Regulation: What's the Problem?

December 6, 2011

For more than three decades, the president has required executive branch agencies to identify the systemic problems they wish to solve when issuing major regulatory actions.  This principle reflects the commonsense notion that before making a decision, decision makers should understand the root cause of the problem the regulation is supposed to solve.  Unfortunately, in practice regulatory agencies often decide what they want to do, write up the proposed regulations, and only then hand the proposals to their economists, relegating problem identification to the late stages of the process, say Jerry Ellig and James Broughel of the Mercatus Center.

  • A Mercatus Center study rating 87 regulations in 2008 and 2009 for their timely identification of a systematic problem gave the maximum score of five to only one regulation.
  • That same study rated 17 regulations zero out of five, recognizing that the regulatory analysis had little or no content assessing the systemic problem at all.
  • In each of the four subcategories assessed in the study, regulation averages ranged between zero and two for both 2008 and 2009, with no statistical difference between administrations.

To create more effective regulatory policy that follows the legal directives set down in the aforementioned executive order, agencies must follow four best practices:

  • Identify a clear market failure or government failure.
  • Identify a problem and offer a theory to explain how the problem came to exist.
  • Provide data-driven, empirical evidence that shows the problem exists and the agency's hypothesis about the root cause is true.
  • Perform a "sensitivity analysis" to assess likely uncertainties about the existence or size of the problem.

Source: Jerry Ellig and James Broughel, "Regulation: What's The Problem?" Mercatus Center, November 2011.


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