Regulatory reform

Rhetoric and Reality on Regulation

Aug. 1, 2017
President Trump has dramatically cut the issuance of new federal regulations and issued an executive order designed to eliminate two existing regulations for each new rule that is issued.

President Trump has made no secret of his aim to cut red tape. “We think we can cut regulations by 75%, maybe more,” he said back in January, “We are going to be cutting regulations massively.” That same month, he issued an executive order to require the elimination of two regulations for every new one. To aid US manufacturers, he instructed the Commerce Department to streamline permitting requirements and recommend specific regulatory requirements for elimination.

Now, more than six months later, we have enough evidence to evaluate the rhetoric. As it turns out, this is not fake news—the President was on point. And his regulatory reform effort has important implications for manufacturers.

So what does the evidence show?

1.   A significant drop in both the number and cost of new regulations across all federal agencies. To see how much, let’s look at the number of new final rules issued in the first six months under a new president. The Trump Administration issued 405 final regulations from January 20-June 30, 2017, which is much lower than the 1,403 regulations issued under President Obama or the 1,805 issued under George W. Bush in the comparable period. If one looks just at the biggest rules, Trump has issued just 7, far fewer than Obama (23) or Bush (23).

Because a rule typically takes years to develop, these numbers reflect the degree to which a new administration scrutinizes rules initiated and largely written by the preceding administration. The Trump Administration has applied the brakes to a large swath of Obama regulations that were in the pipeline. It has also chosen not to defend, or seek to revise, important Obama-era rules under review by the courts.

2.  Reform of existing regulation is more targeted, longer-term, and modest in magnitude. In an unprecedented move, President Trump issued Executive Order 13771, which imposed an incremental regulatory budget on covered federal agencies: for every new regulation that is issued, two existing regulations must be eliminated, and the cost of new rules must be fully offset. No US president has ever adopted such a policy, which has been debated in academic circles for decades and adopted by a handful of other countries in recent years.

However, the Trump version will not result in large reductions in the cumulative burden of federal regulation because (a) agencies will likely issue very few new rules and so few existing rules will need to be cut; (b) much of the compliance cost associated with existing regulations are front-loaded, and these “sunk” costs cannot be recovered and re-purposed; (c) it is legally difficult to eliminate an existing regulation; and (d) it is not a trivial exercise to show that elimination of a regulatory requirement will do more good than harm—a criterion to be enforced by the President’s Office of Management and Budget (OMB).

Given this state of play, what are the implications for manufacturers? Here are three:

Capital investment decisions will carry less political risk. In a 2016 survey by the National Association of Manufacturers, manufacturers were asked how they would re-direct resources if regulatory compliance costs were suddenly reduced significantly and permanently. Nearly two-thirds of respondents said they would increase investment in capital equipment and/or R&D/new products. Because new regulations typically require up-front capital expenditures for compliance, a significant drop in new regulation should allow a greater number of worthy capital-expenditure projects to move forward.

Regulatory enforcement is likely to increase. Regulators are not going away—they will just shift their attention from writing new rules to enforcing existing rules. Manufacturers should not cut back on compliance, quite the contrary—they should be especially vigilant right now. When President Reagan cut back on EPA resources upon taking office in his own regulatory reform effort, agency enforcement actually increased as career employees reacted in a manner consistent with their perception of their mission.

Reform will reward those who seek to preserve the public benefits of existing regulation. The Trump Administration is looking hard for reforms that will reduce opportunity cost—in other words, they seek to cut regulatory requirements that do more harm than good. There is a tendency for regulated entities to believe that cost savings to them equate to net benefits for the public. Not true. The reforms that stand the best chance of adoption will be those that reduce compliance cost without diminishing the regulatory objective—whether that be clean air, safe food, consumer protection, etc. Therefore, regulations that will be targeted for elimination are likely to be those that are outdated (due to technological advances, etc.); redundant or duplicative; ineffective; or penalize good performance (such as a requirement imposed on an entire sector instead of just on the bad actors). Manufacturers would be wise to identify such specific regulatory requirements, gather the evidence, and bring it to the attention of the Trump Administration.

With its regulatory reform efforts to date, the Trump Administration has created opportunities-- and a challenge or two --for manufacturers. In itself, regulatory reform will not revitalize the American manufacturing sector, but it is a first, encouraging step.   

Keith B. Belton is director of Indiana University’s Manufacturing Policy Initiative, an academic research center focused on the competitiveness of the U.S. manufacturing sector. He has served as a public policy analyst and advocate in the private, public, and nonprofit sectors.

About the Author

Keith B. Belton | Director, Manufacturing Policy Initiative

Keith B. Belton is principal with Pareto Policy Solutions, LLC, a consulting firm advancing U.S. competitiveness.

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