The Key Ingredient in Trump's Anti-Reg Two-for-One Executive Order? Fuzzy Math

Steve Bannon's crusade to deconstruct the administrative state took two big steps forward last week, concluding with Donald Trump nominating George Mason University Law School professor Neomi Rao as his "regulatory czar." CPR will publish a new report on the role of the Office of Information and Regulatory Affairs (OIRA) Administrator during the Trump administration in the days to come, but for now, I want to focus on the first big development: Acting Administrator Dominic Mancini's new memo providing agencies with guidance on how to comply with Trump's Executive Order 13771. 

The unenviable task Mancini and his team faced was trying to rehabilitate the almost cartoonishly absurd executive order by transforming its amateur-hour delusions about how the regulatory system works into a serious policy program. Specifically, the memo addresses several key issues related to Section 2 of the order, which requires agencies (1) to identify for repeal two existing regulations for every new regulation they wish to issue and (2) to ensure, for the duration of Fiscal Year 2017 at least, that the cost savings for regulated industries that result from those repealed regulations fully offset the costs that would be imposed by the new rule. The document supplements, and in some cases supersedes, an earlier interim guidance, which CPR filed comments on. Evidently, future memos will address the implementation of the executive order's other requirements. All told, the memo does little to alleviate the confusion and uncertainty that the order is sure to engender over the next several years of its implementation. 

The most troubling part of the memo for me comes as part of Mancini's response to the question, "How should agencies treat unquantified costs and cost savings?" The answer includes this passage: 

In proposed/draft regulatory actions expected to lead to EO 13771 regulatory actions or EO 13771 deregulatory actions agencies should, at a minimum, clearly identify any non-monetized costs or cost savings, explain the key reason(s) why monetization is not possible, discuss any information the agency has that is relevant to estimating such costs, and request information from the public to monetize such costs at the final stage. 

(Emphasis mine.) 

Fuzzy math has always played a problematic role in the economic impact analyses related to agency regulations, and this passage from the Mancini memo invites federal agencies to play fast and loose with non-monetized costs and cost savings as they try to implement Executive Order 13771. Those of us watchdogging implementation will have to be on guard for Enron-esque bookkeeping as agencies try to balance the books on regulatory costs to satisfy the executive order's cost savings requirements. 

The root of the problem, of course, is that Trump's order elevates consideration of a rule's costs as the single most important criterion in regulatory decision-making. In particular, its requirement that agencies fully offset the costs of new regulations through cost savings achieved by repealing or weakening existing ones will dictate whether and what kinds of new rules agencies put into place, as well as which kind of existing agency actions are discarded. Thus, no matter how significant their benefits may be, discretionary rules that impose substantial costs will never see the light of day. Likewise, even the dumbest rules on the books will likely remain in place as long as their costs are relatively small. 

Trump's requirement that agencies fully offset the costs of their new rules creates a strong incentive for agencies both to minimize the costs of new rules and to maximize the cost savings achieved through eliminating or weakening existing ones. For new rules, that means agencies will issue the weakest rules they can possibly get away with. And with existing rules, they will find ways to exaggerate the costs as much as possible to give them the biggest bang for the cost-saving buck by conjuring all kinds of "non-monetized cost savings." The repeal of a rule, an agency might argue, would lead to a whole cornucopia of cost savings manifested through such indirect effects as increased employment or wages, lower energy costs for consumers or manufacturers, improved international competitiveness for affected industrial sectors, enhanced opportunities for technological innovation, or growth of the overall economy. 

These types of indirect costs exist, if at all, only in the realm of economic theory. They're impossible to prove or disprove. But they are particularly important as agencies review existing rules because, for the most part, such rules don't impose much in the way of monetizable costs once their initial implementation has taken place. As the Mancini memo explains, agencies may not count as cost savings any "sunk costs" associated with an existing rule – that is, costs that an affected business will never be able to recoup even if the existing rule is repealed. For example, sunk costs might include the installation and engineering costs associated with a particular piece of pollution control equipment, which is usually the bulk of the costs imposed by environmental regulations. Instead, the only costs that would remain fair game are the operating costs associated with the ongoing use of the pollution control equipment, which are often relatively minor by comparison. 

Mancini's memo provides agencies with still another inducement to exaggerate non-monetized cost-savings. In response to concerns that Trump's order would encourage agencies to repeal rules that generate net benefits because of its laser-like focus on compliance costs, the Mancini memo attempts to retroactively graft a cost-benefit analysis requirement on Trump's 2-for-1 and regulatory cost savings requirements. Agencies, the Mancini memo instructs, are still supposed to ensure that regulatory decision-making is guided by the principle that "benefits justify costs." And this principle applies equally to the issuance of new rules as well as the elimination or weakening of existing ones. 

This cost-benefit test for repealing and weakening existing rules places agencies in another tough bind, and once again, the use of non-monetized costs offers them just the escape hatch they'll need. After all, most existing rules remain cost-benefit justified because their ongoing health, environmental, and safety benefits continue to be substantial for years after they go into effect. Their ongoing costs dwindle since those costs do not include the sunk costs related to upfront implementation. But with the judicious addition of non-monetized costs to the equation, agencies will be able to cook the books enough to make nearly any existing rule look like its costs outweigh its benefits. 

Industry groups interested in targeting an existing rule they find particularly inconvenient will no doubt find this aspect of Mancini's memo appealing. Working with sympathetic officials in the Trump administration, corporate interests can help devise ways to tally up new non-monetized costs for the disfavored existing rule, easing the way for its elimination or revision. 

All of this fuzzy math related to non-monetized costs will likely serve as the essential lubricant that keeps the entire Executive Order 13771 machine from breaking down. Worse still, it might just enable powerful industry groups to fulfill their deregulatory wish list. 

Two other big problems with Mancini's memo: 

Further concentration of power in the White House: As noted above, despite the Mancini memo's best efforts, the task of providing clarity to how Trump's executive order should be implemented proved too great. Not surprisingly then, phrases like "Please consult with OIRA" and "OIRA will consider on a case-by-case basis" (or similar variants) appear with embarrassing frequency (nine and eight times, respectively). In this way, the Mancini memo ends up assigning an enormous amount of power to OIRA to determine how its provisions will be carried out. For example, the order empowers OIRA to decide whether a rule struck down by a court qualifies as a repealed rule that generates costs savings, such that it can be used to offset the costs of new rules. OIRA also gets to tell agencies whether their rules qualify as "statutorily or judicially required" rulemakings, which permits some degree of flexibility for implementing the executive order's burdensome requirements. 

The answers to these questions could have a tremendous impact on whether agencies are able to carry out their statutory responsibilities in a timely and effective manner. Congress certainly didn't envision that a political office ensconced in the White House would wield such significant authority over regulatory implementation when it enacted the statutes that authorized these regulations – after all, Trump's executive order and its influence over agency decision-making could not have been foreseen. This raises troubling constitutional concerns. 

Broad coverage of regulatory activities: Another of the Mancini memo's troubling revelations is that OIRA will permit agencies to use the repeal of such a wide variety of actions beyond regulations, including Information Collection Requests and guidance documents, for the purposes of achieving the order's 2-for-1 and cost savings requirements. Compared to regulations, these types of actions don't typically impose much in the way of costs (indeed, guidance documents arguably don't impose any costs), so it's unclear how useful they'll be from a cost-saving perspective. 

But, unlike repealing regulations, the elimination of these actions requires little in the way of formal process. As such, these actions might offer agencies an attractive option for meeting their goals under the order, because, procedurally speaking, they present the path of least resistance. In all likelihood, agencies would have to bundle together several of these actions to offset the costs of even smaller new rules, but at least the agency would be spared the time and expense of going through the Administrative Procedure Act's rulemaking process to eliminate or weaken existing regulations (a process that could fail and leave the agency looking for other rules to eliminate and other sources of potential cost savings). 

Here's another problem with that approach: Agencies desperate to find cost savings to offset new rules might start recklessly casting aside guidance documents and Information Collection Requests with little appreciation for their individual or collective significance, leading to all kinds of program implementation chaos. Guidance documents, which are often produced in response to requests from industry, are essential for alleviating the kind of regulatory uncertainty that conservative lawmakers and corporate special interests frequently decry. Information Collection Requests enable agencies to carry out a variety of vital tasks, ranging from identifying the least costly manner for achieving regulatory goals to ensuring meaningful compliance with existing requirements. The haphazard elimination of these requests could render existing regulatory programs inefficient or nearly impossible to carry out effectively.