Issue Date: March 20, 2017
Paring back U.S. regulations
Last month, President Donald J. Trump signed an executive order directing each federal agency to establish a task force to seek out unnecessary and overly burdensome regulations. Standing beside him in the Oval Office were about a dozen leaders of major American companies, including Andrew N. Liveris, chief executive officer of Dow Chemical.
Trump thanked Liveris for assembling the gathering and asked, “Should I give this pen to Andrew?” Liveris accepted it as a souvenir.
Liveris has been one of Trump’s most vocal supporters from the business community. He appeared at a Trump victory rally in Michigan in December where the president-elect announced that Liveris would head a council of executives to discuss manufacturing with Trump. After a one of the group’s sessions, Liveris declared that “some of us have said that this is probably the most pro-business administration since the founding fathers.”
Liveris and other business leaders are excited about Trump, and a lot of that enthusiasm has to do with regulation. Executives have long complained about accumulation of federal rules, the idea that lurking within the estimated 300,000 regulations manufacturers collectively face are many ineffective, obsolete, and redundant requirements that don’t do much to help the environment or public safety. Trimming these, they say, would bolster competitiveness and help resuscitate manufacturing in the U.S.
For the past 40 years, presidents have promised regulation reform as often as they have pardoned Thanksgiving turkeys. Most recently, former president Barack Obama launched a regulatory look-back to assess the effectiveness of existing regulations.
But Trump is taking reform a step further by directing agencies to take away two regulations for each new rule they issue and to offset the costs of new rules by eliminating old ones. Already, executives are lining up to tell him what ought to go.
Environmental and consumer groups aren’t happy. They see the effort as a cynical attempt to roll back necessary protections.
“President Trump is rigging the system so corporate lobbyists can lower standards that protect the public health and safety,” said a statement from the League of Conservation Voters. Such detractors doubt regulations are too costly for business. They also say Trump’s approach ignores the benefits that regulations bring to the public.
Pro and con
Mostly because of EPA rules, federal regulations yield more benefits than costs.
NUMBER OF RULES
|Environmental Protection Agency||37||175.5||678.1||43.2||50.9|
|Health & Human Services||17||5.2||22.6||1.6||5.7|
|Housing & Urban Development||1||3.0||3.0||1.1||1.1|
|Joint Transportation, EPA||3||35.4||64.3||9.5||18.2|
Note: Major rules passed between 2005 and 2015 for which annual cost-benefit estimates are available. Figures are in 2014 dollars..
Source: White House Office of Management & Budget
By law, every new federal regulation goes through a formal notice, review, and comment period before it is finalized. Proponents of regulatory reform say, however, that problems arise when too many regulations accumulate. They often compare regulations to pebbles thrown into a stream. Each pebble on its own is of little consequence to the water’s flow, but after a while, they begin to dam up the stream.
“As you get more and more rules in a single industry, those rules can interact. They can contradict. They can be duplicative,” says Patrick A. McLaughlin, director of the Program for Economic Research on Regulation at the pro-free-market Mercatus Center at George Mason University.
McLaughlin cites, for example, rules from the Federal Railroad Administration, where he was an economist. Existing rules that were mandated by a 2008 law former president George W. Bush signed and finalized in 2012 require positive train control, an automated system for stopping trains to head off a crash or derailment. Additional regulations proposed last year would mandate a minimum number of crew members, a requirement that the railroads see as redundant given that positive train control technology is intended to prevent human error.
“Regulatory reform is hard work. But if ever there were an opportunity, it is now.”
—Mark J. Costa, CEO, Eastman Chemical
“We tend to focus on regulations one at a time, but there is a bigger issue,” says Susan Dudley, professor of practice at the Trachtenberg School of Public Policy & Public Administration at George Washington University and George W. Bush’s regulatory gatekeeper.
Dudley says the total effect of regulations hits the corporate bottom line. Regulations also raise prices, direct resources away from innovation to regulatory compliance, and stymie entrepreneurship. “All of those things are hard to measure,” she admits.
Companies don’t formally report their regulatory compliance costs. When asked, Mark J. Costa, CEO of Eastman Chemical, told C&EN that his company spends about $250 million, about 6% of its sales, to comply with environmental regulations alone.
Much of this spending, he claims, is unnecessary. “There are a number of regulations we have been complying with for years that are burdensome and yet produce insignificant environmental improvements,” Costa says.
He points to EPA’s Clean Air Act leak detection and repair (LDAR) regulations to reduce emissions of volatile organic compounds. They require Eastman to hire workers to rove through its plants with pricey equipment searching for leaks at tens of thousands of valves and pipe fittings. “Our monitoring data show that leaks do not occur nearly at the frequency EPA assumed to justify the various LDAR rules,” he says. “Moreover, we already had a process to identify leaks and repair them.”
Few studies show the overall costs of regulation on the economy. The White House’s Office of Management & Budget (OMB) reports to Congress annually on the costs and benefits of regulation. But OMB’s scope is limited. Its most recent draft report included only 129 rules finalized over a 10-year period—out of about 555 major rules—that have estimates of costs and benefits. This set of rules provides up to $873 billion in annual benefits to the public at a cost of implementation of $111 billion per year, the OMB report says.
The National Association of Manufacturers, a trade group, commissioned a report in 2014 that takes into consideration all federal regulations—not just the big ones with readily available cost-benefit data. The report focused on the costs of regulations to business, and not on the benefits to the public as a whole.
Its numbers, thus, are bigger. The report puts the cost of federal regulation at $2.028 trillion per year, about 12% of the gross domestic product. That’s $10,000 per employee for all firms in the economy. Manufacturers are harder hit, bearing a cost of nearly $20,000 per worker.
This report is a favorite of executives. “Manufacturers bear two times the federal regulatory costs than do all other companies,” Liveris noted in a recent conference call with analysts. He added that new regulations “especially these last eight years” have “crippled us in terms of locating factories in the U.S. despite a decent growing U.S. market.” Dow wouldn’t answer C&EN’s inquiries regarding specific regulations it deems overly burdensome.
The Mercatus Center’s McLaughlin conducted a study of his own that models the entire economy and imagines a scenario where no new regulations have been passed since 1980. The additional regulations caused a 0.8% drag on economic growth over that period, the report says. Had regulation been frozen at that time, the economy would be 25% larger than it is today, it concludes.
Cary Coglianese, a professor of law and political science at the University of Pennsylvania and director of Penn’s Program on Regulation, is unimpressed by the supposed connection between regulation and economic growth—and in particular, on job creation in the country.
Regulation, Coglianese says, cuts both ways. “Maybe individual facilities here or there teeter over the edge, but when those firms leave or lay off workers, there are facilities in other parts of the country and other parts of the sector that are usually picking up business, some of it created by regulation,” he says.
For example, one scenario common in the chemical industry is that when a substance is banned for a certain use, business picks up for replacement molecules. Similarly, regulation can create business. In a recent conference call with analysts, Honeywell CEO Dave Cote touted the firm’s XCeed bioreactor technology, which sweeps contaminants out of water with microbes. “Wastewater regulations are getting increasingly strict, and we have unique technology to help our customers meet these requirements more efficiently and cost-effectively,” he said.
Coglianese says regulation isn’t nearly as big an influence on competitiveness as other factors. “The reason manufacturers are deploying factories in other parts of the world is because of the differences in labor costs,” he says. “We are more regulated than China. We are more regulated than Mexico. But even those are small differences related to the really big expense, which is labor cost.”
Throughout the presidential campaign, Trump insisted that regulation does make a difference. He signed the two-for-one executive order during his first month in office.
Experts say the order may have more teeth than previous efforts to reform regulation. The Mercatus Center’s McLaughlin argues that it might reverse what he sees as an old habit among regulators. “Agencies will typically produce a rule looking forward. They will expect to see some sort of effect,” he says. “But they won’t ever look back and see if it did have that effect.”
Trump’s approach isn’t out of the blue. Canada, the U.K., and Australia have taken similar approaches to cutting regulations. British Columbia boasts that it has reduced its regulatory burden by 47% since 2001.
Is the Code of Federal Regulations—the compendium of the government’s rules—padded with bad requirements that could be plucked out? McLaughlin says the answer is probably yes. “There are nearly 180,000 pages of regulations in effect at the end of 2016. Many of them are quite old. My guess is a lot of that stuff is obsolete,” he says.
But finding the dead wood will be tough, GW’s Dudley says. “It is going to be challenging to try to identify regulations that have costs in excess of benefits,” she says. “My guess is one of the best ways to start will be to ask regulated parties themselves to come up with them.”
Many regulated entities are happy to oblige. Last month, Eastman’s Costa wrote a letter to the White House on behalf of the Business Roundtable, a group of CEOs, naming more than a dozen regulations the body would like to see go. Liveris signed the letter, as did Honeywell’s Cote.
Among them are two 2015 rules. One lowered the national standard for ground-level ozone from 75 ppm to 70 ppm. The other, part of Obama’s signature action on climate change, requires newly built coal-fired power plants to have carbon dioxide capture technology.
The CEO group also hit on the 40% so-called Cadillac tax on expensive health care plans. It also wants to tighten eligibility standards for shareholders to make proxy proposals, eliminate rules requiring companies to report the ratio of CEO to average worker pay, and nix conflict minerals disclosures. These minerals contain tin, tantalum, tungsten, and gold and their sale is financing conflict in Africa.
Costa says the Trump Administration is more receptive to industry’s position than past ones. “Regulatory reform is hard work,” he says. “But we do believe: If ever there were an opportunity, it is now.”
David Goldston, director of government affairs for the Natural Resources Defense Council (NRDC), an environmental group, is alarmed by the Business Roundtable’s set of suggestions.
“It’s not a bunch of smaller nuisance rules,” he says. “They are after fundamental policies to protect the public. And so it gives away the game. This is not about reform. This is not about clearing away regulatory underbrush. This is about a frontal assault on fundamental protections.”
The Trump Administration’s two-for-one order is bad policy and illegal, Goldston maintains. “It is just a blunderbuss effort to try to eliminate regulations. There is no real logic to it,” he says.
NRDC has teamed up with Public Citizen and the Communication Workers of America to sue the Trump Administration in a bid to block the order. The complaint argues that Congress never granted the legislative authority to require that two rules be cut for every one enacted.
The suit also argues that the Trump Administration is only taking compliance costs into consideration, not benefits to the public. For example, the suit says, EPA has proposed rules to ban use of trichloroethylene in vapor degreasing, aerosol degreasing, and spot cleaning at dry cleaners. EPA estimates that the rule would cost up to $45 million per year but could provide a public benefit of $402 million by protecting developing fetuses from birth defects.
To Penn’s Coglianese, such health and safety benefits all too often get ignored in the debate. Healthier workers are more productive ones, he points out.
“Regulation itself in a country that proclaims commitment to freedom is certainly not the sort of the thing people champion easily,” he says. “But when you ask people if they want lead in their water, of course they don’t.”
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