Regulation Czar: Low Profile, Big Influence

Cass Sunstein, one of the new President's friends and advisers since Obama's days at the University of Chicago, has landed one of the most powerful jobs in Washington—but one that is little known outside the Beltway. As director of the Office of Information & Regulatory Affairs (OIRA), he will review every major regulation promulgated by any federal agency, from clean air to airline safety. He will have the authority to wave through or block any new rule, giving him enormous influence over the shape of federal regulation.

But if there is anything less well understood than the impressive authority of Sunstein's new job, it is the particular views and beliefs he brings to it.

Sunstein's Senate confirmation hearings are not yet scheduled. However, his appointment has set off some confusion as those on the left and right pore over his prolific writings and try to box him into familiar stereotypes. On both sides of the political spectrum, there are groups who look at Sunstein and see a University of Chicago conservative, influenced by his former colleagues (including Milton Friedman) and bent on dismantling federal regulation.

Others in the business community see Sunstein, 54, as a Harvard Law School liberal who has written books defending strong regulation. Progressives reading the same tea leaves hope that Sunstein's work on "behavioral economics" shows a desire to regulate everything from credit cards to retirement accounts.

Beyond Syllogisms

Sunstein just doesn't fit into any one of these forced categories. His views go beyond "corporations are bad, therefore regulation is good" or "business is good, therefore regulation is bad." A leading intellectual, he has spent his career preparing for the day when such syllogisms fail. And that day has come when Alan Greenspan acknowledges that a lack of regulation contributed to the financial crisis, and stimulus spending on energy efficiency is used to keep U.S. business afloat.

There is plenty of space between a suffocating regulatory state and a reckless, unfettered free market. Based on his past writings, and our own personal interactions with him, we believe that for Sunstein, developing regulatory policy is a technical enterprise where one can learn from one's mistakes and build a better mousetrap. He does not see pollution as a moral problem with a "correct" level of zero. Rather, he sees risk as a natural element of life, and a risk-free society as neither attainable nor desirable. In his worldview, regulatory goals, like safety or environmental protection, are important, but they can be attained in more—or less—intelligent ways. The highest priority in a Sunstein OIRA will be achieving a balancing act of strong regulations that don't break the bank.

But in a society of many disparate interests, there will be winners and losers, even when government regulation is well crafted.

Sunstein will probably favor approaches that shift more power to the private sector, but he will expect big results in return. The industries that have spent years developing competence in negotiating the regulatory labyrinth currently have a comparative advantage. Sunstein almost certainly will shake things up on issues from toxic waste to workplace safety, and companies that thrive in the status quo system are likely to lose out.

More for Less

There are three areas where we predict Sunstein will leave his mark. First, he can push to reform regulatory programs to drive innovation and deliver better results for less money. For example, the Environmental Protection Agency strictly regulates water that comes from a "point source" (say, at the tail end of a factory) but largely ignores "nonpoint source" water pollution (like noxious runoff from pig or chicken operations). Many companies spend large sums complying with point source regulations, while we can achieve equal reductions from nonpoint sources for much less. Instead of pushing to eke out additional small-emissions reductions from regulated companies (at great cost), why not give firms the flexibility to meet permitting requirements by funding projects that reduce the same pollutant in farm runoff? We could even create a more sophisticated trading mechanism based on current pollution into a lake or river that targets dollars at the most harmful emissions for that body of water.

Second, Sunstein can balance the OIRA review so that it does not water down strong regulation. At its inception, during the Reagan Administration, OIRA was conceived as a way to tamp down regulation and reduce the compliance costs of industry by reining in agencies. The assumption was that there was too much regulation, and we needed to scale back to give the economy some breathing room. But Sunstein knows that strict environmental and public health regulations can often increase well-being without drowning businesses. When agencies fail to act, from inertia or special-interest pressure, it takes a toll, from cancer deaths to investment dollars down the drain.

Sunstein is likely to institute reforms at OIRA to force agencies to adopt strong regulation when it can improve Americans' lives. He can do this by removing biases that underestimate regulatory benefits and overestimate regulatory costs, ensuring that deregulation is subjected to as strict scrutiny as regulation, and counting the positive as well as negative side effects of regulation. A newly retooled OIRA could push agencies on everything from toxins in the workplace to speeding up the pace of climate change regulation.

Finally, Sunstein can expand OIRA review to new areas. OIRA has traditionally focused on environmental and public health agencies, but there are now major regulatory actions in many other areas. In the early part of the Obama Administration, there will likely be significant new rules governing the financial sector. Sunstein's writings on behavioral economics, which recognizes that people, and even big sophisticated firms, do not always behave rationally, show openness to a whole host of options to combat market irrationality—from direct regulation of derivatives to increasing capital requirements. While he will be focused on ensuring that these regulations do not thwart an economic recovery, he will also be looking to avoid a repeat of the bad decisions that led to the current financial collapse.

Sunstein has a difficult task ahead. As the recession continues, his job will be to provide the economic backbone for Obama's regulatory agenda. When job losses and foreclosures are at the top of everyone's minds, he will need to show that it is in our national economic interest to pursue smart rules to protect the environment and public health.

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