regulatory reform efforts at the state level will be much more effective.