Under the new “2-for-1” Executive Order (and a subsequent guidance document), a regulator who wishes to issue a new regulation must find two old regulations to withdraw at the same time. Moreover, the new regulation is barred unless its “costs” are offset by withdrawn regulations. The justification for this order is difficult to understand.
Consider the following example:
Proposed Regulation A: $500 benefits – $100 costs = $400 net benefits
Old Regulation B: $100 benefits – $50 costs = $50 net benefits
Old Regulation C: $100 benefits – $50 costs = $50 net benefits
In this example, the regulator can issue Regulation A (which produces costs of $100) only if it withdraws B and C (which jointly create costs of $100, exactly offsetting A’s costs).
The net effect of the Executive Order in this example is to reduce aggregate social benefits from $400 (A alone) to $300 (A plus the withdrawal of B and C)? What could possibly be the reason for that?
The Executive Order is not a model of clarity; there are other ways to read it. Maybe the Order means that the regulator must find and withdraw two inefficient regulations, a regulation D and E which (unlike B and C) jointly produce net benefits of negative $100, that is, their costs exceed their benefits. But shouldn’t an agency withdraw those regulations on its own? Why wait for proposed Regulation A to materialize? It seems that the only effect of the Executive Order would be to encourage agencies to warehouse old, inefficient regulations, holding them in reserve so that the agencies can withdraw them when it is time to issue a new regulation.
The confusion doesn’t stop there. Many regulations impose one-time fixed costs on industry. Factory owners must, for example, buy the scrubber and install it; the subsequent operation of the scrubber will be much cheaper. A regulation’s initial cost-benefit analysis will account for all these costs. But by the time that an agency wants to issue Proposed Regulation A, most of the costs will be sunk. If the Executive Order’s rule applies only to future costs, it will be extremely difficult to find old regulations that can be withdrawn so as to make room for Regulation A. Regulation, for all intents and purposes, will come to a halt (putting aside exceptions in the Order for routine regulations, national security regulations, and so on).
The only possible defense of the Executive Order is that the Trump administration believes that agencies routinely exaggerate benefits (or understate costs) in order to justify regulations that cause more harm than good. The Executive Order puts a crude brake on all regulation in order to halt this behavior. A simpler approach, which avoids the perverse effects of the Executive Order, would be to freeze regulation while ordering agencies or outside auditors to perform rigorous cost-benefit analyses of past regulations as well as new ones.