Setting the record straight on Trump’s regulatory reforms

Many critics in academia and the think tank community love to level attacks on President Donald Trump’s regulatory reforms. This is not surprising given how controversial Trump, the man, is and given that deregulation can be controversial too. And while Trump’s red tape cutting effort has been nowhere near perfect, it’s time to set the record straight: There is far more to these reforms than the critics let on.

As background, the president issued Executive Order 13,771 soon after taking office. Its “2 for 1” requirement received the most attention: Two regulations must be identified for elimination each time a new one is put forward. However, perhaps more important is the “regulatory budget” it set up, which essentially set a cap on new regulatory costs executive branch agencies can impose.

Initially, the cap was set at zero, meaning agencies would have to offset any new costs imposed through regulations by finding savings elsewhere. Lately, the cap has been negative, suggesting agencies need to achieve more in the way of savings than burdens added.

A look at the data suggests the cap is largely working. On Jan. 20, 2017 — Trump’s inauguration day — there were 1,079,601 regulatory restrictions on the books. By Dec. 6, 2019, that number stood at 1,077,822. While the code has not declined substantially by this measure — and the administration should acknowledge that aggregate cuts to-date have been modest — it’s rare to see a code fail to grow across an entire presidential term.

Critics of Trump’s regulatory budget tend to make several arguments. First, they argue that a regulatory cost cap does not consider a policy’s benefits, and second, they argue that any cap is inherently arbitrary.

Both criticisms are unfounded.

The first is simply inaccurate. It is mathematically irrelevant whether one calls something a positive benefit or a negative cost. There’s no difference between adding a number and subtracting the negative of the same number. Regardless of which side of the balance sheet one places them, cost savings from reduced paperwork burdens and eliminated compliance costs are indeed regulatory benefits.

What critics really seem to be saying is that the new regulatory budget is not sufficiently considering nonpecuniary benefits or costs. For example, they want more analytical emphasis on the environment, workplace safety, human dignity, and so on. It’s understandable to want to account for these things, but even this view is confused.

What allows advanced countries like the United States to lead an environmentally-conscious lifestyle, to enjoy comfortable and safe workplaces and to pursue lofty goals related to human dignity is producing the wealth to pay for all those things. That’s precisely what the new budget is encouraging, by emphasizing those impacts with the highest rate of return for society, namely those affecting the capital stock.

The Office of Management and Budget, in its 2003 regulatory analysis guidelines, noted that nonpecuniary social benefits and costs tend to only grow in value at a rate of about 3 percent a year, and even this is probably too optimistic. Meanwhile, capital accumulates at 7 percent a year on average, according to OMB. Therefore, it’s easy to see why what matters most in the long run is capital accumulation.

This is also why Trump’s critics are wrong about a cost cap being arbitrary. A regulatory cost cap set at zero is simply a requirement that regulations don’t reduce what economists call “allocative efficiency.” This simply means that, on balance, new benefits should generally exceed new costs imposed by regulations. Presidents from both major parties, including Reagan and Clinton, have supported such a common sense principle.

A negative cost cap, as has been proposed in recent years, is equivalent to imposing a slightly higher hurdle on regulators. It’s like saying a minimum required rate of return for projects is 3 percent. This seems eminently reasonable given that there is considerable uncertainty as to whether government investments will pay off as anticipated. A cap set at zero leaves no room for error. Leaving a margin of safety protects taxpayers and constitutes sound risk management as well. 

Given the solid economic foundations for Trump’s reforms, undoing the new regulatory budget would be a historic mistake. For decades, agencies have essentially had unlimited license to regulate without limit — that’s why we see an ever-growing level of federal regulation. The new budget is now starting to force them to do something they’ve traditionally avoided doing: balancing benefits and costs.

Could the Trump administration do more? Of course, and there is still time to speed up the pace of reform. But when critics tell you the reforms have been a bust, don’t listen to them. There is far more to these changes than some so-called experts would have you believe.

James Broughel is a senior research fellow with the Mercatus Center at George Mason University and an adjunct professor of law at the Antonin Scalia Law School.