Trump’s New Math on Old Regulations

Trump’s cost-benefit analysis is all cost and no benefit.
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On Jan. 30, Donald Trump did something that every U.S. president has done since Jimmy Carter: He directed the federal government to reduce the burden of regulation. As he signed an executive order in the Oval Office, surrounded by small-business owners, Trump declared that it would lead to “the largest-ever cut by far in terms of regulations.” In signing it, Trump made good on one of his core campaign promises—to roll back federal regulations that he repeatedly blamed for costing the U.S. economy $2 trillion in annual growth.

The intent of Trump’s order isn’t new. The mechanics are. Rather than weigh the pros and cons of individual rules as they come, it directs federal agencies to adhere to a simple trade-off: For every new regulation finalized, two old ones must be phased out. The order also says agencies can’t create new net costs for companies or consumers. This sets up a sort of regulatory cap and trade, in which agencies can swap regulations with each other to stay under the cap.

The order, and the explanatory memo that accompanied it, stand apart from the consensus shared by the past five administrations on how to calculate the impact regulations have on society. As they decide on which rules to keep and which to throw away, federal agencies are instructed to consider only the costs of regulation. Regulations may have benefits, but for the purposes of the executive order, they’re irrelevant.

This flies in the face of decades of regulatory cost-benefit analyses done by the federal government. Jimmy Carter created a White House office to measure the effect of regulation. Ronald Reagan added an executive order saying that the costs of any “significant” new rule—defined as greater than $100 million—couldn’t outweigh its benefits. The federal government currently follows a similar rule signed by Bill Clinton, using methods refined by George W. Bush. And an executive order from Barack Obama encouraged agencies to look back to see how their anticipated pros and cons had stacked up in real life.

By their nature, the costs of a regulation are easier to calculate. They show up more quickly and often impose an identifiable expense on either a business or a consumer. A “direct” cost is what a manufacturer would pay, for example, to buy mandated safety equipment or to complete paperwork for a requirement. These are passed on to customers as higher prices, which might in turn reduce demand for what the company sells. A regulation can have an indirect cost, too, raising component prices for other businesses or making it too expensive for startups to complete their paperwork.

The benefits of regulation are far harder to determine. They’re more diffuse and accumulate over a longer time, often in ways difficult to track or quantify. A regulation on air quality, for example, can reduce unnecessary death or sickness. To calculate what that’s worth in economic terms, regulators rely on what they dryly refer to as “VSL”—the value of a statistical life. A regulation can improve quality of life, which in turn can be quantified through “revealed preferences,” such as how much people are willing to pay to live farther away from the noise of a highway or emissions of a factory.

Cost-benefit analysis was designed as an advisory tool. And for individual regulations, the U.S. is better at it than any other country, says Andrea Renda, a visiting fellow at the Kenan Institute for Ethics at Duke University. In 2013 he authored a 222-page study on cost-benefit analysis for the European Union. The danger, he says, comes when countries rely too much on calculations alone: “It’s important to avoid spurious accuracy, because it looks like science. It’s not science.”

Thomas Hopkins, a professor at Rochester Institute of Technology who worked in the Reagan White House on regulatory costs, says: “Some of these effects are extremely difficult to put a dollar amount on.” Some benefits, he says, need to be described qualitatively, rather than with numbers, and put in another column altogether. “I don’t know then how the decision-maker is going to proceed, but that other column shouldn’t be wiped off the ledger.”

Trump’s focus on cost alone didn’t come out of nowhere. Republicans have long used “job-killing” to describe the word “regulation.” The disdain for federal rules is one of the rare areas of pure accord that exists between Trump and Republicans in Congress. As for the $2 trillion of economic costs Trump cited while campaigning, the number comes from a 2014 report for the National Association of Manufacturers by Mark and Nicole Crain, husband-and-wife professors at Lafayette College in Easton, Pa. The number the Crains produced isn’t a bottom-up sum of regulatory costs; rather, it’s a top-down estimate derived from comparisons between the U.S. and other developed countries on regulatory quality and economic performance. The estimate reflects only the costs of regulation. “We didn’t do benefits,” Nicole Crain says. “Costs are hard enough.”

The Crains say the current U.S. approach fails to either measure the costs of regulations below $100 million or account for the compounded burden of many different regulations on a single company. “By putting out an estimate,” says Mark Crain, “it challenges people to say, ‘If you don’t like that one, what’s your number?’ ”

Renda says it’s impossible to affix a dollar amount to any total estimate of regulatory impact. Is the $2 trillion a back-of-the-envelope calculation? “Probably, it’s on the hidden part of the envelope,” he says. “It’s farther than the back of the envelope.” Renda adds that a single top-line number also doesn’t help figure out which regulations should go.

Versions of Trump’s one-in-two-out rule have been tried in Germany, the Netherlands, and the U.K. These other attempts used relatively straightforward accounting, simply adding up the capital and labor costs for a company to comply with a rule. A memo from Trump’s Office of Management and Budget tells agencies to look at the “opportunity cost of regulation”—sales and economic growth that a new regulation might prevent. “They have to phone their U.K. colleagues and Dutch colleagues, the countries that have a decade of experience in this,” Renda says. “There’s going to be a lot to learn.”

The bottom line: The benefits of regulations have always been tough to calculate. Trump’s apparent approach is to ignore them.

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