Explainer Episode 25 – President Biden’s Memo on “Modernizing Regulatory Review”
Ken Davis joined the podcast to discuss why and how President Biden’s memo on Modernizing Regulatory Review could significantly alter the regulatory review process.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and Narration]
Operator: Welcome to The Regulatory Transparency Project’s Fourth Branch Podcast Series. All expressions of opinion are those of the speaker.
Jack Derwin: Hello and welcome to the Regulatory Transparency Project’s Explainer Podcast, part of RTP’s Fourth Branch Podcast Series. My name is Jack Derwin, and I’m Assistant Director of RTP.
Today, I’m pleased to be joined by Ken Davis to discuss the Biden administration’s early executive orders on regulation and specifically, their order on Modernizing Regulatory Review. Ken has over 40 years of experience in corporate management, public service, and the private practice of law. Ken has advised clients about or been responsible for a host of matters relating to corporations and finance. Most relevant to today’s topic, his extensive experience with regulatory compliance, the regulatory analysis conducted by the federal government, and the procedures used to estimate the social costs and benefits of carbon emissions.
Thanks so much, Ken, for joining me today.
Kennerly Davis, Jr.: Well, thank you, Jack, for the introduction and for the opportunity to visit with you and our listeners this afternoon about what is a very important topic. As we all know, upon taking office in January, President Biden moved immediately to turn the Executive Branch of the federal government in a dramatically different direction. In his first few weeks, he issued more executive orders than any recent president: 37 by early March.
These orders rescinded a wide variety of orders that had been issued by President Trump dealing with immigration, energy, the environment, the pandemic, border security, critical race theory, and a number of other significant matters. Other orders rescinded President Trump’s signature executive orders on regulatory policy and procedures: the 2 for 1 requirement, cost based regulatory budgeting, and restrictions on the use of regulatory guidance.
Now in addition to all of these rescissions, President Biden took a forward-looking action relating to regulatory policy and procedures. On January 20, he issued a memorandum, the one you referred to, “Modernizing Regulatory Review.” In it, he directed OMB to work with the executive departments and agencies to produce a set of recommendations for “improving and modernizing” the regulatory review process.
Now, despite the rather unremarkable nature of the general concept, improving and modernize, this memorandum and the activity it has triggered could prove to be one of President Biden’s most consequential regulatory actions.
Jack Derwin: So why is that, particularly with this specific executive order?
Kennerly Davis, Jr.: Well, let me start with some context. Regulatory review or regulatory impact analysis is the process used by the federal government to evaluate the cost effectiveness of proposed regulations. And economic regulations restrict the actions and impact the property rights of the regulated entities. And regulation forcibly reallocates private resources.
As a result, there has for a long time been virtually universal agreement that the benefits produced by regulation should exceed the cost of their imposition. And as President Obama once famously noted, “If we don’t think there are more benefits than costs to a rule, we’re not going to do it,” a commonsense notion.
And we see this principal, this commonsense principle, in operation every day in our personal lives as we continually assess the benefits and costs that we believe will result from different actions we are considering and then try as best we can to identify and take those actions that will in fact produce more benefits than costs.
Private corporations continually assess investment opportunities using sophisticated quantitative benefit cost financial analysis to identify projects that can be expected to produce economic benefits that exceed the cost of the investment. But in the public sector, the analysis performed by the federal government to assess the benefits and costs of proposed regulatory actions, this review process has always labored under two significant challenges.
First, unlike personal and private sector corporate analysis, the entity performing regulatory analysis has no comparable direct interest in the outcome. The government analysts will not enjoy the benefits of sound analysis nor bare the cost of flawed analysis. Second, there is no clearly defined single systematic universally accepted quantitative methodology that defines the core of the regulatory review process.
Nothing, for example, like the formula we use to calculate the area of a circle: A = πr2. Now, every president since President Carter has issued executive orders and memoranda directing regulatory agencies to consider the cost and benefits of proposed regulations. And in 2003, OMB issued Circular A-4 to provide guidance to agencies regarding the attributes of adequate regulatory impact analysis.
All these directives, the executive orders, the memoranda, the circular, all of them together contain a multitude of requirements for regulatory impact analysis. But these requirements, and this is a big qualification, this big but, these requirements are typically worded using general terms, often themselves significantly qualified.
As a result, this has left the agencies with a good deal of latitude when they estimate the benefits and costs of a proposed regulation. And as a result of these two factors, the lack of direct interest, the lack of a single constraining methodology and the resulting latitude that agencies have as a result of all this, the rigor of regulatory analysis over the years has varied greatly from administration to administration, depending a good deal on the review of draft regulations that is conducted by the Office of Information and Regulatory Affairs, OIRA.
They review to ensure agency compliance with executive order requirements for regulatory review. Sometimes, discipline, rigorous regulatory analysis, has restricted agency overreach. Other times, analysis has been, I’ll say, on the permissive side, effectively facilitating the expansion of regulation. Expansionists have generally prevailed over the years, though the Trump administration did take some notable steps to reign in agency regulatory overreach.
Now, when you look at President Biden’s memorandum on modernizing regulatory review, this single step, this memorandum potentially represents a huge victory for regulatory expansion.
Jack Derwin: Can you expand on that a bit and explain why you feel that’s the case?
Kennerly Davis, Jr.: Well, the memorandum—and it was issued on the 20th of January—does reference basic principles and tips the hat to basic principles, established principles of benefit cost analysis. But then, it pivots, figuratively, and lays out a series of substantive provisions, and all of them support the dramatic expansion of regulation.
For example, the memorandum calls for revisions to Circular A-4, revisions that will reflect “new developments in scientific and economic understanding.” Now, climate activists have complained for a long time that the discount rates set forth in the current circular, and that’s a range of discount rate of three to seven percent that are suggested for use in regulatory analysis, that range of discount rates, three to seven percent, according to the climate activists, they are out of line with current long-term interest rates which are much lower.
And the three to seven percent discount rates, the activists argue, are much too high. And therefore, they significantly undervalue the far distant future benefits that will accrue from near term aggressive reduction in carbon emissions. And so an updating and a lowering of those discount rates is one thing that the memorandum could be signaling.
Now, it also calls for changes to the regulatory review process to ensure that it “fully accounts,” and this is really significant, “fully accounts for regulatory benefits that are difficult or impossible to quantify and does not have,” that is it should — the process should be reviewed and modified to ensure that it does not have harmful anti-regulatory or deregulatory effects. So “fully accounts for regulatory benefits that are difficult or impossible to quantify.” That, in some ways, is some of the most important text in the whole memorandum.
Now, the current review process prior to the memorandum allows for consideration of hard to quantify benefits, but regulatory expansionists have long complained that the process focuses too much on quantifiable factors. Now, of course, if regulatory analysis gives more weight to non-quantifiable benefits, that will make it much more difficult for critics of a proposed regulation to challenge the analysis that is used to support the proposed regulation on that basis, on the basis of non-quantifiable benefits.
And the memorandum raises an obvious general question. If and to the extent that non-quantifiable factors dominate regulatory analysis, then what is left of conventional benefit cost ratio analysis? Anything? What, indeed. Now, I should also note that the memorandum, while stressing the need to fully account for non-quantifiable benefits, makes no mention of trying to take account or working to take account of regulatory costs that are difficult or impossible to quantify, things like distant compliance costs and capital allocation opportunity costs. Not a word.
Next, the memorandum calls for review procedures that “take into account the distributional consequences of regulations to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities.” Now, this raises a host of difficult questions: theoretical, legal, political, practical. How are different communities to be identified? How are they to be classified? How are the regulatory impacts, the costs and the benefits, to be distributed among all of the various communities that have been identified?
Regulatory benefit cost analysis has always, up to now, focused on the maximization of net benefits at a societal level. This aggregation and distribution as called for by the memo will significantly complicate, expand, and extend the rulemaking and regulatory process.
Next, the memorandum calls for recommendations on “ways that OIRA can play a more proactive role in partnering with agencies to explore, promote, and undertake regulatory initiatives that are likely to yield significant benefits.” Now, regulatory expansionists have often complained that OIRA’s traditional gatekeeper watch dog role in the overall process puts too many obstacles in the way of regulatory expansion.
This seems clearly intended — the memorandum, this part of the memorandum, seems clearly intended to repurpose the Office, changing it from a watchdog to, I’ll say, a hunting dog, always out there on the prowl, proactively looking for new game, new regulatory opportunities. Now, I see in the news that early staff picks for the Office and the Biden administration early staff picks are said to be consistent with a proactive role in the future for the Office.
Finally, the memorandum in its specific provisions calls for reforms that will “determine an appropriate approach with respect to the review of guidance documents.” Now, President Trump issued two executive orders designed to increase the transparency of agency guidance and to reign in the use of guidance to engage in stealth agency rulemaking. President Biden rescinded those executive orders with one of his own on January 20th. This memorandum provision is consistent with those rescissions and could signal a return to the aggressive use of guidance such as the famous Dear Colleague letters.
Now, all of these specific provisions are given a big push forward by the now familiar citation of various threats such as “the undeniable reality and accelerating threat of climate change,” threats to the nation that require the administration to “mobilize the power of the federal government,” and “As we do…evaluate the processes and principles that govern regulatory review to ensure swift and effective Federal action.” No hint here, not a word, of any sense that this whole undertaking to look at and modernize and update regulatory review is an enormously complicated subject that needs to be addressed in a careful and thoughtful manner. No, not a word. Full steam ahead.
Now, the ultimate overall goal of this memorandum and modernization effort is to find ways for the regulatory review process to “promote,” among other things, “public health, social welfare, human dignity, equity, and the interests of future generations. The recommendations should include proposals to ensure that regulatory review serves as a tool to affirmatively promote regulations that advance these values.” That is, regulatory review should serve as a tool to promote regulations.
Now, that’s really the bottom line. The regulatory review process shall no longer be, as it has for so many years, an analytical tool to test the cost effectiveness of regulations that agencies propose to advance social welfare policies. Henceforth, regulatory review itself is to be structured and conducted to advance social welfare policies. That is the bottom line, and it’s fair to say that this memorandum, therefore, marks a sea change in regulation.
Jack Derwin: So where do we go from here?
Kennerly Davis, Jr.: Well, the memorandum directs OMB to consult with the executive departments and agencies and “as soon as practicable, begin a process with a goal of producing a set of recommendations…These recommendations should be informed by public engagement with relevant stakeholders — relevant stakeholders.”
So the process is open-ended with no specified deadlines or even target dates. This could take a long time to play out. Given the complexity and significance of the issues involved, the process should take a long time. This memorandum and the process it has triggered is, I believe, tremendously significant. It is something that will affect all of us. We need to follow it closely and look as best we can for opportunities to engage the ongoing debate.
Jack Derwin: Well, thanks so much, Ken, for joining us today and breaking down a memo that didn’t necessarily get a whole lot of attention but as you noted could have a huge effect, so we appreciate it. And thank you to our audience for tuning into this episode of RTP’s Explainer Podcast. You can subscribe on any major podcast platform and check out our website RegProject.org to learn more.
Operator: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch Podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at regproject.org. That’s R-E-G-project.org.
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