Identifying the Problem: The First Step in the Regulatory Process


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The regulatory process consists of many stages, but the essential first step is answering the question “what’s the problem?” A thorough regulatory impact analysis should provide evidence that the regulation addresses a significant, systemic problem and trace that problem back to its root cause. A cursory or faulty analysis of the problem prevents regulators from devising an effective solution and considering realistic alternatives.

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Identifying the Problem: The First Step in the Regulatory Process

  1. 1. Identifying the Problem: The First Step in the Regulatory Process Jerry Ellig Senior Research Fellow Mercatus Center at George Mason University Arlington, Virginia USA
  2. 2. Executive Order 12,866 (b) The Principles of Regulation … (1) Each agency shall identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency action) as well as assess the significance of that problem. (2) Each agency shall examine whether existing regulations (or other law) have created, or contributed to, the problem that a new regulation is intended to correct …
  3. 3. “If you don’t know where you’re going, any road will take you there.” --George Harrison
  4. 4. Reason #1: Determine whether regulation is necessary USDA catfish regulation Does the problem exist? Is it widespread or minimal? Is the problem likely to persist in the future?
  5. 5. In this case, no problem!
  6. 6. Well-articulated problem DOI bird hunting regulation “Tragedy of the Commons” Declining populations pre-treaty
  7. 7. Reason #2: Understand root cause to develop an effective solution • Standards to Prevent Prison Rape (proposed 2011) • RIA quantifies and monetizes cost to victims • No systematic root cause(s) identified • Advisory commission report consists of anecdotes and “best practice” recommendations • No evidence presented showing that the “best practices” reduce incidence of prison rape where they have been implemented
  8. 8. Good root cause analysis HUD RESPA mortgage disclosure (2008) Problem: Information asymmetry One cause: Poorly-designed GFE disclosures Solution: Revised, market-tested GFE disclosures
  9. 9. Reason #3: Develop alternatives that target the problem FDA proposed animal food rule (2013): $13-17 million benefits, $87-129 million costs Apply to pet food only: $12-15 million benefits, $6-9 million costs
  10. 10. Market failures • Monopoly/market power • Externalities • Public goods • Information asymmetries • Note: These may not be permanent
  11. 11. Failures of public institutions • Prior regulation creates the systemic problem • Lack of clarity or litigation regarding a prior regulation • Inefficient management of public resources or programs • Other levels of government may lack incentives to fix, or may encourage, market failures
  12. 12. Other compelling public need • Fairness/equity • Securing a fundamental right (civil rights, privacy, individual liberty) • Paternalism • Just plain redistribution
  13. 13. OMB Circular A-4 “For other interventions, you should also provide a demonstration of compelling social purpose and the likelihood of effective action. Although intangible rationales do not need to be quantified, the analysis should present and evaluate the strengths and limitations of the relevant arguments for these intangible values.”
  14. 14. 1) Six criteria from E.O. 12866 and Circular A-4 2) Proposed “economically significant” regulations 3) Team of economists 4) Read RIA and entire Federal Register preamble 5) Qualitative evaluation with numerical scores 6) 2008 to present
  15. 15. Evaluation Scale 5 Complete analysis of all or almost all aspects, with one or more “best practices” 4 Reasonably thorough analysis of most aspects and/or shows at least one "best practice" 3 Reasonably thorough analysis of some aspects 2 Some relevant discussion with some documentation of analysis 1 Perfunctory statement with little explanation or documentation 0 Little or no relevant content 6 criteria 0-5 points each
  16. 16. Average Scores by criterion (2008-2012) Criteria Score* Systemic problem 2.1 Alternatives 2.8 Benefits (or other outcomes) 3.2 Costs 2.5 Use of analysis 2.2 Cognizance of net benefits 2.5 * Scores out of 5 possible points
  17. 17. Average Report Card scores, systemic problem
  18. 18. Does the analysis identify a systemic problem?
  19. 19. Coherent and testable theory
  20. 20. Empirical evidence
  21. 21. Uncertainty about existence/extent of problem
  22. 22. Solutions • Include analysis of the systemic problem in any legislative mandate for Regulatory Impact Analysis • Require public comment on agency’s analysis of the problem before the agency writes the proposed regulation • Inquire about this topic when conducting agency oversight • Ensure this analysis is done before passing legislation that mandates a regulation
  23. 23. Why does it matter?